Washington -- Countries in Latin America
and the Caribbean must substantially boost their spending
on infrastructure so that the region can compete with China
and other dynamic Asian economies, says the World Bank.
In a new report titled Infrastructure in
Latin America and the Caribbean: Recent Developments and
Key Challenges, the World Bank warns that a sharp fall in
the region's infrastructure investment over the past decade
has hindered economic growth, job creation and poverty reduction,
while also inhibiting the region's ability to keep up with
such countries as South Korea and China.
According to the report, co-authored by
World Bank economists Marianne Fay and Mary Morrison, the
region's "lackluster" performance on infrastructure
has produced severe consequences for Latin American firms.
The report finds that the infrastructure deficit has lowered
the productivity and competitiveness of many regional companies,
because logistics costs -- transportation and storage --
are high throughout the region, due primarily to inadequate
Fay acknowledges that during the preceding
decade there were some important improvements in regional
infrastructure in terms of water, sanitation and wider cell-phone
usage. "But progress in general has been lower than
in other middle-income countries, notably China," she
says. "The result is that Latin America is falling
behind in areas such as electricity, roads, and fixed phone
Moreover, "when infrastructure services
are not good, the poor always suffer the most," she
The report notes that Latin American governments
substantially reduced their spending on infrastructure in
the 1990s, largely in response to fiscal-austerity requirements.
Politically, it was much easier to slash funding for infrastructure
than to reduce salaries or pensions, the report explains.
Although it was assumed that the private
sector would compensate for less government spending on
infrastructure, that expectation was not met, says the report.
World Bank data indicates that the region's total investment
in infrastructure -- both from the public and private sectors
-- fell from 3.7 percent of gross domestic product (GDP)
during 1980-85 to approximately 2.2 percent of GDP in 1996.
The World Bank estimates that regional spending on infrastructure
would need to reach 4 percent to 6 percent per year in order
to achieve or maintain parity with China and South Korea.
Since "private investment was not able
to offset the collapses in public expenditure on infrastructure,"
says Fay, "the main lesson ... is that both the private
and the public sector have a role to play. Unless both are
involved, Latin American countries will continue to lose
PRIVATE-SECTOR INVESTMENT NEEDS TO WIN BACK
The World Bank report also cites the need
to address another issue, which may impede efforts to improve
regional infrastructure if it is not confronted. Not only
does the private sector show little appetite for raising
its contributions to infrastructure development, but --
perhaps more troubling -- the Latin American public now
has a largely negative perception about private-sector spending
on infrastructure, the report says. In fact, public opinion
in the region has turned against private-sector investment
to such an extent that it has become "a serious constraint"
in most countries, the World Bank concludes.
Today, the need to win back public sentiment
is probably one of the most important challenges for private-sector
investment in the region, the report says. At the same time,
the World Bank points out that public reaction is at odds
with generally positive assessments of the impact of privatization
in the region. But in order to garner public support, the
bank argues, measures must be adopted to make privatization
transactions more transparent, to reduce renegotiation of
concessions and to ensure that quality, service levels and
affordability are maintained, particularly for disadvantaged
Although the World Bank report urges governments
in the region to spend significantly more on infrastructure,
it concedes that there are limits to what the taxpayer can
-- or should -- subsidize. Since the necessary financing
cannot come from the public sector alone, governments need
to better leverage their resources to attract private financing,
says the report. The bank advises that this will require
stronger legal, regulatory and institutional frameworks,
as well as more transparency in contracting, and innovative
financing structures to make projects less risky and improve
returns for investors.
The report's co-authors repeatedly emphasize
the need for an expanded public-/private-sector alliance
to meet the growing needs of the region's citizens. Nothing
less will serve to reverse the losses caused by insufficient
infrastructure throughout the Americas, they caution.
"Recent experience in Latin America
illustrates that governments remain central to infrastructure
provision," says Morrison. "Not only is public
funding sometimes indispensable, but the state has an essential
role to play in partnering and overseeing private operators
and protecting consumers."
Clearly, "increasing infrastructure
investment presents considerable challenges for governments
in Latin America and the Caribbean," Fay adds. "But
the potential payoffs make it well worth the effort, both
in terms of growth and competitiveness, as well as the enhanced
opportunities and living standards for the region's poor."
Washington File Staff Writer