Selowsky causes sharp declines in TFP in

Selowsky and Loser (2015) discuss some causes of low TFP growth, with aparticular observation of LAC trends, and on the policies which should beimplemented to trigger a reversal in productivity. The first element is theabsence of distorted incentives affecting the “x-efficiency”. Improvedcompetition forces firms to embrace technological progress and gradually movetowards the frontier. Greater access to information technology, for instance,would allow firms to reduce the cost of technology and produce more for a givenlevel of inputs. Secondly, according to Caballero, Engel and Mico (2004), whatcauses sharp declines in TFP in the short-term is also the inability ofcountries to adapt to unexpected shocks (e.g. oil price falls).

Many countriesin the region, such as Argentina, Brazil, Colombia, Mexico and Venezuela, haveexperienced quantitatively important losses in terms of productivity because oftheir “microeconomic inflexibility”. Finally, governments’ incapacity to reallocateresources across businesses represents an important impediment to the entry ofnew firms and their scalability. Busso, Madrigal, and Pagés (2012) estimatedthat if LAC institutions were able to reallocate factors from less to moreproductive firms so that marginal productivities equalized, they would achievefrom + 45% to + 127% in output gains compared to US firms1.Selowsky and Loser (2010) also add other constraining factors to theregional microeconomic efficiency and TFP growth, namely: market entry barriersand scarce domestic competition, inadequate institutions, low investments andsavings2,and, more importantly, the infrastructure divide with more developed countries.Infrastructure are widely recognized as a fundamental restraint in the LatinAmerican struggling run to catching up with larger economies. Ensuring growthin productivity and aggregate output must pass through the reconsideration ofinvestments in infrastructure development and the provision of capableinstitutions in the sectors of transport and logistics, mobility,telecommunications, water etc.

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These patterns are already well in place indeveloped economies while are lagging in LAC, where the opportunities for LatinAmerican firms to becoming more productive are being missed (OECD, 2017).The issue of economic infrastructure in LAC, indeed, represents the pillar ofthis study, which aims to clarify the fundamental role of infrastructure as adriver of economic growth. On this regard, in order to correct this dispersionis important to estimate the systematic repercussion of infrastructure efficacyon productivity performance. This relation is particularly evident in the caseof Latin American economies.Inadequate infrastructure has been widely assessed as one of the mainbarriers to growth and development in Latin America. Infrastructure and itsassociated services are present in all the factors that make an economysuccessful. Its components generate effects on the quality of life of thepopulation, influence the business climate and induce demand and investments.From the provision of water supply to sustain agriculture and sanitation,through the existence of quality roads enabling the efficient movement ofpeople and goods, to the availability of information technologies asinstruments of communication and education, infrastructure systematicallyimpact three fundamental economic aspects: inclusion, competitiveness andsustainability (IDeAL, 2012).

In addition, world economies are more and more interconnected andcountries’ exigencies of meeting technological standards and extendinginfrastructure coverage are increasingly shaping their competitiveness ininternational markets. In LAC, inefficiencies in infrastructure preventcountries from lowering production costs and from benefitting from regionalintegration, which in turn affect their potentialities to enter global valuechains. Therefore, infrastructure bottlenecks create vicious cycles whichdiscourage capital inflows and distort the accumulation of resources ininfrastructure development projects (Rozas and Sànchez, 2004; Perrotti andSànchez, 2011).The main challenges to infrastructure progress that LAC needs to tackleconcern: the lack of a shared, long-term oriented vision upon the planning, theimplementation and the maintenance of infrastructure assets, scarce quantityand quality of infrastructure, inefficient institutions and regulatoryframeworks, constraining bureaucracy cavils and limited access to financing (CEPAL, 2010). Although remarkableupgrades have been achieved over the last decade, reflecting both an increasein public spending favoured by the commodity boom and more engaging capitalmarkets, the region still faces considerable difficulties in catching-up withadvanced economies (Cerra et al.

,2016). In fact, LAC infrastructure significantly lag the ones of more developedeconomies such as the OECD countries and also the “East Asian miracle” nations(namely China, Hong Kong, Indonesia, South Korea, Malaysia, Singapore, Taiwanand Thailand). This chapter gives an overview of the historic trends of infrastructuredevelopment in Latin America and Caribbean, compared with other regions.Especially, this section will address factors such as quality, quantity andaccess of infrastructure, and more importantly the investment flows andpolicies which have significantly influenced the infrastructure deficit in themajority of the countries.