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Book Summary

Graham, Carol. 1998. Private Markets for Public Goods: Raising the Stakes in Economic Reform. Washington DC: Brooking Institute Press.

Carol Grahams book consists of case studies of attempts by national governments to use markets to increase the efficiency of the public sector. Although market forces may redistribute resources more equitably than political institutions, many countries find it difficult to sustain market reforms politically due to the initial costs to citizens at the onset of the reforms. Graham focuses on the stakeholder approach as a means to sustain reform. The stakeholders approach assumes that active citizen involvement in reform will increase its political sustainability. Governments may attempt to sustain reforms by building coalitions between various citizen groups. Equity may be increased by widening services to the poor who use government services proportionally more than the wealthy. One danger in the stakeholder approach is the notion of citizen as consumer, so that only citizens with the resources to participate can influence government and institutional structure.

An individuals stake in new market reforms can occur through exit and voice. Exit involves removing ones stake in a particular institution and placing it in another. The exit option, although theoretically open to all citizens, is realistically open only to those who can afford alternatives. Exit can discourage the development of voice, because those who would have the strongest voices are usually the ones who can afford to exit. Voice is the more activist option and calls for the improvement of an existing institutional structure. Governments may enhance voice by establishing user fees for certain public goods. Voice also may be used by workers who feel loyalty to a bureaucracy and are willing to work within it to change the system internally.

Graham uses case studies to illustrate several aspects of market reform:

  • ChileBy shifting some services to the private sector, government gave wealthier citizens alternatives while shifting public sector emphasis to poorer population.

  • PeruGovernment chose to address social welfare outside of government institutions instead of reforming existing government ministries.

  • BoliviaIncreased popular participation in an attempt to gain more stakeholder support for reforms.

  • Czech RepublicGovernment altered the incentive structure in reforms by using the voucher program; resulted in short-term success.

  • ZambiaIllustrated the pitfalls of decentralization for a very poor country and the need for capable infrastructure to sustain reforms.

  • ConclusionEfficiency Gains and Equity Tradeoffs

Political success of market reforms depends largely on economic success of the reforms. While citizens can elect candidates into office who run on reform platforms, it is difficult to measure exactly how much influence voters have, for they are usually voting on reforms already initiated instead of deciding on the content of the reforms themselves. Leadership of policymakers and the creation of a broad set of stakeholders are keys to the sustainability of market reforms