Low global interest rates since the 2008 global financial crisis seem to provide an ideal opportunity for boosting infrastructure investment. Bond rates have been historically low, so many governments can borrow at less than the rate of inflation.
There is spare productive capacity in most advanced economies, but weighed down by a heavy legacy of debt, few advanced economies have been in a position to support their slack economies by expanding the stock of infrastructure. Emerging economies, less hobbled by debt, have seized the opportunity, but have their own constraints. This graph tells the story.The constraint for advanced economies has been an overload of government debt. Despite the strenuous efforts to get budget deficits down, deficits persist and thus debt continues to rise. Former US Treasury Secretary Larry Summers, worried about secular stagnation, sees infrastructure spending as a key response and cites a list of US infrastructure inadequacies. So far, debt concerns have overridden his argument.
The emerging economies, on the other hand, had quite low debt, and have used the opportunity to expand infrastructure spending, albeit from a low base. China, as usual, is a special case. Much of its expansion was in the form of a huge financial stimulus in 2009, to offset the global crisis. Other emerging economies didn't match China's expansion but have also boosted infrastructure funding.
Most of this has been in the form of syndicated bank loans. Bank loans have the advantage of flexibility that suits the construction phase, but bonds are often a more appropriate form of longer-term infrastructure funding once the project is operational.
Global financial markets, however, still have limited capacity to accommodate emerging economy bonds. Pricing anomalies are common. It's a puzzle why Indonesia has to pay 8% to borrow while Greece, with its dismal repayment record and patently unsustainable debt level, was able to issue 10-year bonds at 5%. More needs to be done, both by the national authorities and by financial markets (especially rating agencies), to develop these bond markets. The G20 may have something to say about this in November.
Of course there is a danger that low interest rates will encourage projects which aren't viable when funding costs return to normal. The Bank for International Settlements (the source of the graph above) is warning of the urgent need to shift interest rates back towards normal, with this sort of cheap-funding distortion in mind. No doubt there are white elephants among these projects. China is routinely mentioned in this context, but it seems pretty likely that Brazil has spent too much on football stadiums.
That said, the cost of the inevitable mistakes has to be weighed against the debilitating effect of inadequate infrastructure. Budget strictures are crimping maintenance in advanced economies, and most of the emerging economies (with the possible exception of China) have a long way to go before they have adequate infrastructure.