Latin America Must Prioritize Infrastructure to Spur Economic Growth
Jerry Haar
Professor and Executive Director, The Americas, Florida International University - College of Business
?by Jerry Haar
This policy brief provides an overview and analysis of the status and challenges of Latin America’s physical infrastructure, as well as an outlook on what lies ahead for the region. Included in this overview are the region’s roads, ports, airports, and transportation systems, as well as the infrastructure for water, electricity, and telecommunications.
The current situation of the region is not favorable: Latin America falls short when it comes to infrastructure investments. According to the World Bank, while East Asia and the Pacific invest approximately 8% of GDP in infrastructure, Sub-Saharan Africa invests approximately 2 percent, and Latin America and the Caribbean invest close to 3 percent of GDP[1].
The current state of the region’s physical infrastructure does not meet the development or competitiveness needs of the region and are not aligned with the expectations of its populations. Data from the World Bank indicates that current annual investments in infrastructure range from 2 to 4 percent of GDP on average, placing Latin America at a disadvantage when compared to most regions.[2] However, the current investments vary greatly from one country to another, with the region’s average being largely driven by Argentina, Brazil, and Mexico, which account for almost 80 percent of Latin America’s GDP.[3] Argentina spends approximately 5% of GDP on infrastructure whereas Brazil and Mexico spend less than 1%.[4]
It is worth noting that despite their smaller size, countries like Bolivia, Costa Rica, Honduras, Nicaragua, and Panama invest more than 4 percent of their GDP in infrastructure every year.[5] ??In essence there is no clear pattern related to country size or income level and the amount of infrastructure investments.
An important question arises then: how much should Latin America be spending on infrastructure? Per the Inter-American Development Bank, the infrastructure gap in Latin America is estimated at around $150 billion per year.[6] It is estimated that the current needs for investment in infrastructure should be anywhere from 4-8 percent of its GDP.[7] Expert opinions vary but the general agreement is that there should be investments in infrastructure that amount to at least 4-5 percent of regional GDP.[8] Unfortunately, these estimates do not indicate the most efficient way to spend these investments in order to maximize growth. Understanding this requires a deeper look at the current state of the region’s physical infrastructures.
We will begin by looking at the region’s infrastructure for water and electricity. With around 94 percent of households having access to drinking water, Latin America is doing well when compared to other developing regions[9]. However, there are still areas for improvement. According to the World Bank, around 20 million homes still lack access to drinking water, most of these are found in rural areas and concentrated across six countries- Brazil, Colombia, Ecuador, Haiti, Mexico, and Peru.[10] According to the Inter-American Development Bank , the proportion of the rural population with access to piped water is approximately 55 percent, while less than 10 percent of the population has access to sewage systems in rural areas.[11]
?In general, water access has been growing in the region, however quality and safety of water remain an issue, especially with regard to sewerage access and wastewater, of which only 30 percent is being treated.[12] This situation is disconcerting, as it is not up to par with the levels of income and urbanization Latin America has experienced in recent years. Electrical infrastructure is also doing relatively well with around 96 percent of households having access to electricity.[13] Furthermore, electricity has the potential to become one of the region’s competitive advantages due to it being one of the cleanest in the world, based on hydroelectricity. Overall, access to electricity is above average when compared to other developing countries, where access is around 86 percent.[14] Access remains challenging in rural areas with over 50 percent of those without access being concentrated in Haiti, Guatemala, and Peru.[15]?
However, Latin American countries must pay special attention to diversifying its sources of energy from hydroelectric to solar and wind in order to face the increased uncertainty of precipitation brought forth by climate change, as well as the added pressure from advocacy groups pressuring for alternative sources of energy. As a result, the region has seen rapid growth in solar energy with countries like Argentina, Brazil, Chile, and Peru implementing concentrated solar power plants for large-scale electricity production. Similarly, investments in onshore wind energy production have been growing since 2008, mainly in Brazil, Chile, Mexico, and Peru, and on a more modest scale in Colombia, Ecuador, Uruguay, and Central American countries.
Continuing with transportation infrastructure, this is perhaps one of the region’s most notable weaknesses. According to The Economist , Latin America confronts serious problems in this area: it lacks a dense transportation network, is exacerbated by the region’s low population density; additionally, its paved road density is quite low as is the quality of the existing roads.
However, urban transportation performs somewhat better.[16] During the last few decades significant investments have been made in large-scale public transportation systems, especially in the most densely populated cities, most of which now have multiple modes of public transport. One example of this is Medellin’s metro system, which provides an overall efficient public transportation option to one of Colombia’s most populated cities. The subway system in Santiago, Chile’s capital, also stands out due to its extensiveness (87 miles in length and 136 stations), modern infrastructure, and an annual ridership of over 670 million users.[17] However, even in those cities where transportation systems exist, the main challenge are congestion and lack of accessibility due to sharp increases in the population of urban centers.
