Developed countries urged to increase public investment to aid global recovery

9 Oct 20

Richer countries need to increase public investment to revive the global economy from its worst crash in recent times, the IMF has said.

 

In its latest Fiscal Monitor report, the fund said low interest rates, “plenty” savings and a large pool of unemployed workers ready to take up jobs make the conditions perfect to start spending money again.

“Increasing public investment in advanced and emerging market economies could help revive economic activity from the sharpest and deepest global economic collapse in contemporary history”, the IMF said.

“It could also create millions of jobs directly in the short term and millions more indirectly over a longer period.”

The IMF’s most recent World Economic Outlook update in June projected a global economic contraction of 4.9% in 2020.

The new report suggested increasing public investment by 1% of GDP could boost GDP by 2.7%, private investment by 10% and employment by 1.2%, as long as spending is of high quality.

“Maintaining the quality of investment projects is essential,” the fund said. “We find, for example, that the cost of an individual project can increase by as much as 10-15% just because it is undertaken in a period when investment is particularly high.”

Risks of mismanagement, delays and corruption are heightened when investment is scaled up, so improving governance is “crucial”, it added.

For some countries, borrowing to make the investments will be difficult because of tight financing conditions, the IMF acknowledged, but a more gradual scaling-up of investment could still pay off if interest rates do not increase by too much.

Most governments have already borrowed heavily to pay for their initial responses to the pandemic, which have mostly focused on healthcare, supporting businesses and cash transfers to the unemployed.

Global public debt is projected to reach a record high of about 100% of GDP this year, up from 83% in 2019 and higher than the 2014 peak of 90% as the world still reeled from the global financial crisis.

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