Consider the auk;
Becoming extinct because he forgot how to fly, and could only walk.
Consider man, who may well become extinct
Because he forgot how to walk and learned how to fly before he thinked
– Ogden Nash
Is development a public good? It fulfills the twin requirements of non-rivalry and non-excludability. The benefits of development can simultaneously be enjoyed by several individuals and it is impossible to exclude individuals from enjoying these benefits. The other way of looking at non-rivalry is that the marginal cost of providing the benefit to an additional individual is zero. Development therefore fits the textbook definition of a public good. This implies that there will be undersupply if the private sector is entrusted with the task of provision. This is a classic case of market failure. The argument is simple, private enterprise supplies only where it can profitably produce and sell. In the case of goods where there is no way of excluding non-paying beneficiaries, private provision is inefficient. Let us gloss quickly over the fact that ‘development’ as a concept is much abused, having distended to a point where it means much more and much less than is useful for our purposes.
Perhaps the question one should ask is, is development a ‘good’ at all? Is development the primary product of a specific production process or is it an externality, a by-product of the production of other goods? While this does seem to change the way one looks at the problem, there is no real analytical difference. A by-product is merely an additional unit of output that imposes costs on the firm if it is taxed, or yields additional benefits if it can be exchanged. What does seem clear is that development is a composite good, composed of several elements, which may be individually supplied by the private sector, such as education, healthcare or even roads and telecommunication. Is there a fixed proportion in which these inputs must be combined in order to create the right development mix? Some may point to the United States as an illustration of where too many roads but not enough schools will get you. The truth is that there is no blueprint for the development process.
So development can be defined as an externality created by the simultaneous production of goods and services such as health services, education, roads, power etc. What is interesting with a good or service like education is that it can be argued the externality is created not through production, but through consumption. Education is assumed to increase productivity for the the consumer (contentious in the case of blog writers and others of our ilk) and allows her to command a higher income, but apart from the private benefit, society is assumed to benefit with each additional unit of education consumed. Health is similar, though the causal relations are bit complex. It is not so much consumption of healthcare services that raises social welfare levels, but that healthier populations are more productive. Perversely, healthcare is an industry which should be working to make itself redundant; a somewhat dubious incentive structure. Fortunately for healthcare providers, no matter how healthy we become physically practices like psycho-therapy and cosmetic surgery will continue to bring in the bacon. And it would be churlish to assert that either of these are any less socially useful than Pediatrics or Oncology. Mental health is as crucial a determinant of the productivity of an individual as physical health. As for the benefits of cosmetic surgery, I would refer you to one Ms Pamela Lee Anderson who was thus able to raise her annual income by a factor of ten.
To return to the market failure argument stated in paragraph one, the non-rival, non-excludable nature of development makes private provision inefficient. However this argument does not apply equally to all the various components of development. There is evidence that private education has matched and in some cases outperformed public education both at the high end and in providing services to the underserved in developing countries. There is of course a large segment, popularly termed the bottom billion who live on less than $2 a day and cannot afford to pay school fees. Here, it is not the public nature of education that prevents private provision, but the absence of the ability to pay. This is where governments traditionally stepped in to become service providers, although the new paradigm is for the state to provide viability gap funding or enter into Public Private Partnership with a private service provider who has prior experience in the education sector. Healthcare is a similar case. As long as the consumer values a good or service and can only access it by paying for it, the market can and will function. There are sectors like power and telecom which were seen to be unattractive to private investment due to the fact that the initial outlays are typically quite large, and returns take some time to start flowing in. However with the availability of more patient forms of capital, this bastion too has fallen. Of course nothing is quite as simple as it seems, and the role of the government as regulator remains preeminent. As with any positive externality, development will be undersupplied by the private sector unless the state intervenes to provide the right incentives. This may also involve re-pricing the risk associated with entering unexplored sectors, but that is a discussion best left for another time.
"This implies that there will be undersupply if the private sector is entrusted with the task of provision. "
True, but what is the best way to get the government to encourage development- this is a very difficult question.
"What does seem clear is that development is a composite good, composed of several elements, which may be individually supplied by the private sector, such as education, healthcare or even roads and telecommunication. Is there a fixed proportion in which these inputs must be combined in order to create the right development mix?"
Clearly no, the mix will depend on the circumstances, as you say later.
"Some may point to the United States as an illustration of where too many roads but not enough schools will get you."
Cheap shot- Austria has more motorways per capita than the USA despite being a much denser country. Infrastructure in the USA is poor in general. The USA has plenty of schools- the problem is that many, especially at the high school level, are not very good.
" What is interesting with a good or service like education is that it can be argued the externality is created not through production, but through consumption."
This is human capital production. If you want see education as partially about consumption, that is fair, but I don't think this is a big deal in developing countries- more in developped countries where things like higher education involve leisure or leisure-like activities like partying, networking, etc.
