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The Macroeconomics of Financing Basic Utilities for All

The Macroeconomics of Financing Basic Utilities for All. Terry McKinley International Poverty Centre “Financing Access to Basic Utilities for All” Multi-Stakeholder Consultation, Brasilia, 13 December 2006. Some Background.

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The Macroeconomics of Financing Basic Utilities for All

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  1. The Macroeconomics of Financing Basic Utilities for All Terry McKinley International Poverty Centre “Financing Access to Basic Utilities for All” Multi-Stakeholder Consultation, Brasilia, 13 December 2006

  2. Some Background • UNDP has supported 25 national reports on Economic Policies for Growth, Employment and Poverty Reduction since 2002 • The motivation was to promote greater policy dialogue and provide policy alternatives to Neo-Liberalism (“The Washington Consensus”) • Coverage: Asia-Pacific, Eastern Europe and the CIS, Middle East and sub-Saharan Africa • Themes: a) fiscal, monetary and exchange-rate policies and b) financial liberalization, trade liberalization and privatisation • UNDP has also supported a global project on “Privatisation and Poverty Reduction” (most studies in low-income countries in Africa)

  3. The Conclusion of UNDP Studies • The Privatisation and Commercialisation of Public Services are not compatible with Poverty Reduction • They are also not compatible in low-income countries with achieving the Millennium Development Goals • See Working Paper #22 of the International Poverty Centre: Bayliss and Kessler, “Can Privatisation and Commercialisation of Public Services Help Achieve the MDGs: An Assessment?”www.undp-povertycentre.org • A Central Question: How will access to public services—such as water, sanitation and electricity—be financed? • How can cost recovery (commercialisation) be reconciled with ensuring access to all, particularly poor households?

  4. Access to Electricity: Percentage of Population

  5. Access to Electricity: The Need for Public Investment • How to reach households without electricity? • Two-thirds of households in Africa—83% in rural areas? • 59% of households in South Asia—70% in rural areas? • 49% of households in rural Latin America? • We have to dramatically ‘scale up’ public investment in order to expand the electrical grid • Costing the public investment needed to reach the MDGs has provided a stronger impetus for a change in strategy • We have re-asserted the need for Economic Policies that support Economic Development, not just Macroeconomic Stabilization

  6. The Need for Public Investment-Led Economic Policies • Why are Neo-Liberal Economic Policies incompatible with financing public investment to ensure Access to All? • According to Neo-Liberals, increased Public Investment will: • ‘Crowd out’ (displace) private investment • Cause accelerating inflation and appreciation of the exchange rate • Increase the Fiscal Deficit and Public Debt

  7. Public Investment Has Been in Long-Term Decline • In Asia, public investment as a share of GDP fell from 10 per cent in 1980 to seven per cent in 2000 • Latin America has been the most adversely affected by declining public investment • In Argentina, Brazil and Mexico, public investment as a share of GDP: • Rose to a peak of 10-12% in the late 1970s and early 1980s • But plummeted to 2-3% by 2000 • Investment in infrastructure (such as water systems, roads and electricity) was cut sharply: • It dropped to 1.6% of GDP in Latin America in 2000

  8. Public Investment in Developing Countries, 1970-2000(as a share of GDP)

  9. Why Is Increasing Public Investment Justified? • It will stimulate private investment, not dampen it (example: electricity) • It will increase the productive capacity of the economy so inflation is less of a problem • Governments should borrow to finance public investment • It creates future revenue and benefits • Current revenue should cover current expenditures • So incurring deficits is normal for such purposes

  10. The Macroeconomic Implicationsof Expanding Basic Utilities • Fiscal policies need to be more expansionary (investment focused) • Monetary policies should be consistent with fiscal expansion • Low inflation targets (3-5%) can be counter-productive (inflation phobia) • Achieving such targets drives up real rates of interest • Such interest rates slow private investment and make public borrowing more expensive

  11. The Role of Capital Inflows in Financing Basic Utilities • For low-income countries, a dramatic increase of Official Development Assistance need not be destabilizing • Fiscal policies (increase government spending) and monetary policies (sell foreign exchange) need to be coordinated (IPC Working Paper #10) • Plus manage the exchange rate and the capital account in order to avoid volatility • The volatility of aid (and private capital) is the chief problem

  12. The Role of Capital Inflows in Financing Basic Utilities • Private investment in basic utilities has often been unreliable • Its focus on profits often conflicts with ensuring access to all (social objectives) • But this focus can also conflict with long-term development objectives • Achieving long-term capital accumulation and growth as well as equity in access to basic utilities

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