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The Macroeconomics of Financing Basic Utilities for All

This article explores the macroeconomics of financing basic utilities for all, focusing on the need for public investment, the role of capital inflows, and the implications for economic policies. It emphasizes the importance of reconciling cost recovery with ensuring access for all, particularly poor households.

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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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