by Ricardo Hausmann*
The avenue
to economic growth is often blocked by an inadequate supply of
productivity-enhancing public goods. Modern production requires many inputs.
Markets provide some, but others are provided by governments. For example, a
biomedical plant is more valuable if there is good infrastructure, a trusted
drug authorization system, and health insurance.
These inputs are deeply
affected by government actions, embodied in millions of pages of legislation
and thousands of government agencies.
To increase
overall productivity, governments need to improve the provision of millions of
different public goods. Given this complexity and the vast and changing array
of needs, how can this be accomplished efficiently?
Markets face a similar
problem: they need to provide a changing basket of billions of different
private goods.
However, markets have the advantage of the invisible hand: a
decentralized system that provides the information, the incentives, and the
mobilization of resources needed for the system to self-organize.
Every private
good has a price. Goods are provided by profit-motivated firms that respond to
prices. Capital markets allocate resources to those expected to be profitable.
But the
public sector cannot rely on this invisible hand. Public goods usually have no
price, the government usually does not have a profit motive, and there is no
decentralized capital market that decides which public goods to fund.
This
leaves the government at a severe disadvantage that can easily transform public
goods into a constraint to growth.
The
solution is not to attempt to develop an omniscient central planner but instead
to develop a market-like mechanism that can generate feedback, crowd-source
ideas for reform, and create incentives for improving performance.
This tends
to happen naturally but inefficiently. Because different private actors have
different needs, they tend to organize themselves into interest groups to lobby
the government for the public goods that most affect them.
Some of their
requests are win–win, raising overall productivity. But others are not; they
are about redistributing
rents, as when interest groups seek government
coercion to suppress suppliers, workers, and competitors or when they ask for
tax privileges.
In fact, lobbying groups are often deservedly perceived as
enemies of the public interest. However, without them it is difficult to
generate information about opportunities, obstacles, and solutions at the level
of detail that is required.
To create
an alternative invisible hand for public goods, we need interest groups to play
a more constructive and socially legitimate role.
This requires improved
transparency and smaller informational asymmetries. Here we can learn from the
role that credit-rating agencies and auditing firms play in building trust in
capital markets.
These organizations summarize massive amounts of information,
allowing market participants to more efficiently assess the performance or risk
of each firm or security.
I propose the creation of independent public-value
rating agencies that would analyze the proposals to government made by interest
groups in terms of the public interest and the creation of shared value.
Having
initiatives rated by independent agencies would enhance the ability of
societies and political systems to assess the legitimacy and value of requests
for reform and would create incentives for interest groups to focus on win–win
rather than rent-seeking requests, thus improving the provision of public goods
that enhance shared growth.
*Ricardo Hausmann is the director of the Center
for International Development, at Harvard University, and a professor at
Harvard’s John F. Kennedy School of Government.
By: N. Peter Kramer
