Public ownership or regulatory reforms

I started doing research on the ownership and regulation of network utilities in the early 1990s. Then in 1995 I went to the European University Institute to do my PhD and in 2000 I defended my thesis on “Privatized Utilities: Regulatory Reform and Corporate Control,” which you can read here if you are interested. After that, I spent two years and a half in the Regulation Initiative of the London Business School.

I see that the debate around these issues has not lost interest, although today there are new issues like climate change. A key topic today, like then, is whether the nature of ownership (public or private) is crucial to obtain good social results, or these can be achieved with regulation, one that can coexist with several ownership models.

Since the XIXth century until today, there has been a lot of diversity in the ownership structure of network utilities over the world. Public intervention in these industries, given the presence of naturally monopolistic segments, is widely accepted. Several authors in the economics literature have addressed the comparative advantages and disadvantages of private regulated network utilities vs publicly owned ones. The debate is about how best to correct or alleviate a market failure (natural monopoly) or achieve other social objetives (such as universal access), while at the same time securing necessary investments and providing incentives for efficient operation.

Laffont & Tirole (in their classic 1993 book on regulation, ch. 17) criticized the conventional wisdom at the time about the advantages and disadvantages of public vs private regulated ownership. They argued that the disadvantages of i) absence of capital market monitoring, ii) soft budget constraints, iii) risk of expropriation of investments, iv) lack of precise objectives and v) presence of lobbying,  are not universal in, or exclusive of, full public ownership. Similarly, the advantages of i) consideration of social welfare objectives and ii) centralized control, can be attained with appropriate contracts or regulation keeping private ownership.

Instead, they proposed to focus the discussion in one particular trade-off that arises from asymmetric information and incomplete contracts. Namely, on the one hand private regulated firms suffer from the conflict of interest between shareholders and regulators. For instance, each principal fails to internalize the effect of contracting on the other principal and provides socially too few incentives for the firm’s insiders. On the other hand, the managers of a private regulated firm invest more in noncontractible investments because they are more likely to benefit from such investments. Public Enterprise managers are concerned that they will be forced to redeploy their investments to serve social goals such as containing unemployment, limiting exports, or promoting regional development. The authors concluded that “taken together, these two insights have ambiguous implications for the relative cost efficiency of the public and private sectors; theory alone is thus unlikely to be conclusive in this respect.”

David Newbery (1999), in another important book, surveyed the history of network utilities in several regions of the world, and concluded that there is not much difference in terms of performance between a publicly owned monopolistic utility and a privately owned regulated monopolistic utility. 

Similarly to Laffont and Tirole (1993), Newbery (1999) pointed out that both private and public sector owners delegate operations in a board and a managerial team, which enjoy a degree of discretion. Government intervention is generally less costly under public ownership, but a promise not to intervene may be more credible under private production and may have positive incentive effects. But achieving this credibility is not straightforward: “The real case for privatization  must be that it is easier to sustain eficient pricing under private ownership in the face of political and populist pressures, and that privatization will generate additional efficiency gains.”

The differences in performance may come more from changes in the industrial structure, especially when some segments of the value chain can be opened up to competition: “Privatizing public utilities is primarily about ownership rather than control, since utilities can face remarkabky similar regulation under public or private ownership. Liberalization, in contrast, subjects utilities to market forces; it can induce more dramatic changes in performance than privatization alone.”

Tirole (2016) in his post-Nobel prize book on “The Economics of the Common Good” goes beyond his statements in Laffont and Tirole (1993) to argue that ”the conception of the State has changed,” from one of Producer of goods and services through public corporations, to a modern one focused on fixing the rules of the game and correcting market failures. Modern public finance textbooks reflect this evolution. Early editions of these textbooks or handbooks had chapters on “pricing in public enterprises,” which have now become chapters on natural monopoly pricing, admitting that regulated firms may be owned by private investors. 

Private firms in regulated sectors may deliver positive social outcomes, but only if some conditions are in place, mainly regarding adequate regulation. But beyond the objective empirical evidence, there has been a “backlash” in the public opinion of many countries. The late historian Tony Judt, in his celebrated last book “Ill Fares the Land” captures the discontent with privatization also in Britain when he criticizes the business oriented mentality of the new operating companies. Although countries like Chile, the UK or Spain were among the ones that privatized more firms in the 1990s, three decades later the controversy about the ownership of network utilities, and of water operating companies especially, has not disappeared. In an article in the Financial Times just yesterday, the prestigious columnist Martin Wolf echoed this controversy, and mentioned the interesting proposals made by an important expert, Dieter Helm, who has suggested radical regulatory reforms that are not mainly based on a focus on ownership.

