Highways to Heaven
Infrastructure Determinants and Trends in Latin America and the Caribbean
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Inadequate infrastructure has been widely viewed as a principal barrier to growth and development in Latin America and the Caribbean. This paper provides a comprehensive overview of infrastructure in the region and highlights key areas in which infrastructure networks can be enhanced. The public and private sectors play complementary roles in improving the infrastructure network. Therefore, it is critical to strengthen public investment management processes as well as the regulatory framework, including to ensure an appropriate mix of financing and funding for projects and to address environmental concerns.

Abstract

Inadequate infrastructure has been widely viewed as a principal barrier to growth and development in Latin America and the Caribbean. This paper provides a comprehensive overview of infrastructure in the region and highlights key areas in which infrastructure networks can be enhanced. The public and private sectors play complementary roles in improving the infrastructure network. Therefore, it is critical to strengthen public investment management processes as well as the regulatory framework, including to ensure an appropriate mix of financing and funding for projects and to address environmental concerns.

I. Introduction

Inadequate infrastructure has been widely viewed as one of the principal barriers to growth and development in Latin America and the Caribbean (LAC). Investment in infrastructure increases the productivity of other factors of production, improves competitiveness, and expands export capacity. Insufficient infrastructure will usually be reflected in bottlenecks and other inefficiencies that create social dissatisfaction and raise hurdles to investment, which, in turn, constrain growth. Recognizing this, many countries in LAC have recently turned their attention to investment in infrastructure to support demand and to bolster their productive capacity over the longer term.

This paper provides an overview of the current state of LAC’s infrastructure using cross-country comparisons and highlighting areas in which infrastructure across the region can be enhanced.1 The region’s infrastructure has been upgraded over the past decade, reflecting both an increase in public investment, facilitated by the commodity boom, and private greenfield investment, notably in sectors where regulatory impediments had been alleviated. Deepening domestic capital markets have helped to finance an increasing fraction of private investment in local currency. Nonetheless, the region still faces considerable catch-up relative to advanced economies, and infrastructure quality in several countries is lower than in their export rivals. In addition, for most LAC countries, the efficiency of public investment remains well below that achieved by advanced economies, notwithstanding improvements in fiscal institutions. Reasonably sound frameworks for public-private partnerships in some large economies should be replicated by others to foster greater private participation.

The paper is organized as follows. Section II presents cross-country comparisons of stock and quality of infrastructure; Section III discusses the determinants of infrastructure, including fiscal policies, and available financing options; Section IV discusses investment efficiency; Section V describes the evolution and the state of PPP frameworks; and Section VI offers suggestions for developing green infrastructure. Section VII concludes with key policy challenges facing LAC countries.

II. Infrastructure in LAC: Where Do We Stand?

In this section, infrastructure indicators from 24 countries in LAC and the region’s 6 largest economies (LAC6) are compared with averages from several other regions, comprising 42 countries in Sub-Saharan Africa (SSA), 10 countries in Emerging Asia (EMA),12 countries in Emerging Europe, 20 countries in Advanced Europe (EUR), and Canada and the U.S. This group, although not universal, spans a broad range of experiences relevant for LAC and thus offers a useful benchmark. Due to data limitations related to data coverage of social infrastructure (schools and hospitals etc.), the focus here is on three key types of economic infrastructure, namely transport, energy, and telecommunications. The data are described in more detail in the Appendix Table 1.

Comparing Infrastructure Levels across Regions

On average, the stock of economic infrastructure—power generation capacity, road networks, and telephone lines—in LAC economies compares favorably with that of peers in some other emerging market regions, but it still lags behind advanced economies by most standard measures, with differences being starkest in electricity generation capacity (Figure 1). While infrastructure stocks have generally been rising in LAC, the gains do not compare favorably with those in fast-growing regions (for example, Emerging Asia).

