Infrastructure gap in LAC Gerardo Reyes-Tagle Fiscal Municipal Management Inter-American Development Bank March 2015

Does higher investment lead to higher development?

*Author’s calcualtions with data from IMF and ECLAC, for a sample of 156 countries in the period 1990-2011.

y = 0.218ln(x) - 0.036 R² = 0.1703

00.10.20.30.40.50.60.70.80.9

1

0 10 20 30 40 50

HD In

dex

Avg. Investment/GDP (%) 1990-2011

Developing Countries

y = -0.0079x + 0.9156 R² = 0.2515

00.10.20.30.40.50.60.70.80.9

1

15 17 19 21 23 25 27 29HD

Inde

x Avg. Investment/GDP (%) 1990-2011

Latin American Countries

How much has LAC invested?

• Total investment in Latin America is relatively low compared to other regions. Economic infrastructure investment is even lower.

• Economic infrastructure investments in Latin-American countries in the past 20 years have represented between 10% and 20% of total investments.

*Average 1990-2012. Total Economic Infrastructure include: Transport, Energy, Telecommunications and Water and Sewage. ASEAN-5=Using IMF clasification ** Source: data from IMF and ECLAC

What is the quality of the infrastructure?

• Infrastructure investment not only is low, it ranks below average regarding quality indicators.

• The quality of infrastructure investment in Latin America ranks even lower when compared to per capita income.

*Own elaboration with data from World Economic Forum.

The tale of two regions…

• Low investment levels in Latin-America have hindered capital stock accumulation and have decreased TFP.

• Capital stock/GDP ratio in Latin

America grew 18% between 1980 and 2011 compared to 39% in Asia.

*Author’s calculations with data form the Penn World Tables (2014) ASIA-5: Korea, Taiwan, Japan, Hong-Kong and Singapore; LAC-6: Argentina, Brazil, Chile, Colombia, Mexico and Peru.

1980

2011

R² = 0.2042

0.88

0.9

0.92

0.94

0.96

0.98

1

1.02

1.04

2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3

TFP

Ratio (Capital Stock / GDP)

ASIA-5

1980

2011 R² = 0.878

0.88

0.98

1.08

1.18

1.28

1.38

2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3

TFP

Ratio (Capital Stock / GDP)

LAC-6

Stock of Capital very similar

$7,200 bill. Dlls.

$5,609 bill. Dlls.

$26,500 bill. Dlls.

$15,100 bill. Dlls.

How large are the investment gaps in LAC?

*Author’s calculations with data from Hofman, A. (2000) , IMF and ECLAC. The demand of investment increases at a 7.2% yearly rate, and is associated with the average growth of some Asian countries in the period 2000-2011 (China, Hong-Kong, Malaysia, Philippines, Singapore and South Korea). LAC5=Argentina, Brazil, Chile, Colombia and Mexico.

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Inde

x (1

990=

100)

Total Investment gap, LAC-5

K Total K Total (hip.)

88%

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

500.00

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Inde

x (1

990=

100)

Total Economic Inf. Gap, LAC-5

K Inf.Ec K Inf.Ec (hip.)

34%

• Investment gap (economic and total) has been increasing over the years.

Infrastructure deficit and the fiscal stance

Infrastructure investment and budgetary equilibrium in LAC-6

Author’s estimations based on ECLAC and IMF

Assuming that the demand doesn’t increase, just for closing the gap, LAC countries need to invest 5.7% of the GDP each year until 2019 for closing the infrastructure gap.

-6

-4

-2

0

2

4

6

8

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Wei

ghte

d av

erag

e %

GDP

Gov. Inv. closing gap inv. Deficit

Are PPPs the answer?

*Source: Data from PPI Database, World Bank. The

0%

5%

10%

15%19

90

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Argentina

0%

5%

10%

15%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Brazil

0%

5%

10%

15%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Chile

0%

5%

10%

15%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Colombia

0%

5%

10%

15%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Mexico

0%

5%

10%

15%

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Peru

PPP as a % of Total investment