Private or public ownership in infrastructures

Public or private ownership in infrastructure sectors is one of those issues where most of public opinion and many economic experts see things differenty. 

Most economists believe that under some conditions (competition or good regulation) private ownership is preferable. However, some experts in regulation recognise that public ownership may be the default choice where there are no available commitment mechanisms to remunerate sunk private investments. Are there other ways to sustain regulatory commitments in fully democratic societies under populist challenges? In theory yes, but the institutional package (which may include independent regulators) needs the consent of voters. They need to be convinced.

Recent behavioral political economy (and regulation) emphasizes endogenous preferences: standard social choice studies the difficulties of aggregating preferences for given preferences, but preferences and choices are affected by endogenous factors (beliefs, biases, framing, social context…). That is why the public reasons about some policies including public vs private ownership differently from experts.

That and the objective shortcomings of some privatization processes, especially at the end of totalitarian regimes (Pinochet underpricing and selling to cronies, or Russian postcommunism), explain the appeal among many populist progressives of calls to state ownership in water or energy. Chile, once the poster child of the ability to solve the commitment problem in Latin America, in the recent past and now, is experiencing a challenge to “the model” (there is a constitutional referendum on Sept. 4th). In Spain, as a result of the left-wing populist challenge of Podemos and related movements, there is an ongoing campaing to re-nationalize, create public operators or re-municipalize firms in regulated sectors (especially in energy and water).

Chile and Spain have interesting links on this. Mostly privatized Spanish firms took over privatized and other Chilean firms in the 1990s: there is Spanish investment in Chile in telecoms, energy, water, roads, parking lots… The current leaders of the left-wing populist movements (Frente Amplio and Podemos) in the two countries belong to the same generation, are in touch, and inspire each other. And one could add that they share common problems.

For many years, Chile alleviated the commitment problem by a combination of:

-Specific hard to change legislation... with an unpleasant aspect: it is hard to change because of mechanisms embedded in a Constitution that was written in 1980 by the Pinochet regime, although some aspects were reformed in 2005 under democracy.

-Independent judiciary and high quality administration.

-A political system with few political parties, a binominal electoral system, and other checks and balances (such as an agenda setting president with two legislative chambers).

But this political equilibrium collapsed in 2019 under massive protests.

The positive (economic growth, elimination of extreme poverty) and negative (high inequality) outcomes of Chile are an uncomfortable combination of the legacy of a pro-business brutal military dictatorship in the Cold War (1973-1990) under the influence of the Chicago School, and moslty center-left governments in the first years of democratic transition. 

As mentioned above, one of rallying motives of the left-wing populists has been the creation of new public sector operators, especially in the water and energy sectors, so far with little success but a lot of noise. Public ownership in infrastructure sectors then remains attractive because of a combination of the following:

-It remains the default mode when other commitment mechanisms fail.

-Many public sector firms in infrastructure sectors survived the privatization wave of the 1990s.

-Public opinion shows high distrust of the role of private sector firms in infrastructure sectors, and populist forces capitalize on this discontent.

But a focus on climate change, macroeconomic constraints that suggest the need for sustainabe growth, and deep inequalities may make transparent that creating a public operator is a distraction that does little to address the big challenges.

At the same time, large private sector operators need to re-calibrate their role in society, at a time that we face enormous global problems without a global democracy. Not only they need to improve their reputation, but it is imperative that they question the profit motive as their sole driving force, if the correction of global externalities is not strong enough by other means.

My "Google Scholar" view of some economic issues: confused, but at a higher level

As an academic and as an activist, I am sometimes asked (please, keep asking, I learn a lot!) about my opinion on some economic issues on which I am not necessarily an expert. Sometimes I just feel inclined to express my view, perhaps because I suspect that the prevalent opinions may benefit from a more academic perspective. I try to do it with modesty, aware of past mistakes of economists and other academics, on social or policy issues.

For example, this week I have been asked about my opinions on the role of nuclear energy in our transition to a carbon-free economy, and about my opinion about a concept called "doughnut economics," promoted in a 2017 book by Kate Raworth. 

What I usually do in these cases is try to see what the experts say. Of course, the experts are not necessarily those that speak more about these issues in the media. I try to screen them from platforms such as Google Scholar, and then use my own judgment about their credentials, and the identity of their institutions or of the journals or other outlets where they publish.

