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

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

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

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

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 Infrastructure and growth

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

Two ingredients in LAC’s policy framework: 1.Macroeconomic crises and fiscal adjustment Public sector retrenchment Compression of public expenditures – including infrastructure 2.Opening up of infrastructure to private participation Diversity across countries / sectors in timing and form of opening 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 The changing policy framework

Public infrastructure compression contributed a large part of LAC’s fiscal adjustment: vs 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 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. The changing policy framework

The unmet needs $ Billion All infrastructureTransportElectricityWater & SanitationTelecomm. Annual investment need, Actual private investment, 1998 Private financing for infrastructure is important, but still not enough

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.

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