Caribbean growth impacted by failure to invest in infrastructure — IDB

Thursday, April 18, 2019

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WASHINGTON, United States — A new study by the Inter-American Bank (IDB) has found that growth in Latin American and Caribbean (LAC) is sharply impacted by the failure to invest in infrastructure.

The Washington-based financial institution said that the study looks at energy, transportation, telecommunications, and water and sanitation sectors in six countries, “indicative of the reality for the entire region”. The countries used in the study are 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 one percentage point of forgone GDP (gross domestic product) growth. The cost rises to 15 percentage points in forgone growth if the gaps persist over 10 years,” the IDB said, adding that this is the equivalent of around US$900 billion based on the current GDP levels for the entire region.

The IDB Group's annual Macroeconomic Report, which this year has a focus on infrastructure investment, noted the infrastructure investment gap in the region is estimated at around 2.5 per cent of GDP, or around US$150 billion per year.

“Latin America and the Caribbean not only lags in investment amounts but also in quality,” the report added.

IDB Principal Economic Advisor Andrew Powell, one of the report's editors, said the impacts vary across countries,

“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,” he said.

The report states that failure to invest more in infrastructure hurts the poor the most, “likely because they spend more of their income on infrastructure services”.

The study finds that households in the lower 40 per cent 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 labour productivity in economic sectors and also analyses infrastructure investment strategies in more detail by identifying which types of infrastructure – transportation, energy or construction – affect labour 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 (Organization for Economic Corporation and Development) countries, then the economy-wide productivity growth could increase by 75 per cent with respect to the historical average,” the report noted.

“This means the region's income per capita income could double in almost half the time,” it said, noting that in terms of quality, Latin America and the Caribbean comes in fifth place among six regions, ahead of Sub-Saharan Africa.

The report states the region performs best in the energy sector, with scores that are close to emerging Asia.

The region also performs “most poorly” in the transport sector and 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 study.

“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 prioritise and manage complex projects that require both public and private sources of financing should help boost private investment,” the report states.


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