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Infrastructure Compression and Public Sector Solvency in Latin America
Abstract
This paper analyses, in a simple two-region model, the undertaking of noxious facilities when the central government has limited prerogatives. The central government decides whether to construct a noxious facility in one of the regions, and how to …nance it. We study this problem under both full and asymmetric information on the damage caused by the noxious facility in the host region. We particularly emphasize the role of the central government prerogatives on the optimal allocations. We …nally discuss our results with respect to the previous literature on NIMBY and argue that taking into account these limited prerogatives is indeed important.
... All this casts doubt on the contribution of Latin America's public infrastructure spending cuts to strengthen the finances of the region's governments. Calderón, Easterly and Servén (2003b) offer some illustrative calculations suggesting that the solvencyenhancing impact of infrastructure investment cuts falls quickly as the initial level of government indebtedness rises. The reason is that the subsequent fall in real GDP growth detracts from future revenues and hence from the government's debt repayment capacity -a mechanism that becomes more important the higher is initial debt. ...
... Calderón and Servén (2003b) present some estimates of the growth cost of the compression of infrastructure spending in Latin America. ...
How effective was public investment in stimulating the Japanese economy during the economic stagnation of the 1990s? Using a dataset of regional public investment spending, we find that investment multipliers were higher than for public consumption, although they were relatively low and declining over time. The paper also finds that the effectiveness of economic infrastructure investment, implemented mainly by the central government, is lower than that of social investment mostly undertaken by local governments. These results suggest that while public investment may yield higher output effects than other spending, its effectiveness depends upon its composition, the level of government implementation, and supply side factors.
... Several empirical studies that investigate the impact of infrastructure provision on economic performance suggest that a lack of infrastructural facilities is the main growth bottleneck that adversely affects productivity (Calderon and Serven, 2003;Guasch, 2004;Canning, 1998;Prud'homme, 2004;Reinikka and Svensson, 1999;Escribano and Guasch, 2005;Calderon et al., 2003aCalderon et al., , 2003b. Fernald (1999) points out that the interstate highway system in the United States has been very productive, with vehicle-intensive industries in particular benefitting greatly in terms of higher productivity. ...
This study aims to investigate the impact of infrastructure capital on total factor productivity in selected Asian countries. The scope of the assessment is broadened by exploring the effect of infrastructure development on sectoral differences in total factor productivity. The study calculated the total factor productivity over the period 2006-2016 for 16 manufacturing industries in 19 Asian countries. Further, the impact of lagged infrastructure and endowment is also explored with an eye toward improving different infrastructural measures. The empirical findings show that lagged infrastructure and endowment exert a positive and significant impact on infrastructural improvement. The impact of telecommunications, road, and power infrastructure on sectoral productivity is investigated by applying the fully modified ordinary least squares estimation technique to control the endogeneity problem associated with infrastructure provision. Overall, the empirical findings show that infrastructure provision, particularly the provision of telecommunications and power, is an important factor for explaining patterns of comparative advantage, whereas the provision of roads is important to explain patterns of absolute advantage. The results further indicate that road infrastructure is more important for low technology-intensive industries, while power sector infrastructure is crucial for high technology-intensive industries.
... Inadequate infrastructure and low productivity of manufacturing firms tend to be closely related, especially in developing economies (Tybout 2000;World Bank, 1994;Bloom et al., 2010). A substantial literature has linked infrastructure quality to economic performance (Calderón et al., 2003;Canning, 1998;Jiemenex, 1995). However, fewer studies, typically region-specific, have established a link between infrastructure and the performance of the private sector. ...
... In addition, we rely on the literature that assess the growth impact of infrastructure investment on growth, e.g. Calderon, Easterly, and Serven (2003), Briceno-Garmendia, and Estache (2004) and Calderon et al. (2015). Finally, our paper relates to the work by Ghazanchyan et al. (2017) who use a small open economy model to explore the macroeconomic impact of increases in public investments in three Southeast Asian economics, including Cambodia. ...
We evaluate the impact of fiscal reforms on growth and inequality in Cambodia using a calibrated general equilibrium model with heterogeneous agents (Peralta-Alva et al., 2018). Over the last two decades, Cambodia’s consumption inequality and poverty have declined. However, income inequality is higher, and large gaps remain between urban and rural residents. At the same time, domestic revenue mobilization has improved substantially, but collection of tax revenue is biased towards non-progressive sources. We use the model to evaluate the growth and inequality impact of reforms that increase infrastructure spending by raising (i) VAT, (ii) property tax, or (iii) personal income tax. We find that using property taxes delivers the largest increase in GDP and reduction in inequality. Reaping the gains from property taxation will however require additional investments in tax administration.
... Although multiple authors [22][23][24][25][26][27][28][29] studied the link between economic development (at the national, state or regional level) and infrastructure, only a limited number of studies focused on the impact that investments in local infrastructure have on LED or local rural development. Rives and Heaney [11] tried to see if there is any link between infrastructure and the LED level of 178 communities in Iowa (USA) by building an index consisting of indicators structured in four main dimensions: Economic development, infrastructure, location and education. ...
Based on data collected for 398 communes from the NorthWest development region of Romania between 2007 and 2014, this article presents a local economic development (LED) index for rural communities and identifies the main factors which influence LED in these communities. Our results show that exogenous factors, such as location in the influence area of urban communities and the existence of a direct connection to the European Road Network, influence the level of LED. At the same time nor the aforementioned exogenous factors nor other exogenous factors, such as non-refundable investments programs in local core infrastructure (financed by the European Union and the Romanian Government) which were designed to accelerate/spur economic development, as well as direct connections to the National Roads Network, do not have any statistically significant influence on spurring/accelerating LED (at least in this short period of time).
... Cohen and Percoco (2004) state and provided two alternative theories: the theory of asymmetric effects of governmental expenditure and the theory of fiscal illusion. The effect of downward in government investment in the lack of competitiveness and a consequent worsening of fiscal gap has also been analyzed by Calderón et al. (2003). These authors have developed a theoretical framework to explain the importance of what is called fiscal illusion. ...
