Poor people are poor because markets fail them and governments fail them. That markets fail them is well-known. Failures in capital markets mean that young people cannot get loans to finance their education; imperfect or nonexistent insurance markets mean that poor people will not get decent health care if left to unfettered markets; economies of scale as well as the simple fact that basic services such as water are necessities mean that markets will not ensure that poor people will get the services they need to survive. As Roy Radner, a former professor of mine once put it, “When you allocate resources by market prices, you discriminate against poor people.”
To overcome these failures—that is, to protect the poor—governments step in. They finance and provide primary education and basic health care; they subsidize water and electricity so poor people can afford these services. Unfortunately, these well-intentioned government interventions lead to failures of their own. In Ugandan public schools, teachers are absent 27 percent of the time; health workers in primary health centers are absent 37 percent of the time. Only one percent of the money allocated to non-salary spending in Chad reached the health clinics. These “government failures” are sometimes as pernicious as the market failures they were intended to correct. They are also difficult to overcome because various interest groups who benefit from the status quo may resist reform.
