Industry Restructuring and Regulation - Building a base for sustainable growth

**Box 1: First the good news.....** in the 1999 microeconomic competitiveness report, Porter identifies the importance o establishing the right micro-level conditions for an enabling environment where economic growth can exist, This conclusion would seem to come from the high scores for countries that have started or completed the - reform of their infastructure and utility industies Chile is placed 24t, the highest place for any Latin American country (Brazil, placed 35$h, is the next Latin American country).

However, for many of the Latin American countries where reform has been undertaken, as well as the UK, the poor quality of infrastructure is maked as a competitive disadvantage for the country. _Source; Porter_ (1999)

# **Argentina and Brazil"**

Another way in which the impact of infrastructure (both physical and human) on economic growth has been assessed is through an analysis of the determinants of per capita income. Estache and Fay (1997) focused on Argentina and Brazil and investigated the impact of infrastructure on:

- average per capita income; and

- differentials in per capita income between states and provinces.

The results of the investigation of the impact on average per capita income is provided in Table 2. Given the way that the econometric relationship was expressed, the coefficients for the explanatory factors can be treated as elasticities. Although education is by far the most important determinant, the proxies for physical infrastructure are significant in the majority of cases.

**Table** 2: **betermiiants of per capita income (199I )**

|**_Aspect_**|**_Argentina_**|**_Brazil_**|
|---|---|---|
|Human capital|3.36*|1.17*|
|Access to sanitation services|0.24|0.25*|
|Access to road services|0.25*|0.36*|
|Adjusted R'|0.79|0.66|
|Number of observations|23|26|

_Source:_ Estache and Fay (1997), tables 4a and 4b.

_Note:_ (*) implies statistical significance at the 95% level of confidence.

Furthermore, when considering differentials in regional per capita income, physical infrastructure is a key determinant. Table 3 provides some examples from Argentina and Brazil.

||**Table 3: E**<br>**of**|**xplainiig devia**<br>**provincial inco**|**tions from inat**<br>**per ita 1**|**ioual avera**<br>**9)**|**ge**||
|---|---|---|---|---|---|---|
|**_Country_**|**_Province_**|**_Total deviation_**<br>**_from national_**<br>**_average_**<br>____|<br>**_Deviation_**<br>**_explained by_**<br>**_the model_**<br>______________|<br>**_Importa_**<br>**_Education_**|**_nce in explai_**<br>**_deviation:_**<br>**_Roads_**|**_ning the_**<br>**_Access to_**<br>**_~~~~~~~sewers_**|
|Argentina|Cordoba|-0.120|-0.045|0.227|-0.143|-0.130|
||Tierra del Fuego|-0.325|-0.274|-0.025|-0.284|-0.015|
|Brazil|Acre|-0.192|-0.078|-0.095|-0.201|0.027|
||_Minas<br>Gerais|0.602|0.566|0.039|0.122|0.406|

_Source:_ Estache and Fay (1997), tables 5a and 5b.

_Note:_ The deviation explained by the model is the weighted sum of the deviations explained by each of the infrastructure factors. An error term represents the difference between the total deviation and the explained deviation and captures any other explanatory factors. This is not reported here.

This section is based on Estache and Fay (1997).

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