IMF changes its tune

As economic recovery slackens in Europe and bottlenecks persist in the developing world, the International Monetary Fund (IMF) has adopted a dovish stance towards public spending on infrastructure.

In its latest World Economic Outlook, the institution underlines “glaring” gaps in the quantity of infrastructure in developed and emerging markets alike, which it says are being negatively felt by their economies and populations through sluggish production.

Increasing spending on public infrastructure, the report said, would raise output in the short term by bolstering aggregate demand and in the long term by raising aggregate supply.

In most advanced economies, it estimated that every incremental dollar invested in infrastructure had the potential to add 40 cents to GDP in the first year and $1.50 four years after the initial spending increase.

This position contrasts with the views displayed by the IMF in 2010, when it thought this “fiscal multiplier” was less than one (meaning that every dollar invested would not be fully recovered by generating an equivalent amount of GDP). It is also a more upbeat assessment than the one it conveyed in 2013, when it said the infrastructure fiscal multiplier might be positive.

The IMF is therefore calling for a fresh “infrastructure push”, for which it says the timing is right amid low borrowing costs and weak demand in advanced economies as well as growing needs in the developing world.

“Debt-financed projects could have large output effects without increasing the public-debt-to-GDP ratio, if clearly identified needs are met through efficient investment,” the report said. “Facilitating increased private financing and provision of infrastructure could help ease fiscal constraints, generate efficiency gains, and increase investment returns.”

The merits of addressing gaping infrastructure needs globally by fostering public and private funding have recently been put forward by a growing chorus of international organisations, including the Organisation for Economic Co-Operation and Development (OECD) and G20.