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smozumder@worldbank.org MUMBAI, March 13, 2009: With the global economy contracting and as developing countries feel the hit to their real economies through a build up in unsold goods, idling factories, and reduced trade, World Bank Chief Economist Justin Yifu Lin today argued that big investments in infrastructure in developing countries by industrial countries could pave the way for eventual recovery and a resumption in demand.
Lin’s commencement day lecture at EXIM in Mumbai was titled ‘Beyond Keynesian Economics: A Stimulus for Development.’
Stimulus measures initiated so far by developed country governments--typically big nationwide spending programs and immediate tax cuts that aim to boost demand--might not be sufficient in a world beset by falling equity markets, a drying up of credit to emerging markets, and ballooning unemployment, Lin warned.
Explaining his ‘beyond Keynesian’ argument, Lin said that policymakers should factor in the expectations of citizens, many of whom will assume that tax cuts and spending today will have to be paid for later. Anticipating that they might face higher taxes in the medium- to long-term many taxpayers are likely to spend less now, mitigating the fiscal stimulus’ goal of pushing up total demand.
“Making fiscal stimulus plans work by releasing bottlenecks to growth in developing countries offers a potential win-win solution,” said Lin. “because such infrastructure investments will not only increase demand in developing countries, but also their growth, and government revenues – which in turn will enhance overall global demand”.
In this scenario, Lin proposed that developed countries invest a share of their stimulus plans into infrastructure projects in developing countries. Support for such projects – for example to expand electricity grids in Africa -- could complement the World Bank Group’s ongoing efforts.
Central to the institution’s effort to help the poorest countries, World Bank Group President Robert B. Zoellick has proposed an umbrella Vulnerability Fund to which developed countries could dedicate 0.7 percent of their planned economic stimulus. The Vulnerability Fund, which could channel resources not only through the Bank but also through the UN or other Multi-lateral Development Banks, would help countries without the resources to respond to the crisis by funding investments in three key areas: infrastructure projects, safety net programs, and financing for small and medium-sized businesses and microfinance institutions.
Relieving India’s bottlenecks to growth
Turning to India, Lin predicted that by investing in much-needed infrastructure, the country could both kick-start demand in the face of the current crisis as well as pave the way for longer-term growth.
“Investment in infrastructure could revitalize manufacturing in India, which accounts for only 16 percent of the country’s total output, and contribute significantly to job creation,” Lin said. “The potential impact on productivity and growth could be a strong contribution to India’s development.”
As the effects of three consecutive crises—food, fuel, and financial—hit poor households across the developing world, Lin noted that another of India’s defenses against the current situation is its existing social safety nets, such as the National Rural Employment Guarantee Scheme.
While India has faced some deterioration in public finances due to low revenue collections, tax cuts, and additional expenditures; the country holds sizable foreign reserves and could leverage them to invest in infrastructure, Lin noted. Skillful economic management could reduce the impact of a protracted crisis on India’s economy. The bottomline : Need for a global, coordinated fiscal stimulus “It is now widely acknowledged that the world economy is going through a global recession the likes of which we have not seen in eight decades. Unlike previous crises, this one originated in the United States, at the heart of the international financial system, and it involves the world’s main global reserve currency. The inability to rely on export stimulus anywhere also makes it evident that no one country or group of countries can emerge from the crisis on its own. Cooperation among industrialized and emerging economies and coordination of policies across the board are essential,” Lin concluded.
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