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The Macroeconomics of The Macroeconomics of Financing Basic Utilities for AllFinancing Basic Utilities for All

Terry McKinleyTerry McKinleyInternational Poverty CentreInternational Poverty Centre

““Financing Access to Basic Utilities for All”Financing Access to Basic Utilities for All”Multi-Stakeholder Consultation, Brasilia, 13 December 2006Multi-Stakeholder Consultation, Brasilia, 13 December 2006

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Some BackgroundSome BackgroundUNDP has supported 25 national reports on UNDP has supported 25 national reports on Economic Policies for Growth, Employment and Economic Policies for Growth, Employment and Poverty Reduction since 2002Poverty Reduction since 2002The motivation was to promote greater policy The motivation was to promote greater policy dialogue and provide policy alternatives to Neo-dialogue and provide policy alternatives to Neo-Liberalism (“The Washington Consensus”)Liberalism (“The Washington Consensus”)

1.1. CoverageCoverage: Asia-Pacific, Eastern Europe and the CIS, Middle : Asia-Pacific, Eastern Europe and the CIS, Middle East and sub-Saharan AfricaEast and sub-Saharan Africa

2.2. ThemesThemes: a) fiscal, monetary and exchange-rate policies and : a) fiscal, monetary and exchange-rate policies and b) financial liberalization, trade liberalization and b) financial liberalization, trade liberalization and privatisationprivatisation

3.3. UNDP has also supported a global project on “Privatisation UNDP has also supported a global project on “Privatisation and Poverty Reduction” (most studies in low-income and Poverty Reduction” (most studies in low-income countries in Africa)countries in Africa)

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The Conclusion of UNDP StudiesThe Conclusion of UNDP Studies

The Privatisation and Commercialisation of Public The Privatisation and Commercialisation of Public Services are not compatible with Poverty Services are not compatible with Poverty ReductionReductionThey are also not compatible in low-income They are also not compatible in low-income countries with achieving the Millennium countries with achieving the Millennium Development GoalsDevelopment Goals

See Working Paper #22 of the International Poverty Centre: See Working Paper #22 of the International Poverty Centre: Bayliss and Kessler, “Can Privatisation and Bayliss and Kessler, “Can Privatisation and Commercialisation of Public Services Help Achieve the Commercialisation of Public Services Help Achieve the MDGs: An Assessment?”MDGs: An Assessment?” www.undp-povertycentre.orgwww.undp-povertycentre.org

A Central QuestionA Central Question: How will access to public services—such : How will access to public services—such as water, sanitation and electricity—be financed? as water, sanitation and electricity—be financed?

How can cost recovery (commercialisation) be reconciled How can cost recovery (commercialisation) be reconciled with ensuring access to all, particularly poor households?with ensuring access to all, particularly poor households?

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Access to Electricity: Access to Electricity: Percentage of PopulationPercentage of Population

RegionRegion 19701970TotalTotal

19901990TotalTotal

20002000TotalTotal

20002000UrbanUrban

20002000RuralRural

AfricaAfrica 1414 2525 3434 6363 1717

S. AsiaS. Asia 1717 3232 4141 6868 3030

E. AsiaE. Asia 3030 5656 8787 9898 8181

Latin AmericaLatin America 4545 7070 8787 9898 5151

All DevelopingAll Developing 2525 4646 6464 8686 5151

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Access to Electricity: Access to Electricity: The Need for Public Investment The Need for Public Investment How to reach households without electricity?How to reach households without electricity?

Two-thirds of households in Africa—83% in rural areas?Two-thirds of households in Africa—83% in rural areas? 59% of households in South Asia—70% in rural areas?59% of households in South Asia—70% in rural areas? 49% of households in rural Latin America?49% of households in rural Latin America?

We have to dramatically ‘scale up’ public investment in We have to dramatically ‘scale up’ public investment in order to expand the electrical gridorder to expand the electrical gridCosting the public investment needed to reach the MDGs Costing the public investment needed to reach the MDGs has provided a stronger impetus for a change in strategyhas provided a stronger impetus for a change in strategyWe have re-asserted the need for Economic Policies that We have re-asserted the need for Economic Policies that support Economic Development, not just Macroeconomic support Economic Development, not just Macroeconomic StabilizationStabilization

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The Need for Public Investment-Led The Need for Public Investment-Led Economic PoliciesEconomic Policies

