WORLD BANK TECHNICAL PAPER NO. 346 Work in progress VIiP§S)a for public discussion |oarck l 4 Tnhe Role of Government and the Private Sector in Fighting Pov-ertv 0/il .,,/ l d\./ RECENT WORLD BANK TECHNICAL PAPERS No.269 Scheierling, Overcoming Agricultural Polluition of Water: The Challenge of Integrating Agricultural and Environmental Policies in the European Union No 270 Banerjee, Rehabilitation of Degraded Forests in Asia No. 271 Ahmed, Technological Development and Pollution Abatement: A Study of How Enterprises Are Finding Alternatives to Chlorofluorocarbons No. 272 Greaney and Kellaghan, Equity Issutes in Public Examinations in Developing Countries No. 273 Grimshaw and Helfer, editors, Vetiver Grass for Soil and Water Conservation, Land Rehabilitation, and Embankment Stabilization: A Collection of Papers and Newsletters Compiled by the Vetiver Network No. 274 Govindaraj, Murray, and Chellaraj, Health Expenditures in Latin America No. 275 Heggie, Management and Financing of Roads An Agenda for Reform No. 276 Johnson, Quality Review Schemes for Auditors: Their Potential for Sub-Saharan Africa No. 277 Convery, Applying Environmental Economics in Africa No. 278 Wijetilleke and Karunaratne, Air Quality Management Considerations for Developing Coutntries No. 279 Anderson and Ahmed, The Case for Solar Energy Investments No. 280 Rowat, Malik, and Dakolias, Judicial Reform in Latin America and the Caribbean: Proceedings of a World Bank Conference No 281 Shen and Contreras-Hermosilla, Environmental and Economic Issues in Forestry: Selected Case Stuidies in Asia No. 282 Kim and Benton, Cost-Benefit Analysis of the Onchocerciasis Control Program (OCP) No. 283 Jacobsen, Scobie and Duncan, Statutory Intervention in Agricultural Marketing: A New Zealand Perspective No 284 Vald6s and Schaeffer in collaboration with Roldos and Chiara, Surveillance of Agricultural Price and Trade Policies. 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From Analysis to Action No. 299 Tamale, Jones, and Pswarayi-Riddihough, Technologies Related to Participatory Forestry in Tropical and Subtropical Countries No. 300 Oram and de Haan, Technologies for Rainfed Agriculture in Mediterranean Climates: A Review of World Bank Experiences No. 301 Mohan, editor, Bibliography of Publications: Technical Department, Africa Region, Jtly 1987 to April 1995 No. 302 Baldry, Calamari, and Yameogo, Environmental Impact Assessment of Settlement and Development in the Upper Leraba Basin (List continues on the inside back cover) WORLD BANK TECHNICAL PAPER NO. 346 The Role of Government and the Private Sector in Fighting Poverty George Psacharopoulos Nguyen Xuan Nguyen The World Bank Washingtons, D.C. Copyright i 1997 The Intemational Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 1997 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. ISBN 0-8213-3817-X ISSN: 0253-7494 George Psacharopoulos is Senior Adviser in the World Bank's Human Development Department. Nguyen Xuan Nguyen is a consultant to the Bank. Library of Congress Cataloging-in-Publication Data Psacharopoulos, George. The role of government and the private sector in fighting poverty / George Psacharopoulos, Nguyen Xuan Nguyen. p. cm. - (World Bank technical paper, no. 346) Includes bibliographical references (p. ). ISBN 0-8213-3817-X 1. Economic assistance, Domestic-Developing countries-Case studies. 2. Developing countries-Economic policy-Case studies. 3. Privatization-Developing countries-Case studies. 4. Non- governmental organizations-Developing countries-Case studies. I. Nguyen, Nguyen Xuan. II. Title. III. Series. HC59.72.P63P77 1996 96-46315 362.5'8'091724-dc21 CIP iii TABLE OF CONTENTS FOREWORD .0* ......e........... .............,.,,.,,.,,., ........ V ACKNOWLEDGMENTS ................................... EXECUTIVE SUMMARY ...,,..................... ...,,................. ..,.. ., ., ,.., .......................,........ VII INTRODUCTION ,... . .............., .......................4... ......1 TRACK 1: SUSTAINING BROAD-BASED ECONOMIC GROWTH .............................................3 GOVERNMENT AND PRIVATE SECTOR ROLES ........................................................................4 SOCIAL SAFETY NETS ............................................6.......................................................... ...6 TRACK 2: HUMAN RESOURCES DEVELOPMENT ..........................................,.,,,,,,,......8 EDUCATION ................................................................................1................................. 14 Issues ....14 Government and Private Sector Roles .14 P-olicy Issues.16 Examnples ............................,. . . . .. .17 HEALTH.22 Issues.22 Government and Private Sector Roles.24 Policy Issues.26 Examples.30 POPULATION.36 Issues.36 Government and Private Sector Roles.37 P-olicy Issues.39 Examples.40 NUTRITION .............................................. 2244 Issues.44 Government and Private Sector Roles ................................. 44 Policy Issues............................................................................................ 247 Examples... .., 47 CONCLU SION ..................,,.,.,.,,,....... ,,.... 49 BIBLIOGRAPsYsu3 .............. . . . . . . .. .. . APPENDICES ........63...., . 44 APPENDIX B ,,...,,,.,,,,.,,,,,,,.,,,,,,,,,,,,,,,.,,,,,66 BBIG APHYDI B. ,,.........,,,,,,,.,,,,,,,,,,,........,....., ...,,,,.,. ,. ..,4... .......... ....s..... ,s ..... .. ....... 