Infrastructure: the Origin

Various dictionaries define infrastructure as the installations that form the basis for any operation or system. The Online etymology dictionary traces the use of word infrastructure in English language from 1927 onwards.  If one looked into Google’s digital book project, the term infrastructure was used to describe images in a volume on archeological and historical museum in France.  The year was 1635.   Another hundred years later, the term started to be used on how we know it today, initially within military and then for other disciplines.

 

What is different about Infrastructure?

There are six special  attributes that make infrastructure policy quite complex.

•  Interdependence.  First, infrastructure is, or is perceived as, particularly important for expanding economic opportunities, for promoting economic development, to improve competitiveness, and for improving quality of life of people. Over last few centuries,  infrastructure development was found to move in line with economic cycles and investments in road networks, railways, and canals were linked with major investment booms yielding high rates of return. Similarly, high profile project failures leading to bankruptcy have had disastrous economy-wide impacts. This interdependence of infrastructure with macroeconomic conditions and health of financial sector makes infrastructure policy making quite challenging.

• Capital Attributes. Infrastructure is capital intensive and often subject to economies of scale. Most infrastructures are physical networks implying not only lumpy investments but also the fact that there is little use unless these works are complete and maintained good conditions.  Finally, infrastructure assets have large sunk costs, with major challenges in financing and maintenance. These multiple capital attributes of infrastructure leads to many market failures and government failures.

• Spatial Issues.  Unlike other goods, most infrastructure is space specific: once a location is set, it cannot be moved. For example, once a road is created, it is difficult to remove it and use it somewhere else.

•  Political. People value services they derive from infrastructure. It is estimated that between one-third and one half of infrastructure services are used as final consumption by households depending on the region. Second, demands for infrastructure services are inelastic because it is difficult to find adequate substitutes . These two factors mean that any disruption in service will impact large population and may not be tolerated.

•  Institutions. Overall service levels from capital assets such as road networks or power plants are greatly influenced by the institutional and financial regimes under which they operate. In most developing countries, existing institutions are weak, there are capability limitations given that infrastructure policy and institution building is complex, and the political will to act even weaker.

• Externalities. Finally, infrastructure involves large positive and negative externalities. Invariably, there are problems of measurements and designing policy regimes that can address these fully.

 

What is Infrastructure?

In terms of sectors, infrastructure covers roads, bridges, railways, power plants, transmission and distribution lines, telephone lines, telecommunications network, pipelines for water, crude oil, natural gas, waterways, port facilities, airports, canal networks for irrigation, sanitation, and sewerage.

 

Externalities occur when an activity carried out by one or more people affect the well-being of other people and when these impacts are not transmitted through market prices, i.e., impacts are external to the market. Pollution is a classic example of negative externality. New roads often leads to positive externalities in remote areas, besides reducing overall transport costs between the two points, it allows more girls to attend schools.

 

References

Prud’homme, Rémy. 2005. Infrastructure and Development. Annual World Bank Conference on Development Economics, ed. François Bourguignon and Boris Pleskovic, 153–80. Washington, DC and New York: World Bank and Oxford University Press. Available online.

Gramlich, Edward. 1994. “Infrastructure Investment: A Review Essay.” Journal of Economic Literature 32(3): 1176–96.

Aschauer, David. 1989a. Public Investment and Productivity Growth in the Group of Seven. Economic Perspectives 13(5): 17-25.

_______. 1989b. Does Public Capital Crowd Out Private Capital? Journal of Monetary Economics 24(2): 171-188.