Any good international investment banker knows that the end of April is a bad time to come peddling his services, for that is when the world’s finance ministers return home from the IMF meetings in Washington, chastened that risks to the global economy could spill over into their own backyards. Ministers are too busy recovering from their trauma to think about paying fat fees for big new international bond issues. Who wants to build up debt if there might be a financial crisis around the corner? Better to keep socking away US Treasury bills, even if the return is far lower than on most other investments.
Or is it? With today’s global economy in the middle of a sustained and increasingly balanced expansion, has the time come to start considering upside risks? In particular, should governments, especially those that are endlessly building up dollar reserves, instead start thinking about how to build up their roads, bridges, ports, electric grids, and other infrastructure? Has the time come to start laying the groundwork to sustain future growth, especially in poorer regions that have not yet shared in today’s prosperity?
Don’t get me wrong, I am not arguing for fiscal profligacy. But the balance of risks has shifted over the past few years. Yes, within the next three to five years, there will probably be another global recession. And, yes, there will probably be another rash of financial crises – perhaps in Central Europe, which now looks like Asia did before its 1997 crisis. Recent jitters about Iceland’s gaping trade deficit and Brazil’s new finance minister rippled around the world, reminding global investors that while many emerging markets are gradually moving towards investment-grade status, most are not there yet.
But the risks are two-sided, and sound economic policy is just as much about capitalizing on good times as avoiding bad ones. Economic gurus at places like the World Bank have developed a ridiculously long list of steps that countries should take to raise their growth rates (the so-called “extended Washington Consensus”). Like maintaining good health, it is not enough to concentrate on a single component. But if there is one area where obvious opportunities exist, and where policy can really make a difference, it would have to be infrastructure investment.