Infrastructure is the basic requirement of economic development. It does not directly produce goods and services but facilitates production in primary, secondary and tertiary economic activities by creating positive external economies. It is an admitted fact that the level of economic development in any country directly depends on the development of infrastructure.
The developed countries have made a lot of progress due to tremendous growth of social and economic infrastructure.
There has been revolutionary progress in transport and communication in these countries.
Large financial facilities are available due to the existence of well organised banking and insurance.
There is revolutionary progress in science and technology. These countries follow advanced technique of production.
Simply speaking, “Infrastructure means those basic facilities and services which facilitate different economic activities and thereby help in economic development of the country, Education, Health, Transport and Communication, banking and insurance, irrigation and power and science and technology etc. are the examples of infrastructure. These are also called social over head capital. These do not directly produce goods and services but induce production in agriculture, industry and trade by generating external economies. For example, an industry situated on or near the railway line or national highway will produce commodities at less cost.
Here railway line or national highways are the examples of economic infrastructure. They generate external economies and thus induce investment.
Types of Infrastructure:
Broadly speaking infrastructure can be divided in two categories:
(a) Hard Infrastructure
(b) Soft Infrastructure
(а) Hard (or Physical) Infrastructure:
This refers to the physical network that keeps an industrialized nation smoothly functional. Among the components that are classified under the hard infrastructure are the capital assets like the utilities, transport vehicles, telecommunication systems, roads, highways, railways, subways, traffic lights and street lights, dams, walls and culverts, drainage systems, the airports and bus terminals, and bridges, among others.
For private infrastructure, these are the land, the buildings and other improvements, the electric posts and the water systems, the warehouses and storage facilities, and the vehicles, just to name a few.
Hardware infrastructure is further classified into transportation, energy, communication, water management, measurement networks, and waste management.
(b) Soft (Instututional) Infrastructure:
The soft infrastructure, on the other hand, is the framework required to keep and maintain the different institutions. This can also include both the physical and the non-physical assets. Examples of physical assets are the buildings that house the network and the equipment used to maintain the institution.
For non-physical assets, this includes the software and programs, the governing rules and regulations, the financial system, and the organizational structure. In essence, the soft infrastructure embodies the system of delivery of services to the people. If a country wants to create a corporate culture and professional companies, then it must have a soft infrastructure for such firms to operate.
While the role of physical infrastructure is quite well known, we are focusing more on institutional infrastructure here.
How institutional infrastructure plays an important role
Inclusive economic institutions: Secure property rights, law and order, markets and state support (public services and regulation) for markets; open to relatively free entry of new businesses; uphold contracts; access to education and opportunity for the great majority of citizens.
Inclusive political institutions: Political institutions allowing broad participation pluralism and placing constraints and checks on politicians; rule of law (closely related to pluralism), but also some degree of political centralization for the states to be able to effectively enforce law and order.
Extractive economic institutions: Lack of law and order. Insecure property rights; entry barriers and regulations preventing functioning of markets and creating a non-level playing field.
Extractive political institutions in the limit absolutism: Political institutions concentrating power in the hands of a few, without constraints, checks and balances or rule of law.
Growth under Inclusive Institutions Inclusive economic and political institutions
Inclusive Institutions (for short) create powerful forces towards economic growth by:
Encouraging investment (because of well-enforced property rights)
Harnessing the power of markets (better allocation of resources,
Entry of more efficient firms (ability to finance for starting businesses etc.)
Generating broad-based participation (education, again free entry, and broad-based property rights).
Key aspect of growth under inclusive institutions:
Investment in new technology and Creative Destruction (it refers to the incessant product and process innovation mechanism by which new production units replace outdated ones.).
Central question: Why are extractive institutions so prevalent throughout history and even today?
The answers lies in preference of elites, who still calls the shots in most regions
Elite: democracy < absolutism < constitutional monarchy
Middle class: absolutism < constitutional monarchy < democracy
Extractive economic and political institutions which favor elites have been prevalent, because elites still hold considerable power and always try to shift from inclusive institutions to extractive institutions.
