Five Lessons for Emerging Markets from the Trump Infrastructure Plan
Last week the US administration unveiled its long awaited and much-discussed infrastructure plan. Headlined in the 2016 electoral campaign as a “trillion dollar” fix for the United States’ infrastructure woes, its vision grew into a “$1.5 trillion plan” as announced by the President – the largest ever seen, at least as headlined. What can Emerging Country governments learn from this “world’s largest infrastructure plan”?
Let’s start with the immediate reactions to the plan. One might expect, with all the attention on US infrastructure needs, the show-stopping figures beyond what we’ve ever seen (after all, the entire world spends roughly a trillion dollars a year on infrastructure), excitement and delight all around. Finally, action!
Not exactly. “A big nothing burger” (Greentech media), “Trumpastructure is a scam” (Paul Krugman). “Trump Infrastructure Plan: You Pay for It” (Slate), “Trump’s Infrastructure Con” (US News & World Report); “A Scam” (BBC), are among the more characteristic reactions. Outside of the Des Moines Register or the White House, it’s pretty hard to find anyone excited about this plan. Indeed, one notable difference between this and several other initiatives of the current administration: reactions to other policies have broken strictly down party lines; here, in spite of the expectation that infrastructure might be the only area where bipartisan support might be forthcoming, it’s hard to find any defenders on the political right. Sounds like a big missed opportunity.
There are lessons here for the rest of the world. Practically every Emerging Market government faces the same issue that the current US Administration does: insufficient investment in infrastructure. The topic increasingly finds its way into electoral campaigns, as we’ve seen in the past few years in Mexico, India, Indonesia and Argentina. What should Emerging Market governments take away from this last week?
Here are five lessons from the experience of the Trump Infrastructure plan.
1. Communications matter. As with many policy initiatives across different areas, expectations play a huge role in how people react. Promising something far beyond what is delivered is never a good recipe. Of course substance helps, but hardly amount of substance in this plan could have compared to the expectations that were created. Even more important, however, was the nature of the talking. Finding solutions to how to pay for large increases in infrastructure investment is difficult, and any solution is going to play out over many years – read, over more than one administration. Talking about common ground, and building support across the political spectrum, is the only option for any government wanting to implement a large-scale infrastructure plan. Without broad political support, public sector funding will hard to assemble, and private capital will see the risks as too high to play. For an emerging market government, the lesson is: talk less, do more, and talk differently.
2. Sub-sovereigns are more and more central to infrastructure. This piece the US administration got “right.” The concept of a sovereign focusing on supporting investment at the state or local level makes plenty of sense. In the US, according to the Hamilton Project’s analysis of Bureau of Economic Affairs data, infrastructure spending in 2010-2015 was ten times larger at the sub-sovereign than at the Federal level. The substance of the approach may not be so great (see lesson 3 below), but the focus makes sense. Even in Emerging Markets, where sub-sovereigns may seem like much smaller actors, the trend is clear. Driven by the long-term dynamic of urbanization and fiscal devolution, and the newly emerging dynamic of new mobility technologies and business models, sub-sovereigns are emerging as the “Kings of the Hill” for infrastructure. At the IFC, the largest cross-border financier of infrastructure in Emerging Markets, sub-sovereign financing is shaping up as the hot growth area. As an Emerging Market government, understanding how actors at other government levels will help deliver is key to your future.
3. Leverage is good — even better when it is thought through. Another area the US plan gets “right” is the focus on leverage, as in leveraging central government funds. When you’ve got less money than you want to have, making it go farther makes all the sense in the world. Governments throughout the world, and the multilateral institutions which play a big role in supporting infrastructure, have known this for a while. Schemes like the European Investment Bank or the World Bank’s guarantee programs are great at “crowding in” commercial finance, while the municipal bond market in the US is another great example of how enhancement can unlock large amounts of capital, when well designed. But it’s along way from a good concept to large-scale implementation. The design of the current US plan will leave most sub-sovereigns unable to meet the needed terms to unlock the “new” federal money, and the “new” money seems to be coming from cuts in what would otherwise have been spent on infrastructure anyway. As Brookings’ Ryan Nunn put it, there is “still no free lunch.” The consensus view is high marks for the idea, bottom of the class marks for the details. In fairness, it takes a lot of design work – which was not a feature of this plan – to get guarantees to work as intended: even the World Bank’s long-standing guarantee program is regularly criticized for not doing more. So as an Emerging Market government, focus on leverage, but get lost of help on the details.
4. The days of all-government solutions are gone. Leverage is also critical in another sense, namely getting private capital to supplement government spending on infrastructure. In the US, as in most of the world, government spending capacities are further and further away from needs. Aspirations are growing everywhere, while budgets are not. This has been recognized by every group that has looked at the issue of infrastructure in developing countries, including now several G-20 plans. Interestingly, the US is a bit behind the curve on this recognition, with a lower proportion of private to public investment in infrastructure than many other countries. Here, the rhetoric behind the new US plan seems to have gone nowhere. Rather than a detailed and well-thought through plan to mobilize long-term private capital, and to put the bulk of America’s infrastructure spending tab on a private bill, the new plan seems more about public sector grants with little planning behind them for private parties, with a high risk of special interest capture. For an Emerging Market government, the lesson to draw is that no government – OK, with the possible exception of China – can find the money it needs for infrastructure by itself. But, how you go about it makes all the difference in the world.
5. Economics trumps politics (pun intended). Of course, politics are everywhere. A high visibility aspect of today’s US politics – and of many other OECD countries – is the constituencies that push back on change, for a whole variety of reasons. Groups wanting change in energy markets to “go away” were notably strong supporters of candidate Trump, whether they were voters looking to “end the war on coal” or utilities disliking the impact of new energy technologies. And though the “$1.5 trillion” US infrastructure plan manages the remarkable feat of mentioning neither climate nor renewable energy (which may now account for 1/3 of total infrastructure spending), energy markets have continued to move in the same direction they have been. According to a report from the Sierra Club, more US coal plants closed in the first 45 days of 2018 than in the entire first term of Barack Obama. Technology, which has made wind and solar cheaper than thermal alternatives in an ever-growing number of places, has changed energy markets irreversibly. The analogy for many Emerging Markets governments? Trying to protect the losers from technology change affecting infrastructure – as opposed to helping them adapt – is a waste of time and resources. Getting infrastructure done is hard enough without wasting your shots. In many Emerging Markets, this will mean watching out for attempts of incumbents, especially SOEs, to push change away. And with technology change spreading beyond energy markets, there will be plenty of losers.