Both the International Monetary Fund and the World Bank announced last week support for infrastructure development investment in developing and advanced economies. It is a return to the basics for the two banks, which are pinning hopes on infrastructure as the key to improvement.
But the IMF and the World Bank are taking markedly different approaches. The World Bank will not spend any of its own money, rather, it will help build partnerships and provide guidance. The IMF will work to convince wealthier nations, the likes of the U.S. and U.K., to take advantage of low-interest loans to repair crumbling infrastructure.
There is agreement on the basics. Infrastructure is important for all countries and it can boost economic growth, argue the IMF and World Bank. But that does not mean opening the cash floodgates to fund all projects.
“We know that simply increasing the amount invested in infrastructure may not deliver on the potential to foster strong, sustainable and balanced growth. A focus on the quality of infrastructure is vital,” said World Bank Group Managing Director and CFO, Bertrand Badre.
The motivations are also different between the two banks. Global economic growth for 2014 is predicted at 3.3 percent, according to the IMF. That is a 0.4 point decline from its April prediction. The recovery from the 2007 financial crisis “has disappointed in recent years,” said the IMF. Part of the problem is a lack of spending. Infrastructure investments is a place to reverse the trend.
Every dollar spent on infrastructure programs will cause a $0.40 increase in GDP in the first year and $1.50 after four years, according to the latest IMF World Economic Outlook. Given the fact that interest rates for loans are so low, it is worth taking out the money to spend on improvements. If countries listen to the IMF’s advice, then we might see an increase in spending that could accelerate global economic growth.
Improving global growth while fixing the infrastructure shortage is a compelling idea. But, as usual, “between the idea and the reality…falls the shadow. The G20 needs to turn the generalities into operational prescriptions, like having the World Bank restore its detailed project appraisal capacity, and for the credit-rating agencies to improve their capability to sort the beneficial projects from the lemons,” wrote Stephen Grenville, nonresident fellow at Australia’s Lowy Institute for International Policy, in the institute’s blog.
The World Bank is also interested in the intersection between infrastructure and economic development, but is more concerned with the improvements in individual developing countries. World Bank President Jim Kim announced last Thursday the establishment of the Global Infrastructure Facility. Its mission is to “unlock billions of dollars for infrastructure in the developing world.”
Public-private partnerships take the front seat, like many of the major development programs announced recently. The World Bank estimates a $1 trillion infrastructure need in developing countries over the next six years. Kim hopes the GIF can leverage the funding to meet the need.
“We have several trillions of dollars in assets represented today looking for long-term, sustainable and stable investments,” said Kim. “The real challenge is not a matter of money but a lack of bankable projects – a sufficient supply of commercially viable and sustainable infrastructure investments.”
Success for the GIF means unclogging the bottlenecks and encouraging both governments and private companies to do and spend more.
“In leveraging those resources, our partnership offers great promise for tackling the massive infrastructure deficit in developing economies and emerging markets, which is one of the fundamental bottlenecks to reducing poverty and boosting shared prosperity,” said Kim.
Notably absent from the World Bank and IMF announcements are the countries who will undergo the infrastructure transformations. Will countries from Germany to Malawi heed the calls made by the two banks?