This study employs a panel data analysis to examine the relationship between fiscal illusion and budget policy of 15 African countries over the period between 1980 and 2012. The empirical results of the test of Hausman suggest the use of fixed effects estimators. But to check the robustness of the empirical results in different econometric specifications we have also conducted many regressions using alternative estimation methods (such as random effect and population averaged models). Empirical results obtained show a positive and significant association between fiscal illusion and public deficit. An in creasing of 1 percent of fiscal freedom leads respectively to, ceteris paribus, an augmentation of 0.27, 0.24 and 0.3 percent of budget deficit in the fixed, random and population method. As a conclusion, fiscal illusion affects budget policy.
... Además, las infraestructuras pueden tener efectos escalares no lineales sobre el crecimiento, el cual podría frenarse si no se mantiene dicha inversión por encima de un umbral mínimo. Por ejemplo, se estima que la menor acumulación de activos en infraestructura por el descenso de la inversión pública frenó el crecimiento del PIB en numerosos países de América Latina en más de un punto porcentual durante los años 80 y 90 (Calderón et al (2003); Rodríguez (2006)). Así pues, gran parte de los efectos fiscales positivos que se esperaba tuviera el recorte del gasto en infraestructuras se vio anulado por los mayores déficits ocasionados por la desaceleración del crecimiento del producto durante los años posteriores al ajuste. ...
... (b) Unlike government consumption, "good" government investment increases not only actual output (through aggregate demand and multiplier effects) but also potential output, thus avoiding full crowding out even when the economy is operating at high employment. As noted by Calderón, Easterly and Servén (2002) a rise in the level of potential GDP also improves the economy's debt servicing capacity, so that the most heavily indebted countries are those that benefit the most from increased capital formation. ...
Fiscal targets and indicators play an important role in the design and execution of fiscal policies by the governments of many countries. They are also a key ingredient in the formulation and the implementation of programs under arrangements between the International Monetary Fund and its member countries. These arrangements, in turn, frequently influence decisions about development assistance by other international economic organizations (such as the World Bank and the European Community) and by donor countries. Fiscal targets and indicators also play an important role in the process of monitoring the fiscal situation among members of regional economic and monetary groups like the European Community (EC) and the West African Economic and Monetary Union (WEAMU). Yet, the search for a generally accepted concept of the "fiscal position" has remained elusive. The traditional concepts of overall fiscal deficit or overall fiscal balance have been criticized in various respects: they reflect the endogenous effects of cyclical changes in the economy on taxes and transfers; they are distorted by inflation; and it fails to reflect fiscal policy efforts by including interest payments on the debt. The response to these criticisms has included the construction of alternative measures of the fiscal position, such as the cyclically adjusted balance, the primary balance, the operational balance and the structural balance. These adjusted measures have helped to provide a better picture of the underlying fiscal position in
... data inFigure 2 concerning private flows and the data of Serven and Calderon (2004 forthcoming) that builds on their previous work and shows the sharp decline in public spending that ha continued since 1998. Part of their explanation for the earlier decline was that fiscal compression in Latin America fell disproportionately on infrastructure (see Calderon et. al., 2003 b), but that explanation does not explain the failure to cover investment needs over a decade. A view currently gaining credence is that the fiscal stance of Latin American countries, while appropriate to keep historically troubling inflation under control, has, in fact, been inadequate to maintain the region's capital stock in tact, much ...
... In all 12 developing country studies by Briceno-Garmendia, Estache and Shafik (2004) productivity growth is found to be significantly affected by infrastructural investment. Calderon, Easterly and Serven (2003) suggest that reductions in expenditure on infrastructure in Latin America during the 1990s significantly lowered longer term growth prospects of countries in the region: the reduction is estimated at a whooping 3.0 percentage points a year for Brazil and in the range of 1.5 to 2.0 percentage points for Mexico, Chile and Peru. More important for policy formulation in developing countries are perhaps the findings of Calderon and Serven (2004), Willoughby (2002) and World Bank (2004). ...
In recent years the government has taken a number of initiatives for construction and improvement of National highways. The most important of these initiatives consist of (a) allocation of part of the cess revenue from petrol and diesel to the National Highway Authority of India (NHAI); and (b) relying on public-private partnership (PPP) for implementation of highway projects. The overwhelming part of investment under the National Highway Development Programme (NHDP) during 2005-15 will be undertaken through toll based Build, Operate and Transfer (BOT(Toll)) system. Under this mode of PPP private entrepreneurs will undertake construction and mainte- nance during the concession period; financial support from NHAI is limited to an upfront grant which cannot exceed 40 per cent of the cost of each subproject; and the concessionaire recoups the cost through tolls. There are several reasons why not only is investment likely to be suboptimal under BOT (Toll), but compared with other alternatives it imposes a heavier burden on the Treasury in the long run. In view of the dominance of fixed over variable cost, large externalities, and the huge gap between the private and social rates of discount, there is a significant difference between socially optimal and commer- cially viable levels of investment in highways. This is apart from the fact that commercially oriented tolls tend to be grossly distortionary. Hence for making PPP cost effective in securing basic economic and social goals some major modifications in current policies appear necessary. First, since investment in highways is long-term and attended with high risk for a private investor, it is more cost effective for the government to borrow and make the funds available to builders at market rates of interest with adequate guarantee and safeguard against moral hazard. Second, in view the of the low appetite of private agents for long-term risk related to demand, building and maintenance should not be clubbed with tolling and compensation for the former should be made in the form of pre-specified annual payments with suitable escalator clauses. Third, tolls should be imposed primarily for reducing congestion, pollution, etc., and the major part of the cost of highways met through (a) auctioning of land adjoining roads; (b) parts of motor vehicles tax and capital gains tax on land; and (c) general revenue, if necessary.
... Nevertheless, Calderon et al. (2002) reported that the period of fiscal austerity experienced by most of Latin American countries in the 1980s and 1990s was characterized by a sharp contraction in infrastructure spending. According to Balassone and Franco (2000), the link between fiscal consolidation and cuts in capital spending is also confirmed by the experience of EU countries in the 1990s. ...