66 5 FOREWORD Governments and the private sector have important roles in fighting poverty and advancing economic development. Recent experience suggests that the most promising innovations in fighting poverty are hybrid formulas which combine the best of both public and private sectors. Investing in human capital (or, in the social areas such as education, health, nutrition and population) promotes economic growth and reduces poverty. The traditional approach to investing in human capital (at least in the Western world during the last century) has been for the public sector to assume major responsibilities. But in the past decades, social programs have come under heavy financial pressure. In about half of the countries for which data are available, public expenditures on education and health fell as a percentage of GDP between 1980 and 1985. This trend is likely to persist in many countries given the continuing constraints on public budgets. It is, therefore, imperative that the role of the private sector in financing and providing social services be expanded. This paper is intended to put together the recent literature on the role of Governments and the private sectors in investing in human capital. Each country, given the initial conditions and background, commands its own optimal and feasible mix of public and private sectors. Recognizing this, the paper can only suggest the rather general sketches of a complex picture. Hopefully, policy makers and task managers will find these sketches herein helpful to them in completing the more detailed picture specific to their countries and/or projects. Armeane M. Choksi Vice President Human Capital Development ACKNOWLEDGMENTS We wish to thank Armeane Choksi, Jacob van Lutserburg Maas, Ruth Levine, Harry Patrinos for their comments to a previous draft of this paper; to Stella Tamnayo for able empirical assistance, and, particularly to Olivia Lankester for valuable contributions. EXECUTIVE SUMMARY Governments and the private sector have complementary roles in promoting development and in fighting poverty. After decades when government intervention was prescribed as the panacea for all market failures, the world events at the turn of the 1990s led by the demise of central planning have highlighted the failures of government and have shifted the pendulum away from the public sector. Experience now suggests that both the public and private sectors have indispensable roles to play in addressing poverty. Indeed, the most promising innovations in reducing poverty are hybrid formulas which combine the best of both sectors. The traditional economic justifications for governments subsidizing and delivering social services include: (i) benefits flow not only to individuals but also to society at large (externalities); (ii) small private providers may operate inefficiently (scale economies); (iii) capital markets for the social sectors are not well developed (if not absent); and (iv) public expenditures on social services are used to redistribute income (equity). These reasons, while valid for some social services, are not without substantial qualifications. For example, strong consumption externalities may characterize primary education but not higher education. There is also no evidence that hospitals in developing countries experience significant scale economies. For example, a comparison of the unit costs of five Malaysian general hospitals of comparable quality indicated no perceptible downward trend in the unit costs of inpatient days as the size of the facilities increased. For equity purposes, public expenditures on social services have been regarded as a method of income redistribution, particularly if services are financed by progressively collected revenues. Evidence, however, consistent with public choice theory, indicates that progressive redistribution has not always taken place. Uniformly low prices has meant that the most costly services (higher education, tertiary care), consumed mainly by the rich, are subsidized the most. This leaves the poor without access to even the most basic services. Even in the absence of the capital markets for social services and if social services are characterized by public-good features, this does not necessarily justify having the state monopolize their provision. Indeed, except when substantial scale economies exist or when demand is so low to warrant a natural monopoly, monopoly provision is sub-optimal in efficiency terms. Examples of inefficiencies found in public monopolies include disproportionate expenditure on less cost-effective interventions such as tertiary care or higher education, high unit costs, and an inability to ration according to need. Selective private sector expansion may be expected to correct current imbalances and government failures, as well as to mobilize additional resources for social sector investment. viii Executive Summary This suggests the need for a radical restructuring of the roles of government and the private sector. Specifically, it suggests reducing the role of governments and expanding the role of the private sector in promoting growth and meeting the human resource needs of the population. However, although private sector expansion may relinquish governments from certain tasks, it also imposes new responsibilities. In particular, it demands that governments develop incentive mechanisms to promote cost control, quality assurance, and access for the poor. This paper examines the relative roles of the private and public sectors in the implementation of a two track strategy to reduce poverty. This is composed of: (i) sustained broad-based economic growth that makes efficient use of labor, the main asset owned by the poor; and (ii) investment in people or human resources by ensuring access to basic social services of adequate quantity and quality. Evidence suggests that both these tracks have high pay-offs in terms of reducing poverty. Both facilitate employment and raise the incomes of the poor, enabling them to participate in the development of the economy. The challenge to policy is to come up with an appropriate mix of public and private interactions that can effectively promote development, and, in particular, reduce poverty. Even though the mix will vary depending on the socio-economic conditions of each country, some general guidelines about the roles of government and the private sector can still be developed and presented in this paper. TRACK 1: SUSTAINING BROAD-BASED ECONOMIC GROWTH Poverty cannot be reduced by taidng a short-termn, piecemeal approach. Rather, it requires a comprehensive approach that integrates both macroeconomic and sectoral policies. The first track involves bringing about and sustaining growth, and, in particular, a pattern of growth that reduces poverty. The experience of the last decade has led to a rethinking of the role