Beyond the Dichotomy of Public and Private sector

 

Beyond the Dichotomy of Public and Private sector

 

Abstract

The state-market interactions have always been in discussion while contemplating governance processes and development discourse. Based on experiences, it was realised by the 1980s and 90s that the state alone was not able to govern effectively and other stakeholders also need to be considered in the governance process. The state has a role in shaping market forces as well as getting shaped due to market forces. Over the past two decades, the impact of globalisation, rise in market forces and increase in expectations of citizens have brought the question of the state-market interactions that can bring development which is inclusive, equitable and sustainable.

 

Introduction

The proposal of the “Cornwall consensus” to replace the “Washington Consensus” indicates the paradigm shift that is taking place at the global level concerning the relationship between public and private sectors.

The recent report released by G7 Economic Resilience Panel demands a radically different relationship between the public and private sectors to create a sustainable, equitable, and resilient economy. The Washington Consensus, which defined the rules of the global economy, has minimised the state’s role in the economy and pushed an aggressive free-market agenda of deregulation, privatisation, and trade liberalisation. The Cornwall Consensus (reflecting commitments voiced at the G7 summit in Cornwall) would invert these imperatives by revitalising the state’s economic role. It would allow to pursue societal goals, build international solidarity, and reform global governance in the interest of the common good. The Cornwall Consensus proposes to move from reactively fixing market failures to proactively shaping and making the kinds of markets we need to nurture in a green economy. Here state would coordinate mission-oriented public-private partnerships aimed at creating a resilient, sustainable, and equitable economy. In the broader background of state market interactions lie the governance systems that affect the quality of life and “ease of living” of people including vulnerable and marginal groups.

Background

Public goods create positive externalities. Effective provision of public goods is a key element of quality of life. These goods are non-excludable and non-rival in consumption. Most common examples like clean air or water. It is hard to exclude someone from their benefits if he or she refuses to pay (non-excludability) and also, one person’s consumption does not reduce the amount available for others(non-rivalry). The defining feature of public goods is the non-alignment of private and social incentives.

 

While the state plays a key role in providing public goods, it is only one actor among a nexus of institutions that can work in complementary ways. Government interventions do not automatically mean direct involvement of the state in economic activity and could entail an indirect involvement through a partnership with the private sector. Also, non-state, non-market institutions are crucial players in public goods provision and the question is really how to achieve the right balance between the different players to provide the best conditions for public goods to be provided optimally. The design of institutions for public goods delivery needs to be built on models of practical transaction costs, informational asymmetries and perceptions that may influence the output.

 

There are two main categories of public goods. First, Market-supporting public goods like legal structure and contract enforcement. Second, Market augmenting public goods are social goods such as health and education whose provision can bring benefits to society beyond the benefits to individuals. They also include some kinds of infrastructure investments such as electricity, transport and telecommunications.

 

There are also Club Goods for which consumption is non-rival but where exclusion can be applied like cable television. Another class of impure public goods is there in which goods have rival consumption but in their case, it is very difficult to carry out an exclusion in consumption like a congested road.

 

 

Implications when Market replaces State

Public Choice Theorists provide an analysis of the supply of public goods that are not pure public goods, specifically club goods. They focus on the possibility of government failure and show it is widespread. In the 1980s, as an impact of Public Choice Theory there began the “rolling back of state” (like Margaret Thatcher in Britain). In several countries, the private sector has been allowed to play a greater role. The private sector expanded and the state has shrunk both in direct administration and through privatisation of public enterprise. Moreover, contracting out to private providers, outsourcing from private firms and introducing market practices in government have also been the impact of Public Choice Theory.

 

Let’s analyse briefly the positives and negatives of the expanded private sector, more from the perspective of developing countries. The major gains expected are efficiency and reduction in public expenditure. Along with it, the private sector comes with strengths like expertise, professionalism and good management practices, innovation, finance. But challenges that come with the expansion of the public sector in the provision of public goods are- the risk of profit motives at any cost, customer orientation and an individualistic approach.

 

Also, the process of privatising and contracting out is open to corruption and mismanagement. Public agencies find it difficult to manage as it needs constant monitoring and supervision. It adds to the already heavy load of work and cost of public agencies. Successful contracting out and privatisation require an in-depth study of the need and calculation of value. The contract design is a very important step in the contracting out process. Contract or private ownership should be awarded to a private party after introducing a great deal of competition. It has been observed that there is very less competition.  It is just like substituting the government monopoly with the monopoly of the private service provider. There is poor supervision and monitoring of contracts due to the non-availability of qualified staff. The problem of private monopolies can be worse as there is a lack of democratic voice and little transparency, accountability and scrutiny.

 

While there are many positive examples of private expansion in fields like telecommunication, aviation, electricity distribution etc, there are various cases and allegations of mismanagement and corruption.

