With the outbreak of the COVID-19 pandemic, governments all over the world are enacting major stimulus packages to confront the health crisis, one of the biggest challenges since the end of the Second World War. But when the pandemic crisis has been tamed, bigger challenges will be waiting, since the major imperative would be to immediately re-launch the global economy.
To this end, investments in infrastructures can be the right instrument to restart the engine. They are an indispensable part of any plan for fiscal stimulus that many countries will be adopting in the weeks and months to come, as an attempt to mitigate the negative effects of the economic paralysis, at the same time creating employment and improving competitiveness. They are a formidable countercyclical tool in a time when consumption, investments and trade are restrained by the economic slowdown. But investment in infrastructure also constitutes a pivotal component of a country’s future development. Due to its “special foundational role, supporting other factors of production” investments in infrastructure bring important benefits and increase the potential output and productivity of all inputs since they also constitute a platform through which major disruptive and incremental innovation could thrive, in a series of self-sustaining spillover effects that pave the way for future growth
Where to invest?
Over the next ten years, the world's population will grow from today’s 7.5 billion to around 8.7 billion and almost two-thirds of the total population will be living in urban areas: from 55% in 2018 to 68% by 2050, according to the 2018 World Urbanization Prospects produced by UNDESA.
These trends are particularly important because urbanisation with higher population density on the one hand reduces the cost of providing efficient systems of infrastructures and services to the population. On the other hand, however, it poses a major challenge for city planners who have to create a well-functioning system that can avoid the so-called diseconomy of scale produced by overpopulation, and last but not least the spread of diseases.
The second challenge for infrastructure is to embrace sustainability. This has progressively become an imperative, since more than 70% of global greenhouse gas emissions are caused by the construction or operation of infrastructure. Given the global emission reduction targets, enshrined in the Paris Agreement, and the adoption of the UN Sustainable Development Goals (SDGs), it is crucial that infrastructures be designed in the most sustainable way environmentally, economically and socially. As a result, public financial institutions are called upon to share the burden and are in the forefront of the green revolution. In November 2019, the European Investment Bank (EIB) launched a new climate strategy and Energy Lending Policy, becoming de facto the EU Climate Bank. The EIB will end financing for fossil fuel energy projects from the end of 2021, aligning all financial activities with the goals of the Paris Agreement by the end of 2020. New lending will be focused on energy efficiency, renewable energy, new green technologies and all the energy infrastructures required for the transition; the EIB will gradually increase the share of its financing dedicated to climate action and sustainability to reach 50% by 2025. To achieve sustainability in infrastructure a great help may come from technology. Traditionally, projects in infrastructure have been labour-intensive, engineering-driven and not at the cutting-edge of technology. Today, however, a wide array of breakthrough technologies is rapidly transforming the way infrastructure is built and operated, especially using Big Data. Technology will be essential to enhance productivity in construction sectors, improve safety and working conditions during construction and ensure a better operation and management of infrastructure through analytics.
Finally, developed countries will have to invest heavily in infrastructure, in particular to maintain, upgrade or replace existing (and often obsolete) infrastructure. America's infrastructure, for example, is desperately in need of investment, according to the American Society of Civil Engineers, which estimates that the US needs to spend some US$4.5 trillion by 2025 to fix the country's roads, bridges, dams and other infrastructure such as schools and airports. Similar issues can be seen in Europe. In Germany, for example, the KfW – Germany’s state investment bank – has calculated that local municipalities need to spend at least €138 billion to bridge the backlog of urgent infrastructural investments.
Quality is the keyword that should drive infrastructural investments in the years to come. As a matter of fact, only quality infrastructure can ensure sustainability and positive spillovers on long-term growth. To this end, as the 2008 economic crisis stimulated a coordinated approach among major countries’ monetary policies, this time there is a need for stronger commitment at the international level to coordinate a massive fiscal stimulus to restart the engine of the world economy.
The current international health and economic crisis will probably reshape the paradigms of international cooperation and this could be a boost to achievement of a level playing field at a global level. If a cooperative approach prevails, infrastructure investments will effectively play their countercyclical role, mitigating the economic impact of the crisis and promoting the conditions for a sound recovery when the storm will be over.