New Structural Economics and Resource Financed Infrastructure

• Date: 01 February 2016
• Author: Justin Yifu Lin,Yan Wang
• DOI: http://doi.org/10.1111/1468-0106.12154
• Published date: 01 February 2016

NEW STRUCTURAL ECONOMICS AND RESOURCE

FINANCED INFRASTRUCTURE

JUSTIN YIFU LIN Peking University

YAN WANG*Peking University

Abstract. The world economy needs a growth-lifting strategy, and infrastructure financing appears to

hold the key. Two new development banks have been established: the New Development Bank and

the Asian Infrastructural Investment Bank (AIIB). However, what conceptual framework will they

formulate? This paper addresses infrastructural financing issues from the angle of structural transfor-

mation as a strategy for global development. Based on the new structural economics (Lin, 2010,

2012a) we stress the ‘real’side of transforming natural resources to productive assets using the

resource financed infrastructure. As one of the innovative instruments, this approach could, first,

combine two otherwise isolated supply chains, resource extraction and infrastructure building,

and, thereby, bring developmental results many years ahead of what other conventional approaches

could. Second, this could serve as one of the ‘least-cost’options for developing countries, and benefit

borrowers disproportionately due to its feature of ‘non-recourse’loans. Finally, in a low-yield envi-

ronment, the rate of return from investing in bottleneck-releasing infrastructure could be attractive to

many investors. Future prospects of development financing, including the ‘one belt one road’initia-

tive are discussed.

1. INTRODUCTION: THE WORLD NEEDS A GROWTH-LIFTING STRATEGY

In the years since 2008, the global economy has experienced the most treacher-

ous times since the Great Depression. Seven years after the global financial crisis

the recovery is still weak despite years of zero interest rates. Some world-

renowned economists are discussing the possible ‘secular stagnation’.

1

In the

first quarter of 2015, the US economy actually contracted by 0.7%, after

downgrading from 0.2% growth.

2

In addition, for quite some time, the IMF

has been warning about low growth becoming the ‘new normal’. Having lost

confidence in the Washington Consensus in the Great Recession since 2008, de-

veloping countries are increasingly looking East for development experiences

and ideas: what worked, why and how.

1

See papers on this topic including those by Summers, Krugman, Gordon, Blanchard, Koo,

Eichengreen, Caballero, Glaeser, and a dozen others at http://www.voxeu.org/article/secular-stag-

nation-facts-causes-and-cures-new-vox-ebook. Lin’sAgainst the Consensus: Reflections on Great Re-

cession by Cambridge University also discusses the secular stagnation and proposed ways to get of

the problem.

2

See http://www.nytimes.com/2015/05/30/business/economy/us-economy-gdp-q1-revision.html?

_r=0.

*Address for Correspondence: National School of Development, Peking University, Beijing 100871

China. This paper draws from two of our published papers (Lin and Wang 2013 and Lin and Wang

2014). The authors thank Håvard Halland, Bryan Land, Vivien Foster, Xiaoyang Tang, Shuilin

Wang and JiajunXu for discussion, and HaixiaoWu for research assistance.The views expressed here

are entirelythose of the authors and do not repres ent the views of the institutions t hey are affiliated

with. Comments and suggestions can be sent to the corresponding author, Yan Wang, at

yanwang2@gwu.edu.

Pacific Economic Review, 21: 1 (2016) pp. 102–117

doi: 10.1111/1468-0106.12154

© 2016 John Wiley & Sons Australia, Ltd

bs_bs_banner

What policies could constitute a win‒win solution to avoid a protracted ‘new

normal’of slow growth, high unemployment, high volatility and low returns to

investment? There seems to be a consensus that infrastructure investment may

serve as one of the key drivers of a growth-lifting strategy, as shown by the

G20 decisions, and the IMF’s World Economic Outlook 2014 (chapter 3). How-

ever, infrastructure financing seems to hold the key to this growth-lifting strat-

egy. Two new development banks have been established by the emerging

market economies and started operation in 2015, including the New Develop-

ment Bank, as determined by the BRICS summit in July 2014, and the Asian

Infrastructural Investment Bank (AIIB), proposed by China and joined by 56

other countries. They have injected new momentum into the global economic

development arena. However, what conceptual framework will they formulate?

Based on the intellectual foundation of the new structural economics (Lin,

2010, 2011a, 2012a), this paper addresses the infrastructural financing issue from

the angle of structural transformation as a growth-lifting strategy for global

recovery. We present motivations and evidence to support infrastructure invest-

ment, including the rationales for the ‘one belt one road’vision and the ‘resource

financed infrastructure’(RFI) as a new financing mechanism. We argue that

investing in global public infrastructure could increase aggregate demand to

enable structural reforms in advanced countries and support green growth

through investments in bottleneck-releasing infrastructure projects in both

advanced and developing countries. Furthermore, we propose stressing the ‘real’

side of transforming natural resources to productive assets using the RFI as one

of the innovative instruments.

Unlike traditional Keynesian stimulus, the global infrastructure investment

initiative that Justin Lin has proposed since 2009 has several unique features.

First, instead of increasing government spending to support consumption or

by ‘digging a hole and filling a hole’in advanced economies where the rate of re-

turn is low, our proposal emphasizes that any growth-lifting solution should fo-

cus on implementing bottleneck-releasing investments in developed and

developing countries, which will not only increase demand in the short term

but also raise longer-term growth prospects. The traditional Keynesian stimulus

directs spending toward the domestic economy, while this proposal recommends

a globally-coordinated investment initiative, directing global savings toward

where the developmental impact of employment generation and social rates of

return are higher. Such projects will increase demand and jobs in advanced

countries and offset the contractionary effect when the advanced countries exit

the quantitative easing program, raise interest rates and implement the needed

structural reforms (Lin 2011b, 2011c, 2012b, 2013a, 2013b).

Second, investing in ‘bottleneck releasing’infrastructure could lead to high

social and financial rates of returns, as well as employment generation and

poverty reduction in the long term. Empirical literature has found supporting

evidence for the contribution of infrastructure to long-run growth and develop-

ment. Aschauer (1989) found that the stock of public infrastructure capital is a

significant determinant of aggregate TFP in the United States, and his estimate

of the marginal product of infrastructure capital was as high as 100% per year.

NEW STRUCTURAL ECONOMICS AND RESOURCE FINANCED INFRASTRUCTURE 103

© 2016 John Wiley & Sons Australia, Ltd