Speeches & Transcripts

Enhancing Resilience and Re-balancing Economic Growth: Infrastructure Investment

December 5, 2016


World Bank Group MD and CFO Joaquim Levy EVALUACIÓN 2016 Y PERSPECTIVAS 2017 Asunción, Paraguay

As Prepared for Delivery

Ladies and gentlemen, good morning. I am delighted to be here.

Thank you very much to for the invitation to join you for this event and talk about the economic prospects of Paraguay through the lens of the World Bank’s current work in infrastructure. This is also a very important occasion for the three-year Country Partnership Strategy (CPS) between the World Bank Group (WBG) and the Government of Paraguay to support the country’s efforts in reducing extreme poverty to 9 percent and promoting the income growth of the poorest 40 percent of the population. Current progress suggests that the Government is fully committed, and I am very hopeful that the PRODERS Project will become the vehicle to achieve these results over the near term.

But before I talk about Paraguay let me first situate my remarks against the background of the macro situation. Global growth is still feeble and uneven, and the near-term outlook is shaped by a sluggish recovery. Lower oil prices and monetary easing in advanced economies have supported private spending, but investment has yet to recover amid a protracted slowdown of productivity. Policy uncertainty remains high due to rising geopolitical risks and political polarization in many countries. In emerging markets, weak global trade and persistently low commodity prices continue to weigh on the near-term outlook, with domestic demand as key driver of growth outcomes.

Latin America is no exception. Since 2012, the region has been dealing with a twin shock generated in part by a persistent decline in terms-of-trade and the deceleration of external demand, particularly from China. While capital inflows have recently picked up again, growth rates are still below pre-crisis levels suggesting lower potential growth.

However, even in this challenging environment of ongoing structural realignments, Paraguay continues to register robust growth rates, especially in trade-related sectors and construction. As opposed to regional peers, the country has not experienced a strong terms-of-trade shock. Increasing exports and public investment are helping offset weaker private demand alongside a slowdown in credit.

This development should not come as a surprise. Over the past decade, Paraguay has substantially improved its macroeconomic policy mix, which helps explain its enhanced resilience to the current adversity affecting the region.

There are several factors that make us cautiously optimistic about Paraguay’s prospects going forward:

·        First, price stability and fiscal discipline. The adoption of an inflation targeting regime in 2011 has helped maintain stable inflation and anchor inflation expectations, with a flexible exchange rate continuing to serve as the first line of defense against adverse shocks. In addition, the introduction of a fiscal rule[1] three years ago has helped generate fiscal space and consolidate public debt, which remains among the lowest in the region. Some of the fiscal space supported growth-friendly policies aimed at increasing public investment. Likewise, transparency of public policy was significantly improved by the Transparency Commission, which was set up in 2015.

·        Second, diversification of products and markets. Paraguay’s economy has reacted flexibly to changing external conditions. One example is agriculture, which remains a significant (and growing) source of income. Exports to new markets, such as Russia and Asia, increased substantially in the last five years, and more than offset the decline of exports to Europe. Moreover, producers replaced production with higher value-added outputs to counter the effect of falling commodity prices.[2]

·        Third, structural transformation. The economy is undergoing a structural shift from traditional sectors to manufacturing and services sectors, creating jobs with better wages and greater productivity.[3]

However, we also need to acknowledge that growth has recently become less dynamic, with negative implications for poverty reduction and inequality. Growth is expected to reach only 3.6 percent this year, underscoring the need for continued structural reforms to boost productive capacity. While past improvements in welfare and equity have been mainly driven by improvements in labor markets, public transfers are playing an increasingly important role in preventing further increases in poverty. After remarkable socio-economic progress in the last decade until 2013, poverty reduction has stalled, and growth is no longer favoring the bottom 40 percent.[4] Since 2013 poverty rates have remained virtually unchanged. And annualized household income growth for the period 2013-15 is lower than in the previous decade across the whole income distribution.

In this context, Paraguay needs a bold strategy to improve welfare and boost shared prosperity. It is more important than ever for the country to foster new sources of inclusive growth and further strengthen its resilience to adverse shocks while preserving important capital expenditures and social outlays.

1.                 The role of infrastructure is critical in this regard, especially given Paraguay’s blessing of significant natural resources and the social dividend of its young population. Inadequate infrastructure usually results in bottlenecks and other inefficiencies that create social dissatisfaction and barriers to growth and development. Infrastructure investment bolsters productive capacity, improves competitiveness, and expands export capacity. Well-planned infrastructure can also help countries be better prepared for natural disasters and climate risk. Because natural disasters can tighten poverty’s grip on unprepared communities, disaster risk reduction, in turn, goes hand in hand with poverty reduction.

In the past several years, Paraguay- like many other countries in the region- has turned its attention to infrastructure investment to support near-term demand. Infrastructure investment increased during the past decade, and its composition remained relatively stable over time, with most investment provided by the private sector. However, recent improvements in infrastructure quality, such as transportation and road networks, largely reflect greater public spending, facilitated by the commodity boom.