Will God save the king?

I was shocked yesterday to hear the prestigious historian Simon Schama express in the BBC his optimism about the reign of Charles III. I have a higher opinion of the former than of the latter, and that enthusiasm improved (just a little bit) my opinion of the new King and worsened it of the scholar.

After watching parts of the coronation ceremony on TV, I tend to agree with Martin Kettle in The Guardian. I am not so sure that there is any opportunity for reform and modernisation without basically scrapping or at least radically downsizing the institution, but if any existed it has certainly been squandered. Kettle emphasizes the contradiction between the religious statements made in the ceremony and the fact that Britain is a diverse and multiethnic country –with probably a majority of atheists, like probably most European countries. 

The coronation of the new King can be criticized from other perspectives. Spending a big amount of public money on one of the richest families of the world is one of them. The Tax Justice Network issued a letter asking the new King to support its campaign for an elimination of the tax havens that populate the former British Empire, under the support of the British Government. Rachel Etter-Phoya has argued that “While Britain’s overseas aid has dwindled in recent years, unwinding the web of tax havens instead would help many governments fulfill the rights of their citizens. If we were to reverse the tax revenue losses caused by the UK spider’s web, there would be 36 million more people with access to basic sanitation, 18 million more people with access to basic drinking water, and almost seven million children could attend school for an extra year.” 

It is a good thing that the new monarch is concerned about climate change, and hopefully he can make a contribution to that cause, but that is no excuse to keep giving a political role to a medieval institution that is not based on merit or any democratic principle. That applies to any monarch. This one, in addition, is a symbol of an empire that was based on colonialism and slavery. Charles has expressed recently his willingness to cooperate in an investigation of his familily’s direct links with the slave trade. If he follows this to its inevitable conclusion, I don’t know what could be the moral justification for the continuation of the institution that he represents. 

In addition, in a world where people are becoming used to having a voice on everything and a vote on many things, it is increasingly awkward that electorates have to tolerate the lifestyles of the likes of Harry and Andrew Windsor.

On many issues, I am an anglophile, but on the monarchy, my view is that this is an extreme example of the many institutions that are remnants from a time of darkness and irrationality. There are certainly other examples. But I see them with the same discomfort that I feel with slavery, witch hunting and burning, or racial and gender discrimination.

The British Monarchy will try to find a role in post-Brexit times. But it was part of the narrative and the imperial mentality that made Brexit possible. But Brexit has failed. The British should extract all the logical implications and join all the others who want to live in a modern and secular world of equal rights and cooperation, where nationalist pre-democratic institutions like the monarchy are, at least, reduced to a symbolic and minimal role.

Why organizations fail. The case of FCB

The Spanish economist Luis Garicano, who had a short-lived political experience in the failed political party Ciudadanos, has an excellent academic article in the Journal of Economic Literature with the title “Why Organizations Fail.” The title is an analogy with the famous book “Why Nations Fail,” previously writen by Acemoglu and Robinson.

Certainly, not only nations fail, organizations also fail. It is common among economists to study market failure, but it was less common to study the failures of whole nations or organizations. Governments also fail, as communities do. Needless to say, all these mechanisms of resource allocation may also succeed. Good economists, like Garicano or Acemoglu, are good at identifying reasons for success and failure.

In his article on organizational failure, Garicano mentioned among others two usual reasons for it, namely shortcomings in the allocation of talent and mistakes in allocating resources among the short run and the  long run. Good organizations allocate well their scarce talent, and do a good job at attracting and retaining it at the relevant jobs. They also manage well short run problems, at the same time that they devote resources to innovation and to thinking about their future.

These two basic ideas have come to my mind recently on occasion of the decline of FC Barcelona, my soccer team, arguably the best team in the world between 2005 and 2015, the years of Leo Messi, Andrés Iniesta and others. The rise and fall of the club are very well described in the book by Simon Kuper about it. But this distinguished journalist left the story before it emerged that the club had been paying more than 7 milion euros to the vice-president of the committee in charge of allocating referees to games and to categories, and the subsequent PR campaign of the current President, Joan Laporta, to reject any responsibility and couter-attack with a populist campaign blaming rivals Real Madrid and the Franco regime (yes, that military dictatorship that finished almost 50 years ago).

