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OECD has the right recipe

OECD has the right recipe

Way forward in infrastructure spending

by David Marsh in Singapore

Tue 29 Mar 2016

The ‘new mediocre’ as an epithet to describe the global economy suggests a fatalistic resignation to sombre world circumstances – akin to a dull acquiescence in the inevitability of terrorists routinely blowing people up at European airports or railway stations.

For this reason, I believe it is a phrase to be avoided. My fellow panelists at a discussion I moderated at a 24 March session of the Boao forum – the annual Asia-focused economic symposium in Hainan, southern China – joined me in rejecting the implicit pessimism in the panel’s title: ‘The looming new mediocre’.

Instead we focused on some positive features of the world economy. Symptomatic of this was the view from Doug Frantz, a deputy secretary-general of the Paris-based Organisation for Economic Co-operation and Development, that coordinated spending on infrastructure can help put the world on to a higher growth path.

It’s a message the OECD needs to intensify. Low or negative interest rates should be a spur for government borrowing to aid value-added infrastructure projects in areas ranging from transport to communications networks. And there may well be a propitious link to the rebalancing of the Chinese economy as the Beijing authorities seek to divert more of the country’s net foreign assets into the ‘real economy’.

Frantz and the other panelists – including Min Zhu, a deputy managing director at the International Monetary Fund, William Cohen, former US defence secretary, and Didar Singh of the Federation of Indian Chambers of Commerce and Industry – did well in coining a variety of alternative phrases to ‘new mediocre’. Among them were ‘new sustainability’, ‘new reality’ and Zhu’s term for the Chinese slowdown – ‘new quality of growth’.

But it is the OECD’s formulation that sticks in the mind. In Paris a few days previously, on 21 March, I heard Catherine Mann, the OECD’s chief economist, explaining how the first-year effects of an extra 0.5% of GDP public investment by all OECD countries would increase world GDP by around 0.4%, ranging from 0.8% in Japan to 0.3% in the Brics countries. The US and Europe would garner increases in GDP in the mid-range of these figures. At the same time, because of the positive effect on the overall size of economies, debt to GDP ratios would fall, by 2% in Japan and 0.2% to 0.6% in other industrialised countries.

The OECD backs efforts to roll back creeping protectionism and better-focused monetary and fiscal policies to promote credit and equity flows, as well as fiscal policies focused on investment spending. The organisation looks likely to return to its habitual plea for European countries with large structural current account surpluses, led by Germany and the Netherlands, to promote growth through fiscal stimulus.

With an eye on the danger of protectionism, the OECD highlights worrying figures from research body Global Trade Alert showing a significant increase in worldwide discriminatory trade measures, from 400 in 2013 and 2014 to 550 in 2015. The OECD is consequently calling for a further push on regulatory reform in Europe, especially in the increasingly internationally traded service sector.

The link to China is intriguing. The Boao forum was opened by Li Keqiang, the Chinese prime minister, pledging that China would not depreciate the renminbi to stimulate exports. In the next five years, Li said, China's economy will grow at an average annual 6.5%-plus, import over $10tn of goods, and make $600bn of outbound investment. Several hundred big projects and programmes will be put into operation, Li said. We can be pretty certain that a sizeable portion will be in international infrastructure as China joins the bid to make this sector a still more buoyant part of the world economy.

David Marsh is Managing Director at OMFIF.

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