of governments and the private sector in promoting growth and development. The emerging consensus favors encouraging private sector initiatives, reducing the presence of government, and allowing market forces to operate; in short, a market-oriented approach to development. The consensus is built on evidence that suggests, in general, a strong link between investment in human capital and less government on the one hand and improvements in economic performance on the other. Brazil is a recent vivid example, having recovered from economic sharnbles and nearing an "economic miracle". The recovery continues to depend less on government and more on private initiatives, as the government's share of investment has dropped from 30 percent in the 1980s to barely 11 percent in the 1990s. This pattern of development is reinforced by quality investments in human capital. According to one analysis, education accounts for 20 percent of the growth. ix Executive Summary The importance of human resources in sustaining economic growth is also demonstrated by the East Asian success stories. A recent World Bank study of economic growth in east Asia found that the single largest determinant of growth was primary education. Another study of 90 countries confirmed the strong and robust positive association between school enrollment and average rates of growth. Investment in human capital has high returns for society. It raises their productivity, decreases the number of days they are ill and prolongs their potential working lives. Governments and the private sector would focus their efforts on guaranteeing people --especially the poorest-- access to basic social services of adequate quality. This requires that targeting is improved to ensure that programs reach their intended beneficiaries, that adequate resources is provided to meet recurrent costs, and that efficiency of management and responsiveness to local needs be improved. SOCIAL SAFETY NETS Promoting growth and the right pattern of growth can take time and some groups of people may suffer in the transition. Various safety nets measures such as compensation schemes, social investment funds, retraining, public work programs, food subsidies, etc., are necessary to protect the vulnerable populace. These schemes can be fimded by private sources (private funds, charitable contributions), a mix of public and private sources (shared by taxation, employers, workers), or public sources (general taxation). Even if governments finance the schemes, the private sector can play a part in delivering the services. Indeed, the success of the drought relief in Botswana in the 1980s was partly due to the fact that private traders and retailers distributed the food. Experience tends to suggest that the private sector could play an increasing role even though this is an area traditionally reserved for the public sector. TRACK 2: HUMAN RESOURCES DEVELOPMENT The second track in the strategy to reduce poverty is to invest in people. This not only enriches people's lives (considered and end of development in itself), but also lays a foundation for long-term economic growth (a means of development). Both government and the private sector have critical roles to play in human resources development. It is useful to make a distinction between provision and financing. The possible combinations of public and private provision and financing can be represented diagrammatically. The table shows that the private sector can function as both the financier and the provider of social services; alternatively its activities can be restricted to either financing or provision. Three potential advantages associated with increasing the role of the private sector can be identified: first, the private sector may alleviate fiscal or budgetary constraints and mobilize additional resources x Executive Summary for investing in human resources; second, the private sector may improve the efficiency of delivering social services; and third, the private sector may increase equity by releasing public resources to be targeted toward the poor. These factors suggest reducing the role of governments in meeting the human resource needs of population groups who can afford to pay coupled with more intensive targeting of public resources toward the poor. Cost recovery strategies are especially warranted for services that do not exhibit "public-good" characteristics and for which private demand is strong at current prices. A. EDUCATION Education enhances people's productivity and their potential for achieving a higher standard of living. Public/Private Mix in Social Service Provision and Finance PROVISION PUBLIC PRIVATE Government funding and provision Govermnent services contracted to PUBLIC private providers FINANCE l Government Services funded Private services funded (wholly or PRIVATE (wholly or partly) by direct user partly) by private insurance, direct fees, insurance, and donor agencies user fees, and donor agencies Source: Adaptedfrom WHO, 1991. It also provides non-market benefits, such as better child health and reduced fertility. As such, it is a great anti-dote to poverty and a stimulant of economic growth. Yet, after decades of remarkable progress, more than a billion adults remain illiterate in the developing world and enrollment rates have remained extremely low in many countries. The case for involving the private sector in education, like other social sectors, rests on the imperative of: a) sustaining adequate investment in human capital in the face of tight budgets; and b) increasing efficiency and equity in the face of potential government failures. It may be expected that the more a school depends on private financinig, through fees collected from students or contributions from local communities, the more likely the school is to use resources efficiently. When people share directly in the cost of a service, they are more likely to monitor costs Xi Executive Summary closely and to guard against waste. Furthermore, private financing at higher levels of education may also provide incentives for students to complete their study programs more quickly and behave more like investors