Chandan Sapkota’s Blog: 02/01/2019

Structural reforms are hard to apply in the short-term. Stabilization actions will be the medicine for short-term demand insufficiency usually. The solution for the present time: jack up productivity-enhancing public investment. That brings us to the third factor behind the global economy’s anemic performance: underinvestment, by the public sector especially. In America, infrastructure investment remains suboptimal, and investment in the economy’s knowledge and technology base is declining, partly because the pressure to stay in these areas has waned since the Chilly War ended ahead. Europe, for its part, is constrained by excessive public debt and weak fiscal positions.

In the rising world, India and Brazil are just two types of economies where insufficient investment has kept development below potential (though that may be changing in India). The notable exclusion is China, which has preserved high (and sometimes perhaps extreme) degrees of public investment throughout the post-crisis period. Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, motivating technological innovation, and spurring private-sector investment by increasing profits.

Though the public investment cannot fix a big demand shortfall right away, it can accelerate the recovery and establish more sustainable development patterns. And, financial policy only won’t be sufficient. Though monetary stimulus is important to facilitate deleveraging, prevent financial-system dysfunction, and bolster investor confidence, it cannot place an economy on a sustainable growth path alone – a spot that central bankers themselves have repeatedly emphasized. Structural reforms, together with increased investment, are needed also.

Given the degree to which inadequate demand is constraining growth, investment should come first. Faced with tight fiscal (and political) constraints, policymakers should abandon the flawed notion that investments with broad – and, somewhat, non-appropriable – public benefits must be financed with public funds entirely. Instead, they need to establish intermediation channels for long-term financing.

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At once, this process means that policymakers must find ways to ensure that open public investments provide profits for private investors. Fortunately, there are existing models, such as those applied to ports, roads, and rail systems, as well as the royalties system for intellectual property. The way to do that would be: (I) G-20 nations increase open public investment; and (ii) multilateral and regional development organizations mobilize private capital to fund public investment. That is why the G-20 should work to encourage the general public investment within member countries, while international finance institutions, development banks, and national government authorities should seek to channel private capital toward open public investment, with appropriate earnings.

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