Infrastructure Is the Foundation of a Healthy Book Review

  • Length: 6 pages
  • Subject: Economics
  • Type: Book Review
  • Paper: #60389951

Excerpt from Book Review :

Infrastructure is the foundation of a healthy economy and an equitable society. The World Bank's Policy Research Report on Reforming Infrastructure: Privatization, Regulation, and Competition evaluates infrastructure issues in several major sectors: telecommunications, electricity, transportation, and water. Within these infrastructural areas, the report addresses topics related to privatization, state ownership, competition, and regulation. Finally, the report incorporates social and economic concerns into proposed policy reforms. Both privatization and state control of infrastructures present problems that can be addressed with wise and research-based reform.

Chapter One of the World Bank Policy Research Report on Reforming Infrastructure focuses on network utilities. Not limited to telecommunications alone, a networking infrastructure entails all that is necessary for businesses to compete in the global marketplace. Economic development depends on the creation and maintenance of an effective, reliable, and accessible network infrastructure.

Network infrastructure is a "natural target for government intervention" and yet is "difficult to regulate in the public interest,"(p. 30). Problems inhibiting perfect competition within the realm of the network infrastructure include the large sunk costs and the extensive economies of scale that network infrastructures entail. Both of these issues, large sunk costs and extensive economies of scale, create an environment that stifles competition and encourages monopolistic enterprise.

Initiated by the United States in the 1970s, the deregulation of state-controlled network infrastructure has become a de facto model. In developed regions, deregulation has entailed a smooth transition from state-controlled network infrastructure to privatization or some combination thereof. In the developing world, state-controlled network infrastructure remains woefully inept. Chronic underinvestment, underpricing, and poor financial performance are straining the budgets of already strained transition economies.

Privatization is not always a panacea. Only when the market is ripe for genuine competition can privatization avoid morphing into monopolization. In general, however, privatization is a recommended means of reforming network infrastructures in transition economies. The key is to stimulate economic growth and promote social justice at the same time. Recommended strategies include unbundling services at the end-user level and also relaxing barriers to market entry at the enterprise level.

The second chapter of the World Bank Policy Research Report on Reforming Infrastructure addresses important issues in creating effective privatized infrastructures. Any situation in which competition is scarce requires special attention, and the World Bank suggests regulation for two main reasons. First, regulation of privatized infrastructure promotes social justice by ensuring fairness for consumers. Second, regulation of privatized infrastructure helps remove barriers of entry for new players. This is especially apparent in network infrastructures, in which bottlenecks cramp competitiveness.

Much of the World Bank's advice for helping emerging economies to develop effective regulation strategies is commonsensical. For example, the World Bank suggests learning from the mistakes made in the United States and making sure that regulators understand the limitations, pitfalls, and potentials of the region. Characteristics for what comprises effective regulation include separation of powers, strong contract law, and credible financial institutions.

In some cases, industry-specific regulations can be instated. Regardless of how regulation takes place, pricing reform and other economic considerations must guide policy and action. Any proposed program that is not financially viable will fail. The World Bank therefore suggests several mechanisms for pricing regulation, all of which work towards five main goals: rent extraction; supply-side efficiency; demand-side efficiency; revenue adequacy; and fairness.

In Chapter 3, the World Bank Policy Research Report shifts gear and delves into the unique features of the electricity infrastructure. Managing electricity resources has proved challenging to established and transitional economies alike. From complete state-controlled monopolistic enterprises to deregulated privatization, there are many methods of managing electricity infrastructure.

The World Bank deconstructs the energy industry's traditional structure, illustrating the three basic components: power generation, high voltage power transmission, and low-voltage distribution. In the past, these three components fell under the rubric of one vertically integrated power industry. The World Bank describes the vertical integration of the electricity infrastructure as having a "monolithic" form (p. 132). Vertical integration has enabled the growth of economies of scale and economies of scope.

However, the World Bank highlights the reasons why electricity is a peculiar infrastructure that inherently deters new market players. Electricity supply is "rigid," and options for storage of electricity is limited (p. 133). The World Bank describes electricity as a "real-time" product (p. 134). While supply is inelastic, demands will fluctuate. This imbalance creates very real physical problems with the electricity grid. Pricing cannot feasibly reflect the supply-demand curve, which complicates the financial management of the electricity infrastructure.

Industrialized, highly developed economies have demonstrated ways in which emerging economies can manage their energy infrastructures. As economies industrialize and populations become more affluent, the demand for electricity is rising in transitional economies. Until infrastructures improve, the supply is not meeting demands, which is placing extreme and unnecessary burdens on enterprise and consumers. Complicating matters is the issue of pricing; consumers in developing nations are used to low prices that could steeply rise as infrastructures improve. The World Bank asserts that new technologies plus sensible liberalization can together promote a sustainable and socially conscious growth in the electricity infrastructure.

The fourth chapter of Reforming Infrastructure: Privatization, Regulation, and Competition focuses on transportation, and on railroads and ports in particular. Transportation at the railroad and port level is critical for the delivery of goods and services and for the maturation of the market. The private sector is playing an increasingly robust role in both the railroad and the port sectors.

However, the railroad industry plays an ambiguous role in what is becoming an increasingly service- and information-driven economy. As the World Bank points out, railroads may remain effective at transporting bulk items such as raw materials. They are not, however, effective at the transportation of high-value products that need a more timely delivery. Railroads in North America have yet to effectively compete with the automobile and airplane for passenger transportation. In developing nations, an added problem in the railroad industry is chronic overemployment. Overemployment has been creating financial stress throughout the industry.

Shipping is the primary means by which goods are transported overseas, accounting for more than 80% of all trade involving developing countries (p. 205). Although one potentially monopolistic company may manage any given, the variety of services offered at a port opens them up for competition. The World Bank therefore suggests a policy of unbundling and regulating ports so that competition is stimulated instead of stifled.

Reforming the water sector is the topic addressed in Chapter 5 of the World Bank Policy Research Report. Water supply is defined as being location-specific as well as finite. More importantly, the World Bank points out that because of water's necessity in sustaining life, access to water resources is a matter of particular urgency. Water access is closely tied to social justice.

Increasing scarcity of clean water supplies is presenting major policy problems. On the one hand, water needs to be managed like any other infrastructure. The economics of water must be taken into consideration. On the other hand, the commodification of water can create social welfare problems and ethical conundrums. "The challenge for regulation is to meet both efficiency and social welfare objectives in the water sector, balancing the needs of operators, consumers, governments, and the environment," (p. 219).

The World Bank is correct in pointing out the major problems that plague access to water in developing nations. Statistics are not measured as well as they could be, notes the World Bank. Water infrastructure in developing nations is poor at best, and few of those nations' citizens have access to clean drinking water. Ultimately, the World Bank recommends regulation of water infrastructure.

Agriculture accounts for the bulk of water demands in any given region, but hydropower and industry also places heavy demands on water supplies. Demand management has become a policy issue. Other water-related factors impacting policy and infrastructure…

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