In election campaigns, few promises are easier to make than those concerning infrastructure development projects, which politicians exuberantly commit to initiate once they have won the election. In reality, it often proves difficult to fulfil one’s promises when push comes to shove, and actual investments rarely meet expectations. However, politicians would benefit from actually coming through on their promises.
Infrastructure investments provide a lot of benefits. While the project lasts, the process of building up infrastructure drives both growth and employment. Furthermore, well-chosen infrastructure projects drive productivity improvements across a society, facilitating growth across the economy as a whole. It has been estimated that inefficiencies due to inadequate infrastructure can subtract as much as 10 to 15 per cent from a country’s GDP. Lastly, while the benefit of people wasting less time in clogged traffic is difficult to measure, it is all the more tangible for the millions who stand to benefit from improvements. Spending money on infrastructure thus seems an obvious thing to do.
South America is a continent in deep need of infrastructure investments, with underdeveloped roads, rail and ports creating a drag on the economy. Take Brazil, for example: it has the largest economy on the continent by far, but most certainly does not lead the pack in infrastructure development, reflecting a significant infrastructure spending gap. Based on overall infrastructure quality, Brazil ranked 120th out of 144 countries surveyed by the World Economic Forum in 2014.
The country even ranks behind India, famed for its challenged infrastructure. Road and air transport quality rate particularly poorly, while ports and rail lines are also significantly underdeveloped.
According to a recent IMF report, infrastructure investment in Brazil has dropped significantly from an average of 5.2 per cent of GDP in the early 1980s to an average of 2.25 per cent of GDP over the last two decades, and slightly increased to around 2.5 per cent of GDP in 2013. Given the fact that Brazil actually needs to grow its infrastructure and the current level of investment is below the sustainability rate, the infrastructure gap is only becoming bigger. The IMF sums it up: “While part of the growing infrastructure gap may be due to inadequate maintenance and intensification of use, the largest share of the gap is most likely due to a prolonged period of underinvestment relative to other countries.” This is a pretty clear message to Brazilian politicians to up their game.
With the current recession in Brazil, there is increasing focus on development of infrastructure as a stimulant for the economy. Several rounds of spending plans have been announced, such as the partly Chinese funded railway projects announced just after President Xi Jinping’s visit as well as port and airport development programmes. These are steps in the right direction, but history tells us that Brazil tends to fall short of its ambitions, and some of the announced plans are in fact recycled proposals that had not been realized after earlier announcements. Further, the current spending plans are not nearly enough to start making inroads into the infrastructure gap.
Elsewhere in South America, the issues are similar, although less pressing than in Brazil. Infrastructure spending levels are forecast to be somewhat lower than in Brazil as a share of GDP. Going forward, Chile in particular has announced high ambitions for investments in power generation to facilitate industrial development alongside the mining industry. Other countries have similar ambitions adding to the list of projects in the region.
South America remains a region of infrastructure investment opportunities, though recent growth has been a lot slower than expected. To take the next step in economic improvement, the region needs to significantly ramp up projects in its pipeline. When that happens, the outlook for equipment makers in the region are going to look a lot brighter.