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)| false Calderón, César, William Easterly, and Luis Servén, 2003, “ Infrastructure Compression and Public Sector Solvency in Latin America,” in William Easterlyand Luis Servén(eds.), The Limits of Stabilization—Infrastructure, Public Deficits, and Growth in Latin America, pp. 119– 38( Washington, DC: World Bank).
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Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A. Savastano, 2003, “Debt Intolerance,” Brookings Papers on Economic Activity, No. 1, pp. 1–74.
Rodrik, Dani, Arvind Subramanian, and Francesco Trebbi, 2002, “Institutions Rule: the Primacy of Institutions over Integration and Geography in Economic Development,” IMF Working Paper, No. 02/189 (Washington: International Monetary Fund).
Romp, Ward, and Jakob de Haan, 2005, “Public Capital and Economic Growth: A Critical Survey,” European Investment Bank, EIB Papers (forthcoming).
Willoughby, Christopher, 2002, “Infrastructure and Pro-Poor Growth: Implications of Recent Research,” U.K. Department for International Development (revised draft, January).
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World Bank, 2004a, World Development Indicators Database, including the overview available at http://www.worldbank.org/data/wdi2004/Section5-intro.pdf.
World Bank, 2004b, “World Bank Group’s Infrastructure Business: Update on the Implementation of the Infrastructure Action Plan,” paper prepared for the Development Committee (September 15).
World Bank, 2004c, Investment Climate Survey online database http://iresearch.worldbank.org/ics/jsp/index.jsp.
World Bank, 2004e, “Doing Business” Database, http://rru.worldbank.org/DoingBusiness/CustomQuery/.
Unless noted otherwise, the term “public investment” refers to the acquisition of nonfinancial assets.
Most missions included World Bank staff members and, in the case of Latin American countries, also Inter-American Development Bank staff members.
The term “bottleneck” is used mainly to refer to binding constraints on development (i.e., the most urgent needs).
Public Information Notice (PIN) No. 04/45.
All missions had the participation of area department staff, and most missions included World Bank staff and, in the case of Latin American countries, also Inter-American Development Bank staff.
The pilot studies did not identify whether more private investment could have helped address these various bottlenecks. While additional private sector investment may not be able to fully substitute for additional public investment, it would appear likely that the private sector would be willing to increase its participation in the provision of infrastructure services, if proper incentives and regulatory frameworks were in place. See, for example, Beato and Vives (2003) and World Bank (2004a).
However, the existence of infrastructure bottlenecks also frequently reflects inappropriate public pricing decisions that have resulted in poor cost recovery and waste. Underpricing for the use of public assets (e.g., port fees, landing fees, and road user charges) or key inputs (e.g., domestic fuel, electricity, and water) as well as undercollection of existing fees and user charges, have contributed to over-consumption and the existence of infrastructure bottlenecks in many of the pilot countries.
In Brazil, during 1994–98, about 37 percent of all recorded investment in infrastructure with private sector participation reflects privatization proceeds.
It has often been argued that politicians are biased in favor of cutting investment spending, given that cutting wages, pensions, transfers to households, and other current spending items would have a direct adverse effect on important groups of voters. Rogoff (1990) has formalized this in a model that shows how rational voters can reward governments that put the burden of fiscal adjustment on public investment rather than current spending, which may lead to an unsustainably high level of primary current spending.
An episode of significant budget consolidation is defined as a year when the primary balance improved by at least 1 percent of GDP. Using a threshold of 0.5 percent of GDP produced similar qualitative results, while a threshold higher than 1 percent of GDP yielded very few episodes and prevented a meaningful analysis.
World Bank estimates suggest that about half of the fiscal adjustment in Brazil and Peru during the 1990s was accomplished by compressing investment in infrastructure (Calderón, Easterly, and Servén (2003)). These estimates are, however, sensitive to the period being considered. For example, a comparison of average changes in public investment and primary fiscal balances during 1994–98 and 1999–2003 suggests for Brazil a much smaller contribution of infrastructure compression to fiscal adjustment than that suggested by Calderón, Easterly, and Servén (2003), while data for Peru do not support their findings as a decline in public investment went hand-in-hand with a worsening of the primary balance (also see Table 4).
For example, World Bank-financed infrastructure projects that had at least 95 percent of loan commitments disbursed between 1999 and 2003, had an average economic return of 35 percent, with a spread ranging from 19 percent for water and sanitation projects to 43 percent for transport projects.
Data reported in Briceño-Garmendia, Estache, and Shafik (2004) suggest that of 102 studies that have estimated the impact of infrastructure investment on productivity or growth, 53 percent showed a positive effect, 42 percent showed no significant effect, and 5 percent showed a negative effect. In multiple country studies, 40 percent showed a positive effect, 50 percent showed no significant effect, and 10 percent showed a negative effect. In contrast, all 12 single-country developing country studies showed a positive effect.
Also, see the overview presented in SM/04/93. In this context, the recent research by Calderón, Easterly, and Servén (2003) remains in contrast with much of the recent literature by arguing that reductions in infrastructure spending in Latin America in the 1990s significantly reduced longer-term growth prospects (e.g., by about 3 percentage points a year in Brazil, and l½–2 percentage points a year in Chile, Mexico, and Peru). As various surveys caution, such estimates should be interpreted with great care as they are subject to a sizeable margin of error and have proven very sensitive to the underlying assumptions.
In pointing out that “government roads as such do not produce anything,” Romp and de Haan (2005) particularly caution against including infrastructure or public capital as a separate input in a production function.
