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Economic and Social Infrastructure

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Published: Mon, 10 Jul 2017

Infrastructure is generally defined as the physical framework of facilities through which goods and services are provided to the public. Its linkages to the economy are multiple and complex, as it affects production and consumption directly, creates positive and negative spillover effects and involves large inflow of expenditure (Goel, 2002). It is a widely recognized fact that the availability of basic infrastructure facilities and services flowing from these are vital for economic development of the country. If well developed, they stimulate economic development but if inadequate they prove to be hindrances in the growth process.

The concept of infrastructure was probably introduced for the first time by Singer (1950) who identified investment in infrastructure with investment in certain facilities that are regarded as necessary for development. According to Hirschman (1958), infrastructure consists of those basic facilities without which primary, secondary and tertiary activities cannot function. These facilities play an important role in creating investment opportunities in other industries.

Singer (1950), Nurkse (1955), Kindleberger (1958), Bheil (1986), to name few authors, have given a comprehensive list of items that they consider being important pre-requisites for development. Infrastructure is usually defined as the stock of all-social overhead capital i.e. (directly or indirectly) necessary for smooth functioning of all direct productive capital. Usually infrastructure has the following characteristics:

  • Essential but not directly productive
  • Pre-requisite for development
  • Non-importability
  • Lumpiness(technical indivisibility)
  • External economies
  • Provision by the State

The World Bank treats power, water supply, sanitation, sewerage, communication, roads and bridges, dams and canals, ports, airports, railways, waterways, housing, urban services, oil/gas production and mining sectors as infrastructure (World Development Report, 1994, p.2).

 

Dr.Rakesh Mohan committee report in 1996 entitled “The India Infrastructure Report” included Electricity, gas, water supply, telecom, roads, industrial parks, railways, ports, airports, urban infrastructure, and storage as infrastructure. Except industrial parks and urban infrastructure, all these sub-sectors are treated by Central Statistical Organization also as infrastructure.

The RBI defines Infrastructure for raising external commercial borrowings funds, to include (i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects) vide their circular dated 2nd July, 2007.

The Empowered Sub-Committee of the Committee on Infrastructure in its meetings held on 11thJanuary, 2008 and 2nd April, 2008 under the chairmanship of Deputy Chairman, Planning Commission included the following in the broad definition of infrastructure:(i) Electricity (including generation, transmission and distribution) and R&M of power stations,(ii) Non-Conventional Energy (including wind energy and solar energy),(iii) Water supply and sanitation (including solid waste management, drainage and sewerage) and street lighting,(iv) Telecommunications,(v) Road & bridges,(vi) Ports,(vii) Inland waterways,(viii) Airports,(ix) Railways (including rolling stock and mass transit system),(x) Irrigation (including watershed development),(xi) Storage,(xii) Oil and gas pipeline networks.

Thus, infrastructure is an umbrella term covering many activities relating to social, economic and physical overhead capital, that are responsible for creating conducive environment for productive activities in different sectors of an economy (World Bank, 2004).

Consequently, infrastructure refers to such core elements of economic and social change which serve as a support system to production activity in the economy. Without these core elements, or without the support system, production activity can at best provide subsistence; it can certainly not provide prosperity to the people. In fact, infrastructure as a support system to production activity serves as a foundation stone of economic growth and social development of the human beings.

1.1.1 Economic and Social Infrastructure

Infrastructure is broadly categorized as i) Economic infrastructure and ii) Social infrastructure.

iii)Institutional Infrastructure. Following is a brief description of these concepts:

i) Economic infrastructure

Economic infrastructure refers to all such elements of economic change (like power, transport and communication) which serve as foundation for economic growth. Abundant availability of power supply would accelerate the pace of production activity; abundant means of transport would facilitate the movement of goods from the producers to the consumers; abundant means of communication would facilitate marketing and so on and so forth. In the absence of economic infrastructure any efficient system of economic growth would only remain a distant possibility.

ii) Social infrastructure

Social infrastructure refers to the core elements of social change (like schools, colleges, hospitals and nursing homes) which serve as a foundation for the process of social development of a country. Social development focuses on human resource development, implying the development of skilled personnel as well as healthy and efficient human beings.

iii) Institutional infrastructure

Institutional infrastructure can be considered as the real implementation of the norms in the “institutional basis” of the market economy (Buhr, 2003). Institutional infrastructure, being assigned the function of social integration of values, is the object of economic and legal policy. This category of infrastructure encompasses all customary and established formal rules and informal constraints (conventions, norms of behavior) to  shape human interaction … as well as the procedures of enforcement to guarantee and to implement these rules, e.g., by the state (Buhr, 2009).

