Devarajan’s springboard was the following example: when a utility like water becomes publicly held, it becomes beholden to politicians, rather than the customer. In India, for example, water lines end up servicing popular constituencies, leaving people from poor communities paying 5-16x more from water trucks because they don’t have access to the network. He argued that poor people would prefer a system that provided water at slightly higher cost, rather than be excluded from a heavily subsidized system.
He went on to give other similar examples of failure:
- Much of sub-Saharan Africa’s high transport costs aren’t generated by a lack of infrastructure, but instead by high prices charged by local trucking companies that enjoy market protection from governments. Devarajan gave the example of Rwanda, which has recently lowered its transportation costs by lowering barriers to entry in the trucking business.
- In Agriculture, he discussed India’s generous free power subsidy given to rural farmers, allowing them to operate irrigation pumps at zero cost. These subsidies have skewed farming practices towards water intensive crops and have depleted the water table in some areas. Despite this, any attempt to move to a system of charging for power results in political suicide.
- Education: Devarajan cites some startling statistics from rural India: 93% enrollment rates, yet in some regions up to 60% of students cannot read a sentence in their own language. Absentee rates are roughly 25% in India, 27% in Uganda. In case of the latter, teachers that were bothering to attend school only spent 18% of their time teaching. Deverajan noted that the problem isn’t only with pay – private schools in India get much better results at only 1/4 of the official government pay.
Deverajan’s main thrust was: there are many market failures out there that need to be addressed, but we should be cautious in addressing them, as it’s easy to replace that market failure with a government failure, keeping populations stuck in a ‘low-level’ equilibrium.
While I agree in principal, I think this is tricky ground. We like the idea of development policy being shaped by the preferences of the poor – they are, after all, our intended beneficiaries. But what happens when the median voter in poor countries chooses policies which are bad for the long run? This isn’t always the fault of the poor – many of the above failures are due to the political clout of particular interest groups. Sometimes things are quite murky – Malawi, for example, has been heavily subsidizing fertilizer for several years now. This has resulted in clear welfare benefits, with national food production reaching record highs. Yet the government is now stuck in a political minefield – each bag of fertilizer is a vote – so there is continuous pressure to let the program grow, now to unsustainable levels. This is clearly one of Devarajan’s government failures, but it involves an interaction with rational voting on the part of the electorate with some special interests (there’s some evidence that the companies supplying the fertilizer are in on the deal).
Back to the wider picture, another problem is the assumption that a private system will solve all these problems; there’s a reason these policies were so popular in the first place. I don’t think Devarajan believes this – in fact, in the speech he said that this shouldn’t be seen as a call to abandon public provision, but that we should be more flexible in our approach – I think this is reasonable.