 

The blurring of the distinction between the private and public sector

 

 The period of the 1990s onwards is characterised by the public choice approach, devolution and redefinition of roles of state, market and civil societies. It has given rise to features like blurring of the distinction between public and private sectors, shrinking but spreading state and flattening. The distinction between the public sector and private sector is getting minimised as the public sector adopts features of the private sector while the private sector is also trying to work in the public interest. The Public-Private-Partnerships, Corporate social responsibilities and philanthropy from the private sector apart from CSRs are some examples of this blurring.

 

Majorly there are three sides that scholars take about why corporates go for philanthropy. The first side argues that corporate philanthropy is an example of managerial graft. The second side argues that philanthropy brings a competitive advantage to the firm in terms of goodwill. The third side argues that corporations have a duty to do good for others, even if it comes at the expense of the bottom line. It says that a corporation should engage in philanthropy when it is efficient for it, that is when it has a comparative advantage over other corporations and, importantly, non-profit organizations and the government. One more aspect that needs to be considered is that government also writes the rules for philanthropy, largely through tax benefits for certain types of philanthropy, and it may discriminate inefficiently. If the tax rules are not tailored to reflect the relative merits of the different delivery mechanisms or providers, consumers would not choose the product that is best for them, but rather the product that is favoured by the government.

 

In “Philanthropy’s New Agenda: Creating Value” (HBR November–December 1999) outlined four ways in which charitable foundations can create social value: by selecting the best

grantees, signalling other funders, improving the performance of grant recipients, and advancing knowledge and practice in the field. When corporations support the right causes in the right ways a virtuous cycle sets in.

 

India Philanthropy Report 2022 (IPR) states that CSR has grown both in absolute terms and in its contribution to overall private giving. Private philanthropy can be expected to solve and fund India’s development problems by providing long-term capital for newer concepts and deeper focus areas.
Private-sector funding stems from two major sources: foreign and domestic philanthropists. Domestic philanthropists include corporations (corporate social responsibility and corporate trusts) and individuals. Domestic individuals can be further categorised into family philanthropy and retail, depending on their net wealth or income and donation amount.

 

 

State-Market Co-operation and Interventions

From a broader perspective states and markets are seen as complementary to each other. Three kinds of interventions are generally identified which are functional, institutional and strategic. Functional interventions give remedy to market failures which are related to prices giving wrong signals. Institutional interventions seek to govern the market by setting the rules for players in the market. Strategic interventions are to guide the market, as these are interlinked across activities or sectors in an attempt to attain broader, long term objectives of development. The state to facilitate the market functioning needs to develop the physical as well as social infrastructure. The state is ‘shrinking but spreading’ which means that the state has withdrawn from many areas specifically business but at the same time it has entered new areas and assumed new roles including environment, ecology, human rights (recent surrogacy legislation), regulation and facilitation.

 

 

The policy measures that the ‘state’ needs to take in general are building institutions that have proper transparency and accountability mechanisms as well as relevant capacity and capability building of staff. The mechanisms of alternate dispute resolution, as well as the judicial system (case pendency of more than 4 crores), have to work in a fast and fair manner to facilitate the provision of public goods by the corporate sector fairly and equitably. The policies that come for regulations should not be tilted in favour of service providers so that consumers don’t become the weakest party to emerge. Regulatory bodies such as the Competition Commission of India, TRAI, RBI, SEBI, UGC etc should bridge the gaps that are there in respect to their independence, coordination, innovations, accountability and relevance with fast-changing technology.

 

Way Forward

The developing countries are yet to arrive at the developmental stage where the provision of most public goods and services can be handed over to the private sector without the risk of major disruption or threat to the most vulnerable groups. But it should not be concluded that market reforms are not suitable for developing countries. There is a need for initiating reforms in basic social, political and economic activities that prepare the countries to introduce reforms and roll-back of state in some areas and to expose public goods and services to market forces to bring out the best in them. The market-oriented reforms should be accompanied by investment in human capital, social capital, infrastructure, safety nets, democratisation and the Rule of Law.

 

 

Conclusion

The ultimate aim of development, either by state or by the market is to build human capabilities and enlarge human choices, to create a safe and secure environment where people can live with dignity and equality. The challenge to the administration is not only to strengthen the process and institutions of government but also to listen to the voice of the “governed”, to strengthen and empower them to become partners in the process of development. There is a shift towards a societal approach to development, with an emphasis on the centrality of “social capital” to development. It should be emphasised that the role of the market and state is context-dependent. The political structure, physical infrastructure, social infrastructure, inequality and power structures in society all influence how state and market interact to give the best possible results.

 

 

References

 

 

 

Besley, T., & Ghatak, M. (2006). Public goods and economic development. Understanding poverty, 19, 285-303.

 

Henderson, M. T., & Malani, A. (2009). Corporate philanthropy and the market for altruism. Colum. L. Rev., 109, 571.

 

The Competitive Advantage of Corporate Philanthropy

by Michael E. Porter and Mark R. Kramer  From the Magazine (December 2002)

 

 

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