In this paper I challenge the proposition that the golden rule of public sector borrowing is consistent with the principle of intertemporal allocative efficiency, in the sense that growth-enhancing public investment justifies a structural public deficit. I demonstrate that in the long run the social opportunity cost of debt-financed public investment exceeds the social opportunity cost of tax financed public investments. This result holds if the social rate of time preference is lower than the interest rate on government borrowing. Thus a benevolent government would use taxes to finance public investment. In the short run, debt financing is justified if public investment has a considerable growth effect on private consumption. This requires a corresponding initial undersupply of public capital.
... In fact, water is the only EU network utility where liberalization is still in its infancy. (Calderon et al, 2002). While the region was experiencing a sharp contraction in public infrastructure spending, it led the world in infrastructure privatization during the 1990s (Roger 1999, Izaguirre 2002. ...
For much of the 20th century and in most countries, network utilities, such as telecommunications, electricity, natural gas, railroads, and water supply, were vertically and horizontally integrated state monopolies under ministerial control. This approach often led to extremely weak infrastructure services, especially in developing and transition economies. Common problems included low productivity, high costs, poor quality, chronic revenue shortages and falling investments, long waits for and shortages of services, and nonpayment for and theft of services. As a result of these problems, public policies toward infrastructure have undergone profound changes over the past two decades. This report evaluates the privatization of network utilities in developing and transition economies using three criteria: the resulting levels of investment (and thus service expansion), operating (technical) efficiency, and allocative efficiency (as indicated by the rebalancing of tariffs). This report also assesses the distributional consequences of reforms, especially their effects on basic services for poor households and other disadvantaged groups. The report suggests designing pricing policies that strike a balance between economic efficiency and social equity, developing rules governing access to bottleneck infrastructure facilities, and finding new ways to increase poor people's access to services.
... In any case, the countries with available information cover 80 percent of the LAC's GDP.5 In recent years, the LAC Region has seen additional investments in infrastructure from private sector sources totaling between 1 and 2 percent of GDP per year. This range includes telecommunications investments which are mostly private throughout the region but does not include private housing stock Serven andCalderon (2004b).6 Calderon, Easterly, and Servén (2004). ...
Infrastructure investment is a central part of the stimulus plans of the Latin American and the Caribbean (LAC) region as it confronts the growing financial crisis. This paper estimates the potential effects on direct, indirect, and induced employment for different types of infrastructure projects with LAC-specific variables. The analysis finds that the direct and indirect short-term employment generation potential of infrastructure capital investment projects may be considerable - averaging around 40,000 annual jobs per US1billion spent. The paper also describes the potential risks to effective infrastructure investment in an environment of crisis including sorting and planning contradictions, delayed implementation and impact, affordability, and corruption.
... Second, there was a downward trend in public infrastructure investment in the region. Yet, according to Calderon and Easterly (2002), private sector participation does not explain this downward trend in public infrastructure spending. In fact there is little correlation. ...
Twenty years ago, as the United Kingdom was getting ready to launch the privatization of its public services, Professor Littlechild developed and operationalized the concept of price caps as a regulatory regime to control for residual monopoly conditions in those services. Ten years later, Latin American countries, as they embarked into their own infrastructure reforms, also adopted the price cap regulatory model. Relying on a large data base on the factors driving contract renegotiation in the region and a survey of the literature on efficiency gains, the authors assess the impact of this regulatory regime in Latin America. They show that while the expected efficiency gains were amply achieved, these gains were seldom passed on to the users. Instead they were shared by the government and the firms. Moreover, the adoption of price caps implied higher costs of capital and hence, tariffs, and brought down levels of investment.
... 22. See the Implicit Deflator for 1980-2004 in table of the Appendix.23. About Latin America,Calderón, Easterly, and Servén (2003b)estimated that infrastructure compression in the 1990s reduced longer-term growth by about 3 percentage points a year in Argentina, Bolivia, and Brazil, and by 1½-2 percentage points a year in Chile, Mexico, and Peru. According to IMF (2004a: 10):"… It is especially worrying when fiscal adjustment results in infrastructure compression, for a number of reasons. ...
The Brazilian experience is of particular interest as a case study into the fiscal scopefor public sector investments, especially in infrastructure. Brazil has one of thehighest tax burdens in the world and, at the same time, the public sector has beenregistering a historic low in investment, even lower than the average levels seenelsewhere in Latin America. The idea of crating adequate fiscal space to allow forincreased investment has been largely ignored at national level. The little thatnational debate has advanced so far on this issue has only produced at best adefinition of the challenge. In this context, the paper does not intend to provide aready-made solution for such large and varied challenges. Instead, it hopes tocontribute in a small way to the development of debate, starting by raising andsystemizing information and by pointing out possible alternatives, in a preliminaryand perhaps somewhat provocative manner.
... A vast empirical literature suggests that differences in infrastructure may be responsible for substantial differences in economic growth and welfare (e.g., Calderón et al., 2002). Developing countries, on average, show a very poor record in building and maintaining infrastructure. ...
This paper presents ways of measuring the progress of market-oriented reforms in both traditional areas of first-generation reform and the areas of institutional reform that have been emphasized lately. These policy areas are the domestic financial system; international financial markets; international trade; the labor market; the tax system; public infrastructure and public firms; the legal and regulatory framework; and governance. For each of them, first, we discuss the general principles underlying market oriented reform; second, we present various indicators of the policy stance in the area in question; and third, we present various outcome indicators of the policy stance.
... 5 This result is sensitive to time period and speci…cation. In general, debt ratio falls faster when we use labor force and the 1960-1996 sample. ...
How effective was public investment in stimulating the Japanese economy during the economic stagnation of the 1990s? Using a dataset of regional public investment spending, we find that investment multipliers were higher than for public consumption, although they were relatively low and declining over time. The paper also finds that the effectiveness of economic infrastructure investment, implemented mainly by the central government, is lower than that of social investment mostly undertaken by local governments. These results suggest that while public investment may yield higher output effects than other spending, its effectiveness depends upon its composition, the level of government implementation, and supply side factors.
