Private Markets for Public Goods: Raising the Stakes in Economic Reform

In Private Markets for Public Goods, Graham—Senior Fellow in Foreign Policy Studies and Co-Director of the Center on Social and Economic Dynamics at the Brookings Institution—examines the incorporation of market incentives in education, health, social security, and state-owned enterprises across a range of country and income contexts, with case studies from Latin America, Africa, and Eastern Europe. Graham looks at social service reform initiatives in Chile, Peru, Bolivia, the Czech Republic, and Zambia, and offers analyses of salient equity, performance, and political issues.

What are the effects of vouchers and school choice on public education systems? Can the private sector manage the national social security system? What is the appropriate role for the private sector in delivering water, electricity, transport, and other public services?

These questions are the subject of prolonged and often divisive debate in countries ranging from the former communist and developing states to advanced industrial nations. Proponents of increased private sector involvement in realms previously reserved for public institutions cite efficiency and the reduction of fiscal burden as the primary benefits. Opponents cite concerns about equity. And there is little agreement on how to reform public institutions or what the role of the state versus the private sector should be.

Many emerging market countries have already launched full-fledged experiments with private sector delivery of public services. In these nations, the question is no longer whether the approach is acceptable, but what is the best way to incorporate new market incentives in a manner that improves the performance of public institutions and at the same time guarantees widespread access and minimum standards.

Graham identifies a number of ways in which the market can contribute to the better functioning of the public sector and increase its capacity to reach the poor. This by no means eliminates an active role for the state in providing public goods and services. Indeed, in this study the most unsuccessful reforms stemmed from government failure rather than market failures. The book points to several critical areas where the state’s role is indispensable: regulation and monitoring of services; provision of adequate communication and education so that the public — and particularly disadvantaged groups — understand and can participate in new incentive structures; and provision of adequate financing for those groups that cannot afford to pay for services. When the government fails to perform in these arenas, private market approaches have mixed effects, Graham says, which are particularly negative for the poor.

“Objective yet committed is a succinct description of Carol Graham’s analytic and comparative book on policies and reform in countries as diverse as Bolivia and the Czech Republic, as Zambia, Chile, and Peru. One admires the creativity, diversity, and political will outlined by the author in different societies seeking democracy and market economies. Their successes and failures bear valuable lessons for even developed societies, as well as developing nations.”
— Gonzalo Sánchez de Lozada, Former President of Bolivia