Making room for public investment

• Pages: 297-301

Page 297

Many governments are becoming increasingly worried that a decline in public investment is holding back economic growth in their countries. The problem is felt most acutely in Latin America, where public investment declined throughout the 1990s (see top chart, page 300) and where economic growth has been disappointing in many countries.At a recent United Nations conference on hunger and development, Brazil’s President Luiz Inacío Lula da Silva called on the IMF to allow infrastructure investments to be excluded from the fiscal targets countries must meet to qualify for financial assistance. President Vicente Fox of Mexico made a similar proposal last year at a Group of Eight summit in Evian, France.

A number of factors have contributed to the decline in public investment in Latin America, including privatization and other policies aimed at reducing the role of government in the economy. Yet many people see the IMF as the main culprit. According to Ter-Minassian,Page 300 "the IMF is considered responsible for this problem because the decline in investment has occurred in an environment of overall fiscal retrenchment, often associated with IMF programs." But, she says, "the blame is only partly justified. While the IMF might recommend cutting public expenditure, it does not typically have an opinion on where expenditure cuts should occur-except when it comes to protecting essential social programs." By and large, she says, how to carry out the adjust- ment-the emphasis to put on revenue raising versus expenditure cutting-is a country's own choice.

Public investment has suffered, Ter-Minassian explains, because it is much easier for governments to cut capital spending on infrastructure and other public projects than to trim current spending, which includes civil service wages and social security transfers. Cuts in current spending almost invariably affect interest groups with political influence, and reducing such spending becomes even more difficult if it is undertaken in a climate of low economic growth and rising unemployment.

Should the IMF change its approach?

So what can the IMF do to help countries boost investment in infrastructure? The governments of Brazil and Mexico have proposed that the IMF target the current fiscal balance-which excludes invest- ment-instead of the overall...