Small Firms and Infrastructure

Abstract

Hirschman's categories of "infrastructure first" and "infrastructure following (industries)", and the historical experiences of the recently industrialising countries would be useful starting points in understanding the issue of infrastructure in relation to small firms. Many of the sectors of infrastructure, being characterised by low appropriability and high positive externalities, are not easily provided by the private sector, especially in a transforming economy. Typically, governments have had the major role. The long gestation periods, and long life of assets, lend an additional dimension that impedes their provisioning by the private sector. This is because long term capital markets, for periods exceeding the working life of the assets, typically do not exist. The infrastructure first is a possible approach, which would place a considerable responsibility on government, both in efficient provisioning and in ensuring a sustainable and high rate of expansion, through taxes and budgetary arrangements. Such an approach, if wisely and effectively pursued, can contribute greatly to competitiveness of industry. In India too, the Plans, and the large role assigned for the public sector in the provisioning of infrastructure (especially, physical) could have resulted in similar efficiency in the economy as a whole, if other concomitant policies had been right, and the state had been efficient enough. Most importantly, the state failed in the expansion of infrastructure, since its losses in construction were too large and the ability to raise resources steadily dwindled. Furthermore, political populism, which created pressures for under-pricing infrastructural services, brought appropriability down to artificially low levels. The second approach of infrastructure, raises its appropriability. Thus, private provisioning becomes feasible in many more areas, and most importantly, expensive infrastructure does not have to remain unutilised even for short periods and the problem of selecting areas and projects becomes easy.