Barça does a very bad job at allocating talent. The president is elected by the members and operates in a framework of no checks and balances. The current one lacks any management skills and any self-discipline. The club officials around Mr. Laporta are their friends or even relatives, and there is currently no professional structure of experts in organizational turnarounds. However, there is no shortage of experts in communication, starting with Laporta himself, who takes any problem, not as a management challenge, but as a communication challenge, not unlike Boris Johnson or Donald Trump.

The club not only has failed to prepare for the future in its good years, but is now obsessed with the past, blaming the Franco regime, and trying to revive the recent good cycle by trying to sign again an ageing Leo Messi. And it is basically giving up on the future, by paying for current signings with the revenues obtained by selling money-making assets.

This (and Garicano’s reasons for organizational failure) begs the question of what are the factors that facilitate organizational failure. In this case, the populism of a democratic club with no checks and balances plays in my view an important role. Barça is too important to fail, and like many top football clubs it will be bailed out before it disappears (football clubs do not disappear, as explained by Kuper and Szymanski in Soccernomics). A consequence of this is moral hazard in the behavior of club officials, as they don’t face the full consequences of their incompetence (or worse). Other clubs have similar characteristics, but for reasons that deserve further study, the case of my club is an extreme one. However, since the team will not disappear, we can always hope that another lucky shock is around the corner, in the form of another generation of great players.

The exceptional Good Friday Agreement

The 25 year-old Good Friday Agreement in Northern Ireland was exceptional in the double sense that it was a very good agreement, and that it was an exception among other “peace” agreements around the same period of time. The Dayton agreement about the former Yugoslavia or the Oslo agreement about Israel/Palestine were based on the “solution” of creating “nation-states” along ethnic lines. The equivalent in Norhtern Ireland would have been to create a new state for the Catholics (to be merged with the Republic of ireland) and another for the Protestants (to be kept in the United Kingdom). That was not the choice, to try to preserve one single community in a small region where Catholics, Protestants and those that prefer not to be tagged share the land. The Good Friday Agreement has been much more successful in promoting at the same time peace and prosperity than the other two agreements.

In my view, its relative success was based on two key characteristics of the agreement:

-No borders. That is, after the agreement, there would be no checks between the Republic of Ireland and Northern Ireland. Common institutions would be created, along the lines of the functional overlapping jurisdictions conceived by the Swiss economist Bruno Frey. For example, a common wholesale electricity market would allocate this scarce resource South and North of the (former) border. The fact that in 1998 both the Republic of Ireland and the UK were part of the European Union no doubt facilitated things. Imagination beyond the straightjacket of the "nation-state" did the rest.

-Vote over an agreement. The democratic procedure to decide on the Constitutional future of Northern Ireland was the opposite to that established with Brexit. In Northern Ireland, first all the interested parties with democratic support reached a detailed agreement, and this agreement was subject to a plebiscite in the Republic of Ireland and Northern Ireland, where the Yes vote won overwhelmingly. There were no doubts about what had been chosen, and there were no divisions. The referendum was a festival of unity, not of polarization and lies.

My modest perspective is one not of an expert but one of a distant but interested observer. I am interested because Norther Ireland, Yugoslavia and Israel/Palestine are not the only lands with identity conflicts (violent or peaceful). If we realize that the Northern Irish way is the one that should prevail, we will be taking the route of a diverse democracy and not the route of ethnocracy, which is what has been prevailing in the Balcans and in Israel/Palestine. If democracy is not able to cope with diversity and equal rights for all individuals it transforms itself into an ethnocracy, a set of institutions that only looks after some ethnic, religious or linguistic group.The Good Friday Agreement is not perfect. Probably, a perfect agreement was and is impossible. There are two aspects of it that I particularly dislike. One is that shared government is based on tagging parties (and citizens) as Protestant and Catholic, instead of giving incentives for inter-comuniatrian parties or civil society organizations. It would have been better to promote qualified majorities without the need for tagging. In any case, the influence of inter-community organizations such as the Women’s Coalition and the Alliance Party has been a very positive development in the last 25 years.

