Wednesday, September 10, 2008

The role of public and private sectors

Here is Jean-Michael Severino on the role of public and private sectors in the economy. Behind his argument lies the fact that market is not perfect and there are numerous sectors where the private sectors have not yet penetrated due to high risks and uncertainty. It is the public sector job to encourage the private sector to invest in these untapped sectors (infrastructure, education, health, irrigation, agriculture, energy, environment protection) by first sharing risk and then, if necessary, providing other incentives like funding and insurance against potential losses due to high overhead costs. Gone are the days of too much inclination to either one of the ideological schools of thought in economics. We need to be practical, which demands the role of both the government and the private sector. No sector is naturally reserved for this or that entity! The depth of state's involvement should be restricted to the point where its involvement is not disturbing incentives in individuals and in the private sector.
Severino puts it in a better way:

The role of public actors can precisely be to make private actors step into sectors which they would not have thought of penetrating, and enabling or inciting them to walk the extra mile in a way that is compatible with their business approach, but for which they would have lacked financial means, or for which they need to share risks with a third party. So in itself, private sector intervention is a significant contribution to development policy.

The public sector’s role is to comfort the private sector in risk-taking. The private sector’s role is fundamentally to insure and take on that risk, and to manage the concrete operations. Ultimately, what this public-private partnership in favor of economic growth and global public goods in developing countries does is this: developing new services in favor of the populations by taking on additional risks and filling in gaps, I would say, in the financial market. In pushing limits that appear and that would not have been surpassed without concerted action of these two types of actors.”