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José A. Gómez-Ibáñez Regulating Infrastructure Harvard University Press, Cambridge, Massachusetts, 2006, 448 pp., $26.95 (paper). Network utilities—such as electricity, telephones, transport, and gas—have undergone wide-ranging reforms over the past decade, with many governments restructuring, and sometimes even privatizing, entire infrastructure industries. The reforms have aimed at securing private participation in industries that have traditionally been dominated by the public sector. These changes have been accompanied by the creation of regulatory agencies and supervisory frameworks to manage the provision and quality of services and pricing policies. Sector performance has thus become intrinsically linked to the effectiveness of the regulatory framework and to contract design. Using a combination of theory and practice, José Gómez-Ibáñez evaluates the impact of these changes. In the first part of the book, the author describes the relationships between the government, regulators, firms, and users and analyzes how these often complex dynamics shape the regulatory frameworks and the behavior of the participants. Using case studies, he assesses the effect of regulatory capture (when state laws give rise to monopolistic behavior), contractual problems, and asset expropriation on prices, quality, and investment. In one example, he recounts how uncertainty over contracts led to a series of renegotiations in the privatization of Argentina's railroad industry, resulting in serious delays—and in some cases even cancellation—of vital investments. He also discusses how the threat of expropriation may deter private sector investment, using examples of both direct and indirect expropriation in Latin America's electricity industry to illustrate this set of problems. In the second part, Gómez-Ibáñez examines the circumstances under which three principal regulatory strategies—concession contracts, The last section of Regulating Infrastructure studies the consequences of network unbundling—forcing a supplier to give competitors access to its infrastructure—and the related trade-off between competition and coordination. Here, Gómez-Ibáñez uses the examples of the British railroad industry and Argentina's electricity sector to demonstrate that competition can lead to better service and lower prices. However, he also notes that market power may remain an issue even after unbundling has taken place. One challenge in this respect is to establish a mechanism for dealing with access charges and network congestion. This clearly written book by one of the most distinguished economists in the field describes the roles played by the different stakeholders in utility reform and evaluates their impact on the efficient regulation of natural monopolies. The author's use of examples from the real world, combined with a modern microeconomic approach to transactional cost and incentive regulation, makes this a book any serious thinker or practitioner in the field of utilities regulation must read. Daniel A. Benitez Alberto Alesina and Francesco Giavazzi The Future of Europe MIT Press, Cambridge, Massachusetts, 2006, 186 pp., $24.95 (cloth). "A wakeup call." The title of the last chapter captures the thrust of this very readable book on Europe's need for reform. In the book, Alberto Alesina and Francesco Giavazzi cast aside the academic genre—though not their academic grounding—to better convey a sense of urgency. They focus on a short list of core issues and in each case identify the broad direction of reform. Their tone is incisive, even militant, and the book proceeds at a brisk pace with many original insights. Some of the problems have received a lot of attention elsewhere. The continuing decline in working hours belies the increasing old-age dependency ratio. The labor markets in many European countries protect insiders at the expense of the unemployed. Monopolies and other forms of protection reflect the large rents enjoyed by existing firms and the weakness of independent regulatory agencies. And the judicial system fails to provide for the cost-effective enforcement of contracts. The authors look at other important issues as well. They rightly recognize immigration as "one of the important questions for Europe in the next decade, if not the most important issue." While mindful of the social problems associated with ethnic and racial diversity, they advocate a selective immigration policy, attuned to the needs of the labor market in each country. They also roundly denounce conflicts of interest in the financial system and, interestingly, trace them to the resistance of national central banks to their loss of power following the introduction of the euro. And they convincingly argue that the main cause of the decline in the quality of advanced education and research is not a lack of resources but a lack of competition. But the book's most original contribution is its focus on the role of European institutions. The authors argue that policy coordination is beneficial when government activities present significant economies of scale, which is the case in areas such as the European Union's (EU's) single market, its common foreign policy, and its fledging common defense policy. But policy coordination can also lead to excessive intervention when it pointlessly tries to override country-specific