Airports are also underperforming. Historically, the region’s airports were better than those of other developing regions but they have fallen behind due to both a lack of investment to expand and modernize the airports, and an increase in passenger demand brought forth by a growing middle class. For example, Brazil has seen a huge increase in airport traffic; in order to keep up with the increasing demand S?o Paulo Guarulhos Airport will increase its 30 million passenger capacity to 60 million by 2025 through the modernization of its current terminals and expansion, which are estimated to need investments of over $4 billion USD.[18]
Ports have shown some improvement as evidenced by greater connectivity to global shipping networks. UNCTAD’s 2020 liner shipping connectivity index indicates that the Manzanillo port in Panama, the Cartagena port in Colombia, and the Manzanillo port in Mexico stand out in terms of multimodal connectivity.[19] However, the World Bank has pointed out that in order for ports to increase their competitiveness, access roads would need to increase by around 15 percent within 50 kilometers of ports in the next decade to keep up with the expected trade volumes for the region.[20]
When it comes to the integration of different transport modes, especially rail and road, the region faces tremendous challenges that decrease its competitiveness in logistics. Overall, statistics show that roads and ports in Latin America have improved marginally over the past decade, and railroads have not improved at all, placing the region at the same level as Sub-Saharan Africa. According to ECLAC, Latin America has approximately 76,000 kms of rail tracks for an area of 20 million kilometers and Africa has 84,000 kilometers of rail track for an area of 30 million kilometers.[21] Argentina has the largest rail network in the region, with almost 37,000 kms while Brazil, despite being the largest country of the region, has around 30,000 kms of track of which 9,000 are out of operation due to lack of maintenance and an overall abandonment of these transport structures.[22]
In terms of digital infrastructure, improvements have been made but the region continues to face supply and demand constraints to achieve a complete digital transformation. The digital divide in Latin America is palpable, with the majority of its population in rural areas having no access to internet. Countries like Cuba, Nicaragua and Guatemala have particularly low numbers in terms of mobile service coverage and broadband connectivity. The need for better connectivity has quickly become a pressing issue in the region after the COVID-19 pandemic increased the demand for better internet access and wider coverage for those working from home. It is an imperative for Latin American countries to invest in 5G networks, private networks, data centers, and fiberoptic in order to expand connectivity into rural areas. In 2021, Brazil, Mexico, Chile, Colombia and the Dominican Republic established their intention to adopt 5G technology, but doing so will require high upfront capital costs and sustained investments in fixed infrastructure in challenging terrains such as the Andes mountains and the rainforests.[23]
Under these circumstances, to whom should Latin America turn for support? Over the past decade, an important opportunity has developed for Latin American countries: China’s Belt and Road Initiative (BRI). Latin American exporters will have an opportunity to benefit from greater connectivity, with the BRI having the potential to reduce shipping times, trade costs, and according to experts, it could also increase agricultural, mining, and manufacturing exports from 1 to almost 8 percent in at least five Latin American countries.[24] In order to reap such benefits, Latin America must focus on the implications for the infrastructure sector. Countries like Chile are already exploring synergies with the private sector to develop infrastructure projects, as evidenced by the cooperation agreement between China Railway Group Limited and Sigdo Koppers - a Chilean developer.[25] That said, China’s recent economic slowdown will limit the resources available to commit to the country’s foreign policy, which could leave Latin America with narrower infrastructure investments from China.
In order to counteract the initiative from China in the Latin American region, President Biden has sent delegations to Colombia, Panama, and Ecuador, to discuss the “Build Back Better World (B3W)” international infrastructure investment initiative. This could help catalyze much needed infrastructure development projects and investments in sectors like communication technologies. Additionally, the United States is part of the Partnership for Global Infrastructure and Investment (PGII), an effort by Group of Seven to collaborate in the funding of infrastructure projects in developing countries and a response of the member countries to China’s Belt and Road Initiative.[26]
How can Latin America achieve these improvements? In the past, most of the countries in the region have turned to public-private partnerships (PPPs) for infrastructure investments. In 2021 Latin American countries secured over $18.6 billion across 56 projects from private investors, becoming the region with the second largest investment commitment in infrastructure[27].?Brazil received US$15.7 billion of private investment commitments across 36 projects in 2021, which represent 84% of the region’s 2021 PPPs.[28] Mexico received US$1.1 billion in PPP investment commitments across six projects.[29] A successful example of a PPP is that of the Atotonilco de Tula plant in Mexico which treats water from the valley of Mexico. Over 50 percent of the plants was funded by the private sector and is operated by a private consortium.[30] However, not all of these partnerships are successful, as shown by construction firm Odebrecht, which secured contracts by making low bids and then renegotiated them by pushing up the cots, all while bribing politicians. Thus, policymakers in the region must pay special attention to transparency and discouraging corruption and red tape in the development of PPPs.