in selecting their degree. Increasing the reliance on the private sector may also enhance equity by releasing public resources to be targeted to the poor. In most countries, excess demand typically exists in higher education and sometimes also at the secondary level. Charging user fees in such circumstances would not substantially reduce demand for education but these private contributions could be used to expand access at all levels. Students from poor families could be protected by loan schemes and scholarships. These arguments concerning efficiency and equity are supported by empirical evidence. Studies of private and public schools in Tanzania, Philippines, the Dominican Republic, Thailand, and Colombia, found that students from private schools outperform students in public schools in verbal and mathematics tests (sample selection bias and student background held constant), and that the unit costs of private schools are less than those of public schools. Moreover, data from Asia show a negative relationship between the extent of private financing and the share of cumulative public spending on education accruing to the 10 percent best-educated students in a generation. These factors suggest a policy package composed of three elements: * reallocating government spending on education toward those educational levels with the highest social returns -primary education or general education- and recovering the public cost of higher education; * developing a credit market for education, together with selective scholarships, especially in higher education; and * decentralizing the management of public education and encouraging the expansion of the private and community-supported schools. Within this policy framework, the government has an important catalytic role to play in improving the way the market for educational services works. This entails establishing complementary institutional arrangements, such as setting up national assessment systems to generate information about school performance and lifting prohibitions against non-governmental suppliers of education. Governments may also provide financial and technical support to private schools if necessary. For example, the National Education Trust Fund in Tanzania, established by the government, in collaboration with the World Bank and the Norwegian government, has provided funds for private secondary schools to help meet their capital and teacher training costs. xii Executive Summary B. HEALTH Despite marked improvements over the past decades, enormous health challenges still persist. Health care systems in many developing countries are inadequately equipped to meet these challenges. Given that health care costs account for 8 percent of total world product (and about 5 percent for the developing countries) and are rising faster than income in many cases, the immediate policy issue is better spending. Increasing private sector involvement in the provision and financing of health care can be expected to increase efficiency by creating incentives for cost-sensitive consumer/provider behavior, for competition among providers, and for the decentralization of management structures. For example, a selective user fee policy may deter over-utilization, signal to consumers the relative importance of different types of care, and encourage the appropriate use of different levels of the health system; a dismantling of the state monopoly over drug procurement and distribution may reduce waste arising from theft and spoilage; and competition between different types of providers may create incentives to improve the quality of service provision. In addition, private sector participation may release public funds to extend cost-effective services to underserved population groups. These arguments are not without empirical support. For example, in Malawi, greater managerial efficiency has led to mission hospitals being designated as district hospitals, and in Zimbabwe, the introduction of by-pass fees at hospitals has reduced over-loading and so increased the internal efficiency of the health system. In Chile, private hospital care has been expanded while government subsidies have been targeted toward the poor. These factors suggest a policy package of three key elements: * fostering an environment that enables households to improve health; * recovering costs for tertiary care and less cost-effective interventions and redirecting government expenditures towardfinancing a package of public health services and a package of essential clinical services; and * promoting diversity and competition in the delivery of health care services. Promoting competition entails the following key steps: * encouraging the development of social or private insurance (with incentives for equitable access and cost containment) to cover clinical services outside the essential package; * encouraging suppliers (both public and private) to compete to deliver clinical services and provide inputs, such as drugs, to publicly- and privately-financed health services; and * generating and disseminating information on provider performance, on essential equipment, on drugs, on the cost and effectiveness of interventions, and on the accreditation of institutions and providers. xiii Executive Summaiy Within this policy framework, the government's role as coordinator, facilitator, and supervisor of private sector activities is critical to address six potential problem areas: over-provision; cost escalation; moral hazard and adverse selection; failure to promote public health and equity; attraction of professionals out of the public sector; and poor quality of private medical practice. Government involvement may include the prohibition of certain insurance practices, the creation of incentives for cost-sensitive provider/consumer behavior (for example, capitation payments, co-insurance), training programs, tax relief for private providers located in rural areas, and the subsidization of preventive services. C. POPULATION As a whole, the world's population is growing by about 100 million new additions each year. Most of the population increase is concentrated in low-income