Development Aspects Impressum Editors

Exogenous factors

1. Macroeconomic policy³

Developing drinking water supply and sanitation services entails a major invest- ment process for a prolonged period. The intensity and regularity of this process are subject to the macroeconomic environment. Economic stability and growth in the framework of rational and consistent policies will foster healthy public finances, improvements in the population’s ability to pay and an appropriate context for public and private investment. It is therefore understood that a country’s macro- economic situation and public policies have a strong impact on the development of the sector, both when services are provided by public bodies and where the provider is a private company.

Considering the Chilean example, the sector shows substantial, sustained de- velopment which has coincided with the period of favourable macroeconomic con- ditions which began following the serious crisis of the early 1980s, and which has continued to the present. Macroeconomic conditions during that period, together with a stable legal and institutional framework, provided a low-risk environment and encouraged participation by foreign investors in local businesses.
This compatibility of macroeconomic and sectoral policies has been reflected in the fact that increases in tariffs – and their readjustment up to self-financing levels under the model of public service provision – have coincided with periods of growth in household incomes and low unemployment. Political and economic stability, an effective and independent regulatory framework and acceptable tar- iff levels generated incentives and signals which were suitable for sustained high levels of investment based on reasonable profit margins and acceptable levels of corporate borrowing.
Services in the Buenos Aires Metropolitan Area, however, have developed in a framework which is significantly different from that in Chile. In recent decades, Argentina has been characterized by wide fluctuations in economic growth, al- ternating boom and bust periods, repeated crises, macroeconomic instability and periods of high inflation, including one of hyperinflation.
The volatility of the Argentine economy has been increasing, and has been so severe that extraordinary measures have been necessary. These have often involved modifications to the legal framework, and uncertainty and weak insti- tutions have influenced decisions on investment: delaying them, guiding them towards assets with relatively short pay-off periods or demanding high yields in comparison with international averages to compensate for possible losses resulting from changes in the “rules of the game”.
In the macroeconomic context, the problems of poverty and unemployment should be emphasized. Given the characteristics of the services involved, the poor
3 The implications of macroeconomic policies for water resources management in general, and for the provision of drinking water supply and sanitation services in particular, are developed in Solanes and Jouravlev, 2005 and 2006.

are most strongly affected, either because of lack of access to the service or be- cause they are unable to pay. In the former case, they are affected by levels of investment; in the latter, by the existence or otherwise of subsidies, given the need for levels of tariffs which cover the real cost of providing the service. Concerning trends in poverty levels in the past 20 years, Argentina has experienced fluctua- tions, particularly during the crisis of 2002, whereas in Chile the poverty index has fallen steadily since the late 1980s.

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