Thus, while economic infrastructure accelerates the process of growth, social infrastructure accelerates the process of human development. Indeed, economic growth is incomplete without human development. Accordingly, economic and social infrastructures are complementary to each other; one reinforces the impact of the other (Jain and Ohri, 2010).

Apparently, the social infrastructure of a country is very important as it not only presents the human face of economic growth process but represents the very essence of it. Universal access to education, health and safe drinking water is a must for any society to progress. But even after decades of government intervention in form of development planning, India has been unable to ensure a decent living for a large number of people in this country. Despite various development plans, lack of or inadequate basic infrastructure, both social and physical, continues to remain a major constraint to progress in numerous parts of our country. The present study is based on the health sector, which is a crucial component of the social infrastructure; the following section presents a brief discussion on health and the related the issues and constraints related to the Health sector.

1.2 Defining Health

Health is one of the crucial components of the social infrastructure. Conventionally, the word health is derived from the old English word “hall” meaning hale, whole, healed, sound in mind and limb (Last, 1987).There are two main ways of defining health, the positive approach where health is viewed as a capacity or an asset to be possessed, and the negative approach which emphasizes the absence of specific illness, diseases or disorders (Aggleton, 1990). The WHO has defined health as “A state of complete physical, mental and social well-being and not merely the absence of disease or infirmity.” (WHO, 1946). Chronological order

1.2.1 Distinctive Economic Characteristics of Health

Health care is not different from other goods in the sense that like other commodities it is scarce, and therefore requires allocation and institutions to organize its allocation. A number of characteristics are, however, often mentioned as distinguishing health care from many other goods and services:

a. Uneven and unpredictable incidence of illness

Apart from periodic physical examinations and immunization procedures that can be scheduled, requirements for health and medical services depend on the incidence of illness and injury. It is possible to predict rates of illness for a population on the basis of past experience. For an individual, illness is not predictable. Although he can try to save money in order to defray the costs of illness, he cannot be sure that he will accumulate a sufficient amount in time. Moreover, illness entails also the risk of impairment or loss of earning ability.

An obvious implication of the uncertain incidence of illness for an individual and predictable experience for the group is the desirability of pooling payments to meet the contingency of illness in the group.

b. External effect

By definition, external effects in economics involve good and bad results for others that flow from one’s own behavior. In the context of health, one can take the example of a communicable disease, provision of a preventive or curative service to an individual yields a benefit beyond the prevention or cure of illness in that individual. When a chain of infection is broken, the effect achieved is manifold that for the person who received the treatment. Moreover, when a sizable proportion of a population has achieved immunity to a disease, the risk of infection for all others is reduced. In such instances, the economist states, the private marginal benefit from expenditure is less than the social marginal benefit. For instance if air pollution reducing machinery is installed by a firm in a particular area it not only improves the health of one individual but of all the people staying in that area/locality. Thus, the private marginal benefit from expenditure is less than the social marginal benefit because of the positive spillover effects of externalities.

c. Health and medical care as a need

A person’s need for health and medical care is generally taken as the basis of his right to receive it, regardless of ability to pay. The medical profession has always acknowledged an obligation to meet this need or an essential part of it. As a consequence, it provides free care to the poor and applies a sliding scale of fees (varying charges in relation to ability to pay) to the population at large. Hospital care, too, is provided at full pay, at part pay, or free, depending on the patient’s means.

Owing to its increased effectiveness because of scientific advances, health and medical care is now proposed as the fourth human necessity, ranking after food, clothing and shelter. Such a necessity is deemed to have an absolute priority among society’s goals.(reference)

d. Lack of knowledge

Another characteristic of health and medical services is the consumer’s inability to evaluate them. He cannot judge quality even after he has received the services. A person chooses a physician but he does not himself determine how much care he will obtain. The consumer’s ignorance and helplessness place a heavy responsibility on the integrity and the competence of the physician. This is recognized through the Hippocratic Oath administered to physicians at graduation from medical school. Licensure by the state constitutes practical recognition of this fact in modern times.

e. Mixture of consumption and investment elements

For the most part health and medical services are viewed as consumption items. Sometimes seen as necessities, they are also elements of rising standard of living. Failure to render medical care to a gainfully occupied member of the labor force who needs it may result in disability and loss of output. Hence, Medical benefits, including rehabilitation services, are provided under workmen’s compensation.