countries. This poses a serious challenge to developing countries, particularly in terms of their capacity to sustain adequate investments in human capital. Slower population growth will not solve the problems, but it may reduce the pressures and buy additional time to work on solving the problems. Governments and the private sector have important roles to play in stabilizing population growth. First, it is often argued that population stabilization is a merit good, therefore governments would take initiatives for providing leadership and resources to ensure access to safe services. In effect, women's health and reproductive health services not only helps women reduce the health risks from mis-timed and unwanted pregnancies, it has also been shown to be an efficient means of improving the welfare of the poor, particularly of children. For example, studies of Malaysia show that the decline in fertility between the 1970s and early 1990s was accompanied by a closing of the gap in per-child resources between the lowest and highest quintiles of families. Second, the private sector may have a lot to offer in terms of improving the quality of services at low cost. For example, an analysis of five Peruvian family planning NGOs found that they were able to deliver high quality services at considerably lower cost than the government, despite having high administrative expenses. Third, increasing reliance on the private sector may expand overall access to population stabilization services and allow for higher public investments in underserved areas. For example, a Colombian NGO, Profamilia, provides for most of the country's contraceptive needs, freeing the government to focus its effort on the rural poor, and attempts to promote private sector participation through social marketing schemes has expanded overall access in at least 30 countries. Lastly, private sector involvement in women's health and reproductive health services may enable governments to keep a safe distance from politically sensitive issues, while ensuring adequate provision of services. xiv Executive Sumnnaiy These factors suggest a need to restructure the public/private mix in the regulation of fertility. Even though market failures and welfare considerations imply a need for continued government involvement (for example, markets for contraceptives and information may be flawed, depriving groups such as the rural poor of the services they need), government's main responsibility is to promote an efficient public/private mix rather than to deliver and finance services per se. A three-part policy is recommended: * ensure that population policies are integrated within the country's broad set of social and economic goals; * recover costsfor programs that serve those who can afford to pay and target public resources toward the poor; and * promote diversity in the delivery of women's health and reproductive health services programs. The latter recommendation involves four key steps: * incorporating the private sector into strategic planning; * reforming laws and regulations which inhibit private sector participation; * promoting women's health and reproductive health services through advertising campaigns and educational programs; and * providing financial and technical assistance to private sector agencies. D. NUTRITION Dietary deficiencies of calories, protein, vitamins and minerals are responsible for low productivity, learning disabilities, mental retardation, poor health, blindness, and premature death. The most vulnerable to these consequences are children under the age of three and pregnant and lactating women. Investments in nutrition can simultaneously eliminate the debilitating potential effects of malnutrition and allow the poor to become more productive. Malnutrition is, in most cases, a disease of poverty. Hence, the public sector has a role of ensuring access to nutritional services, especially for the poor. However, as in other sectors, government monopoly over the provision of nutrition activities can be sub-optimal in efficiency and equity terms. For exarnple, an evaluation of a government School Milk Programme in Kenya found it to be highly cost-ineffective, mainly due to the monopoly power of the Kenya Cooperative Creameries Ltd. Many other government programs have failed where the private sector has succeeded in terms of targeting resources to the most needy. Hence, actions to increase the participation of the private sector may help developing countries to address malnutrition in the short and the long term. The private sector, especially experienced NGOs and Community-Based-Organizations (CBOs), have a particularly important role to play in the implementation of projects and the delivery of services. The experience of these organizations with communities places them in a strong position to promote xv Executive Summary recipient participation and affect behavioral changes amongst the poorest groups. Indeed, the success of an early World Bank assisted project in Thailand depended largely on the participation of CBOs in the design and implementation of the project. In terms of food procurement, there are indications that the private for-profit sector may be better equipped to deal with logistics, such as transportation, storage, and distribution. Moreover, it may be more cost-effective to design feeding programs whereby entitlements are determined through public bodies (for example, health clinics or schools) with the actual food acquired in private markets. For example, the Honduras Social Investment Fund chose a food coupon program that was administered through the health system, while the coupons could be redeemed through participating retail food outlets. A strong complementarity between the public and private sectors is the most effective way to reach the goal of eliminating micronutrient deficiencies and energy-protein malnutrition. Policies could ensure that: nutrition programs are integrated into a broad set of economic and social programs that address both the causes and consequences of malnutrition; * public resources are targeted toward the most cost-effective interventions for women and