Infrastructure, growth and the two dimensions of industrial policy

When sustained growth depends on establishing an indivisible infrastructure for directly productive activities (DPAs) both discrete and marginal departures from optimal growth can undermine the dynamic efficiency of the market. Producers’ anticipations of paying monopoly fees for infrastructure services dampen their incentive to invest in DPAs and may prevent the economy from reaching a minimal level of activity that would justify investment in a large indivisible infrastructure; and potential investors in infrastructure may be intimidated by the prospect of expropriatory regulation. Thus a credible prior commitment to effective but fair regulation is necessary for achieving optimal growth. But it may not be sufficient. Low-level expectations before the infrastructure is established can be self-fulfilling, indicating a role for coordinative industrial policy. Investment subsidies, even in conjunction with regulation, cannot induce an efficient equilibrium.