Infrastructure investments can have long term consequences for the economy and environment of a country. Some notable public infrastructure projects include energy, transportation, water, and waste disposal systems. There are strong financial, environmental, and social change drivers that are forcing immediate changes. We need to rethink our infrastructure investments and develop sustainable, resilient, and affordable infrastructure systems for vital services of our society. These systems will be able to support the healthy and prosperous communities in future. The objective of this chapter is to review the current state of sustainable infrastructures and provide suggestions to policy makers responsible for infrastructure development how to develop sustainable infrastructures.
The argument for investment in infrastructure and its implication for economic development have attracted a robust discourse. This paper adds a voice to the significance importance of the subject matter by examining the theoretical arguments for infrastructure investment. We further developed a framework, which explains the need for investment in infrastructure and its flow both as input for recycling and input for further production as a final output for consumption. The study shows that no one individual can provide infrastructure but rather all the activities of the various industries sit on a platform from which payment for its use is shared amongst all users. It concludes that Investments in infrastructure are not just one off event but planned to achieve a robust economic development.
Este estudo trata do processo de discussão e aprovação da Lei nº 11.079, de 30 de dezembro de 2004, que “institui normas gerais para licitação e contratação de parceria público-privada no âmbito da administração pública”.
Se cuantifica el efecto que tiene la inversión en infraestructura sobre el crecimiento económico y si está condicionado por factores de índole institucional mediante modelos dinámicos de panel con variables instrumentales y técnica GMM. Los resultados son coherentes con estudios previos en cuanto a la magnitud del efecto de la infraestructura sobre el crecimiento. Se halla evidencia de que factores institucionales inciden significativamente en el potencial efecto expansivo de la infraestructura. Se encuentra que países de América Latina estarían limitando el potencial expansivo de su inversión en infraestructura al presentar indicadores de desempeño institucional desfavorables. Lo mismo estaría sucediendo con países de ingreso medio y bajo.
2000 ve sonrası dönemde Türkiye’de uygulanan istikrar programlarının kalitesini sorununu ele almaktadır. Maliye politikasının kalitesi, bir ekonomik programda kamu açıklarının veya bütçe açıklarının uygulanan harcama ve gelir tedbirleri sonucunda düşürülme şekli olarak tanımlanmaktadır. Faiz dışı fazla, kamu borç stoku gibi mali göstergelere dayalı maliye politikası performans kriterlerini ölçmek kolay olmakla birlikte, maliye politikasının kalitesini ölçmek, farklı bir yaklaşımı ve analizi gerektirmektedir.
Teorik çalışmaların ve Türkiye koşullarının belirleyiciliğinde, Türkiye için uygulanan istikrar programlarında maliye politikasının kalitesi beş temel kriter çerçevesinde ölçülmüştür. Bunlar; mali uyumun yapısı ve kamu harcamaları düzeyinde değişme, sosyal varlık düzeyindeki değişmeyle ilgili olarak kamu eğitim harcamaları ve sunum düzeyi ile kamu sağlık harcamaları ve koruyucu sağlık hizmetleri, ekonomik varlık düzeyindeki değişimle ilgili olarak kamu alt yapı yatırımları ve idame tamamlama yatırımları, vergi sistemi ve vergi politikaları ile son olarak yapısal dönüşümü sağlamaya yönelik reformlar ve bu reformların uygulamasıdır. Bu kriterler çerçevesinde; uygulanan son iki IMF destekli istikrar programı mali performansın tutturulmuş olması açısından belli bir noktaya kadar başarılı görülmekle birlikte, maliye politikasının kalitesi açısından aynı başarıdan söz etmek mümkün değildir. Mali uyumun ağırlıklı olarak gelirler üzerinde sağlanması ve tek kerelik tedbirler nedeniyle sürdürülebilirlik problemi yaşaması, kamu harcamalarının düşürülememesi, kamu eğitim harcamalarındaki reel düşme, kamu sağlık harcamalarındaki etkinsizlik ve koruyucu sağlık hizmetlerinin düşmesi, kamu alt yapı yatırımları ve idame tamamlama yatırımlarının reel olarak düşmesi, vergi sisteminin tarafsız ve en az bozucu etkiden uzaklaşması ve yapısal reformların tasarım, sahiplenme ve uygulama problemleri nedeniyle reform yorgunluğu içine girmesi tezin temel bulgularıdır. Sonuç olarak, mali performansta başarı elde edilmiş; ancak, bu maliye politikasının kalitesinden feragat edilerek sağlanmıştır.
This paper studies the cyclical properties of two key expenditure categories (current and public investment spending) during the different phases of the business cycle (good times and bad times). Anecdotal evidence suggests that policymakers usually cannot resist the temptation of spending more on current expenditure in good times, but only pick capital expenditures to adjust during bad times. The paper answers the following questions: do current and capital expenditures react to the business cycle? If so, by how much, and why? In a sample of more than 100 developing countries and 30 developed countries observed between 1980 and 2014, a new empirical regularity specific to developing countries is identified: upswings are associated with increases in current primary expenditures (e.g., wages, transfers) only, while public investment falls and current spending remains acyclical during downturns. Evidence is also presented that this asymmetrical response is more pronounced in countries where incumbent politicians face shorter time horizons and weak institutions. Other type of factors traditionally discussed in the literature (limited creditworthiness, fiscal rules, and tax base volatility) have limited explanatory power. JEL classifications: D72, E32, E62, H50
We use a dynamic small open economy model to explore the macroeconomic impact of alternative public investment scaling-up scenarios, analyzing how improving the efficiency of capital spending and of tax revenue collection affect growth and debt sustainability for three fast-growing Southeast Asian economies: Cambodia, Sri Lanka, and Vietnam. We show that a gradual public investment profile is more favorable than front-loading capital spending because we assume governments are able to gradually learn how to invest more efficiently, accelerating public capital accumulation and therefore growth. We discuss the pros and cons of alternative financing options and identify the financing mix that generates the best macroeconomic outcome. Sometimes overlooked, improving the efficiency of revenue collection over time may ease the burden of fiscal adjustment, achieving higher GDP growth with substantially lower debt-to-GDP ratios, and will help policymakers efficiently meet the challenge of addressing large infrastructure gaps while maintaining debt sustainability.
