Growth in Latin American and Caribbean is sharply impacted by the failure to invest in infrastructure and the cost rises over time, according to a new report by the Inter-American Development Bank.
The study looks at energy, transportation, telecommunications, and water and sanitation sectors in six countries indicative of the reality for the entire region: Argentina, Bolivia, Costa Rica, Chile, Jamaica and Peru.
On average, failure to add new capital to existing stocks is estimated to cost the selected Latin American and Caribbean countries approximately 1 percentage point of forgone GDP growth. The cost rises to 15 percentage points in forgone growth if the gaps persist over 10 years.
This is the equivalent of around $900 billion based on the current GDP levels for the entire region.
The infrastructure investment gap in the region is estimated at around 2.5 percent of GDP, or around $150 billion per year. Latin America and the Caribbean not only lags in investment amounts but also in quality, according to the IDB Group’s annual Macroeconomic Report, which this year has a focus on infrastructure investment.
“The impacts vary across countries depending on economic structures,” said IDB Principal Economic Advisor Andrew Powell, one of the report’s editors. “Our analysis shows just how critical more and better investments are needed in infrastructure, tackling issues that range from better project identification to financing constraints.”
Failure to invest more in infrastructure hurts the poor the most, likely because they spend more of their income on infrastructure services. The study found that households in the lower 40 percent of the income distribution will lose 11 percentage points of real income over a 10-year period.
The report also looks at how infrastructure investments impact the labor productivity in economic sectors. It calculates that a positive shock to growth of just $13 billion in Brazil, Argentina, Chile, Colombia and Mexico, from well-chosen infrastructure investments, could boost growth in the region by 0.5 percent per year for each of three years.
Investment strategies that work best
The report analyzes infrastructure investment strategies in more detail by identifying which types of infrastructure -- transportation, energy or construction -- affect labor productivity in each economic sector (industry, commerce or agriculture) the most. For the region on average, the estimates are that if countries can increase investment levels in these infrastructure sectors enough to close the gaps with developed OECD countries, then the economy-wide productivity growth could increase by 75 percent with respect to the historical average. This means the region’s income per capita income could double in almost half the time.
In terms of quality, Latin America and the Caribbean comes in fifth place among six regions, ahead of Sub-Saharan Africa.
The region performs best in the energy sector, with scores that are close to emerging Asia. It performs most poorly in the transport sector. The report identifies the sectors where the region has the biggest gaps. For instance, in telecommunications, Panama, Mexico and Guyana underperform, while Jamaica, Barbados and Costa Rica score above their predicted quality levels given their level of development.
“The challenge here is closing the infrastructure gap in times of tight budget constraints,” said IDB Principal Economic Specialist Eduardo Cavallo, a co-author of the book. “And yet investment in the right infrastructure projects can improve productivity and boost growth thus enhancing fiscal revenues.”
The report recommends closing the infrastructure gaps through greater and better public investment and by attracting more private finance. Improving project identification and preparation and providing the necessary institutional and legal framework to prioritize and manage complex projects that require both public and private sources of financing should help boost private investment.
Multilateral development banks are important players to provide both expertise and to crowd-in private financing. Country-level infrastructure funds with an associated MDB facility for project identification and development could issue infrastructure bonds to provide greater financing from institutional investors. Individual projects financed in this way could count on MDB guarantees for certain risks allowing greater participation from hands-off investors.
About the IDB
The Inter-American Development Bank is devoted to improving lives. Established in 1959, the IDB is a leading source of long-term financing for economic, social and institutional development in Latin America and the Caribbean. The IDB also conducts cutting-edge research and provides policy advice, technical assistance and training to public and private sector clients throughout the region.