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November 2, 2016

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Home » Opinion » Foreign Views

Sustainable investment can spur growth

By Jeffrey D. Sachs | November 2, 2016, Wednesday | Print Edition

THE big disappointment in the world economy today is the low rate of investment. In the years leading up to the 2008 financial crisis, growth in high-income countries was propelled by spending on housing and private consumption. When the crisis hit, both kinds of spending plummeted, and the investments that should have picked up the slack never materialized. This must change.

After the crisis, the world’s major central banks attempted to revive spending and employment by slashing interest rates. The strategy worked, to some extent. By flooding capital markets with liquidity and holding down market interest rates, policymakers encouraged investors to bid up stock and bond prices. This created financial wealth through capital gains, while spurring consumption and, through initial public offerings, some investment.

Yet this policy has reached its limits — and imposed undeniable costs. With interest rates at or even below zero, investors borrow for highly speculative purposes. As a result, the overall quality of investments has dropped, while leverage has risen. When central banks finally tighten credit, there is a real risk of significant asset-price declines.

As monetary policy was being pushed to its limits, what went missing was an increase in long-term investments in high-speed rail, roads, ports, low-carbon energy, safe water and sanitation, and health and education. With budget austerity restraining public investment, and major uncertainties concerning public policy and international taxation hampering private investment, such spending has generally declined in the high-income countries.

Despite US President Barack Obama’s promises of investment in high-speed rail and other modern infrastructure, not one mile of fast rail was built during his eight years in office. It is time to translate words into action, in the United States and elsewhere, and usher in a new era of high investment in sustainable development.

There are three challenges facing such a strategy: identifying the right projects; developing complex plans that involve both the public and private sectors (and often more than one country); and structuring the financing. To succeed, governments must be capable of effective long-term planning, budgeting, and project implementation.

Today, governments will have some help in overcoming at least one of the key challenges. The Sustainable Development Goals (SDGs) and the Paris Climate Agreement will help to guide them toward the right projects.

The world needs massive investments in low-carbon energy systems, and an end to the construction of new coal-fired power plants.

China’s “One Belt, One Road” initiative — which aims to link Asia to Europe with modern infrastructure networks — will help to advance some of these goals, assuming the projects are designed with a low-carbon-energy future in mind. That initiative will boost employment, spending, and growth, especially in the landlocked economies across Eurasia.

A similar program is needed urgently in Africa.

As for Europe, the European Commission’s Investment Plan for Europe should become the EU’s SDG program. It should focus, for example, on creating a Europe-wide transmission grid for low-carbon energy, and on a massive increase in renewable-power generation.

To help finance such programs, the multilateral development banks should raise vastly more long-term debt from the capital markets at the prevailing low interest rates. They should then lend those funds to governments and public-private investment entities.

For the poorest countries, much of the needed investment should come through increased official development assistance.

Sustainable development is not just a wish and a slogan; it offers the only realistic path to global growth and high employment. It is time to give it the attention — and investment — it deserves.

 

Jeffrey D. Sachs is Professor of Sustainable Development and Director of the Earth Institute at Columbia University. He is also Director of the UN Sustainable Development Solutions Network. Copyright: Project Syndicate, 2016. www.project-syndicate.org Shanghai Daily condensed the article.

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