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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.

Suggested Citation

  • César Calderón & William Easterly & Luis Servén, 2002. "Infrastructure Compression and Public Sector Solvency in Latin America," Working Papers Central Bank of Chile 187, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:187
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    References listed on IDEAS

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    1. Lars-Hendrik Roller & Leonard Waverman, 2001. "Telecommunications Infrastructure and Economic Development: A Simultaneous Approach," American Economic Review, American Economic Association, vol. 91(4), pages 909-923, September.
    2. Machado, Roberto & Morley, Samuel A. & Pettinato, Stefano, 1999. "Indexes of structural reform in Latin America," Series Históricas 12, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc.
    4. Willem H. Buiter, 1990. "Principles of Budgetary and Financial Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524139, January.
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    Cited by:

    1. Kellermann, Kersten, 2007. "Debt financing of public investment: On a popular misinterpretation of "the golden rule of public sector borrowing"," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1088-1104, December.
    2. Morais, Artur Carlos & Aragão, Joaquim Jose Guilherme & Yamashita, Yaeko & Orrico, Rômulo Dante & de Freitas Dourado, Anisio Brasileiro, 2014. "Analysing the fiscal sustainability of transit investment projects: The case of the metropolitan railway of Brasília," Research in Transportation Economics, Elsevier, vol. 48(C), pages 422-428.

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