Improving Intergovernmental Relations
Edited by Giorgio Brosio and Juan P. Jiménez
Chapter 5: Fiscal decentralization and public investment
Latin America’s investment-to-GDP ratio is low by international comparison. Although it has trended upwards in recent years, the region’s average share of gross fixed capital formation in GDP – the national accounts’ standard gauge of investment activity – is somewhat lower than that of the high-income countries in the OECD area and much lower than that of the fast-growing emerging Asian economies, such as China and India. Latin American governments also invest relatively little by emerging-market and developing country standards, a feature of Latin American public finances that can be attributed to macroeconomic volatility in the 1980s and 1990s and subsequently fiscal duress. The private sector accounts for the bulk of investment, but its participation in infrastructure development and upgrading is held back by institutional and regulatory constraints. At the same time, the state of existing infrastructure in most Latin American countries suggests that spending on operations and maintenance is equally low. The region fares relatively poorly in international comparisons on the basis of a host of indicators of infrastructure quality and in terms of surveys of business sentiment. Arguably, a combination of low investment and poor infrastructure quality is holding back growth. In addition, access to infrastructure is unequal among the different social groups, which acts as a drag on social development.
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