The Limits of Stabilization: Infrastructure, Public Deficits and Growth in Latin America (Latin America and Caribbean Studies)

228 Pages·2003·0.81 MB·English

by  Luis Serven

LATIN AMERICAN DEVELOPMENT FORUM
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atin America’s macroeconomic crises of the 1980s and ’90s forced a severe fiscal e

adjustment across the region. More often than not, however, fiscal stability was L
achieved at the cost of a drastic compression of public infrastructure spending, i
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which in some countries amounted to half or more of the total budget deficit
The Limits of
reduction.The retrenchment of the public sector from infrastructure construction and i
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maintenance was accompanied by the opening up of such activities to the private sector, s
in the hope that it would take the leading role in infrastructure provision.
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This book assesses the consequences of this changed public-private partnership from the
S Stabilization
perspective of economic growth, public finances, and the quantity and quality of infrastructure
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services. First, it documents the major trends in infrastructure provision in Latin America
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over the past two decades. Second, it evaluates the implications of these trends for economic b
growth and public deficits. Finally, it assesses the determinants and macroeconomic effects i
of the private sector response, and in particular whether private involvement has succeeded li
in making up for the public sector retrenchment. Valuable to anyone concerned with Latin z
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America’s development, this book will be of particular interest to those in the fields of
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infrastructure, fiscal policy, and economic growth. i INFRASTRUCTURE, PUBLIC DEFICITS,
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n
“This fascinating book highlights a neglected cost of two decades of fiscal austerity in Latin
America. The authors’ careful analysis reveals that the decline in public investment in AND GROWTH IN LATIN AMERICA
infrastructure may have been expensive not only for growth but for long-term fiscal solvency
as well. Deserves to be read by every IMF economist (and many others besides).”
— Dani Rodrik, Professor of International Political Economy
John F. Kennedy School of Government, Harvard University
“This book addresses a very important issue. Fiscal adjustment programs that focus on
narrowing the government deficit can have detrimental effects because they entice reductions
in the component of public spending that is politically easiest to cut: investment spending.
The book assembles a remarkable data set on public and private infrastructure that will
surely be an important asset in future research. The lessons from this research are likely to
be valuable not only for developing countries but also for the European countries that are
part of the Euro zone.”
— Sergio Rebelo, Distinguished Professor of International Finance
Kellogg School of Management, Northwestern University
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INTER-AMERICAN DEVELOPMENT BANK n
STANFORDUNIVERSITYPRESS
STANFORD
SOCIAL
THE WORLD BANK ISBN 0-8047-4972-8 SCIENCES THE WORLD BANK
The Limits of Stabilization

The Limits of
Stabilization
INFRASTRUCTURE, PUBLIC
DEFICITS, AND GROWTH IN
LATIN AMERICA
Edited by
William Easterly
Luis Servén
A COPUBLICATION OF STANFORD SOCIAL SCIENCES, AN IMPRINT OF
STANFORD UNIVERSITY PRESS, AND THE WORLD BANK
©2003 The International Bank for Reconstruction and Development/The World Bank
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All rights reserved.
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A copublication of Stanford Social Sciences, an imprint of Stanford University Press,
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Library of Congress Cataloging-in-Publication Data
The limits of stabilization : infrastructure, public deficits and growth in Latin America/
edited by William Easterly and Luis Servén.
p. cm. – (Latin American development forum)
Includes bibliographical references and index.
ISBN 0-8213-5489-2
1. Infrastructure (Economics)—Latin America. 2. Economic stabilization—
Latin America. 3. Public-private sector cooperation—Latin America. I.Easterly,
William Russell. II. Serven, Luis. III. World Bank. IV. Series.
HC130.C3L56 2003
339.5(cid:2)098—dc21
2003053802
Latin American
Development Forum Series
This series was created in 2003 to promote debate, disseminate infor-
mation and analysis, and convey the excitement and complexity of the
most topical issues in economic and social development in Latin Amer-
ica and the Caribbean. It is sponsored by the Inter-American Develop-
ment Bank, the United Nations Economic Commission for Latin
America and the Caribbean, and the World Bank. The manuscripts
chosen for publication represent the highest quality in each institu-
tion’s research and activity output, and have been selected for their rel-
evance to the academic community, policymakers, researchers, and in-
terested readers.
Advisory Committee Members
Inés Bustillo,Director, Washington Office, Economic Commission for
Latin America and the Caribbean, United Nations
Guillermo Calvo, Chief Economist, Inter-American Development
Bank
José Luis Guasch, Regional Adviser, Latin America and Caribbean
Region, World Bank
Stephen Haber, A. A. and Jeanne Welch Milligan Professor, Depart-
ment of Political Science, Stanford University; Peter and Helen Bing
Senior Fellow, the Hoover Institution
Eduardo Lora, Principal Adviser, Research Department, Inter-
American Development Bank
José Antonio Ocampo, Executive Secretary, Economic Commission
for Latin America and the Caribbean, United Nations
Guillermo E. Perry, Chief Economist, Latin America and Caribbean
Region, World Bank
Luis Servén, Lead Economist, Latin America and Caribbean Region,
World Bank

