Regional Focus: Major Infrastructure Investments to Benefit Latin America’s Business Environment

The quality of Latin America’s infrastructure network is generally deficient, placing it at a disadvantage compared to other regions such as Asia Pacific and Eastern Europe. Major infrastructure investments which are in progress will have a beneficial impact on Latin America’s business environment and help increase its competitiveness. However, additional reforms will be needed to boost investment in infrastructure projects and improve the region’s ability to compete in the long term.

Key Points

  • Latin America is one of the world’s most dynamic regions, offering attractive opportunities for companies. Between 2006 and 2011, average annual growth of consumer expenditure in Latin America was 5.0% in real terms, higher than Asia Pacific (4.6%) and Middle East and Africa (3.6%);
  • However, Latin America’s underdeveloped infrastructure networks places it at disadvantage compared to competing regions such as Asia Pacific and Eastern Europe. In 2011, Latin America’s electricity generation capacity – measured as GWh per capita – stood at 2,496 GWh compared to Eastern Europe’s capacity of 5,381 GWh;
  • Weak infrastructure networks have negative implications for the region’s competitiveness in aspects such as productivity, trade, foreign direct investment (FDI) inflows, income inequality and population health. Latin America’s labour productivity – expressed as GDP per person employed – reached US$18,956 in 2011, below US$21,017 for Eastern Europe;
  • Many Latin American countries are investing heavily in their infrastructure to improve their business environments and competitiveness. For example Brazil began investing R$955 billion (US$562 billion) as part of its “Programa de Aceleração do Crescimento” (PAC 2) in 2011;
  • Chile currently scores the highest in Latin America in the Global Competitiveness Index 2012 for the quality of its infrastructure at 31st out of 144 countries globally.

Quality of Infrastructure in Latin America Lags Behind Most Other Regions Latin America’s infrastructure network is below-par compared to most other regions largely as a
result of long term underinvestment in infrastructure:

  • In 2011, Latin America had the lowest proportion of paved roads (as a % of total road network) across all regions, at 22.2%. Likewise, household penetration of broadband Internet enabled computers in Latin America stood at 23.3% in 2011, lower than the world average of 31.7%;

Proportion of Paved Roads and Household Penetration of Fixed Telephone across Regions: 2011


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Source: Euromonitor International from national statistics/International Road Federation (IRF)/International Telecommunications Union (ITU)

Note: Proportion of paved roads expressed as a percentage of the total road network measured by length.

  • Latin America’s low and often inefficient investment in infrastructure between 1980 and 2011 has been the consequence of a
    combination of factors present in most Latin American countries
    during this period. These include lack of a disciplined fiscal policy, deficiencies in their business environments and inadequate long-term planning;
  • The lack of discipline in fiscal policy of most countries in the region generated government budget deficits,
    which have had a negative effect on public infrastructure investment. For every year during the period 1995-2011, Latin America on aggregate ran public budget deficits despite a windfall of income caused by record global commodity prices during most of the 2000s;
  • Private sector infrastructure investment is also hampered by deficiencies in the business environment of most countries
    of the region, including weak institutions, deficient rule of law and excessive levels of red tape. As a
    result, total investment in infrastructure in Latin America averaged 2.0% of its total GDP during the period 1996-2008, according to data from the UN’s Economic Commission for Latin America (ECLAC).

Deficient Latin American Infrastructure Impacts Competitiveness

The quality of infrastructure in Latin American countries has implications for other aspects of their economies like productivity, trade, foreign direct investment (FDI) inflows and income inequality;

  • Inadequate infrastructure weighs on the region’s productivity levels by hindering the flow of goods, persons and information. In 2011, Latin America’s productivity (measured as GDP per person employed) stood at US$18,956, compared to US$21,017 in Eastern Europe;
  • The time and cost of trade is also impacted by the poor quality of roads, railroads and ports. According to the World Bank’s Ease of Doing Business 2012 report, the average cost to export a container from the Latin America & the Caribbean region is US$1,257 per container, higher than the East Asia & Pacific average of US$906 per container;
  • Underdeveloped infrastructure networks in sectors such as information communications technology (ICT) also influence the type of FDI inflows that the region receives. According to an study by ECLAC, only 8.0% of total FDI inflows to Latin America & the Caribbean between 2008 and 2010 were highly intensive in technology, compared to an average of 52.0% for the “Asian Tigers” (Hong Kong, Taiwan, South Korea and Singapore);
  • Latin America’s lack of infrastructure also accentuates the problem of income inequality and poverty, as infrastructure in the region is mostly concentrated on urban areas, leaving rural areas with little access to core economic activities and services. The UN’s Human Development Report 2011 ranked Latin America as the most unequal region in the world in terms of income in 2011;

