08-25 Besley & Ghatak (2004) Public Goods and Economic Development

Public Goods and Economic Development Timothy Besley, London School of Economics Maitreesh Ghatak, London School of Economics July 27, 2004 1 Introduction E¤ective provision of public goods is a key determinant of quality of life. Conventional approaches to poverty measurement look only at private goods, but this view is too narrow. Access to safe drinking water, sanitation, transport, medical care, and schools is essential both as a direct component of well-being as well as an input into pro
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  Public Goods and EconomicDevelopment  Timothy Besley, London School of EconomicsMaitreesh Ghatak, London School of EconomicsJuly 27, 2004 1 Introduction E¤ective provision of public goods is a key determinant of quality of life. Con-ventional approaches to poverty measurement look only at private goods, butthis view is too narrow. Access to safe drinking water, sanitation, transport,medical care, and schools is essential both as a direct component of well-beingas well as an input into productive capability.The rich have the option to seek private alternatives, lobby for betterservices, or if need be, move to di¤erent areas. The poor frequently do not.  The authors are respectively Professor of Economics and Political Science, and Pro-fessor of Economics at the LSE. This paper has been prepared for Policies for Poverty Alleviation  (ed.) Abhijit Banerjee, Roland Benabou, and Dilip Mookherjee. We thankMarkus Goldstein, Dilip Mookherjee, and Inger Munk for helpful comments. 1  This accentuates deprivation that is measured on a more conventional privateconsumption basis. Households that appear to enjoy very similar levels of private consumption may in reality enjoy have very di¤erent standards of living once public goods are taken into account. Mechanisms for e¤ectivedelivery of public goods and services are therefore central to any crediblepoverty reduction strategy. This is increasingly recognized by developmentpolicymakers. For example, the UN’s Human Development Index publishedsince 1990 is an attempt to take a broader perspective by including indicatorslike life expectancy and literacy. The World Bank’s World DevelopmentReport of 2004 was devoted to the topic of improving public service deliveryto the poor.There are two broadcategories of public goods that are neededto strengthenthe position of the poor in developing countries:  Market supporting public goods – those state interventions thatmake it feasible for the poor to participate in markets and hence bene…tfrom gains from trade.  Market augmenting public goods – which deal with cases whereeven a well-functioning market will not provide the correct level of thepublic good.In both cases, it is well known that uncoordinated private actions willlead to under-provision of public goods. The main issue is what institu-tional arrangements have a comparative advantage in dealing with this under-provision.2  The traditional view in economics was to equate public goods to gov-ernment provision. The state was viewed as an actor that stands above themarket and is able to correct failures without introducing any new distor-tions. Also, in this view, non-state non-market institutions such as voluntaryand community organizations were either entirely ignored or were thoughtto be transitional phenomena in the development process whose functionswould eventually be displaced by state or market activity.We will argue that this view is now defunct. When it comes to publicgoods provision, traditional boundaries between the state and the privatesector do not provide a very useful analytical basis. It is now widely ap-preciated that government failure may be as important as market failure,and the mere existence of the latter does not necessarily justify governmentintervention. To the extent government intervention is called for, this doesnot automatically mean direct involvement of the state in economic activityand could entail an indirect involvement through partnership with the pri-vate sector, and the third sector consisting of voluntary and communityorganizations.Despite the overwhelming evidence that a large fraction of governmentexpenditure in developing countries on the provision of public goods do notreach the bene…ciaries, public policy debates often continue to revolve around how much , i.e., how much money is spent by the government on someparticular public good. 1 Clearly, the question to ask is how , i.e., designing 1 For example, for some government schemes targeted for the rural poor in India the leakage of funds is as high as 70% (Farrington and Saxena, 2004). Also, doctors, andnurses in government medical centres and teachers in public schools do not regularly showup to work. Banerjee, Deaton and Du‡o (2004) report that on average 36-45% of medical 3  e¤ective mechanisms for the delivery of public goods. This is the main themeof this chapter. It is organized as follows. In the next section, we discussdi¤erent kinds of public goods that are vital to the poor and the evidence wehave on their value. In section 3, we discuss spontaneous or voluntary privateprovision of public goods by the bene…ciaries. In section 4 we discuss formalprovision of public goods where the government or some other organization isin charge of providing the public good, with special emphasis on institutiondesign issues. Section 4 concludes. 2 Types of Public Goods 2.1 Market Supporting Public Goods The key market supporting public good is provision of law and order. TheWeberian view of the state puts the monopoly of force as the sine qua nonof state structures. This can be justi…ed on public good grounds – compet-itive provision in the presence of externalities implies sub-optimal privateprovision. Indeed, where we see private provision, it is frequently throughsocial networks for enforcing contracts. However, this leads to restriction of potential trade to only those within the network. From the point of view of the economy as a whole, this is sub-optimal. It would better to permit trade personnel are absent in the health care centres they studied rural Rajasthan. Since someof these centres are sta¤ed by only one nurse, this high absenteeism means that thesefacilities are often closed which drives the poor to unregulated and mostly unquali…edprivate providers. Kremer et al (2004) report an average absenteeism rate of 25% of teachers in government primary schools in India. 4
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