Luis Servén The World Bank CLAI-OAS Energy Conference March 19 2002 Infrastructure in Latin...

Luis Servén The World Bank

CLAI-OAS Energy ConferenceMarch 19 2002

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

Infrastructure Stocks: PowerMedians by Region, 1980-97

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1980 1990 1995 1997Elec

tric

Gen

erat

ing

Cap

acity

(in

MW

pe

r 100

0 w

orke

rs)

Latin America East Asia 7 Industrial Countries

Power generating capacity per worker(MW per thousand)

0.00 0.50 1.00 1.50 2.00 2.50

Guatemala

Honduras

Nicaragua

Bolivia

El Salvador

Dominican Republic

Peru

Colombia

Ecuador

Brazil

Latin America median

Panama

Costa Rica

Jamaica

Chile

Mexico

EAP median

Argentina

Uruguay

Venezuela

1997

1980

Infrastructure Stocks: TransportMedians by Region, 1980-97

0

5

10

15

20

25

1980 1990 1995 1997

Pave

d R

oads

(in

km p

er 1

000

wor

kers

)

Latin America East Asia 7 Middle Income non-LAC Industrial Countries

Infrastructure Stocks: TelecommunicationsMedians by Region, 1980-97

0

200

400

600

800

1000

1200

1980 1990 1995 1997

Mai

n Li

nes

(per

100

0 w

orke

rs)


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

Infrastructure Quality: PowerMedians by Region, 1980-97

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

1980 1990 1995 1997

Pow

er L

osse

s (%

of O

utpu

t)


Power losses(percent of power output)

0.00 5.00 10.00 15.00 20.00 25.00 30.00

Dominican Republic

Nicaragua

Honduras

Ecuador

Colombia

Panama

Venezuela

Uruguay

Argentina

Brazil

Latin America median

Peru

Mexico

El Salvador

Guatemala

Jamaica

Bolivia

Chile

East Asia median

Costa Rica

Paraguay

1997

1980

Infrastructure Quality: TransportMedians by Region, 1980-97

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1990 1995 1997

Pave

d R

oads

(% T

otal

Roa

ds)


Infrastructure Quality: TelecommunicationsMedians by Region, 1980-97

0

10

20

30

40

50

60

70

80

1991 1993 1995

Te

lep

ho

ne

Fau

lts

pe

r 10

0 m

ain

lin

es

Latin America East Asia 7 Middle Income non-LAC Industrial Countries

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

Infrastructure accumulation and growth (1960-97 country averages, percent)

y = 0.4224x + 0.0007

R2 = 0.3487

-4%

-2%

0%

2%

4%

6%

-2% 0% 2% 4% 6% 8% 10% 12%

Growth in infrastructure stocks per worker

Gro

wth

in

GD

P p

er

wo

rke

r

Others

lac

eap7

The growth cost of LAC’s infrastructure gap: What was its role in the widening of the LAC-EAP output gap ?

1980-97

1. Percent growth in the output gap (change in log of relative GDP per worker) 91.9

2. Portion attributable to the growth in the infrastructure gap (median of country data) o/w: gap in power generation capacity

20.2

6.8

3. [2] / [1] (percent) o/w: gap in power generation capacity

21.9

7.4

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


Public Investment in InfrastructureSelected Latin American Countries, 1980-98

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

As p

erce

ntag

e of

GDP

ARG BRA CHL COL MEX PER

Total Investment in InfrastructureSelected Latin American Countries, 1980-98

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

As p

erce

ntag

e of

GDP


Public investment in power (% GDP)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Argen

tina

Bolivi

a

Brazil

Chile

Colom

bia

Ecuad

or

Mex

ico

Peru

Venez

uela

1980-84

1985-89

1990-94

1995-98

Total investment in power (% GDP)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Argen

tina

Boliv

ia

Brazil

Chile

Colom

bia

Ecuad

or

Mex

ico

Peru

Venez

uela

1980-84

1985-89

1990-94

1995-98

• Public infrastructure compression contributed a large part of LAC’s fiscal adjustment: 1980-84 vs 1995-98


Cumulative Reduction in

public infrastructure

investment / GDP [1]

Cumulative Reduction in

public investment in power / GDP

[2]

Cumulative Increase in

primary budget surplus / GDP

[3]

% [1]/[3] % [2]/[3]

Argentina 2.9 1.6 5.3 53.8 30.4Bolivia 3.1 1.3 6.2 50.3 20.4Brazil 3.1 2.4 1.8 174.3 138.1Chile 1.4 1.3 2.4 58.8 53.0Colombia 0.0 -0.1 4.7 -0.8 -1.7Ecuador -0.7 -0.5 1.8 -37.6 -28.2Mexico 2.0 0.3 6.3 31.5 5.2Peru 1.5 1.2 3.1 48.6 39.6Venezuela 0.4 0.1 -1.9 -21.7 -4.5

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 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.


Private Investment in InfrastructureSelected Latin American Countries, 1980-98

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

As p

erce

ntag

e of

GDP


Private investment in power (% GDP)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Argen

tina

Boliv

ia

Brazil

Chile

Colom

bia

Ecuad

or

Mex

ico

Peru

Venez

uela

1980-84

1985-89

1990-94

1995-98


Power Losses vs. Private Investment(5-year periods, 1980-97)

y = -3.2834x + 18.417

R2 = 0.06630

5

10

15

20

25

0.0 0.2 0.4 0.6 0.8 1.0 1.2

Private Share of Investment in Power

Ele

ctr

icit

y P

rod

ucti

on

Lo

sses


Telephone Faults vs. Private Investment(5-year periods, 1980-97)

y = -75.865x + 100.13

R2 = 0.4065

0

20

40

60

80

100

120

140

0.0 0.2 0.4 0.6 0.8 1.0 1.2

Private Share of Investment in Telecom

Tele

ph

on

e F

au

lts p

er

main

lin

e

The unmet needs

0

10

20

30

40

50

60

70

80

$ Billion

All infrastructure Transport Electricity Water & Sanitation Telecomm.

Annual investment need, 2000-05

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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