The world's leading economies will need to pump close to $19tn of financing into infrastructure and other long-term projects by the end of this decade if they are to produce even modest growth, a group of prominent financial sector figures has said.
Without sufficient investment in infrastructure, factories and equipment, new housing and commercial buildings, education, and research and development, the productive capacity of countries' economies will not increase and the potential for jobs and growth will be limited, according to a study by the Group of Thirty, a body made up of senior bankers and economists.
"But questions loom about whether the supply of financing will be adequate to meet the world's needs," the report, Long-term Finance and Economic Growth
, warns. It highlights new bank regulations, fiscal consolidation and the impact of ageing populations as the main factors behind the squeeze on long-term financing.
The study focuses on nine major economies – the United States, United Kingdom, Germany, France, Japan, China, India, Brazil and Mexico – that together account for 60 per cent of global gross domestic product. It claims that these countries will need annual long-term investments of $18.8tn in real terms by 2020 – compared with $11.7tn in 2010 – to achieve just "moderate levels" of growth.
Since the crisis, the need for stability has dominated the policy agenda, but there must be equal focus on financing the real economy.
But the Group of Thirty notes that policy-makers and market actors are currently failing to adhere to best practice and may, as a result, be doing a "poor job" of supplying long-term finance. They should address the regulatory and other barriers that constrain key investors from providing the finance that is needed in the future, the report recommends.
Among a series of suggestions, it proposes that national regulators and global bodies such as the International Monetary Fund should produce best-practice guidelines to ensure investors can take long-term decisions, new dedicated financing institutions created, and greater use made of public-private partnerships.
"Since the 2007-09 global financial crisis, the need for stability and soundness has dominated the policy agenda, but there must be equal focus on ensuring that financing is available to the real economy – and the two goals are not mutually exclusive," the report says. It adds that long-term finance "exerts a stabilising influence on the financial system".
The analysis was produced by the Group of Thirty's working group on long-term finance, led by former Bank of Mexico governor Guillermo Ortiz, in conjunction with the consultants the McKinsey Global Institute. Other G30 members involved in the publication were the incoming Bank of England governor, Mark Carney; the chairman of the United Kingdom's Financial Services Authority, Adair Turner; and the former president of the European Central Bank and current G30 chairman Jean-Claude Trichet.
In a foreword, Trichet and Jacob A. Frenkel, a former governor of the Bank of Israel, said: "The G30 identified an issue of major concern to both the public and private actors following the financial crisis: the efficient provision of a level of long-term finance sufficient to support expected sustainable economic growth in advancing and emerging economies. Flows of long-term finance via various routes are crucial to bring about sustainable growth and job creation."
The G30's stated aim, according to its website, is to "deepen understanding of international economic and financial issues" and "examine the choices available to market practitioners and policy-makers". Among its members is the current president of the ECB Mario Draghi, whose involvement prompted a complaint, later rejected
by the European Ombudsman, that his taking part undermined the independence of the eurozone central bank.