WASHINGTON, DC – Over the last few decades, globalization ushered in an unparalleled period of economic growth that helped reduce global inequality and create new opportunities for economic development.
Nearly 1.1 billion people have been lifted out of extreme poverty since 1990, reducing their share of the global population from 35% to under 10%, according to recent estimates.
But the undeniable benefits of globalization have not been universally shared, leading to growing calls for protectionism in some countries. Erecting barriers and walling off countries, however, is not the way to help those left behind by globalization, including those affected by technological changes that are making the world more, not less, interconnected.
World leaders need to make a better case for globalization, developing policies to unlock fully its potential for advanced economies, while exploring new dimensions that could make the world safer and more equitable.
One possible dimension is the expansion of cross-border infrastructure investment, especially in developing countries. Infrastructure investment – together with investments in human capital – is an effective way to promote inclusive growth and foster local resilience to global shocks.
Given slow growth in advanced economies – reflected in historically low interest rates and the tapering of trade – new global sources of dynamism are also needed.
The decline in borrowing costs across all major advanced economies, it is argued, is largely a result of higher savings from aging populations and reductions in capital intensity brought by technological change, both of which have reduced aggregate demand. The lack of meaningful investment opportunities lowers confidence in future growth and further depresses economic activity.
Iinfrastructure investments, including cross-border, can help the world respond to the current macroeconomic imbalance between savings and investment. Boosting “climate-smart” infrastructure, in particular, would reduce the carbon footprint of economic progress, while increasing global productivity and creating long-term income streams for investors in aging societies. By improving the economic outlook and reducing the risks of climate change, such investment could also lift confidence and increase aggregate demand in investing countries in the near term, even if building these infrastructure assets were to take some time.
Yet infrastructure investment carries significant risks, especially if it is carried out in distant places. Sometimes, these risks are far more acute than aging savers are prepared to accept. At the World Bank Group (WBG), we are helping reduce this gap between the riskiness of infrastructure investment and investors’ risk appetite in several ways.
For starters, the WBG helps governments develop a favorable legal environment, prepare projects, and lower existing informational barriers. Our teams maintain a permanent dialogue with member countries.
The Global Infrastructure Facility (GIF) is working to develop a pipeline of well-prepared, investment-ready infrastructure projects. And we recently benchmarked the environment for public-private partnerships in 82 countries.
The WBG is also making the range of guarantees we offer, at both the project and portfolio levels, more understandable and better understood, helping to increase the supply of safe assets with positive returns.
And we are creating opportunities for institutional investors to pair with our private-sector-oriented International Finance Corporation, through the recently launched Managed Co-Lending Portfolio Program for Infrastructure and several funds managed by the IFC Asset Management Company.
Finally, we support the development of local capital markets and institutional investors to mobilize domestic resources and make foreign investment easier.
Further innovation could entail developing tools, such as fixed-income infrastructure indexes and emerging-market infrastructure-linked bonds, as well as fostering the recycling of assets on governments’ books.
Overall, infrastructure investment is not necessarily riskier than traditional asset classes, given higher asset recovery and lower return volatility, including in emerging markets.
Growing evidence of this is encouraging regulators to consider more flexible capital charges on these assets, especially for those projects backed by guarantees from multilateral institutions. Such support can help widen the range of eligible assets for local and international institutional investors.
The successful mobilization of private capital on a large scale may require public resources to support some de-risking. Given the positive economic impact, the contribution to the fight against climate change and poverty, and the potential productivity gains associated with mobilization, the use of public resources, for example, to support the provision of more guarantees by multilateral financial institutions could be very effective.
The time has come to think creatively and use investment in “climate-smart” infrastructure as a way to renew the globalization agenda. If we do that, we can help raise potential economic growth without pushing our planet beyond its limits, boost shared prosperity, and move closer to eliminating extreme poverty around the world.
Joaquim Levy, a former finance minister of Brazil (2015-2016), is Managing Director and Chief Financial Officer of the World Bank Group in Washington, DC.
Copyright: Project Syndicate, 2016.