Infrastructure investments can have long term consequences for the economy and environment of a country. Some notable public infrastructure projects include energy, transportation, water, and waste disposal systems. There are strong financial, environmental, and social change drivers that are forcing immediate changes. We need to rethink our infrastructure investments and develop sustainable, resilient, and affordable infrastructure systems for vital services of our society. These systems will be able to support the healthy and prosperous communities in future. The objective of this chapter is to review the current state of sustainable infrastructures and provide suggestions to policy makers responsible for infrastructure development how to develop sustainable infrastructures.
Government spending on public infrastructure, education, and health care can increase economic growth. However, the appropriate financing depends on a country’s fiscal position. We develop a two-sector endogenous growth model to explore how variations in the composition and financing of government expenditures affect economic growth. We find that, when tax rates are moderate, funding public investment by raising taxes may increase long-run growth. If existing tax rates are high, public investment is only growth enhancing if funded by restructuring the composition of overall public spending. Additionally, public investment that is debt financed can have adverse effects on long-run growth due to the resulting increases in interest rates and debt-servicing costs.
Fiscal pressures induced significant changes in the development model driven by the Brazilian government in the 1990s. The process was further enhanced after the launch of the privatization program in 1991. Increasing demand for innovative models for the delivery of public services led to the concession program and more recently to the proposal for public private partnerships, which have yet to be adopted due to the lack of a legal framework. The commitment of the private sector to long-term investments in infrastructure projects is largely affected by factors such as economic stability, institutional quality and soundness of legal and regulatory frameworks in the host country. This paper discusses private participation in infrastructure projects in Latin America and Brazil in the 1990s, and addresses some challenges for the successful implementation of a PPP program in an emerging economy.
This paper develops a dynamic macroeconomic model to explore how variations in the composition and …nancing of government expenditures a¤ect economic growth in the long-run. The model is used to analyze how public investment spending funded by taxes or borrowing a¤ects long-term output growth. We also examine the e¤ect of varying the composition of public expenditure, shifting between consumption and investment spending, or re-allocating between di¤erent types of public investment. In addition, we use alternative parameterizations of the model to explore how the e¤ects on growth change under extreme initial …scal conditions such as high average tax rates, debt ratios and public consumption spending. The model is calibrated to reect economic conditions in the seven largest Latin American economies during the period 1990 to 2008. We …nd that, where tax rates are not already high, funding public investment by raising taxes may increase long-run growth. If existing tax rates are high, then public investment is only growth-enhancing if funded by restructuring the composition of public spending. Interestingly, using debt to …nance new public investment compromises growth, regardless of the initial …scal condition.
This paper deals with the effects of the transfer of additional funds on the real economy of recipient countries, in particular the European Member States. The intended and unintended effects of additional funds on national public finances and, ultimately, economic performance are discussed. Understanding the real effects of additional public funds and the possible complementarity or substitutability with national public finance is important for shaping the policies for the allocation of Structural Funds. Verification of additionality plays a role in ensuring that additional funds are used to effectively complement national expenditure programmes. In the case of the European Union, it is widely recognised that the current verification mechanism is affected by weaknesses, that prevent it from providing reliable and useful data to effectively assess additionality. For this reason, the paper suggests the European Commission to move away from the current verification approach and to adopt a new one that could more effectively assess to what extent the Structural Funds complement national investments.
This paper examines the relationship between investment in transportation infrastructure capital and the debt-to-gross domestic product (GDP) ratio. We analyse the effect of bringing forward investment originally planned for future years to be executed during times of economic crisis and also consider the possible advantages of carrying out such investments with private sector financing. This paper presents a model which shows how policy aimed to encourage investment in transportation infrastructure projects through private sector participation may help raise long-term GDP and thus lead to a lower debt-to-GDP ratio. The theoretical model is then applied to current empirical data from Israel.
This paper studies the productive impact of infrastructure invest- ment in Brazil. Public capital expenditure have declined steadily over the last two decades, and this paper shows the significant impact this has had on infrastructure stocks. The long-run association between output and infrastructure is investigated, and the results are then used to study the short-run dynamic of these variables. Whether in the short or long run, the productive impact of infrastructure is sub- stantial. Simulations explore the impact of debt-financed increases in public investment on debt to GDP ratio as well as public cash flow and net worth.
Economic growth has been extensively studied in the literature since last century. Seminal papers of Achauer (1989a-d) investigated the relation between economic growth and government expenditure. In the same way and using the works of Balvir and Balbir (1984) and Granger Causality test (1980), we aim at identifying a relationship from investments in transportation infrastructure to GDP and vice-versa in the period 1950-2004 in Brazil. As a result, we confirm the hypothesis that investments in road infrastructure imply increasing the GDP and vice-versa, but railroad investments do not have effects on the economy. The results indicate that investments in road infrastructure imply faster returns in growth in GDP than railroad investments.
In this paper we challenge the proposition that the golden rule of public sector borrowing is consistent with the principle of intertemporal allocative efficiency in the sense that growth-enhancing public investment justifies a structural public deficit. We demonstrate that in the long run the social opportunity costs of debt financed public investments exceed the social opportunity costs of tax financed public investments. Thus a benevolent government that cares about future generations and is less myopic than private households uses taxes to finance public investment. In the short run, debt financing is only justified if a considerable undersupply of public capital initially exists.
