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Last Updated: Tuesday, 30 August 2005, 21:13 GMT 22:13 UK
Latin America hit by poor infrastructure
road to Peruvian gold mine
Business has suffered from poor roads, ports and airports
Latin America needs to triple its spending on infrastructure like roads and ports if it is to catch up with the dynamic East Asian economies, according to the World Bank.

A report from the Bank says that ageing infrastructure and under-investment are reducing Latin America's growth prospects and increasing poverty.

It says that infrastructure spending has been halved since the 1980s, and now amounts to just 2% of GDP, compared with the 4%-6% in other middle income countries.

The World Bank blames a series of "traumatic macro-economic crises" which led to drastic fiscal adjustments as the root cause of the problem.

And it adds that more money from the private sector will be needed despite the fact that private sector investment has "collapsed" and shows "no immediate signs of recovery".

Falling behind

The report points out that in the 1980s Latin American countries were ahead of their East Asian rivals such as Korea by a factor of three to two in the provision of infrastructure.

Now these proportions have been reversed, with East Asia surging ahead in terms of supplying roads, telecommunications systems and electricity.

The state has an essential role to play in partnering and overseeing private operators and protecting consumers
Mary Morrison, World Bank

Latin America has retained its lead only in the provision of water and sanitation facilities, and even in this area, 58 million Latin Americans lack access to clean water and 137 million lack access to adequate sanitation.

The lack of good infrastructure costs Latin American businesses dearly.

The World Bank says that the lack of inadequate logistics adds 15% to 34% to the cost of exports, compared with about 10% in other middle-income countries.

And 55% of private businesses complain that poor infrastructure is a serious problem in Latin America, compared with 18% in East Asia.

The Bank estimates that better infrastructure could mean higher economic growth - an increase in the annual rate of GDP by 1.4% to 1.8%.

But it says that would require 20 years of increased investment - which would be difficult for the public sector to provide.

Private sector

So the Bank argues, controversially, that increased private sector investment will be needed to rebuild Latin America's infrastructure.

Investors watching screens in Buenos Aires
Investors have lost faith in Latin American privatisations

It acknowledges that there is an uphill battle in rebuilding public and business confidence in private-public partnerships in Latin America.

In the 1990s, Latin America attracted half of the $786bn spent on private investment in infrastructure in developing countries.

As a result, whereas 97% of telephone and electricity connections were supplied by the public sector in 1990, by 2003 private utilities were managing 86% of telecoms subscriptions and 60% of electricity connections, as well as 11% of water connections.

However, private investment has fallen from $71bn in 1998 to $16bn in 2003, and the average contract only attracts two bidders.

And opinion poll findings that suggest that only one in four people in Latin America believe that privatisation has been beneficial to their country, compared with 56% in 1998.

Concerns

The report acknowledges popular concerns about job losses, excessive profits and high prices for privatised services.

Street in Salvador de Bahia, Brazil
Latin America's weak infrastructure has hurt the poor
But it argues that the privatisation of utilities has increased efficiency, widened coverage and reduced waste.

It says that it was the lack of transparency and the perception that contracts were unfairly awarded, as well as the lack of an adequate government regulatory system, that is behind the public concerns.

From the point of view of private business, there have been major problems in the management of contracts, with 30% of concessions renegotiated by governments, including 74% of contracts in the water and sanitation sector.

Report co-author Mary Morrison acknowledged that "the state has an essential role to play in partnering and overseeing private operators and protecting consumers".

Growth prospects

In the short term, things have improved for Latin America's beleaguered economies.

Brazilian oil rig
Latin America is too dependent on raw material exports
Latin America's economy grew by 5.5% in 2004, its best performance since 1980, while exports registered their best performance in two decades.

However, high oil prices are leading to slower growth this year (except in Venezuela), with an estimated 4% growth rate in 2005.

And Latin American export growth still lags behind the export-led manufacturing boom that has transformed East Asia, and is very dependent on primary products such as minerals and agriculture.

In many countries, despite recent growth, living standards have still not recovered from the financial crises of the last few years.




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