The World Needs to Boost Infrastructure Spending, but Many Countries Are Cutting Back (WSJ)

By DAVID HARRISON published Jun 15, 2016

The world needs to dramatically ramp up spending on infrastructure to keep up with economic growth, according to a new report from the McKinsey Global Institute. But many major economies are going in the other direction.

Researchers estimate the world needs to increase investment by about 0.4% of global output between now and 2030 to meet the increasing demand to move people and goods. That translates into an additional $350 billion of annual spending. The report includes spending on transportation, power, water and telecommunications infrastructure.

That’s a daunting gap to fill, particularly at a time when the world’s major economies appear to be in retreat. Many developed country members of the group of 20 largest economies are cutting back infrastructure spending after boosting it in the aftermath of the recession. All this comes despite frequent and urgent calls from international gatherings of finance officials for more infrastructure spending to jolt economic growth and invigorate productivity.

The U.S., for instance, spent 3.2% of gross domestic product on public infrastructure in 2014, down from 4.2% in 2009. The eurozone spent 2.7% in 2014, down from 3.6% and the U.K.’s investment fell from 3.4% to 2.7% during that period.

Worldwide, countries spend an average 3.5% of GDP on infrastructure, the report found.

There’s a pretty wide variation among countries. In fact, some places are apparently overinvesting in infrastructure, the report found.

Take China, which in recent years has binged on infrastructure. Combined public and private investment averaged 8.8% of output between 2008 and 2013. Researchers estimate the country could cut back its investment by about 3.3 percentage points of GDP and still meet demand between now and 2030.

Likewise, Japan, which is aging rapidly, could pare back its spending by about 1.5% of GDP.

On the other hand, some countries have been beefing up spending yet are still falling behind. India, for instance, spends 5.2% of GDP on infrastructure but needs to boost that by another 0.5 percentage point. South Africa, which spends 4.7% of GDP still faces a 1.2 percentage-point gap.

The report rests on the assumption that global growth will average 3.3% between now and 2030. That would imply a pickup of growth in the years ahead. The World Bank’s latest estimates peg global growth at a dismal 2.4% this year, 2.8% in 2017 and 2.9% in 2018.

If global growth does not rebound, the research group’s estimates of the global infrastructure gaps would have to be revised downwards.

With slower growth rates “you have less economic activity, less personal transport, less goods transport and less need for infrastructure,” said Jan Mischke, a senior fellow at the McKinsey Global Institute and one of the report’s authors.

Governments don’t have to be the only source of new money for projects, the report found. Worldwide, banks and institutional investors such as pension funds and university endowments have about $120 trillion in assets that could be invested in infrastructure. Making it easier to connect that money with projects could close the gap, Mr. Mischke said.

“It’s really a fundamentally quite solvable problem,” he said.



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