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World Bank Urges More Spending on Infrastructure in the Americas

Report warns that poor infrastructure hinders economic growth

Posted: September 1, 2005

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 transport infrastructure.

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 lines."

Moreover, "when infrastructure services are not good, the poor always suffer the most," she adds.

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 ground."

PRIVATE-SECTOR INVESTMENT NEEDS TO WIN BACK PUBLIC CONFIDENCE

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 consumers.

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."

Lauren Monsen
Washington File Staff Writer

 
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