Letter IEDI n. 1089—The role of infrastructure in the recovery of Brazilian economy
Today's Letter IEDI addresses a study carried out by economists Daniel Keller, Igor Rocha, Renato Rosa and Marcelo Marques. The work seeks to show that Brazil needs a robust program to promote public and private investments in infrastructure to generate productivity gains and cost savings for all economic sectors in the short, medium and long term while, simultaneously, also helping the economy and employment to recover. In other words, it is a program whose objective is to expand potential growth, help the economy to grow again and achieve sustained development.
In the last decade, the Brazilian economy had an average GDP growth rate close to zero and, in the case of investment, there was a decline, a situation worsened by the COVID-19 pandemic. That is, the challenges we are facing are twofold: in the macroeconomic dimension, there is a need to resume growth and reduce unemployment; in the structural dimension, the country urgently needs to once more promote economic and social development, which depends on investments capable of leveraging productivity and the transformation of the production structure towards digitization and socio-environmental sustainability.
Investments in infrastructure are central to overcoming these challenges for they contribute to increasing the potential for economic growth, due to positive effects on the production structure via gains in productivity and competitiveness, and by acting directly and indirectly on aggregate demand.
The study shows that a prominent factor for the country's economic weakness in the last decade comes precisely from the fact that this type of investment became far removed from our actual infrastructure needs, contributing to depress the competitiveness and productivity of the entire economy.
In 2020, investments in infrastructure totaled about R$ 123.0 billion, an amount 32% lower than the 2014 peak (R$ 180.3 billion). The sector's industrial association ABDIB indicates that annual investments of around R$ 284.4 billion would be needed over the next 10 years to overcome the bottlenecks in Brazilian infrastructure, a sum equivalent to 4.31% of annual GDP. However, in 2020, this share was of only 1.7% of GDP.
International comparisons, using data from the World Economic Forum, reinforce the finding that our investment is too low. China and India, fast-growing economies in the 21st century, invest 4% and 13% of GDP in infrastructure, respectively.
With regard to the stock of these investments, international comparisons prove how far Brazil is from the main economies in the world. While the Brazilian indicator stands at 36% of GDP, in the case of other emerging economies, such as India and China, it reaches 58% and 76% of GDP. Developed countries also have significantly higher rates.
Breaking from this situation depends on the resumption of private and public infrastructure investment. Although private investment is, without a doubt, indispensable, the insufficiency of a public counterpart presents itself as a serious limitation to the advance of infrastructure in the country.
Currently, Brazil is one of the only countries in the world where the State's share in total investments is lower than that private sector's. In other emerging economies, around 70% of disbursements and financing are made through the State, either directly or through public banks or development agencies.
The investment deficit and the needs and gaps of the infrastructure segments in Brazil will only be corrected by a balanced and joint action of the public and private sectors in the construction of adequate regulatory parameters, in the creation of models for facilitated financing, in PPP incentives and in the development of projects and promotion of more precise sectoral investments.
For several authors consulted by the study, spending in the sector and economic growth are mutually reinforcing, as good infrastructure investments increase potential growth and at the same time generate greater demand, reflecting both the expansion of the sector itself and of other economic activities.
Thus, a planned, multimodal and dynamic infrastructure is part of the construction of a modern, competitive and efficient economy, capable of reducing production and logistical costs of companies from all sectors, bringing benefits for business and for the country's insertion in the global supply chains.
A developed infrastructure will bring the following benefits: increase in potential output growth; direct contribution to income growth and job creation; reduction in production and logistics costs, benefiting competitiveness by reducing the “Brazil cost”; increase in productivity in different sectors; greater integration between geographic regions; and improvement in the quality of public services.
As addressed by Letters IEDI n. 1043 of Nov 13, 2020 and n. 1082 of May 25, 2021, it should be noted that, given the COVID-19 crisis, the IMF has been recommending fiscal stimulus via public spending in infrastructure, in addition to encouraging private investment. Other bodies, such as UNCTAD/UN, argue in the same direction, as discussed in Letter IEDI n. 1052 of Dec 21, 2020.
In the Fund's assessment, the increase in public investment in infrastructure must meet the following conditions: (1) priority must be given to expenditure on maintenance of existing infrastructure; (2) governments must identify and create a portfolio of carefully evaluated projects ready for implementation in the next 24 months; (3) selection and bidding procedures for public investment projects must be strengthened immediately to curb corruption, delays and cost increases.
Finally, we now make a reference to the so-called Biden Plan of the USA which, like other development programs that are underway in countries or blocs such as China and the European Union (Letter IEDI n. 1039), gives great emphasis to infrastructure. A document of the "Council of Economic Advisers" (Issue Brief of May, 2021), a body that advises the President of the United States on economic policy, expressed the importance of infrastructure for the Plan:
“Public infrastructure is the basis of economic activity. Infrastructure improvements and enhancements enable business and commerce to connect with customers and generate economic opportunities. Public investments are critical to reducing risks associated with people's health and safety, as well as increasing overall productivity and output. Studies suggest that the stock of public capital is very small and needs to be improved.”