Initiative for Infrastructure Integration in South America: Way Toward Regional Convergence

ABSTRACT

This paper studies how the public provision of transportation infrastructure impacts output convergence and trade integration in a two-country dynamic general equilibrium model in which the transportation cost between countries is endogenously determined by the stock of public infrastructure in both countries. Because of its particular conception, the so-called ‘Initiative for the Integration of Regional Infrastructure in South America IIRSA’ serves as the case of study. Data from Argentina and Brazil is thus used to solve the model. Two main results emerge. First, increasing public investment in infrastructure provides an impetus to commercial integration but does not necessarily generate output convergence. Second, the model shows that the only way for the two countries to achieve output convergence (in a win–win economic growth scenario) is to coordinate their increments on public infrastructure, as proposed by IIRSA.

KEYWORDS:

• Catch up policy
• convergence
• economic integration
• infrastructure integration
• IIRSA
• South America

JEL CLASSIFICATION:

• C61
• F11
• F42
• O54

Disclosure statement

No potential conflict of interest was reported by the author.

ORCID

Andrea Bonilla Bolaños http://orcid.org/0000-0001-5191-8522

Notes on contributor

Andrea Bonilla Bolaños is Professor at Escuela Politécnica Nacional del Ecuador (EPN) and associated researcher at the GATE CNRS France. She received an Engineering in Economics from EPN Ecuador, and an MS from École Normale Supérieure of Lyon France. She received her Ph.D. in Economics from the Université Lumière Lyon 2. Her research interests are Macroeconomics, International Economics and Regional Integration.

Notes

1 ‘Physical integration’ refers to the coordinated provision of infrastructure and its services – for example, construction of communication channels by connecting transportation, energy, and telecommunications networks at a regional level between two or more neighboring nations' governments, resulting in further regional economic interdependence (ECLAC, 2009; Gramlich, 1994; World-Bank, 1994).

2 The role of infrastructure in determining transportation costs, and thus trade volumes, is well reported by empirical literature (i.e. Francois and Manchin, 2013; Limao and Venables, 2001; Shepherd and Wilson, 2006).

3 For evidence on infrastructure spillovers, see Cohen and Morrison Paul (2004), Del Bo and Florio (2008), Canning (1999), Pereira and Andraz (2010), and Cohen and Morrison Paul (2003).

4 In 2008, the formation of the Union of South American Nations (Unasur) provided IIRSA with a new institutional framework and asserted its continuity. Later in 2011, the South American Infrastructure and Planning Council (Cosiplan) assumed this coordination role and defined the Strategic Action Plan, 2012–2022. The physical integration project in South America continues to function even today and provides an appealing set of dynamics to be examined in line with the objectives of this study.

5 It is worth mentioning that IIRSA is Unasur's most advanced project. The initiative has been cataloged as a process of ‘silent’ integration because, despite the difficulties in political and economic integration (e.g. political frictions from Paraguay's expulsion from the bloc owing to the 2012 coup d'etat), physical integration continues to work (ECLAC, 2009).

6 An EID is a multinational territorial space with specific natural resources, human settlements, production areas, and logistics services. Transportation, energy, and communications infrastructure serve as its links because they facilitate the flow of people, goods and services, and information within the territorial space as well as to and from the rest of the world.

7 Even if Argentina and Brazil are members of the Mercosur, an incomplete common market, labor and capital mobility between them remains low. For instance, according to the capital openness index (Chinn and Ito, 2016), Argentina is the second less financially open Unasur country after Venezuela and ranks 160th among a set of 182 countries. After the collapse of convertibility (the 2001–2002 crisis), Argentina imposed strict control over capital outflows (Frenkel and Rapetti, 2010), which continues even today. Thus, the non-international mobility of factors is not completely unrealistic.

8 Public capital is provided without user charges (no congestion), and thus, public capital is assumed to be a pure public good.

9 A similar reasoning is used by Martin and Rogers (1995) to examine the impact of public infrastructure on industrial location.

10 depends on the relative size of the Home economy (country 1), η, and a trade openness measure, . Precisely, and .

11 The two sources are included to account for technological differences and publicly provided capital stock specificities in the analysis of individual output dynamics.

12 The period of 2000–2011 covers almost the entire lifetime of IIRSA. Remember that IIRSA was initiated in September 2000.

13 PWT's version 8.0 provides two types of TFP information: first is a relative measure of TFP levels across countries (relative to the United States, which is normalized to one) and the second type is conceived to compare TFP growth over time. For the purpose of this study, the first measure of TFP is retained.

14 The values are an average of the ‘Transport, Cash Expenses of the Budg. Cen. Govt.’ item in IMF's GFS database for 1995–2001.

15 Even if Argentina's superiority is well accounted for in the benchmark, it does not perfectly match with reality. According to the model, Argentina's output is 2.18 times Brazil's output, while according to data, Argentina's output is only 1.51 times that of Brazil. This imperfection does not change the essence of the conclusions but the quantification of the effects.

16 It is pertinent to use the standard openness index as a proxy measure of commercial integration in view of the retained two-country framework.

17 Hereinafter, public investment refers to that in transportation infrastructure in GDP percent.

18 A further version of the model is envisaged to account for individual welfare, such that the gains and/or loses of this experiment can be measured in welfare terms.

19 As described in Appendix A.5, at the steady state, public capital stock is determined by , , and : . , in turn, is determined by τ: . Thus, capital stock in one country can be modified by the change in that of the other through .

20 The transmission mechanism underlying the interaction of public capital stocks in the two neighboring countries will be pursued in future research.

21 Note that, at the intermediate firm optimum and , so, .

22 The bar refers to the steady-state values.