"Education is assumed to increase productivity for the the consumer (contentious in the case of blog writers and others of our ilk) and allows her to command a higher income, but apart from the private benefit, society is assumed to benefit with each additional unit of education consumed."
Sure, there's spillovers. That's the government has a role to play.
"Perversely, healthcare is an industry which should be working to make itself redundant; a somewhat dubious incentive structure."
Sure, but aren't a lot of professions like that? I would love nothing better than for the economic problem to be solved and for there to be no more scarcity, even though that would like involve making my training much less valuable. Same with firefighters, police, and lots of other professions.
"And it would be churlish to assert that either of these are any less socially useful than Pediatrics or Oncology. Mental health is as crucial a determinant of the productivity of an individual as physical health. As for the benefits of cosmetic surgery, I would refer you to one Ms Pamela Lee Anderson who was thus able to raise her annual income by a factor of ten. "
Gotta disagree there. Mental Health needs to be provided socially, but most cosmetic surgery is just conspicuous consumption. Regarding Pamela Anderson Lee, that's human capital if I've ever seen it! But it's still socially wasteful. Just look at Brazil which underperform similar countries in terms of (public) health. Due to the inequality, demand for doctors is high for cosmetic surgery and low for other more socially useful branches of medicine. This is massively wasteful and injust.
"There is evidence that private education has matched and in some cases outperformed public education both at the high end and in providing services to the underserved in developing countries."
Sure, but private education will always be unequal. There needs to be public education that is of a decent quality to provide everyone an opportunity to become highly educated. This provides productive workers for employers, high wages for workers, as well as providing a more equal opportunity society. Private, high cost education, even of high quality, will fail to provide for a just society. Is that a part of development? I think it should be.
Part 2:
"As long as the consumer values a good or service and can only access it by paying for it, the market can and will function."
As long as there are not market failures, which you've mentioned above. I think the expectation is that a lot of these sectors would be developed with public-private partnerships, but I don't think that this is always best. Why shouldn't the state play the main role in health and education? A lot of this is a neoliberal push to remove the state from the economy. The role of market reforms in development has been extensively discussed elsewhere and I don't think the issue is black and white. But what is troubling is the total dominance of neoliberal ideas to the exclusion of any other modes of thought. While some of these reforms have been successful- I feel the wave of market reforms has largely run its course. The neoliberal economies of Africa and Latin America did not surpass the growth rates of East Asia, despite transitioning from less market based than E Asia to more market based. (compare Mexico to South Korea). Where do we go from here? Just more privitizations and lowering of tariffs? We need a new paradigm.
Macrodevelopment thought has largely stagnated with the dominance of neoliberal ideas. Development shouldn't even be a separate branch of economics if developing economies are governed by the same neoclassical framework as developed countries. Everything is essentially microeconomic at that point. So to some extent this is to be expected. But where do we go from here? Will development continue its trend towards becoming solely microdevelopment, or will we see a new wave of macrodevelopment thought, like the outpouring of research on the topic in the immediate postwar until the 1970s? I guess only time will tell.
I agree with Gabe's comment on the preponderence of macrodevelopment to skew towards neoliberal ideas. Singapore, and more recently the rise of China, are worthwhile examples of largely government planned economies that seem to be doing something correctly.
Anyway, going back to your post, I would disagree with the argument that development is a public good. Development isn't a good. I think it's actually the access to development products that's the good. Access is a commodity that has limitations, where a marginal unit has a marginal cost. If development is a public good, isn't that similar to making the argument that happiness is a public good? I'm not equating development with happiness, but rather pointing out that happiness plays the same role as development in your logic.
The one incontrovertible truth seems to be that development strategies are bad travelers. So what has worked in China may not work in India or for that matter Chile. It is possible also that a strategy that has failed in one place may actually work in another. The Marshall Plan is seen as a success story, while similar efforts with regards to Africa have failed. At a macro level I'm a huge believer in institution building, or in adapting strategy to suit existing institutions. The market can only function in a scenario where property rights are clearly defined. More importantly informal structures like social norms and customs play a critical role in determining how efficiently markets can operate. Cognizance of how socio-cultural dynamics interact with externally enforced formal rules and structures can be the difference between success and failure both at the macro and the micro level.
In sectors where consumers are unable to assess quality ex ante like with health and education, a pure market system will lead to a race to the bottom.
I think the choice between private and public comes down to monitoring costs. In countries where the rule of law is strong, while corruption continues to thrive within the higher echelons, government programmes get implemented fairly successfully on the ground. In developing countries, monitoring private companies may in fact be easier than monitoring the state.
It is also a matter of expertise. The government may not be the best service provider in every sector. In any case when the government implements a programme, they outsource a large part of it to private contractors. Is this very much different in spirit from a public private partnership?
I largely agree with what you've said, and I do think both markets and government have a role to play in development.
"In developing countries, monitoring private companies may in fact be easier than monitoring the state. "
This is definitely true, even in developed countries, and needs to be pointed out more.