children most at riskfrom malnutrition; and * complementarities are forged between the public and private sectors in the delivery and financing of services. Within this policy framework, however, governments could establish mechanisms to facilitate and coordinate private sector activities. In the case of the for-profit sector, it could provide incentives to stimulate appropriate provider behavior. For example, legislation that requires micronutrient fortification of basic foodstuffs such as salt could be combined with incentives to encourage compliance (for example, tax relief, import licenses, loans for equipment, subsidies on fortificants, and positive press coverage). CONCLUSION The events in the past decade, from the collapse of central planning to the debt crisis in Latin America, have exposed the astounding costs of government failure. The world has learned to rely more on markets and less on government to reduce poverty and promote development. This is not to insinuate that there is no longer a role for governments. On the contrary, at all levels, there is a need to make better use of existing human, natural, and financial resources currently available in developing countries. Governments, NGOs, local communities, and the for-profit private sector need to work together to mnake better use of these resources. Governments could do more of what they do best, and less of what the private sector does better. xvi Executive Summary Increasing the involvement of the private sector advances the World Bank's objectives of reducing poverty in many ways. First, it improves economic efficiency. Second, it redirects government efforts away from competing with private goods and services and so frees up tax revenues for funding social programs that benefit the poor. Finally, it simplifies regulations, privatizes, and broadens access to credit through reform of collateral, hence lowering the cost of doing business for small farmers and entrepreneurs where most of the poor are concentrated. The Bank is supporting developing countries to promote private sector development. The strategy has three themes: * improving the business environment by supporting macroeconomic stabilization and procedural, regulatory, and legal reforms; * restructuring the public sector by supporting redirecting public spending and encouraging the private sector to compete in the delivery and financing of services; and * reforming the financial sector by supporting the development of efficient financial systems that mobilize savings and channel them to the most productive uses. Each country has its own range of government and private sector initiatives available to fight poverty. However, the general principle remains that, given a country's constraints, governments can best help reduce poverty by fostering an environment that maximizes the vitality and dynamism of the economy, by providing safety nets and certain required investments, and by letting the private sector do most of the rest. After all, it is the people, not the government, who will, in the final analysis, improve their own welfare. 1 INTRODUCTION Governments and the private sector have complementary roles in fighting poverty and in promoting development. This paper discusses each of these roles particularly with regard to reducing poverty. Despite the remarkable progress made by developing countries in improving the lives of their people over the past few decades, poverty remains pervasive and has even increased in many countries.' More than one billion people, one fifth of the world's population, live on less than one dollar a day, a standard of living attained two hundred years ago by the Western industrial countries.2 Moreover, both the number and the proportion of poor people have increased in various countries in Sub-Saharan Africa, in the Middle-East and North Africa, and in Latin America. Poverty has also increased in the countries of Eastern Europe and the former Soviet Union (Sandstrom, 1993). The challenge of reducing poverty is, obviously, overwhelming, but by no means impossible.3 Experience suggests a "two-track strategy" composed of (i) sustained broad-based economic growth that makes efficient use of labor, the main asset owned by the poor, and (ii) investment in people or human resources by ensuring access to basic social services of adequate quality and quantity. Evidence suggests that both these tracks have high pay-offs in terms of reducing poverty. Both facilitate employment and raise the incomes of the poor, enabling them to participate in the development of the economy. The success of this strategy depends on each and every actor in society. Specifically, both the government and the private sector have indispensable roles to play. The dichotomy between government and the private sector has influenced policy thinking in the past century. The two sqctors have long been regarded as competing paradigms in mobilizing human energy. After decades when government intervention was prescribed as the panacea to all market failures, the world events at the turn of the 1990s led by the demise of central planning have highlighted the failures of government and have shifted the pendulum away from the public sector. As this century is drawing to an end, we are learning how the private sector can contribute to reducing poverty. 'Poverty is commonly defined as the inability to attain a minimal standard of living, interpreted to encompass not only consumption of food, clothing, and shelter, but also access to education, health services, clean water, etc. (World Bank, 1990a). 2The estimates are based on data accounting for 80 percent of the population in the developing countries. The head-count index is used to indicate the percent of the population that is poor. It is based on a poverty line in 1985 PPP (purchasing power parity) dollars of $370 per person per year. This level may also be interpreted as a measure of absolute poverty (World Bank, 1990a). 3The poverty gap measure suggests a much less intimidating task. The poverty gap indicates the transfer required to raise the incomes of the poor above the poverty line. Expressed as a percentage of total GDP in the developing world, it is only 4 percent. 