But the efficiency of public investment- i.e., value for money- remains below that achieved by regional and global peers. We can construct an “efficiency frontier,” with vertical axis corresponding to the “output” dimension, representing quality of infrastructure, and the horizontal axis corresponding to the “input” dimension, measuring the public capital stock (estimated as cumulative real net public investment) as a proxy for infrastructure investment. As the level of input increases, the marginal gains to infrastructure quality decrease, similar to a production function with diminishing returns. Public investment in Paraguay seems to be well below the efficiency frontier.

Despite higher investment, Paraguay still faces a substantial infrastructure gap relative to countries with a similar level of income. The stock of economic infrastructure- notably power generation capacity, road, and telephone lines- compares favorably with that of peers in other emerging market regions. However, similar to its larger neighbors Argentina and Brazil, Paraguay’s infrastructure still lags behind other Latin American countries by most standard measures. This chart shows that Paraguay’s quality of infrastructure is lower than expected based on its level of development, measured, for example, by income per capita.[5] Based on several research studies, the infrastructure gap is estimated to be around 50 percent of GDP (» US$15 billion).

Lower growth and fiscal constraints will require (more) crowding-in private investment in infrastructure. Limited fiscal buffers suggest greater sensitivity of public investment to possible revenue weakness in the period ahead. Even though public-private partnerships (PPP) often generate efficiency gains, only the right incentives and conditions create an attractive business environment while minimizing fiscal risks; this includes clear and effective regulations, fair and consistent bidding procedures, as well as a strong and transparent oversight framework. In 2014, the Economist Intelligence Unit ranked the “LA5 countries” (Brazil, Chile, Colombia, Mexico, and Peru) highest in terms of the overall environment for PPPs, with Paraguay following closely behind. But we know that Paraguay’s PPP framework needs to improve. It is still too complicated, and private investors face legal uncertainty because contracts are enforced under local law.

Updating the legal framework will be essential for Paraguay to remain competitive in the international market for PPPs. The WBG has been collaborating with Paraguay on a national PPP agenda since 2010. Our Public-Private Infrastructure Advisory Facility (PPIAF) provides technical assistance to strengthen the institutional capacity to prepare and manage PPP projects aimed at addressing three pressing infrastructure challenges in Paraguay:

·        First, the “energy paradox.” Paraguay has enormous hydropower potential; yet, only half of the population (and 20 percent in rural areas) have access to non-solid fuel sources- the remainder is still using wood as a main energy source. Investing in the efficient transmission and distribution of energy will be critical.

·        Second, the “landlocked syndrome.” There are still critical bottlenecks in road, river and air transport, which need to be addressed. Information and communications technology (ICT) can also provide real opportunities for growth and development.

·        Third, “urbanization spillovers.” Urbanization is expected to surpass 64 percent in less than 10 years from now, which places a premium on upgrading the infrastructure for basic utilities, such as water, energy and sewage.

However, infrastructure investment is only one element to enhancing resilience and re-balancing economic growth. Access to quality education is essential to achieving higher productivity and competitiveness.[6] This would not only increase employment prospects, but may also stimulate greater self-employment and entrepreneurship. Similarly, an ensuring the effectiveness of the legal and institutional framework, political accountability, and public security are as much a priority as enhancing the physical infrastructure. In all of these areas Paraguay has undertaken sustained efforts but it has still some way to go.

Ladies and gentlemen, infrastructure development remains critical to continuing Paraguay’s forward momentum. But closing the current infrastructure gap is not an end in itself- it is essential but not sufficient to enhancing resilience and supporting rebalancing long-term growth. Finding the right policy mix will also require a good understanding of long-term socio-economic trends and challenges to growth to improve prospects for broader, equitable and sustained growth in the coming decades.

Thank you very much for your attention and the opportunity to share these thoughts with you today.

 

[1] Paraguay implemented a fiscal rule in 2013 under the Fiscal Responsibility Law (FRL) that prescribes a 1.5 percent of GDP deficit limit. In addition, overall it limits the growth of primary current expenditure (4 percent p.a. in real terms) and legislates public salary increases.

[2] With soybeans for example, the production moved from seeds to flour and soybean oil which have a higher price. In addition, cereal production increased substantially thanks to the introduction of new products such as rice which was almost non-existent a few years ago.

[3] Manufacturing is a fast growing and promising sector although still at its infancy. The industry is expanding towards more sophisticated production like auto parts/light machinery industry, and international companies from Brazil, Japan, Korea, China, and Germany have entered the market.

[4] Between 2003 and 2013 poverty fell by 20 percentage points (from 44 to 24 percent), extreme poverty halved (from 21 to 10 percent), inequality reached a historical low (Gini coefficient fell from .52 to .48), and the income of the bottom 40 grew at an annual rate of 5.9 percent compared to 3.7 of the average person.

[5] Economic development brings about the resources to raise infrastructure and, at the same time, improvements in infrastructure support future economic growth.

[6] The 2016 World Economic Forum’s Global Competitiveness Report finds that besides inadequate infrastructure gaps, the most problematic factors and binding constraints to growth and competitiveness are inadequate education and inefficient bureaucracy.


Api
Api