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Financing infrastructure in developing countries : lessons from the Railway Age

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  • Eichengreen, Barry

Abstract

Arguments for financing infrastructure development through government subsidies and foreign borrowing meet with increasing skepticism. Numerous"white elephants"subsidized by governments have strengthened doubts about the efficacy of public finance, and the debt-servicing problems of the 1980s have weakened arguments for foreign borrowing. Recent innovative suggestions for financing infrastructure investments in developing countries have a back-to-the-future quality. At the heart of the nineteenth century debate on financing infrastructure development - especially railways - lay certain concepts: relying on private finance, encouraging the growth of domestic financial markets, and choosing financial instruments that minimize the risk of dependence on foreign funds. The author reviews the historical record in an attempt to glean lessons for developing countries today. In the nineteenth century, much as in many of today's less developed and less liberalized economies, not all the informational and contractual preconditions for efficient private or commercial finance of infrastructure projects prevailed. In some regions, it was difficult to tap investors at home or abroad. Many countries lacked the private institutions (such as universal banks) and public ones (such as regulatory agencies) needed to facilitate monitoring, to discipline management, and to ensure an adequate flow of information to investors. In places as diverse as Canada, India, Spain, and the United States, getting enough finance often required that the government provide collateral (land grants) and bond guarantees - especially where asymmetric information caused credit rationing. The main lessons: exploiting nontraditional approaches to financing infrastructure investment requires action on two fronts. First, liberalizing and developing domestic financial markets. And second reforming administrative mechanisms that ensure accountability from enterprises enjoying government subsidies or guarantees.

Suggested Citation

  • Eichengreen, Barry, 1994. "Financing infrastructure in developing countries : lessons from the Railway Age," Policy Research Working Paper Series 1379, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1379
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    References listed on IDEAS

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    6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. Vincent Bignon & Rui Esteves & Alfonso Herranz-Loncán, 2015. "Big push or big grab? Railways, government activism, and export growth in Latin America, 1865–1913," Economic History Review, Economic History Society, vol. 68(4), pages 1277-1305, November.
    2. Olivier Debande, 1997. "Le rôle du secteur privé dans le financement des infrastructures : une mise en perspective historique," Revue Économique, Programme National Persée, vol. 48(2), pages 197-230.
    3. Singh, Nirvikar & Srinivasan, T. N., 2004. "Fiscal Policy in India: Lessons and Priorities," Santa Cruz Department of Economics, Working Paper Series qt8nx3v467, Department of Economics, UC Santa Cruz.
    4. P. Nayak, 2007. "Infrastructure Development in India An Appraisal," Working Papers id:980, eSocialSciences.
    5. Ramamurti, Ravi, 1997. "Testing the limits of privatization: Argentine railroads," World Development, Elsevier, vol. 25(12), pages 1973-1993, December.
    6. James Alm, 2015. "Financing Urban Infrastructure: Knowns, Unknowns, And A Way Forward," Journal of Economic Surveys, Wiley Blackwell, vol. 29(2), pages 230-262, April.

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