WASHINGTON, August 31, 2005 — Infrastructure has improved in most of Latin America and the Caribbean (LAC) over the last decade, but a sharp fall in investment in the sector is hindering economic growth, poverty reduction, and the region's ability to compete with China and other dynamic Asian economies, says a new World Bank report.
According to Infrastructure in Latin America and the Caribbean: Recent Developments and Key Challenges, by World Bank economists Marianne Fay and Mary Morrison, the region is currently spending less than 2 percent of GDP on infrastructure, down from 3.7 percent of GDP in 1980-1985. But spending would need to reach 4 to 6 percent a year for infrastructure to catch up or keep up with countries that once trailed it, such as Korea and China.
"Progress in Latin America and the Caribbean has generally been slower than in other middle income countries, notably China," said Marianne Fay, World Bank Lead Economist in Infrastructure for Latin America and the Caribbean and co-author of the report. "LAC has now fallen behind for electricity, roads and fixed telephone lines, with only cellular telephony and access to safe water and sanitation facilities performing comparatively well."
According to the report, the infrastructure deficit lowers the productivity and competitiveness of Latin American firms, slowing economic growth. Logistics costs (transportation and storage) are high in LAC, due largely to inadequate transport infrastructure. These costs are about 10 percent of product value in industrialized countries, but in LAC they range from 15 percent in Chile to 34 percent in Peru.
The study argues that the region needs to increase investment in infrastructure, from both the public and private sectors. Despite some expectations, private sector investment never compensated for public cutbacks in the 1990s. And the level of private participation has plunged recently, with the value of LAC infrastructure projects with private participation dropping to $16 billion in 2003 from a peak of $71 billion in 1998.
Furthermore, many countries and sectors have seen little private investment. By total project value, 93 percent of private investment in LAC infrastructure over 1990-2003 went to just six countries (Argentina, Brazil, Chile, Colombia, Peru and Mexico), and mostly into telecommunications and energy.
The report says that attracting back the private sector will require stronger legal, regulatory and institutional frameworks, more transparent contracting, and innovative financing structures that make projects less risky and improve returns for investors. Many of the problems of private involvement, including frequent renegotiation of concessions, have arisen because of immature governance arrangements and controls.
Improvements in these areas will also address negative public sentiment about privatization, now widespread in the region, by helping ensure that quality, service levels and affordability are maintained, particularly for disadvantaged groups. Targeting public subsidies more toward those who really need them will also benefit the poor.
"Recent experience in Latin America illustrates that governments remain central to infrastructure provision," said Mary Morrison, co-author of the report. "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."
The study presents new World Bank reseach that says improving the region's infrastructure to the level of Korea could result in annual per capita growth gains of 1.4 to 1.8 percent of GDP, as well as reducing inequality by 10 to 20 percent. The poor benefit from infrastructure expansion both because gaining safe water, electricity and other services improves health and quality of life, and also because it helps them advance economically. Better roads, for example, mean greater market access for small farmers and rural communities.
"Increasing infrastructure investment presents considerable challenges for governments in Latin America and the Caribbean," said Fay. "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."
In access to safe water, LAC surpasses the middle-income average, as well as China, having increased from 82 percent of the population in 1990 to 89 percent in 2002. In addition, the region has a higher cellular penetration than other middle income countries. Nevertheless, less than a third of national road networks are in good condition and the region has slipped behind middle-income countries in energy generation capacity.
Alejandra Viveros (202) 473-4306
Patricia da Camara (202)-473-4019
Co-author Marianne Fay discusses the findings of this report