On nuclear energy, my first reaction was to believe that there should be a scientific consensus on this topic, as the private and external costs (that is, the social costs) of different ways of producing energy should be well known and quantifiable. However, I could not find such consensus. I didn't find anyone serious saying that nuclear would be a panacea to transition quickly to a carbon free economy, because of its costs, but several articles and apparently independent reports argue that nuclear energy, which does not contribute to climate change, should have a role in the transtition, if ways are found to safely reduce these costs. Probably the lack of consensus is behind the difference of opinions that the European Commission and the European Parliament seem to hold on this issue. What disinterested citizens should ask for, is more expert independent work on this, now that the focus  of public opinion and environmentalist groups is righlty on fighting the climate emergency.

On "doughnut economics," a concept I had heard about but to be honest I never paid much attention to, I looked at a few links I was provided with and I did a Google Scholar search for book reviews of Raworth's book. Its idea is to provide a visual representation of a social and economic system that pays attention to environmental and other limits to economic activity. Some of its principles are very reasonable, and would be subscribed my most experts. The review by Erik Shokkaert criticizes it for building a strawman of maisntream economics. Raworth's agnosticism about economic growth, with the hindsight of the Covid-19 crisis and the current shock of the Ukraine war, is perhaps not something that struggling majorities in our democracies share, as Janan Ganesh points out today in the Financial Times, and as I mentioned in a previous post.

Social science should not be about yes or no answers, but about grey zones and qualified answers, even understanding that policy makers and politicians are often forced into more black and white dichotomies.

Perhaps because I have a vested interest in keeping the value of my Economics PhD, my inclination is that of  not departing too much from the true mainstream, by which I mean the research that is currently done at the frontier, and not the one done 50 years ago. By this I mean that taking into account inequalities, climate change and beahvioural issues, for example, are now part of the economics mainstream, or at least the mainstream self-criticism of standard economics. Advanced research sometimes provides strong answers, but many times it does not, which does not mean that it should not be a useful guide. Very reasonable scholars may sometimes disagree, based on different perspectives, beliefs and ideologies.

By obtaining an overview of current research, sometimes we'll stay confused, but at a higher level.

One full academic year with CORE

I had used the CORE Project’s materials before for one semester courses. But this academic year I have covered the whole contents of the e-book “The Economy” from September to June. The group I taught has been the first cohort of a new degree on Contemporary History, Politics and Economics at my university (Autonomous University of Barcelona). Being an interdisciplinary degree fully taught in English, the students were highly motivated and many of them very participative.

Having shared and worked through all the units of “The Economy”, plus two of the experiments in the e-book “Experiencing Economics” I could more fully appreciate the coherence and richness of the contents. Macroeconomics is seen as an extension of microecnomics, and microeconomics is embedded in a debate about the great questions of our time, such as inequalities, institutions or climate change, in dialogue with other disciplines, such as natural sciences, politics, history or psychology.

Markets are a special case of social interactions (introduced using game theory), and perfectly competitive markets are an extreme and unusual case among many possible more or less competitive, efficient or inefficient markets. Economics is taught with references to what economists have been doing in the last 30 years, such as behavioral economics or Rodrik’s trilemma (I asked my students in the exam how would they solve the trilemma if they could choose: I can proudly say that no one proposed to exclude democracy…). All this can convince students that economics is useful and interesting without lowering the standards.

Perhaps in the future it would be useful to contrast it to other more traditional texts in an explicit way (eg on Aggregate Supply and minimum wages), because students find these materials in the net. The current materials can also be complemented with more on the European economy, populism and modern social choice, or evolutionary applications. Some materials I have barely used this time, I plan to use them more in the future, such as the Leibnizes and the Einsteins (parts that use more intensive mathematical tools), or the empirical projects of the e-book “Doing Economics”. The analytics of the classes, the exams and the exercises have focused on graphical models, but I believe that students should be helped to understand that mathematics is another useful language, and probably simpler than some other existing ones.

We have done many of the Exercises/Interactive Questions of the e-book “The Economy” in class, and the students have produced very interesting Essays/videos with cases related to the units of the e-book or related to supplementary materials such as the files on Covid-19.

Great experience, for wich instructors and students should be grateful to all those who contribute to the CORE Project.