Fellow blogger Alex Uriarte has called our attention on the issue of the quality of investment. The focus of his posting is, understandably, on public investment as this is the variety that is currently fashionable in Latin America. Governments throughout the region have, in recent years, taken a more interventionist stance and have sought to replace the private sector as the motor and financier of investment, even in sectors like energy and transportation where the share of private participation had risen in the previous decade.
Take the case of MERCOSUR countries (Argentina, Uruguay, Paraguay, Venezuela and Brazil). This is a set of countries that was severely hit by series of negative shocks in the period 1998-2003, triggering among other things, a collapse in investment. Figure 1 makes two points: on the one hand total investment as a share of GDP has recovered since the collapse which bottomed in 2003, although it has not yet reach the pre-crises levels (right scale on the graph). On the other hand the recovery has come accompanied by a change in the composition, with a decrease in the share of private investment in the total (from 77% to 71%) and a corresponding increase in the share of public investment in the total (from 23% to 29%). These numbers are even more pronounced if we exclude Brazil, the only country of the group where the share of private investment has (slightly) increased since 1998.
This phenomenon has many explanations. The current bonanza of public revenues in the region fostered by high commodity prices plus the cheap availability of credit has made it possible for governments to assume a more active role. Also, the “doing business” climate in the region is far from record highs and that hampers private investments (see world Bank’s “Doing Business” Report) leaving a perceivable vacuum that the governments are compelled to fill. One of the many adverse consequences of the wave of financial crises that spread throughout the region is that they sow the seeds for a growing anti-private sentiment, as “privatization”, “deregulation”, “competition” and the like, are concepts associated with the now unfairly demonized 1990’s.
The purpose of this posting is to bring the attention back to the issue of private investment. Yes, I know I might be old fashioned but I guess that some readers might have some sympathy for what I have to say. Indeed, ideally public and private investments should complement each other, so a focus on private investment might even be interesting to those that have converted to the faith of growing state interventionism.
I find the aforementioned patterns troublesome for at least a couple of reasons: (1) to the extent that public investment is financed through extraordinary revenues (i.e., booming commodity and oil prices plus very low interest rates), the question arises about what will happen if and when these sources of revenues fade-away. (2) The quality of public investment has historically been lower than private investment for the simple reason that the former is not always driven by efficiency standards. Thus, long run growth could be hurt by the current patterns.
For both of these reasons, I think the region would be well served if we focus our attention on how to make investment climate better so that new and better opportunities arise for everyone. In a next posting I will discuss the issue of the cost of financing for private firms in emerging markets.