2 The challenge to policy is to come up with an appropriate mix of public and private interactions that can effectively promote development, and, i particular, reduce poverty. Even though the mix will vary depending on the socio-economic conditions of each country, some general guidelhnes about the roles of government and the private sector can still be developed and presented in this paper. 3 TRACK 1: SUSTAINING BROAD-BASED ECONOMIC GROWTH Poverty cannot be reduced by taking a short-tern, piecemeal approach. Rather, it requires a comprehensive approach that integrates both macroeconomic and sectoral policies. The first track involves bringing about and sustaining economic growth, and, in particular, a pattern of growth that reduces poverty. No country has succeeded in reducing poverty without sustained economic growth. Economic Box 1 growth (as measured by the growth in mean Complementarity Between Macroeconomic Policy and Education income or expenditure) is a significant factor in in Explaining Growth Rates, 1965-87 raising the poor's incomes (World Bank, 1990).4 (Percent Growth) Countries that have experienced growth in mean expenditure in excess of 3 percent annually (for example, Brazil, Indonesia, High Low Malaysia, and more recently, China) have distortion distortion substantially reduced their poverty percentage. Countries with very low growth (for instance High education 3.78 5.53 India and Morocco, which grew at about 1 percent per year) made very modest progress in Low education 3.06 3.79 reducing poverty, and in those countries with Note: Hgh distortion reflects a foreign exchange negative growth (Colombia and Venezuela), premium of more than 30 percent; low distortion, a poverty increased.5 premium of 30 percent or less. Education is measured as the average years of schooling, The evidence also indicates that the pattem of excluding postsecondary schooling, of the growth is as important as the rate of growth. population age 15 to 64. High education reflects Maintaining a pattern of growth that makes more than 3.5 years; low education, 3.5 years or Maintaining a attern of groth that makes less. efficient use of labor, the main asset owned by Source: World Bank, 1991a the poor, is the most effective way to reduce poverty. Countries that have made great progress in reducing income inequality, instead of relying on cash transfers, have pursued growth policies that provided incentives for using labor effectively, while also providing universal basic social services (World Bank, 1990; Johansen, 1993). This entails taking steps to free up labor markets and maximize employment such as reducing income 4Cote d'Ivoire household survey data show that, when incomes dropped due to the deteriorating economy, the poor were forced to cut their spending on education and health care (Husain, 1993). 5The econometrics suggest that a 1 percentage point increase in the growth rate of mean income leads to a decline in the rate of change of the head-count index by 0.24 percentage points (Squire, 1993). 4 and payroll taxes and relaxing employment regulations. Indonesia followed this broad-based growth strategy; the proportion of the population living in poverty fell from 64 to 22 percent in just 17 years. Government and Private Sector Roles The experience of the last decade has led to a rethinking of the role of governments and the private sector in promoting growth and development. The emerging consensus favors encouraging private sector initiatives, reducing the presence of government, and allowing market forces to operate; in short, a market-oriented approach to development (World Bank, 1991a; Patel, 1994). The consensus is built on evidence that suggests, in general, a strong link between investment in human capital and less government on the one hand and improvements in economic performance on the other (Barro and Lee, 1994). Recent data in 116 economies from 1965 to 1985 suggest five factors that discriminate between slow and fast growers: the positive effects of investment on GDP; the positive effects of high human capital levels in the forms of educational attainment and health; the negative effects of political instability; and, in particular, the negative effects of large governments and government-induced distortions of markets. Brazil is a recent vivid example, having recovered from economic shambles and nearing an "economic miracle" (Development News, 05/10/94). The recovery continues to depend less on government and more on private initiatives, as the government's share of investment has dropped from 50 percent in the 1970s to 30 percent in the 1980s, and to barely 11 percent in the early years of the 1990s. A recent analysis of growth in Brazil found, however, that the recovery is also dependent on investment in human resources. According to this analysis, 20 percent of the growth is explained by quality investments in education (Lau et al., 1993). The importance of human resource development in sustaining broad-based economic growth is also borne out by the East Asian success stories. A recent World Bank study of economic growth in East Asia found that the single largest determiinant of growth was primary education (World Bank, 1992a). This finding is reinforced by evidence from a study of 90 countries that confirmed the strong and robust positive association between school enrollment and average rates of growth (Barro, 1991). Survey data also shows that better health is associated with greater productivity, (measured by higher wages). For example, a study of the potential income loss from illness in eight developing countries showed that losses averaged between 2.6 and 6.5 percent of yearly earnings (World Bank, 1991 a). Hence, investment in the health, nutrition, and education of the people has high returns for society. It raises their productivity, decreases the number of days they are ill and prolongs their potential working lives. Governments and the private sector, therefore, would focus their efforts on guaranteeing people --especially the poorest-- access to basic social services (basic education, health care, women' health and nutrition, water and sanitation). Moreover, improving access to the poor and the vulnerable populace requires that targeting is improved to ensure that public programs reach their intended beneficiaries and only these beneficiaries. 