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Infrastructure Compression and Public Sector Solvency in Latin America

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  • César Calderón
  • William Easterly
  • Luis Servén

Abstract

Public investment and infrastructure spending are often singled out for drastic cuts at times of fiscal retrenchment. Fiscal austerity in Latin America during the 1980s and 1990s was characterized by a sharp contraction in infrastructure spending. In 5 of the 9 major Latin American countries, infrastructure investment cuts contributed half or more of the total fiscal adjustment. However, the compression of infrastructure spending does not guarantee the sustainability of the public sector. Infrastructure spending cuts not only reduce the public deficit (thereby raising the public sector’s net worth) but also leads to a decline in infrastructure stock accumulation and in output growth as well. This in turn implies a reduction in the economy’s debt-servicing capacity, thus weakening the public sector net worth (Easterly, 2001). In the present paper we quantitatively assess the growth cost of public infrastructure compression for major Latin American economies during the fiscal austerity period of the 1980s and 1990s, and examine the effectiveness of infrastructure spending cuts as a device to enhance public sector solvency.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 187.

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Date of creation: Oct 2002
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Handle: RePEc:chb:bcchwp:187

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  1. Willem H. Buiter, 1990. "Principles of Budgetary and Financial Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524139, January.
  2. Röller, Lars-Hendrik & Waverman, Leonard, 2000. "Telecommunications Infrastructure And Economic Development: A Simultaneous Approach," CEPR Discussion Papers 2399, C.E.P.R. Discussion Papers.
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