Theoretical framework

The provision and development of Infrastructure has been subject of much theoretical analysis and empirical studies. It is referred as an umbrella term for many activities and named as “Social Journal of Business Management & Social Sciences Research (JBM&SSR) ISSN No: 2319-5614 Volume 2, No.1, January 2013 _________________________________________________________________________________ Blue Ocean Research Journals 83

Overhead Capital”, “Economic Overheads”, “Overhead Capital”, “Basic Economic Facilities”, and so on. Nurkse elaborated the concept of overhead capital. According to him “overhead investment aims at providing the services – transport, power, and water supply, which are basic for any productive activity, cannot be imported from abroad, required large and costly installations and in the history of western economics outside England, have usually called for public assistance or public enterprise. Typically overhead investments take a considerable time to reach maturity in growing. To be sure, all investments depend on expectations but the time range of expectations is opt to be particularly long in overhead projects because of their lumpiness combined with their high operational capital intensity. Other development economists like Rostow and Hirschman have also used the word of social overhead capital. W. W. Rostow (1960) in his ‘Theory of Stages of Growth’ According to him SOC is a pre-condition for take-off into self-sustained growth.

Academic anxiety?
Get original paper in 3 hours and nail the task
Get your paper price

124 experts online

Investment in SOC and development of those services encourages potential entrepreneurs to invest in risk-bearing business. Those SOC prepare the base for expansion of economic activities by decreasing the cost and increasing the profitability of productive activities. It also helps in the creation of an educated labour force, superstructures of communication networks, and mechanism to provide energy, basic civic amenities and law and order. According to Rostow, “All these create an atmosphere that breeds entrepreneurial capabilities and sustains a climate which is throbbing with economic activities and optimistic decision.” Consequently, he made investments in SOC, especially in the fields of transport and power, one of the main preconditions for take-off. In the precondition to take – off stage the investment in social overhead capital should create literate and technically trained personnel in the working force. They are necessary condition for self sustaining economic growth. Hirschman’s concept of social overhead Capital (Infrastructure)Comprises of these basic services (include all public services like transportation, communication, power, health, water supply, irrigation and drainage system) without which the primary, secondary and tertiary activities in the economy cannot function. In its wider sense, it includes all public services from law and order through education and public health to transportation communications, power and water supply, as well as such agricultural overhead capital as irrigation and drainage system. The hard core of the concept can probably be restricted to transport and power. Hirschman (1958): According to the theory of unbalanced growth by Hirschman no LDC has a sufficient endowment of resources as to enable it to invest simultaneously in all sectors of the economy in order to achieve balanced growth.

Hirschman maintains that investments in strategically selected industries or sectors of the economy will lead to new investment opportunities and so pave the way for further economic development. He stresses that development to take place a deliberate strategy of unbalancing the economy should be adopted. This is possible by investing either in social overhead capital or indirect productive activities. Investments in social overhead capital are advocated not because of its direct effect on the final output, but it permits and invite DPA to come in some SOC is required as a prerequisite of DPA investment. According to Hirschman an activity can be included in the category of social overhead capital (Infrastructure) provided it satisfies the following conditions:- The services provided by the activity facilitate or are in some sense basic to the carrying on of a great variety of economic activities. These services are usually provided in practically all countries by public agencies because of externalities, or by private agencies subject to some public control. They are provided free of charges or at rates regulated by public agencies. These services cannot be imported.

These investments needed to provide the services are characterized by Lumpiness (technical indivisibilities) as well as by a high degree of capital- output ratio (provided the output is at all measurable).

Hirschman‟s point of view was that the enlarged availability of electric power and transportation facilities are essential preconditions for economic development. Rosenstein Rodan. The services of overhead capital are indirectly productive and become available only after a long gestation period. They include all those basic industries like power, transport or communication. Their investments precede directly productive investments. They constitute the framework and overhead costs of the economy as a whole. Its installations are characterized by a sizeable initial lump and low variable cost. The increase in overhead costs and fixed capital since the nineteenth century has raised the risk of loss of capital and lowered the mobility of resources and flexibility of the economic system. It has vastly increased the average size of the firm. According to Rodan views on industrialization and economic development, National and international investment should concentrate at the start on building of “basic industries” and public utilities which give rise to new investment opportunities. Journal of Business Management & Social Sciences Research (JBM&SSR) ISSN No: 2319-5614 Volume 2, No.1, January 2013 _________________________________________________________________________________ Blue Ocean Research Journals 84

“Let us build railways, roads, canals, hydroelectric power-stations, the rest will follow automatically.” where the lack of transport facilities is a flagrant obstacle to economic progress, as for instance, in China and parts of Latin America, that may indeed be the best start of development investment. If sufficient capital is available for investment in basic industries the normal Multiplier effect will “naturally” lead to further industrialization. Hansen (1965), in looking at the role of public investment in economic development, divides public infrastructure into two categories Economic Overhead Capital (EOC) and Social Overhead Capital (SOC).