About the Contributors
César A. Calderón is a senior economist with the Research Depart-
ment at the Central Bank of Chile. He received his Ph.D. in economics
from the University of Rochester. His research focuses on growth, de-
velopment, and open economy macroeconomics.
Javier Campos is a professor of economics in the Department of Ap-
plied Economic Analysis at the University of Las Palmas de Gran
Canaria. He specializes in the empirical analysis of competition and
regulation issues in network industries. Since his sabbatical at the
World Bank, he has continued to advise governments on reform and
regulation of the transport sector in Latin America.
William Easterlyis a professor of economics (joint with Africana Stud-
ies Program) at New York University, where he is also codirector of
the Development Research Institute. He is also a senior fellow at the
Center for Global Development and the Institute for International
Economics. He worked for 16 years as a research economist at the
World Bank. He is author of The Elusive Quest for Growth: Econo-
mists’ Adventures and Misadventures in the Tropics(2001), as well as
of numerous academic articles. His research specializations include
economic growth, foreign aid, ethnic conflict, political economy, and
macroeconomic policies. He holds a Ph.D. from the Massachusetts
Institute of Technology.
Antonio Estacheis a senior economic adviser at the World Bank and a
research fellow at the European Center for Advanced Research in Eco-
nomics and Statistics at the Université Libre de Bruxelles. He special-
izes in industrial organization and public sector economics. For the
past 20 years, he has advised governments in Africa, Asia, and Latin
America on infrastructure sector reform and regulation.
viii ABOUT THE CONTRIBUTORS
Noelia Martín is a researcher in the Department of Applied Econom-
ics at the University of Las Palmas de Gran Canaria. She holds an M.A.
in economics from the University of York, where she is currently com-
pleting her Ph.D. Her research focuses on the interactions between
macroeconomic performance and infrastructure sector investments
and reforms.
Sheoli Pargalis a senior economist at the World Bank, with experience
in the Bank’s research department as well as in Bank operations. She
has worked on infrastructure, environment, and social development is-
sues, focusing on institutional, incentive, and regulatory aspects. She
received her Ph.D. in economics from Northwestern University.
Luis Servén manages the research program of the Latin America and
Caribbean Region of the World Bank. He has published numerous ar-
ticles in academic journals and several monographs in the fields of
macroeconomics and international finance. He has taught at the Uni-
versidad Complutense de Madrid, Centro de Estudios Monetarios y
Financieros (CEMFI), and the Massachusetts Institute of Technology.
His research areas are saving, investment, and open economy macro-
economics. He holds a Ph.D. from the Massachusetts Institute of Tech-
nology.
Lourdes Trujillo is a professor of economics and the director of the
Department of Applied Economic Analysis at the University of Las
Palmas de Gran Canaria. She specializes in the empirical analysis of
the infrastructure industries. She has advised governments throughout
Latin America on transport sector reform and regulation.
Contents
Acknowledgments xv
1 INTRODUCTION 1
William Easterly and Luis Servén
2 LATIN AMERICA’S INFRASTRUCTURE IN THE ERA OF
MACROECONOMIC CRISES 21
César Calderón, William Easterly, and Luis Servén
3 THE OUTPUT COST OF LATIN AMERICA’S INFRASTRUCTURE GAP 95
César Calderón and Luis Servén
4 INFRASTRUCTURE COMPRESSION AND PUBLIC SECTOR
SOLVENCY IN LATIN AMERICA 119
César Calderón, William Easterly, and Luis Servén
5 MACROECONOMIC EFFECTS OF PRIVATE SECTOR
PARTICIPATION IN INFRASTRUCTURE 139
Javier Campos, Antonio Estache, Noelia Martín,
and Lourdes Trujillo
6 REGULATION AND PRIVATE SECTOR PARTICIPATION IN
INFRASTRUCTURE 171
Sheoli Pargal
Acronyms and Abbreviations 199
Index 205
ix