Institutional investors, such as pension funds and life-insurance companies, with more than US$70 trillion in assets are a major additional source of long-term capital. While such investment in long-term productive assets, like infrastructure, is essential to generating the income that these investors demand, less than 1 percent of pension-fund assets are allocated directly to infrastructure projects.
Meanwhile, net savings in developing economies are increasing, and low yields in developed economies are providing an incentive for investors to channel more resources to productive investment in these countries.
Another promising development is the growth of local-currency bond markets. These markets can become a strong source of financing for longer-term domestic investment, including in infrastructure, thereby reducing currency risk for borrowers and investors. However, strong and sustainable development of these markets cannot occur without institutional and regulatory reforms that ensure an attractive environment, as well as capacity-building in both the public and private sectors to facilitate further market development.
Investors’ willingness to make capital available over the longer term for infrastructure development, job creation and economic growth depends on their perceptions of various kinds of risk. Policymakers can manage these perceptions by improving public-sector governance, ensuring sound macroeconomic management, promoting a transparent and supportive legal framework for private-sector activity, building debt-management capacity, and protecting investors from expropriation.
Moving away from a one-size-fits-all approach to financial reform means committing the time and effort needed to understand the political economy, as well as establishing partnerships with representatives from government, civil society and the private sector. Such tailored solutions are essential to bolstering economic performance in developed and developing economies alike.
Mahmoud Mohieldin is managing director of the World Bank Group.
Copyright: Project Syndicate