The other aspect I don’t like is that, to facilitate the signature of Sinn Fein, the political branch of the IRA, the Good Friday Agreement accepts the possibility of a a future referendum over a united Ireland, which would be the opposite of the referendums that made the Good Friday Agreement a reality. Brexit has interfered and that Irish referendum is now more likely than in the past, although the failure of Brexit and the recent pragmatic agreement on Northern Ireland belonging to the Single Market may make this development unnecessary. As The Economist recently said, "the Brexit vote critically destabilized a deal which had deliberately and helpfully blurred the border on the island."

25 years ago, the less populists politicians prevailed, but unfortunately they have been outvoted by the more radical parties in Northern Ireland, in spite of the progress of the Alliance Party. With Trump and Johnson, the Agreement would have been impossible. The Good Friday Agreement is an example of how to defeat the worst of national-populism and identity politics, through abolishing frontiers and voting after and not before, an agreement.

Trump, Johnson, Netanyahu and other elitist populists

The academic literature on populism in political science and economics has converged around an accepted definition of populism (the one first coined by political scientist Cas Mudde) as "a thin-centered ideology that considers society to be ultimately separated into two homogenous and antagonistic groups, ‘the pure people’ versus ‘the corrupt elite,’ and which argues that politics should be an expression of the general will of the people."

Some aspects of this definition seem to me undisputable, as the reference to a “thin-centered” ideology that can be adapted to different projects, or the references to the will of a pure people that leaves no room for pluralism. 

Many of these movements also include an emphasis on a “corrupt elite,” like for example the Spanish party Podemos, with its initial reference to the battle between the “caste” and the people.

However, some of the most iconic examples of populism would have a hard time portraying themselves as part of the people as opposed to a distant corrupt elite, because it is implausible to take the view that they are not part of this corrupt elite. I have in mind Trump, Johnson, Netanyahu, and also some of the leaders of Catalan national-populism that are not in the global news but that I know well.

Trump, Johnson, Netanyahu and some of our local populists that I have in mind come from privileged families, and most of them have received an elitist education. Johsnon went to Oxford (read Simon Kuper’s book “Chums”), Netanyahu went to the MIT, and one of the most disruptive Catalan national populists has a Phd in Economics from the University of Minnesota. All of them are part of the dominant ethnic (or ethno-linguistic, or demographic) group and live in the neighborhoods of the rich and not the working class.

Here are the most important characterstics of their behavior as I see them:

-Victimization to confront judicial problems.

-Devaluation of institutions.

-Placing themselves beyond the rule of law.

-Disruptive promotion of Polarization.

But not being anti-elitist in any sense. Is this important or am I just obsessed with a few examples?

It could still be that an anti-elitist rhetoric is part of most populist movements, but anti-elitist behavior doesn’t seem to be a fundamental trait of some of the most important of them.

Autocracies and Sports Governing Bodies

An article in The Economist during the World Cup in Qatar pointed out that autocracies were organizing more sports events recently than in the past. The summer and winter Olypimic Games in China, and the winter Olympic Games and the soccer World Cup in Russia, together with the last one in Qatar, are examples of the trend. The piece was based on an academic article in the American Political Science Review.

The reason of this increasing trend is probably that democracies are more reluctant to organize these events, because now there is a solid academic literature showing that the social costs outweigh the social benefits for the taxpayers of the host cities or countries. Freedom of speech in democracies makes it inevitable that this knowledge is communicated to the taxpaying public opinion, which does not happen in autocracies. Still, most of the host cities or countries are democracies.

It has to be said that this is a relatively recent phenomenon, as the academic literature questioning these events has emerged only in the last two or three decades. Barcelona in 1992, for example, could not have been influenced by this then non-existent literature. Since then, it has increasingly become an example of how the academic research can influence public debate.

The trend will most probably continue, because autocracies are complementary of unreformed sports governing bodies. The global governing bodies of sport (like FIFA or the IOC) are unregulated global monopolies that accummulate power because of the popularity of the competitions they own –the Olympic Games and the World Cup. This power is increasing because the popularity of these events is increasing. This power is prone to corruption, and it prefers the lack of accountability of autocracies rather than the light of democracies.

