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Thursday, April 27, 2006

Time to Build

When we last heard from Ken Rogoff, he was worried about being replaced someday by robots programmed with artificial intelligence, "pocket professors" as he called them. In his latest installment for Project Syndicate, he urges developing countries to begin using their accumulated reserves to make much needed investments in infrastructure. Because risks have diminished over time, these reserves can be used to build a foundation for sustained future growth instead of being placed in Treasury Bills as a hedge against risk:

A Time to Build, by Kenneth Rogoff, Project Syndicate: ...With today’s global economy in the middle of a sustained and increasingly balanced expansion, ... should governments, especially those that are endlessly building up dollar reserves, ... 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. ... 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.

India’s infrastructure problems are legendary, with airports and railroads that are comically inadequate. However, aside from a few countries – including China, of course, but also Spain – low infrastructure spending is epidemic. Even the United States has infrastructure that is hobbled by neglect, with collapsing bridges and a dangerously overburdened electrical grid. Land-rich Brazil, too, is a case study in the consequences of under-investment. ... Russia, despite Siberia’s massive oil and gas riches, isn’t even investing enough to support healthy growth in its energy industries, much less human development in the country’s impoverished areas (including hapless Siberia).

True, government infrastructure spending is often wasted. My hometown of Boston recently managed to spend an astounding $15 billion dollars to move a few highways underground. And that so-called “Big Dig” looks like a model of efficiency next to many of Japan’s infamous bridges to nowhere.

But there are ways to waste less. Transparency in procurement works wonders. So, too, does private sector involvement. The Nobel laureate economist William Vickrey argued tirelessly in favor of privately financed toll roads. Private oversight can often produce better and more efficient construction, and, in theory, toll roads help alleviate traffic congestion. (Ironically, Vickery died while sitting in a traffic jam.) Even China, which has added more than 50,000 kilometers of roads and dozens of airports over the past five years, makes use of private financing.

True, countries that have not cleaned up their fiscal act, such as India, must not recklessly plunge ahead ... without counterbalancing reforms to ensure sustainability. Fiscal prudence and stable inflation rates are cornerstones of today’s relatively healthy global economic environment. But for countries that have scope to invest more, particularly those that are holding a surfeit of precious development dollars in idle US Treasury bills, the time may be ripe to reassess the balance of risks.

The IMF is absolutely right to remind ministers each April of downside risks. Countries’ need for better infrastructure is no license to throw prudence out the window. But when the world’s finance ministers ... also need to look at the opportunities.

I think this is a good idea as well. Speaking of the IMF, Anne Krueger will be stepping down as deputy managing director in August. Ken Rogoff is rumored to be on the shortlist of candidates to replace her:

US reviews shortlist for IMF job, by Krishna Guha, Financial Times: The US is reviewing a shortlist of candidates to succeed Anne Krueger, who yesterday announced she would be stepping down as first deputy managing director of the International Monetary Fund in August. ... The process of finding a successor to Ms Krueger ... is well advanced. John Lipsky, vice-chairman of JPMorgan investment bank, and Ken Rogoff, a professor of economics at Harvard university who was once director of research at the IMF, are understood to be on the shortlist, along with at least one other highly rated candidate...

Update: Andrew Glyn of Oxford University gives contrary advice in the Financial Times where he says not to be complacent about the chances of a financial collapse: Finance’s rise threatens economic stability, by Andrew Glyn, Commentary, Financial Times:

...the past decade has seen the least volatile output growth of any decade since 1950. Does this refute the argument that the rise of finance threatens greater economic instability? Such a conclusion would be too complacent. Stable economic conditions themselves encourage greater risk-taking. Financial innovation may have thickened the financial elastic. But it is becoming more and more tightly stretched. Who can be confident that it will not snap?

    Posted by on Thursday, April 27, 2006 at 12:15 AM in Economics, International Finance, Policy | Permalink  TrackBack (0)  Comments (10)

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