This article was received from Project Syndicate, an international not-for-profit association of newspapers dedicated to hosting a global debate on the key issues shaping our world
The extreme poor in Latin America’s rural communities live five kilometers or more on average from the nearest paved road – almost twice as far as non-poor rural households, resulting in difficult and very costly access to markets and needed services. Moreover, poor transport undermines Latin America’s international competitiveness. More than half of Latin American firms consider poor infrastructure to be a major obstacle to the operation and growth of their business.
One option is obvious: spend more (and more wisely) on infrastructure. On average, countries in Latin America and the Caribbean spend less than 2% of their GDP on infrastructure, while 3% to 6% is needed to sustain rapid growth and keep pace with countries like China or Korea.
Given scarce public funds and fiscal constraints, to increase spending, users must cover a higher share of the costs. This requires developing a payment culture, as well as providing a safety net for those citizens who cannot afford to pay.
The temptation to build “white elephants” should be avoided; projects should be chosen for their potential to increase productivity and competitiveness. For many nations, that will require developing institutions capable of conducting adequate planning, monitoring, and evaluation.
Bolivia recently rehabilitated two stretches of road, improving the Calamarca-San Pedro and Boyuibe-Yacuiba routes at a cost of around $25 million. But the project generated benefits worth roughly twice that amount because it lowered the costs of vehicle operation, accidents, and travel time, removed physical constraints to the flow of goods and people within Bolivia and from Bolivia to its neighbors, and ensured more reliable and safer transport services.
A similar project targeting the maintenance of Mexico’s federal highways yielded even greater benefits. The project increased the percentage of highways classified as being in “good” or “fair” condition from 57% to 75%, at a total cost of $77 million, while the benefits of the project were estimated to be worth $612 million. Laying kilometer upon kilometer of bitumen is the favoured solution for many politicians. But other options are more cost-effective.
One approach is to create policies that raise the standards of unreliable transport and logistics companies. Exporters pay a high cost for low-quality trucking industries, as in Colombia, or when trucking services for perishables are inadequate. As a result, less than 65% of agricultural products in Latin America reach markets. Firms stockpile much more of their products, because they can’t rely on their carriers, adversely impacting their competitiveness. The energy and resources businesspeople devote to making sure their goods get from factory to market could be put to much better use.
The goal should be to foster private-sector investment to provide efficient logistics services. Deregulation can be a big help.
In Peru, logistics costs represent 34% of the value of the country’s products. Reducing this to 20% would spark an impressive increase in demand and employment across many industries. Even if this led to just one percentage point of additional growth, Peru’s GDP would increase by $800 million a year.
The third solution we recommend is very cheap, and has the most benefits related to costs: Latin American countries need to make it cheaper and easier to move goods across national borders. This means change both at borders and within countries. The congestion and urban chaos that is typical in a port area, for example, must be eliminated through better planning. Customs procedures, which currently obstruct the flow of international trade, must be modernized and simplified in order to facilitate it. Simple changes like special fast lines for reliable clients are part of the answer.
Each country could create a council that represents public bodies (transportation, public works, customs) and major users (exporters and logistics companies) that must work together to identify ways to reduce logistics costs. Communication between users and government services is vital to achieve any real improvement.
It is just as vital, though, for committees to be developed along similar lines in the provincial areas of each country. Merchandise needn’t pass through the capital, as it does in most Latin American and Caribbean countries, with the associated cost increases. Regions then can be turned into engines of growth. Above all, local companies need to be supported when they make moves to become more efficient, innovative, and competitive. Firms that go global are more likely to stick around, adding to the economy and employing locals.
These sorts of reforms bring massive returns relative to the investment required to finance them. However, spending on infrastructure wins more public support and creates fewer protests.
The real challenge is to establish how Latin America can generate the political consensus needed to adopt the best policies to remove its infrastructure logjams.