Why are Neo-Liberal Economic Policies Why are Neo-Liberal Economic Policies incompatible with financing public incompatible with financing public investment to ensure Access to All? investment to ensure Access to All? According to Neo-Liberals, increased Public According to Neo-Liberals, increased Public Investment willInvestment will::

1.1. ‘‘Crowd out’ (displace) private investmentCrowd out’ (displace) private investment2.2. Cause accelerating inflation and appreciation Cause accelerating inflation and appreciation

of the exchange rateof the exchange rate3.3. Increase the Fiscal Deficit and Public DebtIncrease the Fiscal Deficit and Public Debt

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Public Investment Has Been in Public Investment Has Been in Long-Term DeclineLong-Term Decline

In Asia, public investment as a share of GDP fell from In Asia, public investment as a share of GDP fell from 10 per cent in 1980 to seven per cent in 200010 per cent in 1980 to seven per cent in 2000Latin America has been the most adversely Latin America has been the most adversely affected by declining public investmentaffected by declining public investment

In Argentina, Brazil and Mexico, public In Argentina, Brazil and Mexico, public investment as a share of GDP: investment as a share of GDP:

1.1. Rose to a peak of 10-12% in the late 1970s and early Rose to a peak of 10-12% in the late 1970s and early 1980s1980s

2.2. But plummeted to 2-3% by 2000But plummeted to 2-3% by 2000Investment in infrastructure (such as water Investment in infrastructure (such as water systems, roads and electricity) was cut sharply:systems, roads and electricity) was cut sharply:

It dropped to 1.6% of GDP in Latin America in 2000It dropped to 1.6% of GDP in Latin America in 2000

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Public Investment in Developing Public Investment in Developing Countries, 1970-2000Countries, 1970-2000(as a share of GDP)(as a share of GDP)

4

5

6

7

8

9

10

11

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Simple average Weighted average

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Why Is Increasing Public Why Is Increasing Public Investment Justified?Investment Justified?

It will stimulate private investment, not It will stimulate private investment, not dampen it dampen it (example: electricity)(example: electricity)It will increase the productive capacity of the It will increase the productive capacity of the economy so inflation is less of a problemeconomy so inflation is less of a problemGovernments Governments shouldshould borrow to finance borrow to finance public investment public investment

It creates future revenue and benefitsIt creates future revenue and benefits Current revenue should cover current expendituresCurrent revenue should cover current expenditures So incurring deficits is normal for such purposesSo incurring deficits is normal for such purposes

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The Macroeconomic ImplicationsThe Macroeconomic Implicationsof Expanding Basic Utilities of Expanding Basic Utilities

Fiscal policies need to be more Fiscal policies need to be more expansionary (investment focused)expansionary (investment focused)Monetary policies should be consistent Monetary policies should be consistent with fiscal expansionwith fiscal expansion

Low inflation targets (3-5%) can be counter-Low inflation targets (3-5%) can be counter-productive (inflation phobia)productive (inflation phobia)

Achieving such targets drives up real rates of Achieving such targets drives up real rates of interestinterest

Such interest rates slow private investment and Such interest rates slow private investment and make public borrowing more expensivemake public borrowing more expensive

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The Role of Capital Inflows in The Role of Capital Inflows in Financing Basic UtilitiesFinancing Basic Utilities

For low-income countries, a dramatic For low-income countries, a dramatic increase of Official Development increase of Official Development Assistance need not be destabilizingAssistance need not be destabilizing

Fiscal policies (increase government spending) Fiscal policies (increase government spending) and monetary policies (sell foreign exchange) and monetary policies (sell foreign exchange) need to be coordinated need to be coordinated (IPC Working Paper #10)(IPC Working Paper #10)

Plus manage the exchange rate and the capital Plus manage the exchange rate and the capital account in order to avoid volatilityaccount in order to avoid volatility

The volatility of aid (and private capital) is the The volatility of aid (and private capital) is the chief problemchief problem

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The Role of Capital Inflows in The Role of Capital Inflows in Financing Basic UtilitiesFinancing Basic Utilities

Private investment in basic utilities has Private investment in basic utilities has often been unreliableoften been unreliableIts focus on profits often conflicts with Its focus on profits often conflicts with ensuring access to all (social objectives)ensuring access to all (social objectives)But this focus can also conflict with long-But this focus can also conflict with long-term term developmentdevelopment objectives objectives

Achieving long-term capital accumulation Achieving long-term capital accumulation and growth as well as equity in access to and growth as well as equity in access to basic utilitiesbasic utilities