April 29, 2019
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If you’ve waited for that big file to download, then you’ve experienced what it’s like when infrastructure holds back economic growth. At least metaphorically. Imagine that your lengthy download time is a system of outdated, inefficient or unreliable roads and bridges. By the time your file is done, someone else has already pulled it up on their phone – or by the time your produce finally makes it to market, half of it is no longer fresh. To compete in the global economy, the countries of Latin America and the Caribbean need better roads, ports and energy grids.
The region’s infrastructure investment gap – or the difference between the amount required to support growing populations, achieve economic growth and meet the UN’s Sustainable Development Goals, and the amount currently being invested – amounts to 2.5 percent of GDP, or some $150 billion per year, according to IDB estimates. The region’s infrastructure also lags in perceived quality, ranking fifth out of six regions, only ahead of Sub-Saharan Africa. Policymakers know they need to invest more in infrastructure, but the kind of infrastructure they should prioritize is often less clear. More fiber optics or better sanitary systems? Splurging on the wrong kind of infrastructure could even do economic harm.
The interplay between economic growth and infrastructure is the focus of our latest Macroeconomic Report, Building Opportunities for Growth in a Challenging World.
Researchers looked at how Argentina, Bolivia, Costa Rica, Chile, Jamaica and Peru invested in energy, transportation, telecommunications, and water and sanitation. They found that failure to add new capital to existing stocks can cost the six countries up to 15 percentage points of forgone growth if the policy persists over 10 years. This is the equivalent of approximately $900 billion, based on the current GDP levels for the entire region.
Researchers also looked at data from almost 70 countries to see how transportation, energy and construction affected labor productivity in industry, commerce or agricultural sectors.
Interactive: choose a country and see how it invests as a percentage of its GDP
“We found that labor productivity in agriculture, for example, would benefit from investments in the all three infrastructure-related sectors: transportation, energy and construction,” said IDB economist Eduardo Cavallo, one of the Macroeconomic Report’s coordinators.
But, Cavallo notes, this does not occur equally. A one-percent increase in the productivity of transport would increase agriculture productivity by 1.2 percent, whereas a one-percent increase in the productivity of utilities is estimated to increase agriculture productivity by just 0.5 percent.
In other words, an avocado farmer in Mexico would benefit from both better roads and cheaper energy, but would gain more from better roads. Getting the mix right can make the Mexican economy more productive overall.
In the case of manufacturing, which is a high-productivity growth sector in the world, a one-percent increase in the productivity of construction is estimated to increase productivity by 0.42 percent.
#LatAm and the #Caribbean face difficult external challenges, ranging from #Brexit to slower growth in China. Learn what the IDB's newly released macroeconomic report says about how these challenges could affect the region's growth. https://t.co/SKscJaCZDW
— BID IdeasQueCuentan (@IDB_Research) April 23, 2019
“Investments in transport are particularly helpful for agriculture, and investments in construction are relevant for productivity growth in all economic sectors, except for mining,” said the IDB’s Alejandro Izquierdo, who studies the infrastructure-growth relationship.
Researchers are now exploring if, and to what extent, the aggregate data from many countries applies to specific countries, given their unique characteristics.
“The sector-level evidence from our world sample provides a roadmap in terms of which infrastructure investments are best for which economic sectors. Now we need to contrast this evidence with the country-specific data to confirm that these investment allocations are right. That’s why we are now conducting pilot case studies, such as in Argentina, to come up with well-founded infrastructure investment strategies,” said Izquierdo.
Once this exercise is completed, the final step is to look at a country’s public investment plans to see if they are aligned with the studies’ findings. As Izquierdo put it: “In times of tight budgets, every investment dollar counts.”
The potential payoff? If countries in Latin America and the Caribbean increased investment levels in these infrastructure sectors enough to close the gaps with developed countries grouped in the OECD, the economy-wide productivity growth could increase by 75 percent with respect to the historical average.
Were that to happen, according to Izquierdo, the region’s per capita income could double in almost half the time. This is a powerful way for countries to secure more economic growth in times of global economic headwinds.
Download our full Macroeconomic Report, and also by country, here.
Bachelet,Pablo A.
