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Private sector public goods

Michael Jarvis's picture

This year's Program of Seminars at the IMF/WB Annual Meetings are built around the theme of "Asia in the World, the World in Asia" and many of the sessions have looked at the consequence of Asia being home to the most populous nations, a large majority of whose people still live in rural settings. This was certainly picked up as the focus of the session “Business Reaching the Poor”. C. K. Prahalad, building on his comments earlier in the day, noted that in Asia, the poor are not a distinct business proposition to be treated warily. Rather, serving them as core consumers and linking them as producers into the supply chain is simply conducting business for the majority.

One cannot ignore the fast market growth – 5.5 million new cell phone users a month in India. Rupert Keeley, from Visa International, noted sustained triple figure growth in China for its financial services from low-cost payments. Keeley also described the rapid uptake of debit and prepaid cards in Asia, which now form over two-thirds of their business. Further (and familiar) positive examples followed, such as that of Amul dairy linking small dairy farmers to a sophisticated dairy distribution and marketing system, or the e-choupal system outlined by ITC Ltd. Chairman Yogesh Deveshwar, linking rural producers to urban markets and fully integrated into ITC’s business model.

However, Shanta Devarajan, the World Bank's chief economist for South Asia, noted that many of these examples reflect market failures that the private sector is addressing on its own initiative.

Business is providing collective action goods in the absence of government action. He cited the example of the health sector - where 80% of Indian health spending is in the private sector. This provoked debate on the extent to which the private sector can overcome the lack of public goods.

David Housego outlined the successful case of Shades of India, which sells textiles produced by women entrepreneurs in Indian villages to the global luxury market. (Housego, formerly a correspondent for the Financial Times and The Economist, is now President of Shades of India.) Scaling up this success is constrained by restrictive labor regulations and infrastructure limitations – notably unreliable electricity and water supply and poor roads. Governments need to help create the enabling environment to allow business innovation to flourish - as a facilitator, not just a provider. The big question: how to find the right balance of public sector support? Too much government involvement might risk undermining business efficiencies and profit motivations.

Comments

Second Owen Barder's comment. I also found this funny: "noted that many of these examples reflect market failures that the private sector is addressing on its own initiative." So, every good created privately merely addresses the market's heretofore failure to provide that good! No electricity for most of human history? Thousands of years of market failure!

Submitted by Michael Jarvis on
Thanks for the comments and my apologies for not being clearer in the original post. While not wanting to speak on behalf of the panelists, my sense was that they were focusing on the private sector providing public or collective goods not in the sense of selling mobile phones or textiles, but in providing some base supports that enable those businesses/markets to develop (such as back up generator power to avoid dependence on very unreliable electricity supply, improving roads to production sites, or offering affordable health care). Government would typically provide this conducive environment for business to prosper, but the supporting infrastructure is often lacking in practice. In some cases, firms are trying to fill in the gaps to enable their business to grow. The question is whether they can do so on sufficient scale and whether government will facilitate the process.

Government Interference will be a Step Back for China’s Free Market Finding the correct balance between government involvement and privatization is a long standing debate throughout the history of business and economics. A free market economy will effectively allow China to correct problems which interfere with consumers’ demands. China’s private sector will benefit immensely through the free markets ability to recognize growing target markets. The free market economy in China has demanded that the private sector begin to pay closer attention to their wants and needs. This has never been more evident than in Visa Internationals triple digit growth achieved by catering to Chinese citizens and offering low cost payments for its financial services. Amul diary’s distribution and marketing system would have never come into existence if it were not for the private sector recognizing a consumer demand existed between dairy producers and the urban market. As for the female entrepreneur’s making textiles in India, if a demand exists for their product, companies will interfere and eliminate the restrictions the infrastructure now imposes. The private sector of China must realize that businesses are most efficient when not under Government regulation. China’s privatization of business has soared under a new free market economy; it would be a shame to involve their Government for problems which will ultimately be worked out through basic supply and demand.

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