This article summarizes our joint paper for the United Nations High Level Panelon the Post 2015 Development Agenda, entitled Beyond the Marshall Plan: A Global Structural Transformation Fund.
Five years after the global financial crisis exploded in September 2008, the global economy is not ‘out of the woods’ yet. Our new joint paper proposed to “go beyond the Keynesianism, go beyond the Infrastructure, and go beyond the Marshall Plan”. This paper addresses infrastructural financing issues from the angle of structural transformation as a growth-lifting strategy for global recovery.
We present motivation and evidence to support a global infrastructure initiative – a Global Structural Transformation Fund (GSTF) that could motivate excess savings from the emerging market economies and Sovereign Wealth Funds, invest in bottleneck-releasing infrastructure projects in both advanced and developing countries, and thereby promote green growth and job creation.
First, our proposal emphasizes that any growth-lifting solution should focus on implementing bottleneck-releasing investments in developed and developing countries which will not only increase demand in the short-term but also raise longer term growth prospects.
The traditional Keynesian stimulus directs spending toward the domestic economy, while this proposal recommends a globally coordinated investment initiative, directing global savings toward where the developmental impact of employment generation and social rates of return are higher. Such projects will increase demand and jobs in advanced countries and offset the contractionary effect when the advanced countries implement the needed fiscal consolidation.
Second, investing in ‘bottleneck releasing’ infrastructure could lead to high social and financial rates of returns, as well as employment generation and poverty reduction in the long term. Empirical literature has found supporting evidence for the contribution of infrastructure on long-run growth and development.
Third, investing in infrastructure alone is not sufficient to propel the growth engine and generate jobs unless it is combined with productive assets and human capital. A common misconception is that the lack of investment in infrastructure is always to blame where the private sector is not creating jobs – the causes may be related to inadequate agglomeration and cluster development, and other productive assets and human capital or capacity.
Our new idea is to combine infrastructural building with green urban development, Eco-industrial parks and structural transformation to generate employment, revenue, growth and poverty reduction, making the environment more sustainable and the infrastructure financially viable.
Additionally, when reviewing the history of the Marshall plan, we notice that the Marshall Plan had not limited to the reconstruction of the infrastructure only. And it cost only $13 billion dollars, or around 1.1 percent of the US GDP during that period.[Source] At the time of the Marshall Plan there was never an attempt to separate infrastructure from the industrial production and trade. Why do we limit ourselves to infrastructure only?
Fourth, there is a huge infrastructural funding and capacity gap in developing countries, especially in the area of renewable energy and green technology. The GSTF can help ‘crowd in’ funding and increase utilization of green technology by transforming existing cities into green cities, and building new clusters of eco-friendly industries.
It will attract emerging market economies such as Brazil, China, India, and Arab countries to invest overseas and relocate some of their excess production capacity to low-income developing countries where there is a demand.
Box 1. Southern Partners are leading financier of Infrastructure in SSA
The roles of emerging donors in infrastructure financing
Recent studies show that non-traditional bilateral development financiers such as China, India, Arab countries and Brazil have emerged as major financiers of infrastructure projects in Africa.
In particular, China has been working on bottleneck-releasing sectors such as power generation and transmission. While “Donors have neglected power since the 1990s” , 50% of China’s commitment on infrastructure was allocated to Electricity.
A recent study found that China has contributed, and is contributing, to a total of 9.024 Gigawatt of electricity generating capacity, including completed, on-going and committed power projects. The impact of this investment is likely to be transformative when one considers that the entire installed capacity of the 47 Sub-Saharan African countries excluding South Africa countries is 28 Gigawatt.
These emerging financiers are seeking opportunities to increase their investment and diversify their portfolio into different types of projects, thereby increase their risk-adjusted returns.
Box Figure 2: Confirmed Chinese infrastructure finance commitments in Sub-Saharan Africa by Sector 2001-2010
The roles of Sovereign Wealth Funds
The potential for mobilizing funding from investors, such as, for example Sovereign Wealth Funds (SWFs) seems promising. It is estimated that SWFs hold more than US$6.03 trillion in financial assets as of December 2013 and these assets are expected to grow rapidly in coming years. Some SWF are already investing in infrastructure in developing countries.
In particular, the world’s largest Sovereign Wealth Fund, The Norwegian Government Pension Fund, with $818 billion assets, is debating about the opportunities of investing more in the emerging markets. A separate and small Fund, the Norfund is the Norwegian government’s fund for equity- and other investment in developing countries.
A study found that Norfund has had successful investments in developing countries and higher rates of return, outperformed the larger oil fund. This has kicked off a larger national debate — why not the oil fund invests more in developing countries?
Investing in productivity enhancing infrastructure projects is critical for generating growth and creating jobs, here and abroad. In the advanced economies, it can be a powerful instrument to promote green growth, create jobs, and enhance future competiveness. In particular, we propose to set up aGlobal Structural Transformation Fund (GSTF) to mobilize vast savings from the official entities from emerging market economies, SWFs, public pension funds as well as the private sector.
Our proposal is a ‘win-win’ for the world as well. It would boost exports and employment in high-income countries while reducing poverty and enhancing growth in developing countries. Now is the time to develop pragmatic plans that put these ideas into practice and build the roads, ports, railways, and power plants needed to support jobs and prosperity in high-income and developing countries for a brighter future of all.
Looking forward, our new joint paper suggests a broadening of the definitions of development finance to attract more investment from SWFs for releasing developing countries’ bottlenecks.