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
1
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 NeoLiberalism (“The Washington Consensus”)
1.
2.
3.
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)
2
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
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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?
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Access to Electricity:
Percentage of Population
Region
Africa
1970 1990 2000
Total Total Total
14
25
34
2000
Urban
2000
Rural
63
17
S. Asia
17
32
41
68
30
E. Asia
30
56
87
98
81
Latin America
45
70
87
98
51
All Developing
25
46
64
86
51
4
Access to Electricity:
The Need for Public Investment
How to reach households without electricity?
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

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
5
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:
1. ‘Crowd out’ (displace) private investment
2. Cause accelerating inflation and appreciation
of the exchange rate
3. Increase the Fiscal Deficit and Public Debt
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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:
1. Rose to a peak of 10-12% in the late 1970s and early
1980s
2. 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
7
Public Investment in Developing
Countries, 1970-2000
(as a share of GDP)
11
10
9
8
7
6
5
Simple average
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
4
Weighted average
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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
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The Macroeconomic Implications
of 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
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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
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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 longterm development objectives
 Achieving long-term capital accumulation
and growth as well as equity in access to
basic utilities
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