Infrastructure Privatization and Regulation: Promises and Perils

Infrastructure is crucial for generating growth, alleviatingpoverty, and increasing international competitiveness. For muchof the twentieth century and in most countries, the networkutilities that delivered infrastructure services—suchas electricity, natural gas, telecommunications, railroads,and water supply—were vertically and horizontally integratedstate monopolies. But this approach often resulted in extremelyweak services, especially in developing and transition economiesand especially for poor people. Common problems included lowproductivity, high costs, bad quality, insufficient revenue,and shortfalls in investment. Over the past two decades manycountries have implemented far-reaching institutional reforms—restructuring,privatizing, and establishing new approaches to regulation.This article identifies the challenges involved in this massivepolicy redirection within the historical, economic, and institutionalcontext of developing and transition economies. It also reviewsthe outcomes of these policy changes, including their distributionalconsequences—especially for poor households and otherdisadvantaged groups. Drawing on a range of international experiencesand empirical studies, it recommends directions for future reformsand research to improve infrastructure performance.      

Sunk Costs,Market Contestability,and the Size Distribution of Firms

In this paper we offer a new economic explanation for the observed inter-industry differences in the size distribution of firms. Our empirical estimates based on three temporal (1982, 1987, and 1992) cross-sections of the four-digit US manufacturing industries indicate that increased market contestability, as signified by low sunk costs, tends to reduce the dispersion of firm sizes. These findings provide support for one of the key predictions of the theory of contestable markets: that market forces under contestability would tend to render any inefficient organization of the industry unsustainable and, consequently, tighten the distribution of firms around the optimum.