Private sector participation (PSP) in the water and sanitation sector has received much less attention in the academic literature than other infrastructure sectors. In part, this is due to the smaller flow of investments in this sector. It is also due to the limitations in the existing data on projects with private involvement and on sector-level institutions and performance. In this paper we present descriptive statistics from the new Water and Sanitation PSP database that has been developed by the authors for the purposes of this research. We use a negative binomial regression model to investigate the factors influencing the number of PSP projects in a sample of 60 developing countries with 460 PSP projects. The regression results provide support for the hypotheses that PSP is greater in larger markets where the ability to pay is higher and where governments are fiscally constrained. We test six models using indicators for different aspects of institutional quality. The protection of property rights and the quality of the bureaucracy emerge as the most important institutions that encourage PSP. Rule of law and the control of corruption are significant, but at a lower level while contracting rights and political stability are not robustly significant.
The macroeconomic experience of emerging and developing economies has tended to be quite different from that of industrial countries. Compared to industrial countries, emerging and developing economies have tended to be much more unstable, with more severe boom/bust cycles, episodes of high inflation and a variety of financial crises. This textbook describes how the standard macroeconomic models that are used in industrial countries can be modified to help understand this experience and how institutional and policy reforms in emerging and developing economies may affect their future macroeconomic performance. This second edition differs from the first in offering: extensive new material on themes such as fiscal institutions, inflation targeting, emergent market crises, and the Great Recession; numerous application boxes; end-of-chapter questions; references for each chapter; more diagrams, less taxonomy, and a more reader-friendly narrative; and enhanced integration of all parts of the work.
Summary Empirical explorations of the growth and aggregate productivity impacts of infrastructure have been characterized by ambiguous (countervailing signs) results with little robustness. This paper, utilizing panel data for South African manufacturing over the 1970-2000 period, and a range of 19 infrastructure measures, explores the question of infrastructure endogeneity in output equations. The paper develops an instrumentation strategy generalizable to other contexts. Controlling for the possibility of endogeneity in the infrastructure measures renders the impact of infrastructure capital not only positive, but of economically meaningful magnitudes.
The paper's objective is to explain factors underlying Africa's weak infrastructure endowment and to identify suitable infrastructure goals for the region based on benchmarking against international peers. The authors use a dataset covering the stocks of key infrastructure-including information and communication technology (ICT), power, roads, and water-across 155 developing countries over the period 1960 to 2005. The paper also examines subregional differences within Africa. They make use of regression techniques to control for a comprehensive set of economic, demographic, geographic, and historic conditioning factors, as well as adjusting for potential endogeneities. Results show that Africa lags behind all other regions of the developing world in its infrastructure endowment, except in ICT. By far the largest gaps arise in the power sector, with generating capacity and household access to electricity at half the levels observed in South Asia. While it is often assumed that Africa's infrastructure deficit is largely a reflection of its relatively low income levels, the authors find that African countries have much more limited infrastructure than income peers in other parts of the developing world. Countries that face the most challenging environment, with low population density, weak governance, and history of conflict, have the poorest infrastructure endowments. At the outset of the data series, Africa was doing significantly better than other developing regions for road density, generation capacity, and fixed-line telephones, but Africa's relative position has deteriorated over time. The most dramatic loss of ground has come in electrical generating capacity, which has stagnated since 1980.
Thirty years ago, in 1974, Chile launched the first large-scale privatization in a developing country. About 15 years later, Argentina provided a new model of global infrastructure management. Since then a variety of public-private partnerships in infrastructure have been adopted throughout the developing and transition world. These experiences add up to a large and heterogeneous enough sample of experiences from which some fairly robust conclusions on who benefited from the reforms and who did not. Because many of these experiences are also turning sour and the"privatization"fad of the 1990s seems to be turning into an"anti-privatization"fad, it seems important to separate facts from emotions. The author argues that the wide differences in interpretations of the facts can be explained by wide differences in the assessment criteria used by analysts, including the definition of the baseline data chosen to assess the incremental effect of reforms. It is also driven by the sectors, the regions, and probably most important, the actors on which the analysis tends to focus. Once all these factors have been considered, a relatively fair and quantitative assessment of the prospects of the public-private relationship in infrastructure is possible.
How effective was public investment in stimulating the Japanese economy during the economic stagnation of the 1990s? Using a dataset of regional public investment spending, we find that investment multipliers were higher than for public consumption, although they were relatively low and declining over time. The paper also finds that the effectiveness of economic infrastructure investment, implemented mainly by the central government, is lower than that of social investment mostly undertaken by local governments. These results suggest that while public investment may yield higher output effects than other spending, its effectiveness depends upon its composition, the level of government implementation, and supply side factors.
Driven by ideology, economic reasoning, and early success stories, vast amounts of financial resources and effort have been spent on reforming infrastructure industries in developing countries. It is therefore important to examine whether evidence supports the logic of reforms. The authors review the empirical evidence on electricity reform in developing countries. They find that country institutions and sector governance play an important role inthe success and failure of reform. And reforms also appear to have increased operating efficiency and expanded access to urban customers. However, the reforms have to a lesser degree passed on efficiency gains to customers, tackled distributional effects, and improved rural access. Moreover, some of the literature is not methodologically robust and on par with general development economics literature. Further, findings on some issues are limited and inconclusive, while other important areas are yet to be addressed. Until we know more, implementation of reforms will be more based on ideology and economic theory rather than solid economic evidence.
The authors provide an empirical evaluation of the impact of infrastructure development on economic growth and income distribution using a large panel data set encompassing over 100 countries and spanning the years 1960-2000. The empirical strategy involves the estimation of simple equations for GDP growth and conventional inequality measures, augmented to include, among the regressors, infrastructure quantity and quality indicators, in addition to standard controls. To account for the potential endogeneity of infrastructure (as well as that of other regressors), the authors use a variety of generalized-method-of-moments (GMM) estimators based on both internal and external instruments and report results using both disaggregated and synthetic measures of infrastructure quantity and quality. The two robust results are: (1) growth is positively affected by the stock of infrastructure assets, and (2) income inequality declines with higher infrastructure quantity and quality. A variety of specification tests suggests that these results do capture the causal impact of the exogenous component of infrastructure quantity and quality on growth and inequality. These two results combined suggest that infrastructure development can be highly effective to combat poverty. Furthermore, illustrative simulations for Latin American countries suggest that these impacts are economically quite significant, and highlight the growth acceleration and inequality reduction that would result from increased availability, and quality of infrastructure.
