Soft Infrastructure and Trade Costs

Soft (or institutional) infrastructure, such as predictable legal rights and procedures, enforceable competition policy, and a sound regulatory framework, is essential for physical infrastructure to function efficiently. Financial services, particularly long-term, local currency bond markets, play a central role in infrastructure financing. Reliability of trade facilitation and administrative procedures at customs is crucial, including rationalization of the customs transit system to reduce inspection time and simplify declarations and documentation.

In Indonesia, soft infrastructure limitations play a greater role than hard infrastructure limitations in constraining port efficiency. Lack of direct competition between ports controlled by the same government authority is also a factor (Patunru et al., forthcoming). In 2005 the ocean freight rate for importing a container to India was about two thirds greater than for exporting, while for importing to the PRC from six Asian countries it was far lower (De, forthcoming a). This may be because auxiliary shipping charges (documentation fees, container handling charges, government taxes and levies, etc.) can be greater than ocean freight charges, particularly where there is congestion.

Some infrastructure services, such as telephones, railways, and water supply systems, exhibit network externalities. Then the maximum amount a consumer is willing to pay depends on the number of other users, possibly leading to monopolies and calling for enforcement of competition policy. The Republic of Korea has achieved one of the highest rates of broadband Internet penetration at competitive prices by carefully balancing the technical advantages of network infrastructure with the efficiency advantages of competition.

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