Private investment in transportation infrastructure in Brazil: the effects of state action.
| Autor | da Rocha, Fernando Vinicius |
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Introduction
Contrary to the traditional argument that investments in logistics infrastructure is the duty of the state, some emerging countries have experienced a clear upward trend in private investments in transportation infrastructure, especially since the beginning of the 1990s (World Bank, 2015a, b, c, d). Along with this increasing participation of the private sector, economic liberalism claims that the state should limit itself to setting rules in favor of private investments, since its presence in the production sector would restrict the action of private investors in the economy, the so-called crowding-out effect (see e.g. The Heritage Foundation, 2015).
However, recent studies such as that of Mazzucato (2014b) claim otherwise: that governments that run the economy directly have a relevant role and capacity to create and shape new markets, directing the private sector's action, the so-called crowding-in effect (attraction).
This paper aims to discuss this issue, seeking to make a headway in relation to the theoretical approaches regarding the role of the state, based on the Brazilian experience in the infrastructure sector. Thus, based on theoretical references addressing investments and the New Institutional Economy, this paper seeks to answer the following research question:
RQ1. Have the state's investment programs in transportation infrastructure had any positive effects on private investment in Brazil since the 1990s?
The results are based on two quantitative techniques of data analysis: cluster analysis and panel data analysis. The cluster analysis is used to find, based on data from the World Bank (2015a, b, c, d), countries that are similar to Brazil for the panel data analysis. The panel data analysis compares these countries, making it possible to find out the impacts of public policies on private investments.
The second part of this paper includes discussions about the relationship between public policies and private investments, with emphasis on the transportation infrastructure sector. The methodology used - cluster analysis and panel data analysis - is described in Section 3. The results are shows in Section 4. Finally, the conclusions are discussed in Section 5.
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Public policies and private investments
The relationship between investments and the characteristics of the institutional environment is already consolidated in the academic literature (Acemoglu and Robinson, 2012; North, 1990). The main argument is that strong institutions stimulate economic development through a better allocation of resources (Besley and Ghatak, 2010) and inclusive institutions (Acemoglu and Robinson, 2012) evolve and change to minimize transaction costs (Williamson, 1985).
The academic literature also has plenty of studies evidencing that institutions do in fact matter. North and Weingast (1989), for instance, show that the establishment of stronger institutions with well-defined property rights stimulated England's economic growth with the Glorious Revolution of 1688. By analyzing investments in two regions of Ghana, Besley (1995) argues that institutions influence the level of investments made. Pongeluppe and Saes (2014) reconfirm this hypothesis by showing that less secure institutional environments tend to receive less investments.
According to The Heritage Foundation (2015), market openness, regulatory efficiency, government size, and rule of law are the principles of economic freedom. In economies with great economic freedom, state action or government control that interferes with individual autonomy limits economic freedom (The Heritage Foundation, 2015). By fulfilling the role of setting the rules for private investments, the state must act transparently, ensuring equal opportunities to all individuals in a society.
Following liberal thought, The Heritage Foundation (2015) claims that the state is the most efficient agent in supplying the so-called "public goods" (national defense, for example) and that its action beyond the necessary level limits economic freedom, thereby reducing investments. "Government provision of goods and services beyond those that are clearly considered public goods also imposes a separate constraint on economic activity, crowding out private-sector activity and usurping resources that otherwise might have been available for private investment or consumption" (The Heritage Foundation, 2015). This crowding-out effect, in which private agents no longer make investments in the presence of public investments, due to the competition for resources, among other factors, is discussed considering the Brazilian economy in the studies conducted by Sonaglio et al. (2010) and Jacinto and Ribeiro (1997). In this theoretical model, state action must therefore be effective only to "correct" existing market failures, investing in public goods and creating market mechanisms to internalize external costs (pollution, climate change).
Opposed to this argument, Mazzucato (2014a, b) advocates that unlike the crowding-out effect on private investments, governments, through public policies, have the role and the capacity to create and shape new markets (crowding-in effect). The author shows that major advances in different sectors of the economy would not have happened in the same way without the state's decisive role in boosting the sectors, through a direct action. Together with the private sector, the state acts by sharing investment risks and benefits, focusing on reducing market failures and on boosting innovation-mission-oriented public investments. Mazzucato (2014b), arguing about the development of these sectors, emphasizes that "the State leads the growth process rather than just incentivizing or stabilizing it" (Mazzucato, 2014b, p. 92).
The controversy--public investments result in a crowding-out (or crowding-in) effect on private investments--will be tested for the Brazilian case in the transportation infrastructure sector. This is a sector that has been historically under the responsibility of the public sector.
2.1 Investment in transportation infrastructure: public and private investment
There is a consensus in the literature that investment in infrastructure is a prerequisite for economic development. Romminger et al. (2014) indicate that there is a causal relationship between public investments in transportation and GDP growth. Aschauer (1989) shows that public expenditure on infrastructure stimulates the productivity of the economy, a fact that is also argued for by Fernald (1999). These studies are focused on evaluating public investments in the sector, since it involves large investments with characteristics of public good.
The participation of the private sector in infrastructure projects is a growing phenomenon, not exclusive to the transportation segment and to Brazil. The increased number of countries that invest through partnerships with private entities, as well as the increased number of investment projects, are indicators of this phenomenon.
The growth trend in the flows of private investments in Latin American countries has also gained significant importance in the literature, especially as to how this this subject correlates with international capital investments. Forte and Santos (2015), for example, highlight the fact that Latin American countries have very different levels of economic development and show, based on cluster analysis, that groups of countries with better performance in certain variables (institutional and economic) attract greater flows of foreign investments.
Other studies focused on Latin American countries show that private investments are also boosted with: higher levels of aid for education in the country (Donaubauer, Herzer, and Nunnenkamp, 2012); higher levels of economic freedom and a lower political risk (Amal and Seabra, 2007); and appreciation of local currency and inflation control/ reduction (Baingo, 2013).
Freitas and Prates (1998) show that Argentina, Brazil, and Mexico were the Latin American countries that received most of the foreign capital invested since 1990. As for investments in transportation, the target sector of this study, Brazil, India, and China are the three countries that carried out the most investment projects in partnership with the private sector between...
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