A program aimed at preventing illness and disability among productive workers is obviously more of an investment in the nation’s output than one that extends needed medical services to aged persons who are retired from the labor force.

f. Large component of personal service

Most health and medical services are personal services or embody a large component of personal service. This fact has important implications for an economy that grows mainly through gains in productivity, rather than through expansion of the labor force. Thus, hospitals, which compete with other industries for some classes of employees, have not been able to offset the same proportion of salary increases with productivity gains. As a result, the costs and prices of hospital care rise faster than the costs and prices of most other goods and services.

g. Nonprofit motive

For a large sector of the health and medical care industry the profit motive is not relevant as an explanation of behavior. Voluntary (nonprofit) organizations under religious, ethnic or community auspices play a major part in rendering hospital care. Provision of large masses of social capital under such auspices derives from the historical circumstances under which the modern hospital developed, namely, its religious or ethnic sponsorship.

The voluntary character of the hospital has created other problems. Historically, the hospital’s labor force has received low wages, and hospital organizations have striven for – and obtained – exemption from labor relations laws and from coverage under social insurance legislation. Furthermore, in the absence of the profit motive, the criteria for efficient operation are not obvious.

Although these characteristics are unusual they do not in themselves mean that health care cannot be treated in the same ways as other commodities, nor do they necessarily imply a particular form of organization. However, there are market failures in health care and the health care market does not, in practice, function according to the theory of perfect competition- an ideal form of market structure where there are large number of buyers and sellers, no barriers to entry and exit, no significant economies of scale, no product differentiation, no externalities or spillover effects in production or consumption, no risk or uncertainty: there exists perfect knowledge of prices, of products, of the implications of consuming or not consuming a product etc. and assumption of self interest: producers aim to maximize profits and consumers aim to maximize utility (i.e. benefits). As against this the market failure refers to the situation in which these conditions necessary to achieve the market-efficient solution are absent, or are contravened in one way or another (Panchmukhi, 2001). These market failures in provision of health care services are discussed in the section below.

1.2.2 Market Failure in Health

Some traditional forms of market failures are discussed below.

  • Public goods

Some aspects of health are public goods, meaning it costs nothing for an additional individual to enjoy the benefit and it is not possible to exclude an individual from enjoying it. An example is herd immunity. As evidence that a free market might under-supply herd immunity, public school systems (governments) require documentation of childhood vaccinations (or evidence of a qualifying exemption). Public assistance (Medicaid, public clinics and hospitals) also increase access to care, facilitating the provision of the public goods aspects of health care, among others.

  • Externalities.

Herd immunity is a positive externality of health care. So might be increased educational attainment and work force participation associated with good health. Both can reduce demands on public programs and buoy economic growth that benefits society in ways not captured by the participants in health care transactions. Therefore, the market might under-provide health care. (A related phenomenon is when a health insurer rationally does not “invest” in preventative care for its policyholders because it is not likely to capture the long-term benefits as policyholders switch to other insurers.) Government mandates and subsidies are among the possible responses (J.Stiglitz,2000).

  • Competition and barriers to market entry

The medical care market is not conducive to free competition. A number of professional groups have developed to control entry of suppliers to the health care market. The arguments in favour of this control are that it is important to maintain standards of practice, and to reduce the uncertainty regarding professional competence. The disadvantages are that such controls, by reducing supply, tend to increase costs.

A number of barriers to entry exist – professional licensure, licensing of drugs and pharmaceuticals, controls on the establishment of new facilities and/or services. Professionalization may have increased the numbers of highly trained personnel and reduced uncertainty about competence, but it is essentially anti-competitive.

  • Information

For many commodities the consumer has some understanding of the product, or can acquire such information by experience. With medical care, patients have little idea of the effectiveness, of the quality, or of the consequences of having or not having treatment. Individuals may not even realize that they are ill. Furthermore, consumer entry into the market is infrequent, knowledge acquired from past experiences becomes rapidly outdated, while the urgency of some conditions precludes time-consuming and often costly information gathering. There is little incentive for producers to provide information, and although patients may try to obtain more information through ‘second opinions’, doctors are traditionally reluctant to provide conflicting information or to disagree with colleagues. The irreversibility of much medical care emphasizes the importance of making the right decisions based on adequate information. Many professional groups and agencies have developed to provide information but for ethical reasons there are often controls imposed on the advertising of services.

These problems have in part contributed to the unusual relationship between producers and consumers in health care. The doctor is consulted and acts as an agent on behalf of the patient. The consumer chooses to delegate decisions about consumption to the doctor, thus demand for health care is often initiated by the supplier (demand may even be supplier-induced). An obvious danger of this is that consumers may be exploited: depending on the price of health care, and the method used to pay for it, doctors may stand to benefit from generating demand for their own services.

