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Chapter Summary

Graham, Carol. 1998. Private Markets for Public Goods: Raising the Stakes in Economic Reform. Washington DC: Brooking Institute Press.

Chapter 7: Private Markets and Public Goods: Efficiency Gains and Equity Tradeoffs

The central objective of Grahams work is to explore what has made public institutions perform better, and how these improvements can make market-led growth more sustainable and equitable. Graham asserts optimistically that private market incentives such as competition and choice can broaden the base of participation and substantially improve institutional performance. The sustainability of reforms is greatly enhanced as a consequence of wider stakeholder support.

A closer look at the case studies, however, reveals more diverse and perhaps less optimistic realities. While in some instances, new market incentives successfully resulted in an increased role for beneficiaries and an increased capacity of public institutions to deliver essential services, in other cases, certain sectors of society were unwilling or unable to respond to new incentives, and reforms met with little success. The results of reform depend on a complex interaction of market forces, pre-existing infrastructure, political economy and the nature of civil society. Thus, there can be no single, failsafe reform model which will be optimal in every context. It is possible, however, to glean more general guiding principles from the studies presented, particularly with respect to issues of equity and government responsibility.

Considerations for Poverty and Equity

Graham makes four overarching observations with regard to poverty and equity considerations:

(i) Equity problems can limit the potential of reforms. To the extent the poor are unable to participate in markets for public goods, both the growth potential of these markets and the political sustainability of reforms are compromised.
(ii) Success of the stakeholder approach relies in part on the pre-existence of basic institutional infrastructure and a public sector which can serve as a default provider. The countries most likely to be deficient in these respects are the poorer ones which are most in need of reform.
(iii) The ideal solution for poorer countries, where poverty related constraints are near prohibitive, is to gradually introduce private incentives while simultaneously introducing complimentary policies such as cross-subsidies in order to improve the ability of the poor to respond and participate in reforms. Even gradual improvements in institutional efficiency are likely to have significant marginal returns in poorer countries with lots of room for improvement.
(iv) Failure to improve equity in the short run may be justified by improvements in institutional performance and sustainability. To the extent that governments are committed to future equity improvements, stronger, more efficient government institutions may serve as a more substantial foundation on which to build equity improvements in the long term.

The Role of the State

Private market approaches to the provision of public goods do not replace the state. Most unsuccessful market reforms have not stemmed from market failure, but rather from the governments failure to fulfill its responsibilities. Graham identifies several important functions which governments must perform in the interest of facilitating successful reform.

(i) Governments need to be committed to reforms. Organized opposition from well established groups with vested interest in maintaining the status quo, (as was the case with education in Peru), will be difficult to override without strong commitment from government.
(ii) Governments must provide and enforce the laws which regulate political and economic interactions.
(iii) Flexibility is very important. Governments need to be monitoring reforms closely and be willing to correct and adjust policy as problems emerge.
(iv) Governments must be able to offer the administrative capacity to ensure the availability of basic physical infrastructure.
(v) Governments must be able to finance the provision of the more basic essential goods and services.
(vi) Governments must ensure a coherent set of macroeconomic policies in place, for the logic behind privatization and market reform is contingent upon market-led growth.
(vii) Communication and public education programs are critical to achieving broad participation. Governments need to disseminate information effectively and provide channels for making demands and resolving conflicts.

Using criteria such as political sustainability and institutional efficiency, Graham is optimistic about the potential embodied in the reforms discussed. She acknowledges that equity concerns can be ignored or even exacerbated by reform, but takes comfort in the notion that in the long term, market reform will be the best means for reducing poverty