Infrastructure and Prosperity
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In the past, if you were to mention the word "infrastructure",
the only mental association would have been: "physical". Infrastructure
comprised roads, telephone lines, ports, airports and other very
tangible country spanning things. Many items were added to this
category as time went by, but they all preserved the "tangibility
requirement" - even electricity and means of communication were
measured by their physical manifestations: lines, poles,
Today, we recognize three additional
categories of infrastructure which would have come as a surprise to our
Social infrastructure - laws, social
institutions and agencies, social stratification, demographic
elements and other social structures, formal and informal.
It is amazing to think that previously no one
thought of the legal code as infrastructure. It has all the
hallmarks of infrastructure: it spans the entire country, it
dynamically evolves and is multi-layered, without
it no goal-orientated human activity (such as the conduct of
business) is possible. A foreign investor is likely to be more interested to
know whether his property rights are
protected under the law than what are the availability and
accessibility of electricity lines.
An investor can always buy a generator and produce his
own electricity - but he can never enact laws unilaterally. The country's
denizens are bound to encounter the law (or
resort to it) sometime in their lives, even if they never travel on a
road or use a telephone.
The second category of infrastructure is the
human infrastructure. What is the mentality of the people? Are
they lazy, industrious, submissive, used to improvise, team-spirited, individualistic, rebellious, inventive and so on?
Are they conservative, open-minded, xenophobic, ethnically
radicalized, likely to use brute force to settle disputes? Are
they ignorant, educated, technologically literate, seek
information or reject it, trustful and trustworthy or suspicious
An educated workforce is as much part of a country's
infrastructure as are its phone line.
The last category of infrastructure is the
information infrastructure. It is all the infrastructure which
tackles the manipulation of symbols of all kinds : the
accumulation of data, its processing and its dissemination. Words
are symbols and so are money and computer bytes. So banks,
computers, Internet linkups, WANs and LANs (Wide and local area
computer networks), standardized accounting, other standards for
goods and services - all these are examples of the information
The development of all these types of infrastructure is
intimately linked. They usually evolve almost concurrently. They
form feedback loops. The slow or hindered development of one of
them prevents the flourishing of all the others.
This is really quite reasonable. If the
workforce is not educated, it will not be keen or qualified to manipulate data and symbols. It will buy less computers, use
the Internet less, bank less and so on. This, in turn, will
reduce the need for phone lines, office buildings and so forth.
There seems to be an "infrastructure multiplier" at work here.
This multiplier is a two way street: an
increase or decrease in each type of infrastructure adversely or
positively influences the others.
The West itself is in dire need of infrastructure. Its current infrastructure is
crumbling, either owing to advanced age or to over-usage. Roads in large parts of the USA are in
poorer condition than they are in some countries of Africa. In 1997, America-On-Line,
a major Internet provider, was unable to provide services to its
customers for weeks on end because communication lines in
the USA were totally jammed. Certain places in Israel could
receive television signals only in the last few years, as
infrastructure reached them. Infrastructure is a universal
The West invests in the infrastructure of developing countries
through two venues:
Through international finance organizations (such
as the World Bank and the European Bank for Reconstruction and
Development). The terms and conditions of this kind of financing
are very lenient. Those are really grants more than credits.
The implementation of these infrastructural
projects is awarded to contractors via international tenders,
with bids submitted from the world over. Rarely does a local firm outbids its better
financed, better equipped and better motivated first world rivals.
Alternatively, multinational firms get involved in local
projects directly. But this kind of financing comes with a lot of strings
attached. The multinationals expect to recoup both their investment and a
reasonable return on it. They come heavily subsidized by the governments of
their countries. Their contribution to the local economy, during the
construction of the infrastructure, is fleeting, at best. They prefer to employ
their own crews and equipment. They do not trust the locals too much or too
But whichever way the infrastructure is created, problems
arise at the host country.
Consider international, multilateral, finance
organizations. Inevitably, think and plan on a global scale. They invest in infrastructure only if and when
it services - or has the potential to service in the larger
scheme of things - a cluster of neighboring countries.
Clear regional benefits have to be unequivocally demonstrated
in order for multilateral organizations to get involved. They neglect, overlook, or outright reject
investments in much needed local infrastructure.
Such financial institutions always prefer to invest in a cross-border
highway rather than in a cross-country road, for instance. The benefit
to the domestic economy of the aforementioned local road could be appreciatively
more sizeable. Still, the international fund would encourage the
cross border highway. This is its charter - to promote
multilateral investments - and this is what it does best. The
interests of the host country are a secondary consideration.
