Building towards sustainable growth

“Where the warm sun shines with a new glow toasting the sands. Where the air is still clean in the soft light of stars. Where love becomes fire, the river talks and the mountain is jungle. Today I found a place for us both in this new land.”

The above is a description of Latin America in a song by Spanish singer Nino Bravo. Our region does indeed have a great deal of natural beauty, but this can obscure the need for long-term and sustainable development. And an important part of any development strategy is connecting an abundance of opportunities with scarce and volatile capital.

Latin America should be constantly thinking about what will fuel competitiveness, economic growth and productivity to improve social well-being. The output of Latin American economies is close to their potential, so growing more means investing more, both in human and physical capital. But so far the quality and quantity of these investments have been unsatisfactory. For example, Latin American economies only invest on average 17% of their gross domestic product, compared to 45% in China. Maybe the comparison is a little unfair, given several key differences, but the contrast is striking. Higher investments rates mean stronger and sustainable economic growth. There is no other way.

According to a recent World Economic Forum report, Infrastructure Investment Policy Blueprint, the shortfall in global infrastructure investment is around $1 trillion per year. However, there are several investors, such as pension funds, insurance companies and sovereign wealth funds (SWFs), that want to find profitable projects. We therefore need to reduce this gap between the need for infrastructure projects and capital made available by investors. The contribution of the Forum report is to provide guidance for governments in doing this. And of course, building public-private partnerships for investment in infrastructure is also a key component of any sensible development strategy.

Governments seeking private investment can do so in a variety of ways. These include:

• Having a strategic vision for infrastructure that maps out a project pipeline, a viable role for investors and a communication strategy
• Introducing policy and regulatory enablers, which mitigate renegotiation risk and increase the efficiency of key processes
•  Having an investor value proposition at the individual project level, which focuses on maximizing value for governments and ensuring a competitive risk-adjusted return for investors

Whatever path governments choose, the fundamental goal should always be to improve productivity for the benefit of their citizens.

But by themselves, these steps are not enough. For investors to commit to projects, they also need a transparent framework. The Santiago Principles for SWFs are a great example of this type of framework. The principles include the reporting of clear objectives, better coordination with macroeconomic policies, good corporate governance structure, and a transparent investment and risk management framework. This is especially important for Latin America given its history of opaque processes for allocating projects to investors.

These principles should be standard not just for SWFs, but for other institutional investors as well. They would enhance the credibility and transparency of infrastructure investors, allowing governments to access a larger pool of foreign capital and encourage public-private partnerships. Perhaps then they will be able meet the need for greater investment and add sustainable growth to the region’s natural beauty. As Nino Bravo would say: “When God made the Garden of Eden, he thought of America.”

Author: Eric Parrado is a professor of economics and finance at the Universidad Adolfo Ibáñez in Chile

Image: A local rests in front of the “El Viaducto del Malleco” railway (Viaduct of Malleco) near Temuco city, some 677 km (420 miles) south of Santiago August 27, 2009. REUTERS/Ivan Alvarado