The Output Cost of Latin America’s Infrastructure Gap

Latin American has lost substantial ground relative to other developing and developed regions in terms of the quality and quantity of infrastructure over the last two decades. For instance, Latin America’s infrastructure gap in infrastructure growth relative to that of the seven successful economies of East Asia grew by 40-50 percent for road length, 50-60 percent for telecommunications, and as much as 90-100 percent in terms of power generation capacity over the 1980-97 period. The consequences of this loss of ground or growth and welfare in the region are a matter of concern. Lack of adequate infrastructure services results in lower productivity and higher production costs for private producers. Poor road and telecommunication networks raise transport and, more generally, logistic costs, which have been shown in comparative studies to exceed the international norm by wide margins (Guasch, 2001). The reduced profitability in turn discourages private investment. Through all these channels, the result is lower output growth. As with infrastructure, Latin America’s loss of ground was particularly marked in the 1980s. We find evidence of a strong empirical association between output and infrastructure although this need not reflect causation from infrastructure services to aggregate output. The present paper wants to determine the role of Latin America’s growing infrastructure gap in the widening of the output gap. We devote our efforts in this paper to answer this question.