More investment in infrastructure offers countries a way out of the imbalances behind the global financial crisis, argues Justin Lin Yifu, honorary dean at Beijing University’s National School of Development and former chief economist at the World Bank.
Speaking at the Boao Forum for Asia, China’s big annual meeting of politicians and business leaders, Lin recounted how in September 2008, as Wall Street teetered on collapse, he had to advise emerging market governments on whether this represented a short-term disruption or a long-term, structural problem.
The US had become accustomed to brief, moderate recessions, but Lin felt this was a more fundamental problem, particularly as the government arranged bailouts and stimulus measures – all financed by increased borrowing.
He believed the US and developed markets in general needed to restructure in order to create long-term gains in productivity, and argued that greater spending on infrastructure would help. In this way the crisis could be leveraged into smart fiscal policy, so long as it targeted necessary projects and wasn’t simply investment for its own sake.
Many emerging markets have a huge need for infrastructure spending, but often lack the domestic capital to achieve it. Developed markets have the resources, but are wary that they won’t get a sufficient return on investment in emerging markets; meanwhile their own infrastructure is ageing and in need of upkeep.
Lin equated renewed infrastructure with structural reforms, noting that Japan spent 20 years failing to tackle its industry’s lack of competitiveness. Not all emerging markets will provide the necessary returns to private investors, he noted, arguing that those returns can’t be separated from a country’s broad rate of economic growth.
Just as Japan outsourced its labour-intensive industries to Taiwan, Korea, Hong Kong and Singapore in the 1980s – and they in turn outsourced manufacturing to China – so now China is likely to see some of its manufacturing shift to countries with lower wages.
Given the size of China’s manufacturing sector, which employs over 150 million people, that could mean huge gains for countries in places such as Africa that provide sufficient infrastructure to allow efficient business and trade.
Infrastructure investing is not by itself a panacea for global imbalances in trade and payments. That requires better social spending in emerging markets, deleveraging the financial sector, a cheaper renminbi (that doesn’t spark a beggar-thy-neighbour cycle of retaliation, especially versus the US); and a more robust restructuring effort among major developed markets.
“Developed and developing nations are working in silos,” Lin said. “We need a global approach.” For him, that ultimately means replacing the current international system of trade and finance that is dominated by the US dollar with something not beholden to one powerful country’s domestic agenda.
Lin’s big idea is the creation of a gold-like standard as a global currency in which national currencies operate, with a global central bank led by IMF-type wonks who control the unit’s supply.
That is a far-off dream, and one that may never be realised, at least not as long as the US is able to continue to dominate the global financial system.
But infrastructure spending, which was not at the time of the global financial crisis seen as relevant, has become recognised as a useful part of the solution. It is also one that is immediately applicable to investors.