Infrastructure is crucial for generating growth, alleviating poverty, and increasing international competitiveness. For much of the twentieth century and in most countries, the network utilities that delivered infrastructure services--such as electricity, natural gas, telecommunications, railroads, and water supply--were vertically and horizontally integrated state monopolies. But this approach often resulted in extremely weak services, especially in developing and transition economies and especially for poor people. Common problems included low productivity, high costs, bad quality, insufficient revenue, and shortfalls in investment. Over the past two decades many countries have implemented far-reaching institutional reforms--restructuring, privatizing, and establishing new approaches to regulation. This article identifies the challenges involved in this massive policy redirection within the historical, economic, and institutional context of developing and transition economies. It also reviews the outcomes of these policy changes, including their distributional consequences--especially for poor households and other disadvantaged groups. Drawing on a range of international experiences and empirical studies, it recommends directions for future reforms and research to improve infrastructure performance. Copyright 2005, Oxford University Press.
In the last 15 years, a variety of public private-partnerships in infrastructure have been adopted throughout the developing and transition world. Because many of these experiences are also turning sour, it seems important to separate facts from emotions. The paper argues that the wide differences in interpretations of the facts can be explained by differences in the assessment criteria used to assess the incremental effect of reforms. It is also driven by the sectors, the regions and the actors on which the analysis tends to focus. Copyright Springer 2006
This paper presents a number of facts about growth in Latin America, and shows how critical correlates of growth have evolved over time. In comparison with other regions, Latin America has consistently exhibited higher macroeconomic volatility, lower openness, and higher income inequality, though openness and macroeconomic stability have improved since the early 1990s. The paper then discusses three views of why reforms have not led to higher growth in Latin America: that reforms have gone too far; that reforms have not gone far enough; and that reforms have missed the point.
During the 1980s, various factors have caused developing countries to reduce government expenditures in real terms. In many countries, rising debt service burdens have squeezed non-debt service expenditures. This paper examines data for 24 developing countries, to see which kinds of expenditures were cut and which were protected. In general, it finds that capital expenditures were reduced more than current expenditures. Among the various sectors of government expenditure, the social sectors and defence were relatively protected, while the productive and infrastructure sectors bore a relatively larger burden of the adjustments.
Based on a sample of 56 countries, we find that while fiscal policy in the G-7 countries appears to be broadly consistent with Barro's tax smoothing proposition, in developing countries government spending and taxes are highly procyclical (i.e., government spending rises and taxes fall during expansions, while the reverse is true in recessions). To explain this puzzle, we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending. Given this distortion, a government that faces large (and perfectly anticipated) fluctuations in the tax base will find it optimal to run a procyclical fiscal policy. We argue that the differences in fiscal policy between the G-7 countries and developing countries can be traced back to the fact that the tax base is much more volatile in developing countries than in the G-7 countries.
There is a long-standing literature that shows that fiscal adjustment is often implemented through cuts in public investment, including infrastructure (Roubini and Sachs, 1989; Hicks, 1991; De Haan et al. 1996). In this respect, the present paper aims to provide a comprehensive overview of the evolution of infrastructure stocks, quality and spending in Latin America in order to assess whether the infrastructure sector suffer from the prolonged period of macroeconomic stabilization in the 1980s and 1990s. First, we assess trends in quantity and quality of infrastructure using data on 19 Latin American countries, and we compare them to the performance of the seven "East Asian miracle" countries. Second, we look at trends in infrastructure spending for 9 major Latin American countries on which we have country data. Here we examine to what extent changes in public infrastructure spending were linked to fiscal deficit reductions and driven by the privatization of infrastructure and increased private spending on infrastructure. Finally, we assess the relationship of infrastructure quantity and quality to the path of infrastructure spending in a panel data econometric analysis.
What principles should govern the design of governmental, budgetary and financial policy? Policymakers in the major industrial countries and officials of international organizations are deeply concerned about rising public debt burdens. But there are others who believe that only public spending on goods and services matters, while public debt and deficits are irrelevant. Principles of Budgetary and Financial Policy seeks to bridge the gap between these views, showing how rigorous economic theory can be applied to the study of fiscal, financial, and monetary policy and examining the contributions of such policy to the goals of cyclical stabilization, structural adjustment, and secular growth in modern "mixed" economies. This book brings together twelve years of Willem Buiter's work on fiscal and financial policy, including both previously published and new essays. In addition to raising the level of policy debate, it unites the two subdisciplines into which economists have split the study of fiscal and financial policy: the microeconomic theory of neoclassical public finance and the macroeconomic neoKeynesian theory of stabilization policy. The book's introductory section sets the scene through broad ranging, nontechnical papers emphasizing the unavoidable interconnection of the stabilization role of fiscal policy with its allocational and distributional roles. In the following sections Buiter focuses on the measurement of public sector activity over time, considering how (and to what extent) a longer-run perspective on the government's finances can be summarized in a single comprehensive government balance sheet. He examines "crowding out," the displacement of private economic activity by public economic activity, explaining why and how public debt and deficits matter and emphasizing the distinction between various financing issues. The fiscal origins of inflation are addressed, as well as the eventual monetization of public sector deficits. In an extensive concluding essay Buiter considers the role of fiscal policy in stabilization and structural adjustment in open developing countries.
During the 1980s and 1990s the countries of Central America experienced protracted fiscal crises and debt repayment problems which resulted in the implementation of structural adjustment agreements. Apart from attempting to reestablish fiscal balance and to control inflation, the proponents of adjustment policies sought to enhance growth by de-emphasizing the wasteful aspects of state spending while maintaining public expenditures on physical and human capital, which were believed to promote private sector productivity. By comparing a pre-debt crisis period with the period given by debt crisis and adjustment, the study reveals that the shares of government spending on human and, particularly, physical infrastructure dropped precipitously during the adjustment period. At the same time, the shares devoted to defense and subsidy categories—as well as interest payments on external debt—generally registered notable gains. The experience of adjustment policies in Central America indicated that substantial discrepancies existed between the idea and the reality.