Though growth is much more likely under inclusive institutions, it is still possible under extractive institutions.
Generate output and resources to extract.
Two types of growth under extractive political institutions:
Extractive economic institutions allocating resources to high productivity activities controlled by the elites (e.g., Barbados, Soviet Union)
When relatively secure in their position, the elites may wish to allow the emergence of relatively inclusive economic institutions under their control (e.g., South Korea under General Park, China today).
But big difference from growth under inclusive institutions: no creative destruction and dynamics very different. Consequently, even though growth is possible under extractive institutions, this will not be sustained growth.
Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. This is true today in Africa, in places such as Zimbabwe and Sierra Leone; in South America, in countries such as Colombia and Argentina; in Asia, in countries such as North Korea and Uzbekistan; and in the Middle East, in nations such as Egypt.
There are notable differences among these countries. Some are tropical, some are in temperate latitudes. Some were colonies of Britain; others, of Japan, Spain, and Russia. They have very different histories, languages, and cultures. What they all share is extractive institutions. In all these cases the basis of these institutions is elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society. The different histories and social structures of the countries lead to the differences in the nature of the elites and in the details of the extractive institutions. But the reason why these extractive institutions persist is always related to the vicious circle, and the implications of these institutions in terms of impoverishing their citizens are similar—even if their intensity differs.
Thus, it is clear that it is lack of institutional infrastructure which has caused the backwardness in most countries in the world, while this preclude physical infrastructure, the role of inclusive legal and financial infrastructure is paramount in giving a direction to life of people.
Thus, it is important for India to create level playing field, and easy entry for new firms as that is very important for improving productivity and harness the power of youth and new innovation from grass-root. Similarly, last mile financial inclusion and availability of easy finance of business is another parameter, which determines the growth of small business, which in fact are the engines of growth in long-run and contrary to popular view, more new technology comes from small businesses than the large scale ones, as small business are more adaptive and innovative.
Their impact on society
While inclusive economic institution would encourage inclusive growth and a coherent society with less crime, the extractive economic institutions promote undemocratic political system in longer run as they have much to save and preserve by thwarting the opportunity for new firms and discouraging innovation and creative destruction.
Since this model is more compatible with undemocratic regimes, they try to install one with money power and muscle power. Thus, extractive institutions not only create inequality, they also promote political expropriation. Also, they lead to other side effects such as violence, large scale immorality and other social ills simultaneously, by virtue of their actions in society.
Egyptians in Tahrir Square, not most academics and commentators, had the right idea. In fact, Egypt is poor precisely because it has been ruled by narrow elite that have organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it, such as the $70 billion fortune apparently accumulated by ex-president Mubarak. The losers have been the Egyptian people, as they only too well understand.
Whether it is North Korea, Sierra Leone, or Zimbabwe, the poor countries are poor for the same reason that Egypt is poor. Countries such as Great Britain and the United States became rich, because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities. To understand why there is such inequality in the world today we have to delve into the past and study the historical dynamics of societies. We’ll see that the reason that Britain is richer than Egypt is because in 1688, Britain (or England, to be exact) had a revolution that transformed the politics and thus the economics of the nation. People fought for and won more political rights and they used them to expand their economic opportunities. The result was a fundamentally different political and economic trajectory, culminating in the Industrial Revolution.
The Industrial Revolution and the technologies it unleashed didn’t spread to Egypt, as that country was under the control of the Ottoman Empire, which treated Egypt in rather the same way as the Mubarak family later did. Ottoman rule in Egypt was overthrown by Napoleon Bonaparte in 1798, but the country then fell under the control of British colonialism, which had as little interest as the Ottomans in promoting Egypt’s prosperity. Though the Egyptians shook off the Ottoman and British empires and, in 1952, overthrew their monarchy, these were not revolutions like that of 1688 in England, and rather than fundamentally transforming politics in Egypt, they brought to power another elite as disinterested in achieving prosperity for ordinary Egyptians as the Ottoman and British had been. In consequence, the basic structure of society did not change, and Egypt stayed poor.