Major Investments in Infrastructure will Improve Latin American Countries’ Business Environments

Many Latin American countries are investing heavily in improving their infrastructure:

Brazil:

  • In 2011, Brazil began an infrastructure investment plan called “Programa de Aceleração do Crescimento” (PAC 2). This will provide for total infrastructure investments of R$955 billion (US$562 billion) in areas such as basic infrastructure (electricity and water), transport networks and energy;
  • Investments in the transport network will help to connect Brazil at both a national and international level. Its proportion of paved roads reached just 15.7% of the total road network in 2011.

Mexico:

  • The “National Infrastructure Program 2007-2012” worth over US$150 billion (equivalent to 13.0% of Mexico’s 2011 total GDP) is in execution as of 2012, with investments in areas including energy, roads, ports and telecommunications;
  • In addition, elected Mexican President Enrique Peña Nieto, due to take office in December 2012, has announced his intention to allow private participation in the country’s state-owned oil monopoly Pemex;
  • Investment in Mexico’s energy sector is key if the country is to reverse the trend of declining crude oil production. Should current trends in Mexico’s oil production and consumption continue, the country runs the risk of becoming a net oil importer by 2020.

Chile:

  • Chile is investing US$11.8 billion (equivalent to 4.7% of 2011 total GDP) in its infrastructure programme in the period 2010-2014.This is designed to improve areas such as intercity roads, airports and hospitals;
  • According to the World Economic Forum’s Global Competitiveness Index 2011, Chile had the best infrastructure network in Latin America, ranked at 32nd out of 139 countries at a global level. Continuous improvement of Chile’s developed infrastructure network will help consolidate this position.

Quality of Overall Infrastructure in Selected Countries in Latin America: 2012


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Source: World Economic Forum

Notes: (1) Rankings based on the index for the “Quality of overall infrastructure” category from the World Economic Forum’s Global Competitiveness Index 2011. (2) The “Quality of overall infrastructure” index relates to assessments of general infrastructure (e.g. transport, telephony and energy) from respondents to the survey, and ranges between 1 (extremely underdeveloped) and 7 (extensive and efficient by international standards).

Colombia:

  • The National Infrastructure Agency of Colombia has announced investments for a total amount of Col$58.0 trillion (US$31.4 billion, equivalent to 9.4% of total 2011 GDP) during the period 2012-2016, to cover areas like ports, road and railroad networks;

Peru:

  • The Peruvian government will invest US$10.4 billion in infrastructure projects to be undertaken between 2012 and 2013. The main focus of the projects is in the areas of airports, roads and pipelines for natural gas;
  • Road construction will allow better connectivity to rural areas and also help reduce income inequality. In 2011, Peru’s Gini Index – a measure of income inequality ranging between 0 (perfectly equal) to 100 (perfectly unequal) – stood at 54.2, one of the highest in the world.

Prospects

In the longer-term, maintaining substantial investments in infrastructure will be needed in order to improve the region’s competitiveness:

  • Latin America’s average annual growth rate of total real GDP is expected to accelerate slightly from 3.8% during the period 2006-2011 to 4.0% for the period 2012-2020. Robust economic growth will allow for governments in the region to increase public investment in infrastructure;
  • However, public infrastructure investment will necessarily have to be complemented by private investment in order to bring Latin American at par with competing regions. According to ECLAC esti mates, Latin America would have to invest an average of 8.1% of its total GDP during the period 2012-2020 in order to catch up with infrastructure levels from the “Asian Tigers” by the end of that period;
  • Public-Private-Partnerships (PPPs) are increasingly being used by several Latin American economies like Brazil, Chile and Colombia in order to finance infrastructure projects. This is a positive step in order to involve private participation and reduce the burden on governments. However, the ability to attract private infrastructure investment in Latin America will continue to be strongly dependent on the quality of the business environment
    of individual countries.