Soft Infrastructure

While trade infrastructure often evokes images of large-scale physical projects, institutional (or soft) infrastructure is equally important. A supporting environment of predictable legal and judicial rights and procedures, equitable and enforceable competition policy, and a sound but not unduly restrictive regulatory framework are crucial for physical infrastructure investment to be efficient. Financial services, including financial intermediation, risk management opportunities, and payment and clearing services are especially important for international trade. International bond markets capable of supplying long term finance in local currencies play a central role in infrastructure finance, but are still in an early stage of development in most of Asia. Cooperative efforts are underway to broaden, deepen, and strengthen these markets throughout the region, in part to support greater trade.

Regional cooperation activities aimed at facilitating international trade work particularly well when targeted at soft infrastructure. These activities include (among others) enhancing availability of adequate credit and foreign exchange at reasonable rates, a reliable system of legal recourse and dispute resolution, effective competition policy, and the capacity of existing human capital to process exchanges. Indeed, soft infrastructure may often be more important than physical infrastructure for increasing trade and its profitability, and equitably distributing the benefits. In the international context, the role of harmonizing and strengthening soft infrastructure stands out as an essential partner of expanded physical infrastructure.

Infrastructure improvements generally have the positive effect on competition of applying equally to both foreign and domestic entrants. This is particularly true when infrastructure improvements are complemented by effective competition policy that constrains monopoly power and removes barriers to entry within the region (Brooks 2005). Regional cooperation can help to maximize the benefits from balancing agglomeration effects with international competition's efficiency gains.

Exploiting complementarity of hard and soft infrastructure raises overall trade and economic performance. This is especially noticeable in the case of networks. Many infrastructure services that are important for economic development and trade expansion exhibit network externalities. Infrastructure networks exhibiting service externalities include telephones, railways, and water supply systems (see Laffont and Tirole 2000). In the presence of such externalities, the maximum amount that consumers are willing to pay for a good or service depends in part on the number of other consumers who purchase the item in question. This interrelationship calls for consideration of these network systems' governance in competition policy. As one example, Republic of Korea has achieved one of the highest rates of broadband internet penetration at competitive prices by balancing the technical advantages of network infrastructure with the efficiency advantages of competition.

In the case of Indonesia, Patunru, Nurridzki, and Rivayani (forthcoming 2009) find that soft infrastructure plays a vital role in relieving constraints on port efficiency, more so than hard infrastructure although the two are interlinked. The competitiveness of a seaport as a regional hub may suffer from poor physical infrastructure such as inadequate channel depth, shortage of berths, and limited cargo handling equipment, storage and transit areas. But it may also suffer from limitations in soft infrastructure, such as weak labor skills, inadequate regulation, stifling bureaucracy, and other institutional factors affecting port capacity utilization, such as rigidities in existing patterns of regional shipping routes. Lack of direct competition between ports controlled by the same government authority is also a critical, related factor.

While difficult to quantify, governance is a critical aspect of soft infrastructure. Definitions vary, but governance can be thought of as the institutions and processes by which collective decisions are made and problems are solved. Khan (2008) provides a framework for considering how governance, and soft infrastructure in general, can contribute to lowering trade costs and strengthening regional cooperation in developing Asia, applying a modified form of the effective rate of protection. Comparing the height of different trade cost barriers with this formulation again allows a rough ranking of priorities for undertaking potential soft infrastructure interventions at both the national and regional level.

Download this Paper [ PDF 177.1KB| 21 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.