Figure 1 –
Figure 1 –

Electricity Infrastructure Indicators

Citation: IMF Working Papers 2016, 185; 10.5089/9781475536744.001.A001

Sources: Energy Information Agency; World Bank; and IMF staff calculations.US & CAN = United States and Canada; EUR = Advanced Europe; EME = Emerging Europe; EMA = Emerging Asia; SSA = Sub-Saharan Africa; LAC = Latin America and Caribbean; LAC6 = Argentina, Brazil, Chile, Colombia, Mexico, Peru. Sources: Energy Information Agency; World Bank; and IMF staff calculations.
  • Electricity infrastructure networks have expanded notably in LAC recently but gaps relative to advanced economies remain large. For example, the results show that 12 percent of the population in LAC did not have electricity coverage on average over 2001-13 compared to virtually full coverage in Advanced Europe, Canada and the U.S. over the same period. Although electricity generation capacity in LAC is similar to Emerging Asia, at slightly more than 50 kilowatts per 100 persons, it compares poorly with twice that level in Emerging Europe and more than 200 and 300 kilowatts per 100 persons in Advanced Europe and U.S. and Canada, respectively.2

LAC’s road infrastructure availability also faces large gaps (Figure 2). LAC6 lags behind both emerging and advanced economies in terms of road density, measured as km of road per 100 square km of land area. For every 100 km2 of land, there is only 13.2 km of road in LAC6 on average compared to 43.8 km in Emerging Asia; the gap is even wider when compared to Canada, the U.S., and Europe. At the same time, the quality of LAC’s roads (measured by the share of unpaved roads to total roads) is poorer than all regions except Sub-Saharan Africa.

Figure 2 –
Figure 2 –

Road Infrastructure Indicators

Citation: IMF Working Papers 2016, 185; 10.5089/9781475536744.001.A001

Sources: World Bank; International Road Federation; and IMF staff calculations.US & CAN = United States and Canada; EUR = Advanced Europe; EME = Emerging Europe; EMA = Emerging Asia; SSA = Sub-Saharan Africa; LAC = Latin America and Caribbean; LAC6 = Argentina, Brazil, Chile, Colombia, Mexico, Peru.

The mixed record on telecommunications suggested by Figure 3 is heavily influenced by technological progress. As in a number of emerging economies, the gap in utilization of fixed telephone lines in LAC was filled through more extensive usage of mobile phone networks that serve a variety of needs, including by providing payment and money transfer services. Indeed, while LAC lags behind its main comparators on fixed telephony, the region has made impressive advances in mobile phone and broadband services. While only 45 percent of the region’s population has a fixed-line telephone, mobile phone coverage exceeds 98 percent of the population. From less than 3 percent of the population in early 1990, computer and internet usage rose to 19 percent of the population in 2014. The region’s average use of broadband at 7 percent is, however, low compared with other emerging and advanced economies, at 25 percent and 34 percent respectively. Similar to Emerging Asia, Emerging Europe, and Sub-Saharan Africa, telephone infrastructure service quality in LAC (measured by annually reported faults per 100 fixed telephone lines) has improved significantly recently and the region is now on par with Emerging Asia, though still remains below advanced economies standards.

Figure 3 –
Figure 3 –

Telecommunication Indicators

Citation: IMF Working Papers 2016, 185; 10.5089/9781475536744.001.A001

Sources: International Telecommunications Union; and IMF staff estimates.US & CAN = United States and Canada; EUR = Advanced Europe; EME = Emerging Europe; EMA = Emerging Asia; SSA = Sub-Saharan Africa; LAC = Latin America and Caribbean; LAC6 = Argentina, Brazil, Chile, Colombia, Mexico, Peru.

Although a proper standard for infrastructure is often hard to define, the proximity to the “ideal” of universal access constitutes a clear benchmark, as it relates to the well-being of the population. In this dimension, LAC countries are in a better position than Emerging Asia and Sub-Saharan Africa in terms of access to electricity, but not so much concerning other measures such as rural access to roads.

Comparing Infrastructure Quality across Regions

LAC’s overall infrastructure service quality, as summarized in the World Economic Forum (WEF) index, has improved more slowly than some of the other regional comparators. LAC’s overall infrastructure service quality perception increased by 2.3 percent over 2006–15 compared with 4.9 percent in Emerging Asia, 4.4 percent in Emerging Europe, and 7.4 percent in Sub-Saharan Africa (Table 1 and Figure 4). The overall rankings of Argentina, Brazil, Chile, and Venezuela have worsened for a variety of reasons: because of worse electricity supply (Argentina), roads (Argentina, Chile, and Venezuela), ports (Argentina, Brazil, Venezuela), air transport (Argentina, Brazil, Chile), and railroads (Argentina, Brazil, and Venezuela).

Table 1.

Latin America: Changes in Infrastructure Quality (2006–15)

(Average annual percentage change)

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Source: Staff estimates, Energy Information Agency, and World Economic ForumAbove one standard deviation of LAC median Within one standard deviation of LAC median Below one standard deviation of LAC median