Besides, the above other market failures in the health sector include-

  • Consumer rationality and consumer sovereignty

Rationality implies consistency and in particular that decisions are consistent with the principle of utility maximization (i.e. that consumers use their economic resources in order to maximize their utility or benefit). In a few instances in health care, rationality would appear to be absent or impossible. Those who are mentally ill, and who reject or who do not recognize their need for treatment, are incapable of pursuing rational ends. Others, such as those who are unconscious, are temporarily unable to exercise rational choice. Health care may, therefore, in some circumstances be a merit good which must be distributed by the government because it will be under-consumed if left to the willingness-to-pay of individuals (who are not always rational in their demand for health care).

  • Risk and uncertainty

The need for health care is difficult to predict. Costs associated with illness are uncertain and often large. Insurance is of course the mechanism that has developed in order to cope with the problems of risk and uncertainty, and in many countries insurance systems exist to cover the expenditures arising from ill-health. Insurance systems do not necessarily imply state involvement, although many existing schemes operate with varying degrees of government support or control.

The main problem with the operation of insurance in a market system is in the way risks are treated. Private insurance systems must at least cover their costs. To do this they set a premium based on the observable characteristics of those applying for insurance, and the estimated costs of treating certain conditions. Some individuals have characteristics that make them bad risks (such as the very young or very old, those with existing chronic conditions, and smokers); some conditions imply high treatment costs as a result of expensive procedures or long periods of treatment (such as the problems arising from chronic illness, haemophilia, or old age). A private insurance system is unlikely to cover these individuals. Some form of state intervention is therefore essential to ensure that all individuals secure access to health care, irrespective of their age, initial state of health, or ability to pay.

  • Economies of scale and monopoly

There are some instances of economies of scale and tendency to natural monopoly in health care. Examples include pharmaceutical firms, and hospitals. More often, the market will be characterized by a limited degree of competition between a few large producers (i.e. oligopoly). Price competition may be reduced in these circumstances by collusion, and competition limited instead to, for instance, advertising of brand names (Health Economics for developing countries: A survival kit, 1998).

Having analyzed the characteristics of health care services and instances of market failure let us now turn our attention to understand the role of health in the endogenous growth theory perspective.

1.2.3 Importance of Health for an Individual and Economy

For an individual, health has a double function. On the one hand, perfect health represents value of its own, a target that needs to be reached as closely as possible. On the other hand, there are other aims in life as well e.g. good health gives good income in labor market (Zweifel and Breyer, 1997). World Development Report, 1993 explained good health as a crucial part of well-being. It further asserted that spending on health can also be justified on purely economic grounds. Improved health contributes to economic growth in four ways; it reduces production losses caused by worker illness; it permits the use of natural resources that had been totally or nearly inaccessible because of disease; it increases the enrollment of children in schools and makes them better able to learn; and it makes alternative uses of resources that would otherwise have to be spent on treatment. The significance of health to economic growth process can be briefly discussed as:

a. Gains in worker productivity

The most obvious sources of gain from healthier workers are savings of workdays, increased productivity, greater better-paying job opportunities, and longer working lives. A study on lepers in urban Tamil Nadu estimated that the elimination of deformity with them would enhance the expected annual earnings of those with job by more than three times.

b. Improved utilization of natural resources

Some health investments raise the productivity of land and lead to improved utilization of the natural resources by enhancing the quality of worker’s health.

c. Benefits to the next generation through education

Poor health and nutrition reduces the benefits of schooling primarily in three areas: enrollment, ability to learn, and participation by girls. Children who enjoy better health and nutrition during early childhood are better prepared for school and more likely to enroll. A study in Nepal has found that the probability of attending school is only 5 per cent for nutritionally stunted children as compared to 27 per cent for those at the norm.

d. Reduced costs of medical care

The spending that reduces the incidence of disease can result in big savings in treatment costs. For some diseases, the expenditure pays for itself even when all the indirect benefits – such as higher labor productivity and reduced pain and suffering – are ignored. Polio is one such example. Estimation for the Americans made prior to the eradication of polio in the region showed that investing US$ 220 million over 15 years to eliminate the disease would prevent 22,000 cases and save between US$ 320 million and US$ 1.3 billion (depending on the number of people treated) in annual treatment costs. The program’s net return, after discounting at even as much as 12 per cent a year, was estimated to be between US$ 18 million and $480 million (World Bank, 1993).

Let us now turn our attention to how the resources need to be allocated to produce good health. This is explained through the health production function below that how resources allocated (inputs) help to produce good health (output) for the population. Besides, since the resources devoted to health are scarce people want value for the money spent on health care.

