The American Build Back Better World must invest in physical infrastructure

Infrastructure is a theme I have come back to many times, both in these pages and elsewhere. It is the backbone on which any functioning economy rests, and the global infrastructure needs are enormous. Functioning infrastructure improves productivity and competitiveness and “helps provide economic incentives to public and private sector participants,” according to the Federal Reserve Bank of Atlanta.

The lack of functional infrastructure slows down economic growth and cancels out its gains. The global infrastructure deficit is undermining global growth and productivity, with the deficit being more pronounced in some parts of the world than in others, particularly in Africa. African economies are therefore alert to any changes in the global infrastructure financing landscape.

The White House estimates infrastructure financing needs in the developing world at $40 trillion. McKinsey estimates global infrastructure needs at around $3.3 trillion per year through 2030 to meet projected GDP growth.

These projections were made before the pandemic and the economic scars it caused – particularly in low- and lower-middle-income countries. Even when FDI flows and infrastructure investment rebounded in 2021, it was high-income economies that “saw by far the strongest rise, with FDI reaching around $777 billion in 2021,” according to the report. UNCTAD.

Patterns of capital flows in industry and infrastructure have retained and worsened the pre-pandemic pattern of favoring high-income economies, with low-income countries lagging far behind.

A confluence of decades-long delays and postponements in infrastructure construction and maintenance, coupled with climate-induced extreme weather events around the world, is compounding a pervasive and growing gap. Infrastructure financing is an economic security issue in most countries of the world.

The incredible ambition of Belt and Road

In 2013, China launched a global infrastructure financing program called One Belt One Road, which was later replaced by the Belt and Road Initiative (BRI). There is no real list of projects or total investment amount. But to give some perspective on size, data firm Refinitiv estimates that in the first quarter of 2020, the value of BRI projects topped $4 trillion for the first time.

They classified 1,590 projects (with an estimated value of $1.9 trillion) as BRI projects, and another 1,574 (with an estimated value of $2.1 trillion) as “projects with Chinese involvement”.

Despite the relentless criticism of China’s debt-fueled infrastructure financing and the risk it entails for borrowing countries, the scale and ambition of the BRI is staggering. According to the World Bank, the BRI covers a third of world trade and more than 60% of the world’s population. If the United States and the European Union reach this scale, either together or separately, the global infrastructure deficit will shrink.

So it was with great anticipation that we hosted two global funding programs in 2021.

The United States introduced Build Back Better World (B3W) and the European Union introduced Global Gateway. Both programs emphasized that they presented alternatives to the BRI. Global Gateway’s main stated advantage was “investment quality”. And B3W repeated the same themes, as a “values-driven, high-level and transparent infrastructure partnership.”

US and EU responses pale in comparison

Then, as now, I argued that to be considered a competitor or alternative to China’s BRI, both of these initiatives had to match China in scale and scope.

The EU’s Global Gateway is already a disappointment. As my colleagues at the Center for Global Development explain in a blog: “Global Gateway is a simple exercise in packaging things that have already been programmed. The €300 billion is mostly made up of a mix of existing commitments from European development finance institutions… the Global Gateway also makes very questionable assumptions about mobilizing private investment, rather than actual spending or new commitments.

B3W presents a similar challenge. The intensity of the battle in the US Congress to pass a national infrastructure bill does not inspire confidence in the possibility of a BRI-sized response from the United States. Until now, it’s not even clear how big B3W would be – whether it will include new resources or simply repackage existing development funding programs.

More troubling is B3W’s apparent excision of material physical infrastructure from its remit, with a focus on “climate, health and safety, digital technology, and gender equity and equality.”

In Africa, which lags behind all other regions of the world in terms of the availability of paved roads and electricity, this deficit is expected to increase without a massive influx of investment in hard infrastructure. At the current rate, the minimum deficit for the road network will be 60,000 km by 2040 and an additional deficit of 30,000 km for the rail network.

It bears repeating that this continent will house half of the projected 2 billion increase in world population by the middle of the century. The Africa region and other low-income countries around the world, threatened by the ongoing climate calamity, will now have to focus on building stronger and more resilient infrastructure, which involves more spending. B3W still has time to go back to the drawing board and tackle infrastructure in a broad sense.

Last year, the United States said that B3W would unveil “five to ten major infrastructure projects around the world”. It is hoped that these are only the first of many announced projects that are being funded quickly. As the US has recognized, there is a $40 trillion global infrastructure gap and a slow, piecemeal B3W approach will not address this need.

The only way to close the gap

If there is one thing each of these programs can learn from the BRI, it is ambition. The ambition of the BRI reflects the necessary scale of any infrastructure financing program that targets this gap.

This is not a defense of China’s methods. While the “debt trap” argument is completely unproven, the opacity around China’s signature deals opens the BRI up to legitimate criticism.

Despite the opacity of China’s deals, their efforts remain the only bilateral infrastructure program that matches the problem in terms of scale and ambition. I would rather fight to improve a flawed but existing program than face an ever-growing infrastructure deficit with haphazard and undersized responses.

Gyude Moore is a senior policy fellow at the Center for Global Development.

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