EOC is oriented primarily toward the direct support of productive activities or toward the movement of economic goods and includes most of the public works projects listed above. SOC is designed to enhance human capital and consists of social services such as education, public health facilities, fire and police protection, and homes for the aged. Other classifications of public infrastructure include investments by the private sector. Hansen theorizes that the potential effectiveness of economic overhead capital will vary across three broad categories of regions: congested, intermediate, and lagging. Congested regions are characterized by very high concentrations of population, industrial and commercial activities, and public infrastructure. Any marginal social benefits that might accrue from further investment would be outweighed by the marginal social costs of pollution and congestion resulting from increased economic activity. Intermediate regions are characterized by an environment conducive to further activity an abundance of well-trained labor, cheap power, and raw materials. Here, increased economic activity resulting from infrastructure investment would lead to marginal social benefits exceeding marginal social costs.

Lagging regions are characterized by a low standard of living due to small-scale agriculture or stagnant or declining industries. The Economic situation offers little attraction to firms, and public infrastructure investment would have little impact. Kindleberger and Herric (1973) however, while defining infrastructure introduced two more concepts such as Economic Overhead Capital (EOC) and Strictly Social Overhead Capital (SSOC) which are two different components of Social Overhead Capital. According to them EOC are nothing but public utilities in the form of transport, communication, road, railways, electricity, etc. whereas SSOC includes the plants and equipments required for providing services in the form of education, health and housing. According to development economist Michael P. Todaro (1981) Emphasis capital accumulation including all new investments in land, physical equipment and human resources, results when some proportion of present income is saved and invested in order to augment future output and income. New factories, machinery equipments and materials increase the physical “capital stock” of a Nation (i.e. the total “net” real value of all physical products capital goods) and make it possible for expanded output levels to be achieved. These directly productive investments are supplemented by investments in what is often known as social and economic “Infrastructure” roads, electricity, water, and sanitation, communications etc. Which facilitate and integrate economic activities for example investment by a farmer in a new tractor may increase the total output at the vegetables he can produce, but without adequate transport facilities to get this extra product to local commercial markets, his investment may not add anything to national food production. To sum up all the above economists views on infrastructure in the form of overhead capital or overhead costs. This was the theoretical base of socio economic infrastructure of the economy. Since Ashauer (1989) around the world numbers of studies were conducted by the different economists in different time Spain periods. Through the empirical testing of infrastructure really influences growth and development. For example during the 1970s, there was a high correlation between declining productivity in the USA and reductions in investment on public infrastructure, numerous studies have suggested that infrastructure investment is likely to augment economic performance. For a review (see Aschauer1989, Gramlich 1994).

This implies that increasing the investment in infrastructure can enhance productivity growth as well as quality of life. Assets (e.g. Easterly and Rebelo 1993, Canning and Fay, 1993, Canning, 1999) using cross section-time series pooled data found that public infrastructure has positive effects on a country‟s productivity performance as well as growth is affected positively by the stock of infrastructure. In a large exercise, 102 cross country studies were assessed by Fuente and Estache (2004) Table.1 shows the distribution of the study findings. Studies conducted over the past 15years, few years Journal of Business Management & Social Sciences Research (JBM&SSR) ISSN No: 2319-5614 Volume 2, No.1, January 2013 _________________________________________________________________________________ Blue Ocean Research Journals 85

This essay was written by a fellow student. You may use it as a guide or sample for writing your own paper, but remember to cite it correctly. Don’t submit it as your own as it will be considered plagiarism.

Need a custom essay sample written specially to meet your requirements?

Choose skilled expert on your subject and get original paper with free plagiarism report

Order custom paper Without paying upfront

Theoretical framework. (2017, Feb 12). Retrieved from