Another important source of funding is China. The Economist reported that in 2018, Chinese banks invested more in Latin America’s infrastructure than the World Bank. According to the UN’s ECLAC, this financing has been mostly provided through the China Development Bank (CDB) and China Export-Import Bank. For example, in 2017 Chinese firms invested around $21 billion in Brazil, and Bolivia has a line of credit with China of about $10 billion to spend on hydroelectric dams and motorways.[31] Overall, China’s growth in Latin America has been increasing rapidly since 2000, and most recently it was evidenced by the country’s support of the region in fighting against COVID-19, supplying Latin America with millions of vaccines.
Multilateral development banks have also been important sources of funding in infrastructure projects in the region. Accordingly, Latin American countries have turned to the World Bank, the Inter-American Development Bank (IDB), Development Bank of Latin America (CAF), and the Central American Bank for Economic Integration (CABEI), for the majority of their lending needs. While the stock of multilateral debt has grown in real terms, this growth has not been linear over time but rather growth spurts, rising as a result of crises. According to ECLAC, multilateral debt grew at an annual rate of 1.8% until 2003, then debt stocks declined until 2007, and have been increasing since 2008 when the global financial crisis created a surge in the demand for multilateral debt.[32] However, relative to private debt, multilateral debt has decreased in the region, according to the ECLAC. Furthermore improvements in the region’s macroeconomic conditions and low-interest rates since 2010 led to an increase of commercial bank lending to the public sector.[33]
In sum, Latin America’s infrastructure is not on par with its growing upper-middle income population and the expectations of economic growth. Investing in infrastructure is essential to the region’s economic growth, to reduce inequality, and to achieve sustainability. ?So, how can the region move forward? The region has tremendous potential, especially given its experience with PPPs[34]. Latin America has the means to improve its infrastructure, but first it must work on prioritizing its investment needs and goals, on improving the efficiency of public spending, and on attracting cost effective funding via transparent PPPs and through local or international commercial lending. In doing so, Latin America can become more strategic in allocating it resources for infrastructure improvements and achieve a level of infrastructure that can contribute to sustained economic growth.
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This article was originally published by the Woodrow Wilson International Center for Scholars, on March 13, 2023.
[1] Retrieved from the World Bank’s report “Rethinking Infrastructure in Latin America and the Caribbean” 2017
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[2] Same as first reference
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[3] Same as first reference
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[5] Same as first reference
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[6] Retrieved from the Inter-American Development Bank’s report “Financing Infrastructure in Latin America and the Caribbean: How, How much and by Whom? 2015 https://publications.iadb.org/en/financing-infrastructure-latin-america-and-caribbean-how-how-much-and-whom
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[7] Same as first reference
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[8] Same as first reference
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[9] Same as first reference
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[10] Same as first reference
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[11] Retrieved from the Inter-American Development Bank’s report “From Structures to Services” 2020 https://publications.iadb.org/publications/english/document/From-Structures-to-Services-The-Path-to-Better-Infrastructure-in-Latin-America-and-the-Caribbean-Executive-Summary.pdf
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[12] Same as previous reference
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[13] Same as first reference
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[14] Same as first reference
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[15] Same as first reference
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[16] Retrieved from The Economist (2018) - Latin America needs an infrastructure upgrade https://www.economist.com/the-americas/2018/03/10/latin-america-needs-an-infrastructure-upgrade
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[17] Retrieved from https://en.wikipedia.org/wiki/List_of_Latin_American_rail_transit_systems_by_ridership
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[19]?Retrieved from https://unctad.org/press-material/unctads-review-maritime-transport-2020-highlights-and-figures-latin-america-and
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[20] Same as first reference
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[23] https://www.whitecase.com/insight-our-thinking/bridging-latin-americas-digital-divide#article-content
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[24] https://www.atlanticcouncil.org/in-depth-research-reports/issue-brief/belt-and-road-in-latin-america-a-regional-game-changer/
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[25] Same as previous
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[26] https://www.whitehouse.gov/briefing-room/presidential-actions/2022/06/26/memorandum-on-the-partnership-for-global-infrastructure-and-investment/
[27] Retrieved from the World Bank’s report “Private Participation in Infrastructure” 2021 https://ppi.worldbank.org/content/dam/PPI/documents/PPI-2021-Annual-Report.pdf
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[28] Same as previous reference
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[29] Same as previous reference
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[30] Same as first reference
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[31] https://www.reuters.com/article/us-brazil-china-investment/china-investment-in-brazil-hit-seven-year-high-in-2017-idUSKBN1F7387 and https://www.bu.edu/gdp-cn/files/2017/11/Chinese-Finance-to-LAC-in-2016-Web-and-email-res.pdf
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[32] Retrieved from ECLAC’s report “Financing development in Latin America and the Caribbean” 2019 https://repositorio.cepal.org/bitstream/handle/11362/44608/1/S1900213_en.pdf
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[33] Same as previous reference
[34] Same as previous reference