preferences, for instance in the fields of social policy or even fiscal policy (the authors suspect that the EU's "stability and growth pact," which sets rules for the conduct of fiscal policy, has gone too far in that direction). Failure to properly allocate the prerogatives of "Brussels" and of individual member states may sharply undermine the effectiveness of European institutions in promotion badly needed reforms. This is a useful and even enjoyable book, though it is frustrating that the authors—like others in this field—do not address the key question of why the rigidities they denounce are so prevalent in Europe. A deeper understanding of their social function would surely help in designing reform strategies. It is also unfortunate that the authors pin the differences in social models between Europe and the United States on different attitudes toward inequality. Rather, different attitudes toward the role of government in the economy stand out as a general thread across the diverse reform areas discussed in the book. In each case, the need for reform arises because insiders have captured the authority of government to prevent competition—what is known among economists as "regulatory capture" is, unfortunately, a common occurrence in Europe. The proliferation of public and semi-public enterprises, curiously not discussed in the book, is an important manifestation of this phenomenon. The authors could have noted its rollback in the past two decades as a welcome development, but plenty remains to be done. Pierre Dhonte How news affects sovereign spreads Paolo Mauro, Nathan Sussman, and Yishay Yafeh Emerging Markets and Financial Globalization Oxford University Press, Oxford, 2006, 200 pp., $74 (cloth). What can emerging market countries do to lower their cost of borrowing in international capital markets? In this timely book on the determinants of emerging market spreads, economists Paolo Mauro, Nathan Sussman, and Yishay Yafeh attempt to answer this important question. The analysis in the book is based on a comparison of two historical periods characterized by unusually lively trading in emerging market sovereign bonds. The first period is 1870–1913, sometimes called the first era of financial globalization because government bonds from all over the world were traded on the large bond market in London. The second period covers the early 1990s, when the market in Brady bonds took off. Comparing sovereign spreads from two so obviously different historical periods is not, of course, without its problems. For example, there are differences in the way bonds were issued (in terms of maturity length and redemption clauses) and how bond yields were, and should be, calculated. However, these problems do not diminish the merits of attempting a comparison in the first place. In my opinion, the comparison is a truly original and innovative methodological contribution and makes this book stand out among other books on the same topic. The authors set out to uncover the most important factors driving emerging market spreads in 1870 and today. They do so by linking significant shifts in bond spreads to different types of news as covered by the media. By classifying news into different categories such as "wars," "bad economic news," "reform," and "debt-related news," the authors are able to get a precise picture of the kind of information driving the spreads. Of course, one may question whether findings based on news about wars can be generalized into findings about actual wars. Using panel data regressions on the full sample of countries, the authors successfully show that news about wars and instability does, in fact, have a much larger impact on spreads than any other type of news. In contrast, news about institutional reforms, whether good or bad, has almost no measurable effect on spreads. Although this finding could simply be because many reforms become effective only over longer periods of time, it serves as a useful reminder that institutional reform alone cannot solve acute public finance–related problems in the developing world. The authors also find evidence suggesting that markets for emerging market bonds have become more prone to contagion. First, the overall impact of news on spreads has diminished considerably over time, which could indicate that investors are more likely to treat emerging markets as a homogeneous group today than they were at the turn of the nineteenth century. Second, movements of emerging market spreads are much more correlated today than in the past. Even if economic fundamentals are also more closely correlated today than they were 130 years ago, this does not explain the entire increase in correlation. Based on these two findings, the authors argue that a systemic problem underlies institutional investor behavior today, increasing the risk of international contagion and exposing countries whose finances are basically sound to contamination from financial crises in other countries. Emerging Markets and Financial Globalization is an impressive empirical achievement. It provides both new statistical evidence and insightful analysis of the workings of emerging sovereign debt markets. It deserves to become required reading for all economists with an interest in financial history and sovereign bond markets for many years to come. Daniel Waldenström
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