Good infrastructure plays a critical role in the development process. When it is well developed, it offers a method to improve economic growth and financial inclusion, thereby reducing poverty. However, when infrastructure is poorly developed, it exacerbates the situation of many poor countries and introduces a cycle of poverty. Infrastructure development is particularly important for Latin America, which has a relatively low quality of infrastructure development when compared to similarly developed countries.

 

Why Infrastructure in Latin America Matters

On the other hand, infrastructure can have a positive impact on a country’s economy. A diverse body of literature suggests that improved transportation infrastructure may stimulate free trade in any given economy as a result of many factors. For example, better infrastructure translates to a more efficient economy: it becomes easier to move goods and services within countries and across borders and decreases transportation costs involving inventory and logistics, therefore expanding the size of the potential market. A further incentive for improving regional infrastructure is the increased attraction by foreign investors, who tend to invest in countries with well-built roads and developed supply chains. Lastly, developed infrastructure can reduce social and economic inequality, particularly in rural regions where poorer infrastructure lends itself to difficulties in transporting goods to market.

In fact, there are suggestions by the World Bank that there is a correlation between the quality of infrastructure assets and a lower Gini coefficient. The Gini coefficient measures levels of inequality, where a score of 1.0 translates to perfect inequality where one person owns all the wealth, and a score of 0 translates to perfect equality, where incomes are the same across the board.

There are two types of infrastructure—“hard” infrastructure and “soft” infrastructure. Hard infrastructure is the durable and tangible assets that make up a network of transportation such as roads, railways, canals and airports. Soft infrastructure, by contrast, refers to the set of institutions that facilitates the movement of goods and services, such as health and law enforcement, or to the level of regulation regarding trade, such as the number of documents required by governments for import or export.

Issues involving hard infrastructure need to be addressed across the entire region. For instance, LAC countries spend almost twice as much to import goods by freight than does the U.S., mainly due to poor hard infrastructure development. In order to raise this hard infrastructure gap to a competitive level, the region should boost its investment in infrastructure at a rate equivalent to 4 to 6% of its GDP per year.

To reduce poverty in Latin America and promote financial and social inclusion, infrastructure development is a factor that must be included in the policies of governments.

– Jeff Meyer

Sources: Peterson Institute, The World Bank, Harvard University, The World Bank
Photo: Latin Trade