What can be done to attract more democracies? If the reason for their reluctance to bid for big events is that costs are too high, anything that could be done to reduce costs would be a good idea, like having a permanent venue or a few of them that rotate. More directly, democratic jurisdictions and multinational sponsors could threaten to withdraw their support unless the governing bodies introduce a condition to bid for these events: the respect of basic human risghts.

Although Qatar probably doesn’t regret having organized the last World Cup, the open debate about the lack of some basic human rights there is probably something that didn’t make their rulers happy.

Three years after the COVID-19 lockdown

Three years ago, the Spanish government took the decision to mandate a strict lockdown that kept us at home for six weeks. People like me had to get used to online classes and meetings, and our social life and connection to loved ones was severely restricted. Compared to what many others had to endure, I was very lucky.

In those days, there was huge uncertainty, which persisted for a long time. I will never forget the empty streets of Barcelona. Even after the strict lockdown, for many months ours was a sad town in the absence of visitors and tourists. My courses for foreign students on soccer and economics were suspended for more than one year. We didn’t know if we would emerge from the coma-induced economic crisis in a V-shape, L-shape, W, or what… Today we know that the recovery has been better than expected and things have basically gone back to normal... although more for some than for others, depending on whether you have lost loved ones, or whether you've been seriously affected by the disease. 

Still today, some of the discussions that we had at the moment have not been closed. If I understand well, it is not even clear whether it was a good idea to lock us down at home, or even to mandate wearing masks. Some months into the pandemic, we already had books about how everything had changed and would change even more. Some of the authors would like to hide some of the books now. I think that we will, and we must, keep studying about issues related to the pandemic for a long time. It is a great opportunity to use this natural experiment to patiently study lots of phenomena. More than one century later, there are still studies trying to understand the so-called Spanish flu of 1918.

What we do know is that public intervention and complementary social norms took center stage, and that politicians like Donald Trump who disregarded scientists and experts will be forever discredited. We also experienced a clear example about the interdependence of countries and governments and the importance of human cooperation at many levels.  We learned that there is no such thing as the absolute truth. Truth is provisional and subject to change, improvement and refinement, but that does not mean that it does not exist. It is precisely because of uncertainty that we must listen to scientists and not to demagogs. I honestly believe that the COVID-19 pandemic has contributed to stop the worse of populism, although there are still many survivors.

The pandemic has been a lesson about our vulnerability as species, and a call to be cautious about making predictions. The philosopher Yuval Noah Harari was discredited because he had said this in 2017:

 “So in the struggle against calamities such as AIDS and Ebola, scales are tipping in humanity’s favor. … It is therefore likely that major epidemics will continue to endanger humankind in the future only if humankind itself creates them, in the service of some ruthless ideology. The era when humankind stood helpless before natural epidemics is probably over. But we may come to miss it.”

He was wrong. Millions of people died, and today we can all agree that the pandemic was not created in “service of some ruthless ideology.” However, he together with other popular pundits continued to offer their supposed expertise by appearing on TV shows during the pandemic, as explained in this article in the magazine Current Affairs. 

The pandemic has taught us not only that public intervention was needed to stop the diffusion of the disease, deploy massive plans to protect the incomes of people, develop and massively administer vaccines, and to articulate massive investment funds (like the Next Generation program in Europe). It has also reminded us of the acute inequalities at the local and especially at the global level. And it has been a lesson in multidisciplinarity, as combining knowledge from science, humanities and politics has been crucial to understand what was happening and react to it.

Not having a clue about mathematics or statistics, and not even believing in their importance, has been very costly, as an article about the mathematical ignorance of British prime Minister Boris Johnson reveals.

I was very impressed by the ability of governments to mobilize resources for a common good. For example, I had never seen as graphical an application of the principle “to everyone according to their needs, from everyone according to their abilities” as with the administration of vaccines in Spain and the EU in general, where the ability to pay played absolutely no role. I was also very impressed in the fall of 2021 when I flew to Chile (a country usually associated to neo-liberal policies, then still with a right-wing government), to experience a very detailed and intrusive, but necessary and successful, plan to have all foreing visitors tested and monitored between their arrival and their departure. Or by the practical application of European integration with the development of a EU-wide Covid-19 certificate.

Still today, I know university graduates (not necessarily right wing ones) who have strong stances against vaccines. This has been a lesser problem in Spain compared to other countries, but it shows that there is still a lot to think about in terms of how to communicate science in uncertain contexts.