On the other hand, the private sector invests
only in countries with well developed infrastructure in all the
aforementioned categories. But this is a conundrum: if the infrastructure is already developed,
investments by the private sector are less beneficial. The result is
that straightforward investments by the private sector - not subsidized,
not partial, not co-funded by international institutions - mainly flow
to the developed, industrial world.
Studies unearthed four disadvantages of countries with
Such countries suffer from interminable
bottlenecks in all the levels of economic activity, especially in
the production and distributions phases (principally in the transportation of raw materials
to factories and of finished products from industry and field to the
This adversely affects the availability of the
country's domestic produce in both local and foreign markets. Agricultural
produce is most affected but, to a lesser extent, so are industrial goods. If
the communications infrastructure is decrepit, the service sector is similarly
A second issue is the distortion of the price
mechanism. Prices increase owing to the wastage of resources when
trying to overcome problems in infrastructure. Prices are
supposed to reflect inputs and values and thus to assist the
markets to optimally allocate resources. If the prices
reflect other, unrelated, issues, then they are distorted and, in turn, distort economic activity.
The third problem is that one country's disadvantage is another's advantage. Other countries, with better infrastructure benefit
: they attract more foreign investment, they conduct more
business, they export more, they have lower inflation (cheaper
prices) and their economy is not distorted by irrelevant,
ulterior, non business considerations.
The fourth - and maybe largest and longest term
- handicap is when the country's image is affected.
Infrastructure is much easier to fix than a country's image. If
the country acquires a reputation of a mere transit area, an
underdeveloped, inefficient, non productive, hopeless case, it
suffers greatly until these impressions change. The image problem has
the gravest possible consequences: repelled investors, reluctant
financiers, frightened bankers, disgruntled foreign investors.
There are eight known solution to the problems
of a country with underdeveloped infrastructure:
It can privatize its infrastructure
(commencing with its energy and telecommunications sectors, which
are the most attractive to foreign and domestic private investors
Then, it can allow the business sector to
operate parts of the national infrastructure. The usual
arrangement is that firms invest in creating
infrastructure and then collect fees for operating and
maintaining it. The fees collected are large enough to cover both
the investment and the maintenance costs and to return a pre-determined profit. The most famous example
are toll roads, often constructed by the private sector.
Another way is to commercialize the
infrastructure (to collect fees for using the telephony network,
or the highways) and to plough back the proceeds exclusively into
projects of infrastructure. Thus, all the income generated by
cars passing on a highway can be dedicated to the construction
of additional highways and not funneled into the general budget.
The fourth method is to adapt the prices of using the
infrastructure to the real costs of constructing and of operating it. In most
developing countries, consumers pay only a fraction of these real costs. Prices
are heavily subsidized and the infrastructure is left to decay and rot away.
This, obviously, is a political decision to be taken by the political echelons.
In many countries, such readjustment of prices to reflect real costs frequently creates social unrest and has severe
The country could condition investments in
multilateral infrastructure projects upon investments in its own,
local infrastructure. A multinational firm which wishes to invest in a
highway (and thus reap considerable rewards), can be required to invest
a portion of its future profits in local roads and other forms of
infrastructure. A multinational fund interested to
invest in a telecommunications project which involves three countries can be
asked to commit itself to a "local investment" clause, a
"local content purchase" clause, or an "offset"
arrangement (the purchase of local goods against any import of goods connected
to the project to the country).
The country must open its markets to domestic
and foreign competition by de-regulating. It must
dismantle trade barriers : tariffs, quotas, restrictions, anti-investment
regulations, restrictive standardization and so on. Competition
both lowers the costs of infrastructure and improves its
quality, as rival firms strive to supply more value at a lower
An important condition is that the country does
not prefer one kind of infrastructure to another. All
categories of infrastructure should be simultaneously and
similarly stimulated. This will carry favor with the
international business community and is bound to alter the image
of the country for the better. It will also create a positive
feedback loop whereby an improvement in one category of
infrastructure yields improvements in all the others.
Last - but far from least -
the country must promote international agreements which
facilitate reductions in the costs of cross-boundary transport of
goods, services and information.
Less documentation, less one sided fees, less bureaucracy will
reduce the costs of doing businesses (transaction costs) and the total damage to the
national economy. The less encumbered by red tape, the more a
country tends to prosper.
This material is copyrighted.
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About the AuthorSam Vaknin is the author of "Malignant Self Love - Narcissism
Revisited" and "After the Rain - How the West Lost the
East". He is a columnist in "Central Europe Review", United
Press International (UPI) and ebookweb.org and the editor of mental health
and Central East Europe categories in The Open Directory, Suite101 and
searcheurope.com. Until recently, he served as the Economic Advisor to the
Government of Macedonia.
His web site: http://samvak.tripod.com
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Article Published/Sorted/Amended on Scopulus 2006-07-16 02:09:12 in Economic Articles