Infrastructure Development in Latin America: Macroeconomic Analysis

1. Infrastructure in Latin America: a macroeconomic perspective Luis Servén The World Bank CLAI-OAS Energy Conference March 19 2002

2. Infrastructure in Latin America Outline 1. Where does LAC stand ? A comparative perspective 2. The consequences: infrastructure and growth 3. The changing policy framework 4. The unmet needs

3. Where does LAC stand ? • A. Comparative perspective on infrastructure stocks • Focus on 3 standard indicators across countries [from the growth literature]: • Power: generation capacity • Transport: paved roads • Telecom: phone lines • Three main facts: • LAC lags significantly behind industrial countries and the successful East Asian economies • LAC lost a lot of ground relative to East Asia in the 1980s and early 1990s • There is considerable diversity within the region

8. Where does LAC stand ? • B. Comparative perspective on infrastructure quality • More severe data limitations on international comparisons • Power: % transmission losses • Transport: % roads paved • Telecom: phone faults [or % unsuccessful calls] • Again the same three facts emerge: • LAC lags significantly behind industrial countries and the successful East Asian economies. • LAC lost a lot of ground relative to East Asia in the 1980s and (early) 1990s. • There is considerable diversity within the region

13. Infrastructure and growth • Effects of LAC’s infrastructure gap • Lower productivity and higher production costs • Higher transport and logistic costs -- LAC transport costs and typical inventory levels double those of industrial countries • Higher costs reduce export competitiveness and deter foreign trade • They lower the profitability of capital and discourage investment • Through all these channels, the result is slower growth

15. Infrastructure and growth The growth cost of LAC’s infrastructure gap: What was its role in the widening of the LAC-EAP output gap ? Source: Calderón, Easterly and Servén (2002)

16. The changing policy framework • Two ingredients in LAC’s policy framework: • Macroeconomic crises and fiscal adjustment • Public sector retrenchment • Compression of public expenditures – including infrastructure • Opening up of infrastructure to private participation • Diversity across countries / sectors in timing and form of opening

17. The changing policy framework • Public sector retrenchment in LAC • Generalized decline in public infrastructure spending in the mid to late 1980s [with Colombia as the exception]. • In power, sharp decline in all major countries except Colombia and Ecuador. • Lacking private sector involvement, the result in most cases is a decline in overall (public + private) infrastructure investment. • The investment decline was a major factor behind LAC’s widening infrastructure gap

22. The changing policy framework • Public infrastructure compression contributed a large part of LAC’s fiscal adjustment: 1980-84 vs 1995-98

23. The changing policy framework • Public sector retrenchment in LAC • Was infrastructure compression an effective strategy to improve public sector solvency ? • The first-round effect of spending cuts is to raise public sector net worth • But infrastructure cuts hamper growth, tax collection and the public sector’s future debt servicing capacity [second-round effect] • If the debt stock is large, the second-round effect is big and infrastructure cuts do little to help public sector solvency • Infrastructure compression is not an efficient way to raise solvency

24. The changing policy framework • The opening up to private participation • In many cases too early to assess. • Effects uneven across sectors / countries in LAC • Among the major countries, large response of private infrastructure investment in Chile and Colombia. But the rest still show a declining trend in overall infrastructure investment. • In power, strong private response in COL, BOL, CHL, but continuing decline in overall investment in ARG, BRA, MEX (still closed). • No clear improvement in efficiency in power generation (as measured by power losses) – unlike in telecom.

27. The changing policy framework

28. The changing policy framework

29. 80 70 60 50 40 30 20 10 0 The unmet needs $ Billion Annual investment need, 2000-05 Actual private investment, 1998 All infrastructure Transport Electricity Water & Sanitation Telecomm. Private financing for infrastructure is important, but still not enough

30. Summary • 5 points: • LAC lags behind in terms of infrastructure quantity and quality. This applies also to power generation. • This infrastructure gap entails a significant cost in terms of output and productivity. • The gap widened with the compression of public infrastructure spending in the 1980s and early 1990s. • Private participation in the 1990s has led to a partial investment recovery, but uneven across countries and infrastructure sectors. • Private participation falls way short of actual financing needs.

31. Fin