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Does infrastructure hold secrets for the global economy?

Infrastructure for the global economy

Infrastructure investment is a hot topic that seems to have piqued interest from governments around the world.
In 2014, The European Commission launched a three-year programme to invest €315 billion in infrastructure across the continent, while Chinese president Xi Jinping’s Belt and Road Initiative will better connect the country with Central Asia, the Middle East and Europe – the ‘Belt’ will provide a new Silk Road route over land, with a maritime ‘Road’ route over sea to the south. This will be achieved through investing in road, rail and port, and includes the first direct freight train route from Yiwu in eastern China to London.

Infrastructure was also one of the few things on which Donald Trump made concrete pledges during his presidential campaign – he vowed to spend $1 trillion on building roads, bridges, ports and other public works projects across the US as part of his drive to 'make America great again'.

In times of political change and uncertainty, is there any evidence that government investment in infrastructure is an effective way of calming or stimulating economies?  An International Monetary Fund study in 2014 found that infrastructure spending of one percentage point of GDP in advanced economies increased output by 0.4 per cent in the same year. This had a snowball effect and, as a result of increased supply, there was a further 1.5 per cent boost four years later.

The study found that ’the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise’, and that when managed well, public infrastructure investment can pay for itself.  These projects also often have a huge multiplier effect – building a road not only enables movement, but also connects people with healthcare, employment, markets and other factors that can reduce poverty levels and improve prospects.

Concentrating on infrastructure investment to bring economic stability isn't a new phenomenon. Perhaps one of the most famous was Franklin D Roosevelt’s New Deal, launched in the early 1930s, which supported the high number of unemployed people in America after its economic collapse.

Significant investment triggered the construction of around 650,000 miles of road, 78,000 bridges, and 125,000 civilian and military buildings, along with 800 airports – giving many of those without jobs work, as well as access to a higher standard of living. However, while it’s hailed as the greatest infrastructure project the US has ever seen, it was arguably only successful because war broke out.

Whether Donald Trump's trillion-dollar pledge will have the same positive impact in 2017 as Roosevelt's New Deal in 1933 remains to be seen – there are many differences between now and the post-Great Depression US and what is clear is that any infrastructure investment needs to be supported by other policies, if is to bring economic stability.

Speaking to Global Finance, Gianluca Minella, infrastructure specialist at Deutsche Asset Management, said that investment in infrastructure is a key measure in the fiscal policy now required – there has been a realisation that central banks can print money, but not economic growth.​