Friday, May 28, 2010

The Count: Latin America's infrastructure gap

2... how many percentage points Latin America's average annual growth rate would increase if it achieved the same levels of infrastructure observed in other middle-income countries. Or at least according to a new policy paper by the World Bank.

According to the report, the retreat of the State in Latin America during the 1980s and 1990s has resulted in a significant "infrastructure gap" in relation to other middle-income and newly industrialized countries. As the region rushed to privatize public entities and downsize the State, public investment in infrastructure dropped dramatically. At the same time, increased private participation in infrastructure development became the norm.

And in Latin America, private participation in infrastructure during the 1990s was larger than in any other region of the world. As can be seen below, there was a boom in private infrastructure investment between 1990 and 1998. Investment commitments increased from $10 billion in 1990 to more than $70 billion in 1998. These then crashed after 1998 in the wake of the Asian crisis and failed to recover during the early 2000s (due in part to Argentina's crisis and the completion of initial investments related to utility company privatizations).

[Private participation in infrastructure: investment commitments, millions of dollars]
But it seems that, despite this huge investment boom, when it came to infrastructure the private sector simply wasn't up to the task. To quote the report:
"Because private sector participation was not sufficient to offset the contraction of Latin America's public infrastructure spending, the ensuing fall in total spending resulted in a slowdown in infrastructure development in the region, and a widening gap vis-a-vis other world regions in terms of both infrastructure and growth."
Taking into account access to telecommunications, roads and electricity, the authors of the report put together an "infrastructure quantity" index for all of Latin America. The results: Latin America as a whole gets a low score of 0.88, compared to 1.02 for all other middle-income countries, 1.20 for East Asia and 2.09 for industrial countries.

Within the region, Central America is worse off, scoring 0.57. Chile, Venezuela and Brazil, in order, score the highest, with respective scores of 1.57, 1.37 and 1.12. These are well above the middle-income average and in the case of Chile and Venezuela, above the East Asia average--but nevertheless still far from the industrial average.

The gap is also quite large in terms of infrastructure quality, which is based on a series of polls:

[Overall infrastructure quality]
And now to the punch line. The result of all this is that Latin America would have supposedly been enjoying higher growth rates if it had levels of infrastructure on par with other middle income countries. To estimate this, the paper runs several standard growth regressions but incorporating its infrastructure quantity and quality indexes. It then takes the estimated impact of infrastructure on growth rates and combines it with the size of the gap.

The result is that on average, as the big two above says, annual growth rates would be 2 percentage points higher in Latin America without the infrastructure gap, with most of the increase due to higher quantity rather than quality. Significantly, countries in the Andean region would benefit the most from closing the infrastructure gap, with average growth rates 3.1 percentage points higher.

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