1.2.4 Health Production Function

A health production function is an analytical method for determining how to allocate resources among alternative programmes to achieve increase in health (Feldstein, 1988). Health care is viewed as an output of medical care industry and also as one of the inputs, which contribute to the production of the output, ”good health” (Feldstein, 1973). It examines the impact of inputs into the production process on a person’s ability to produce good health.

There are ‘inputs’ that are necessary if ‘good health’ is to be produced. Some of them are nutritious food, good physical environment free from pollution, pure drinking water, a life free from stress, and the opportunity for work and recreation of one’s choice. One of the most important ingredients essential for good health is genetic endowment. In the economists jargon ‘good health’ can be represented as a function of all these things: this relationship can be called ‘the health production function’. Or in symbolic language:

Good Health = f (nutritious food, pollution free environment, drinking water, mental peace, opportunity for work and recreation, genetic endowment, and use of health services). This means that the outcome, good health, depends on the availability of all the inputs mentioned.

Good health is one of the most important factors contributing to individual welfare. It is an essential pre requisite for enjoyment of almost every aspect of life.

Usually health status increase as the quantum of inputs increase; but beyond a point, the relationship may be reversed.

 

For instance-as inputs like food, exercise increase; health status rises for a certain period. Thereafter, increases in health inputs have a negative relation with the health status and for good health as well, as too much of it leads to obesity.

After understanding the importance of health and how good health contributes to the growth of an individual as well as the economy let us try to analyze the scenario of health care in India.

1.2.5 Value for Money and Health

Policy makers face the task of providing services in a world where resources are limited. For example for health care; even in the wealthiest country it will not be possible to provide every beneficial medical service to all citizens. Health care, like other services, has to be rationed. This means that choices need to be made in the allocation of resources, i.e. where to ‘put the money.’ If resources must be allocated, then how would citizens want them to be allocated? -They would want an allocation that provides the best health improvement. Or, in other words, they want the best value for their money (colloquially, the most ‘bang’ for the ‘buck’.)

The question is how to measure ‘value’ and ‘money’. In order to measure true use of resources, we do not only need monetary values, but actual consumption of the resources themselves, doctors’ time, hospital beds, equipment etc. We can then value these at the cost of their provision. The ‘value’, i.e. the health improvement, is more difficult, and should encompass the objectives the policy makers are aiming for, such as better survival rates, increased coverage of a health service, increased take-up, and better customer satisfaction. These outcomes are usually brought about by a series of direct and measurable outputs, such as number of patients treated, number of staff etc.

Figure 1B: Value for Money

Value for Money = Outcome

Expenditure

=Input * Output * Outcome

Expenditure Input Output

Economics Efficiency Effectiveness

The relation of the Inputs to their Costs is commonly called the ‘Economics’ of a project and answers the question “How cheap did we shop?”. The relation of the Outputs to the Inputs of a project is called the ‘Efficiency’ of a project, and answers the question “How productively did we use our resources?” And the relation of Outcomes to Outputs defines the ‘Effectiveness’ of a project and provides information about how effective each outcome was in bringing about our objectives.

In a developing and emerging economy like India where resources are scarce to meet the health care demands of its increasing population, it is necessary to understand the plight of health care in this country to enable better and judicious use of the scarce resources to ensure better health for its citizens.

1.2.6 Role of Health

The economic growth theory has become inextricably linked to the evolution of economics itself; at least in as far as this provides an explanation for the wealth of nations. The works of Solow and Swan gave rise to a wide range of literature on economic growth and this in turn fueled the debate on the capital production relationship and the properties that determine market equilibrium. In the neoclassical models technological progress is considered as exogenous. The most basic proposition of exogenous growth theory is that in order to sustain a positive growth rate of output per capita in the long run, there must be continual advances in technological knowledge in the form of new goods, new markets, or new processes. This proposition came to be demonstrated by the neoclassical growth model developed by Solow (1956) and Swan'(‘1956), which shows that if there were no technological progress, then the effects of diminishing returns

would eventually cause economic growth to cease.Thus, as a criticism to these neo classical growth models, an endogenous growth macro model is built in which the long-run growth rate of output per worker is determined by variables within the model, not an exogenous rate of technological progress as in a neoclassical growth model like those following from Ramsey (1928), Solow (1956), Swan (1956), Cass (1965), Koopmans (1965). Since endogenous technology determines economic growth in an endogenous way they are known as “endogenous growth models.”

The first of these models was published by Romer (1986). The concept of technology here depends on economic factors such the capital-labor relationship. An increase in this ratio explains not only an increase in income but also the ability to maintain high levels of growth in the long term. From the early 90’s various studies have attempted to identify the determinants of economic growt


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