In this context, it must be recognized, however, that governments usually face financial and absorptive capacity constraints that require them to make trade-offs between high-return projects and programs in different sectors, also including in health and education. It is difficult to refute the argument that under-funding health, nutrition, and education programs in a single year may potentially have more dire long-run consequences for human and economic development than under-funding public infrastructure projects in a single year. Still, good infrastructure may help to further increase the returns of projects in other sectors. For example, recent studies, including Willoughby (2002) and the World Bank (2004b), point to a strong link between the availability of infrastructure services and several of the Millennium Development Goals (MDGs), such as child mortality, educational achievements, and health indicators. Yet, it is precisely in the area of spending choices and trade-offs that more work and guidance for policymakers is needed.
Simple correlation exercises indicated that the relationship between public investment and real GDP growth is weak. The correlation coefficients were found to be mostly insignificant and even negative in three countries (Table 5), and only the correlation coefficient for India proved significant at the 95 percent confidence level. Still, a significant compression of public investment may adversely affect growth. Using data from 1994 to 2003 showed that in seven out of eleven cases, average GDP growth deteriorated in the two years following episodes of significant declines in public investment. In this analysis, an episode of significant investment cuts was defined as a year when public investment fell by at least 1 percent of GDP; a threshold of 0.5 percent of GDP produced similar qualitative results, while a threshold higher than 1 percent of GDP did not yield many meaningful episodes.
In some cases and sectors, private sector solutions have emerged to address shortfalls in public infrastructure services, although these may not always be efficient. An example of the latter would be India, where an average estimated electricity shortfall of 11 percent for regular demand and 18 percent for peak demand (with wide variations across states) has been mitigated by the relatively high reliance of Indian businesses on self-generation of power. See the World Bank’s Investment Climate Survey (ICS) (World Bank, 2004c) for more information.
The results are similar to those found in other countries. Results from the World Bank’s ICS program, which covers more than 26,000 firms in 53 countries, suggest that, while priority constraints can vary widely across and even within countries, policy-related risks, including policy uncertainty and macroeconomic stability are systematically ranked among top investors’ concerns (see World Bank, 2004d).
Similarly high infrastructure investment requirements have also been estimated for other pilot countries. For example, for Ghana, the World Bank estimates that the government would have to spend about 4½ percent of GDP annually over 2004–08 to address maintenance and new infrastructure investment needs in the road sector alone; addressing overall infrastructure investment needs in Ghana’s energy, water, and sanitation sectors would cost the Ghanaian government about 3½ percent of GDP annually during 2004–08.
World Bank estimates suggest that stopping a further deterioration of Brazil’s federal road network would require increasing annual road maintenance expenditure by about 20 percent (0.01 percent of GDP) over the next five years, whereas upgrading the existing network to good condition would require doubling maintenance spending to about 0.06 percent of GDP over the next five years.
See, for example, North (1990); Olsen (1993); Acemoglu and others (2003); Rodrik, Subramanian, and Trebbi (2002). These findings are also supported by findings in the World Bank’s Investment Climate Surveys shown in Table 6.
The role of these two instruments is studied separately in Section V and the accompanying paper on government guarantees and fiscal risk.
These are proxied by the World Bank’s governance indicators. The World Bank’s governance indicators include six dimensions: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, the rule of law, and control of corruption. The indicators are available at http://www.worldbank.org/wbi/governance/.
This is a small sample, however, and there could be other causal factors involved. Still, the relationship holds even after controlling for per-capita GDP, which could be expected to be the single most important factor in explaining differences in the sample.
Table 6 above suggests that there is much room in pilot countries to improve the overall business environment. Also see Table 8 for an overview of business environment indicators in the pilot countries.
Also see Figure 3, which shows a strong negative correlation between gross public debt and sovereign bond ratings. Accordingly, additional spending, if financed by additional debt, could be expected to have an adverse impact on bond ratings (and therefore interest rates) regardless of the type of spending. Appendix Table 10 provides a general overview on fiscal policy and debt profiles of the pilot countries. Also see Reinhart, Rogoff, and Savastano (2003).
This may also require changing incentives for politicians. Robinson and Torvik (2005) have shown that it may be more beneficial for politicians to spend funds on new white elephant projects rather than on maintenance of existing efficient projects whenever white elephant projects influence political outcomes and a large value is attached to being in power.
GFSM 2001 refers to a PE as a nonfinancial public corporation, defined as a corporation controlled by a general government unit. Government control can mean majority government ownership, government appointment of the board and management, or government authority or substantial influence over business decisions and operations. Government-controlled entities that sell most of their output at “economically significant prices” (i.e., prices that influence supply and demand) are classified as nonfinancial public corporations. Otherwise, they are classified as general government units. GFSM 2001 also requires the compilation of fiscal statistics on a cash basis and their reconciliation with accrual data.
In India, which has a large PE sector, data availability prevented an assessment. However, in India PEs are sorted into two main groups, with one enjoying broader autonomy in response to a demonstrated record of efficiency. Those PEs deemed undeserving of a higher degree of autonomy run deficits of the order of 1.5 percent of GDP a year, primarily due to QFAs and overstaffing.
This may well be the case in some Latin American countries, where e.g., the oil companies account for a sizeable share of the consolidated public sector primary surplus, but for little of its debt.
With prisons, private construction and operation are possible. There are doubts, however, as to whether all prison services are contractible; this is clearly the case for detention, but less obviously so for rehabilitation.
The recently enacted PPP law in Brazil also provides for the setting up of a fund, backed by marketable government assets. But, in this case, the aim is to shield PPP investors from the risk of nonpayment by the government of future contractual obligations.
There are also emerging private sector disclosure requirements for service concession arrangements that could influence an eventual public sector standard.
The contributions made by staff from other Fund departments, and the staffs of the World Bank and the IDB, all of which were indispensable for the overall work, are not included in these estimates.