In this paper we investigate how telecommunications infrastructure affects economic growth. This issue is important and has received considerable attention in the popular press concerning the creation of the "information superhighway" and its potential impacts on the economy. We use evidence from 21 OECD countries over the past twenty years to examine the impacts that telecommunications developments may have had. We estimate a structural model which endogenizes telecommunication investment by specifying a micro-model of supply and demand for telecommunication investments. The micromodel is then jointly estimated with the macro-growth equation. After controlling for country-specific fixed effects, we find evidence of a positive causal link, provided that a critical mass of telecommunication infrastructure is present.
ZUSAMMENFASSUNG - (Telekommunikations-Infrastruktur und Wirtschaftsentwicklung: Ein simultanes Modell)
In diesem Beitrag wird untersucht, welchen Einfluß die Telekommunikations-Infrastruktur auf die wirtschaftliche Entwicklung ausübt. Diese wichtige Frage hat im Zusammenhang mit der Diskussion um "Informationsautobahnen" Aktualität erlangt. In der vorliegenden Studie wird der Einfluß der Telekommunikations-Infrastruktur für 21 OECDLänder für die vergangenen 20 Jahre analysiert. Es wird ein Strukturgleichungsmodell geschätzt, in dem Investitionen in die Telekommunikations-Infrastruktur als endogene Variable erfaßt werden und in einem Mikromodell Angebot und Nachfrage nach Telekommunikations- Investitionen spezifiziert werden. Das Mikromodell wird dann zusammen mit der Makro- Wachstumsgleichung geschätzt. Als Ergebnis stellen die Autoren dann eine positive Kausalbeziehung zwischen Telekommunikations-Investitionen und wirtschaftlicher Entwicklung fest, wenn eine kritische Masse an Telekommunikations- Infrastruktur existiert.
The fiscal rules set in the Treaty of Maastricht and in the Stability and Growth Pact have sometimes been criticised as an excessively binding constraint for appropriate counter-cyclical action. The risk that the rules may permanently reduce the public sector’s contribution to capital accumulation has also been pointed out. In this framework, the adoption of a ‘golden rule’ has been suggested. Starting from the recent debate, this paper tackles two questions: (a) the implications of the Pact for public investment and (b) the pros and cons of introducing a golden rule in EMU’s fiscal framework, given the objectives of low public debts and adequate margins for a stabilising budgetary policy. The analysis suggests that the rules set in the Treaty and in the Pact may negatively influence public investment spending. However, the golden rule, although intuitively appealing, does not seem to be an appropriate solution to the problem.
In this paper we investigate how telecommunications infrastructure affects economic growth. We use evidence from 21 OECD countries over a 20-year period to examine the impacts that telecommunications developments may have had. We jointly estimate a micromodel for telecommunication investment with a macro production function. We find evidence of a significant positive causal link, especially when a critical mass of telecommunications infrastructure is present. Interestingly, the critical mass appears to be at a level of telecommunications infrastructure that is near universal service.
The Private Sector Response: Trends, Determinants and Challenges.” The World BankExpenditure Reductions in Developing Countries Revisited
- Estache
- Antonio
- Pargal
- Sheoli
Estache, Antonio; Pargal, Sheoli (2002) “The Private Sector Response: Trends, Determinants and Challenges.” The World Bank, Mimeo Hicks, Norman L. (1991) “Expenditure Reductions in Developing Countries Revisited”, Journal of International Development: vol. 3, No. 1, 29-37
How did Latin America’s Infrastructure Fare in the Era of Macroeconomic Crises? The World Bank, Mimeo Calderón, CésarThe Output Cost of Latin America’s Infrastructure GapWhen is fiscal adjustment an illusion?” Economic Policy
- Calderón
- William César
- Luis Easterly
- Servén
Calderón, César; William Easterly, and Luis Servén (2002). How did Latin America’s Infrastructure Fare in the Era of Macroeconomic Crises? The World Bank, Mimeo Calderón, César; Luis Servén (2002). “The Output Cost of Latin America’s Infrastructure Gap.” The World Bank, Mimeo Easterly, William (1999). “When is fiscal adjustment an illusion?” Economic Policy, 57- 86. _______ (2001). “Growth Implosions, Debt Explosions, and My Aunt Marilyn: Do Growth Slowdowns Cause Public Debt Crises?”, World Bank Policy Research Working Paper
Testing for Unit Roots in Heterogeneous Panels”. Manuscript, University of Cambridge (Revised VersionThe impact of adjustment and stabilization policies on infrastructure spending in Latin America
- Kyung Im
- M So
- Hashem
- Yongcheol Pesaran
- Shin
Im, Kyung So; M. Hashem Pesaran and Yongcheol Shin (1995) “Testing for Unit Roots in Heterogeneous Panels”. Manuscript, University of Cambridge (Revised Version: December 1997) Jonakin, J. and M. Stephens (1999). “The impact of adjustment and stabilization policies on infrastructure spending in Latin America”, North American Journal of Economics and Finance 10, 293-308
Testing for Unit Roots in Heterogeneous Panels
- Kyung Im
- So
Im, Kyung So; M. Hashem Pesaran and Yongcheol Shin (1995) "Testing for Unit Roots
in Heterogeneous Panels". Manuscript, University of Cambridge (Revised Version:
December 1997)
The Private Sector Response: Trends, Determinants and Challenges
- Antonio Estache
- Pargal
- Sheoli
Estache, Antonio; Pargal, Sheoli (2002) "The Private Sector Response: Trends,
Determinants and Challenges." The World Bank, Mimeo
Growth Implosions, Debt Explosions, and My Aunt Marilyn: Do Growth Slowdowns Cause Public Debt Crises?
_______ (2001). "Growth Implosions, Debt Explosions, and My Aunt Marilyn: Do
Growth Slowdowns Cause Public Debt Crises?", World Bank Policy Research Working
Paper.