How should public goods be provided to citizens? The traditional answer is that it is the state's job to do so. Some public goods are pure public goods, a well-defined category in theoretical economics. These have the property that, if they are provided, they are by their nature available to all. Since charging for them in the ordinary way is impossible, the private sector would have no incentive to produce them. (The standard examples are law and order and national defence.)
In ordinary parlance, however, public goods is a much wider category than pure public goods and covers many others (such as infrastructure facilities, education, and health care) that impinge on the welfare of large numbers of people, but are likely to be underprovided by the market for various reasons, including inability to pay. For example, the state may rightly take the view that the coverage of primary education and health care should be universal. But, the market would fail to achieve universality as poor people cannot afford to buy at market prices. This is the basis of the traditional consensus view that the state should finance, produce and deliver a wide range of public goods, not just pure public goods.
The traditional consensus needs to be questioned. It does not distinguish between public sector finance and public sector production. The state may choose to pay for public goods. But, it does not follow thereby that it must produce or deliver them: It may be more efficient and effective to leave the production and delivery to the private sector. For example, food security may be thought of, quite rightly, as a public good. The state may pay to ensure that everyone has access to a basic minimum quantity of food. But, it does not follow that it should carry out the task of actually delivering food to people. The state could enable the poor to buy food in the market, at market prices, by transferring purchasing power to them directly in the form of cash. A system along these lines may be much more effective in reaching poor people, and also less corrupt. This example is obviously not chosen at random. It is a portrayal of India's public distribution system (PDS) for food. Delivery of cheap food by the PDS is very badly targeted and there are huge leakages all the way down the supply chain. Targeting would be greatly improved and a lot of money saved for other constructive purposes if the government retained the function of stabilising food prices by buffer-stock operations but got out of the business of distribution, in which the private sector has a comparative advantage. The state would still have a job to do, viz to regulate market activity and ensure that food trading and distribution remain competitive activities, free from cartelisation. But, this is a very different task from distributing food to millions of people. The government's role would be "to steer, not to row", to do smart regulation, not the heavy lifting.
The above point has wide application. And it has found some acceptance in India in the field of infrastructure facilities. These used to be thought of as exclusively the state's preserve, but no longer. There is now some recognition of the point that opening up to competition from the private sector is the best (and perhaps the only) way to make public sector enterprises efficient. (But the quality of the accompanying regulation still leaves a lot to be desired.) Privatisation is still regarded as beyond the pale but public-private partnerships (PPPs) have gained in popularity. These could be financed by the private sector, or jointly by the public and private sectors. There is a justified presumption that the private sector would be more efficient at construction and operation (especially by controlling costs and undertaking innovations.) But the private sector has its own deficiencies. Since its objective is to maximise profits, it may be tempted to sacrifice quality in order to cut costs. Whether to leave the production of public goods to the private sector then depends on whether it can be regulated to preserve quality standards, either directly or through the terms of a contract. PPPs in India have often disappointed even though the basic underlying concept is sound, because the government has yet to master the techniques of writing and monitoring contracts, and setting up independent dispute-resolution arrangements.
Primary education and health care are still considered to be ideal candidates for exclusive public sector delivery (despite the fact that the private sector has a large presence in these activities.) All the evidence suggests that the quality of state-delivered primary education and health care in India is dire. Teachers in government primary schools, and doctors and nurses in primary health centres, are frequently absent. And when they are present, they deliver services of abysmal quality. Evidence also indicates that absenteeism and lack of effort are much less of a problem in private schools and private health care, and the quality of the outcomes is also somewhat better (though not by much). Those who advocate that the state should be the exclusive supplier of primary education and health care have to consider whether it is realistic to expect that the performance of state functionaries could be massively upgraded by reform from within. In fact, performance is likely to improve only if there were genuine competition with the private sector, such that if state schools or health clinics fail to attract custom, they would have to close down. Without the discipline of competition it is hard to see how state employees could be made accountable. Needless to say, competition is not enough. State regulation is essential to prevent the quality of education and health care being degraded by profit-maximising considerations.
The demarcation of the state-market boundary in India thus raises many difficult questions about which much more public debate is necessary. The detailed discussion of these issues in my recent book (see below) is a modest contribution to such a debate.
The writer is an emeritus fellow of Merton College, Oxford. His new book, India's Long Road - The Search for Prosperity, has just been published by Penguin
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