# **1. Introduction**

Over the last 10-15 years, a lot of attention has been given to the role of institutions in economic growth. This has, in large part, been driven by economic policy priorities such as how to develop effectively functioning market economies in Central and Eastern Europe and the former Soviet Union post-1989; and how to foster economic growth in lagging world regions such as Sub-Saharan Africa. In parallel, and partly in response, there have been major explorations of the role of institutions in the functioning of market economies both by economists (e.g. the literature arising out of Williamson’s transaction cost economics approach) and by economic historians (e.g. North (1990) and others).

In recent years, there has also been a substantial empirical literature on the relative roles of institutions, policy, geography and trade openness on growth performance across countries. This literature currently indicates that _institutional quality_ is the dominant determinant of variations in long-term growth performance<sup>1</sup> . Good institutions embody a heritage of past good policy decisions and themselves generate a flow of superior policy decisions that support sustained investment and productivity growth<sup>2</sup> . In his recent survey on growth strategies, Rodrik (2003) argues that, although it is quite possible to achieve short-term growth accelerations (e.g. of 10 years or more) with very limited institutional change; the main requirement to ensure sustained growth and convergence with the living standards in advanced countries “... is the acquisition of high quality institutions”. In particular, he argues that there is a requirement for a “... cumulative process of institution building to ensure that growth does not run out of steam and that the economy remains resilient to shocks”<sup>3</sup> .

Infrastructure industries are not just a microcosm of the aggregate economy. The arguments above on aggregate growth apply with extra force to utility service industries. This is because they are not only highly capital intensive, but also most of their assets are very long-lived and (in economic terms) sunk assets. Hence, an effective institutional framework is essential to sustain growth in output, efficiency and capacity for commercialized utility service industries such as electricity, telecommunications, water and others - particularly if these industries have significant amounts of private investment (physical and/or financial).

This paper was prepared as part of the research program on Industrial Organization Policy for Development at the Development Research Group of the World Bank, under the direction of Ioannis Kessides. We are grateful for comments on this paper from seminar participants at the University of Cambridge, at City University and at the ISNIE 2004 Conference. We would particularly like to thank Dimitrios Asteriou, Richard Gilbert, Jean-Michel Glachant and Witold Henisz for helpful discussions, Peter Burridge for econometric advice and Evens Salies for initial assistance with the data collection. The authors alone are, however, solely responsible for the analysis and the views expressed for which none of the above take any responsibility and which should not be attributed to the World Bank nor to any of its staff or members.

> 1 See Rodrik , Subramanian and Trebbi (2002) for a recent survey of the literature on studies of cross-country growth performance.

> 2 Rodrik et al (2002), pp 20-21.

> 3 Rodrik (2003), p.25

2