5 In addition to increasing the quantity of human investments, the quality of services needs to be improved. The irnpact of quality on the returns to social sector investment is well-documented. For example, Card and Krueger (1992) found that improvements in the quality of education for black Americans explained 20 percent of the narrowing of the black-white earnings gap in the United States between 1960 and 1980. Heyneman and Loxley's (1983) study of over 25 developing and developed countries found that the lower the per capita income of the country, the weaker the influence of socio- economic background, and the greater the effects of school and teacher quality on pupil achievement. Quality also affects the dernand for services. Studies of health care in Ghana and Nigeria found a strong positive association between utilization rates and quality improvements (Lavy and Germain, 1994; World Bank, 1990c). Similarly, analysis of data from 72 countries demonstrated that the range of methods available in family planning programs (an indicator of program quality) strongly affected contraceptive prevalence rates, even after controlling for level of socioeconomic development and other aspects of program effort (Jain, 1989). Improving quality entails providing adequate resources to meet recurrent costs, improving the Box 2 Percent of Countries With Declining Government Social Expenditures As a Percentage of GDP, 1980-85 Percent of countries with declining expenditures Region/Group Education Health Industrial countries 57 45 Central and West Asia 31 63 South Asia 0 50 East Asia 0 33 North Africa 20 67 Sub-Saharan Africa 57 60 Latin America & the Caribbean 54 39 Eastern Europe 57 50 Total 44 48 Note: For purpose of comparability across countries, data are taken only from consolidated budget accounts; countries that report only budgetary central government expenditures are not included. Source: Derived from World Development Report 1991, page 66. efficiency of management, and increasing responsiveness to local needs. However, social programs have come under heavy financial pressure in the past decade. In about half of the countries for which data are available, public expenditures on education and- health fell as a percentage of GDP between 6 1980 and 1985. This trend is likely to persist in many countries given the constraints on public budgets. It is, therefore, imperative that the role of the private sector in financing and providing social services be expanded. Social Safety Nets Promoting growth and the right pattern of growth can take time, and some groups of people may suffer in the transition. Various safety net measures such as social funds, compensation schemes, retraining, food subsidies6, and public work programs are necessary to protect the vulnerable populace.' Public employment schemes, in particular, have a vital role to play in reducing poverty and, in some cases, in preventing famine. They can be designed to minimize leakages by incorporating self- selection mechanisms (for example, by setting wages low enough to be attractive only to the poor). These schemes can be funded by private sources (private funds, charitable contributions), a mix of public and private sources (shared by taxation, employers, workers), or public sources (general taxation). Even if governments finance the schemes, the private sector can play a part in delivering the services. Indeed, the success of the drought relief in Botswana in the 1980s was partly due to the fact that private traders and retailers distributed the food. Another poverty reduction mechanism that is increasingly being adopted in developing countries is the social investment fund, the first of which were introduced in Bolivia in 1986 (Emergency Social Fund or FSE) and in Bangladesh in 1983 (Grameen Bank). This mechanism is based on a public and private complementarity. Resources were made available at concessionary rates by private, public, and international sources; and management and implementation relied heavily on the private sector. For example, Peru's National Fund for Social Compensation and Development (FONCODES), since its inception in 1992, has approved more than 6,000 small-scale community-based projects. Even though government provides the funds, local communities administer the projects while private contractors carry out the plans. The Honduran Social Investment Fund (FHLS) was created in 1990 to alleviate the social cost of adjustment and to improve the lives of the poor. The Fund makes use of a wide array of NGOs and private institutions to prepare and implement projects involving small and medium-size entrepreneurs in poor communities. 6Food policies include general food price subsidies, rationed food subsidies, food stamps, and supplemental feeding programs. General food price subsidies provide unlimited amounts of subsidized food to anyone who demands it. The private sector provides the food. This scheme, although administratively simple, has enormous leakage. A more targeted approach is to ration food subsidies. Food stamps are similar to rationed food subsidies, except that the ration is measured in terms of nominal currency units. Supplemental feeding programs are usually more cost-effective when they are delivered through the health care system as Chile, China, Costa Rica, Cuba, Jamaica, Korea, and Sri Lanka have proved. 7Another common safety net mechanism is cash benefits. However, a recent study by the World Bank using household level data in Hungary from 1987 to 1989 found that cash benefits as a whole are not well targeted and do little to reduce poverty (van de Walle, Ravalion, and Gautam, 1994). 7 The experience tends to suggest that the private sector could play an increasing role in both financing and providing social services even though this is an area traditionally reserved for the public sector. However, safety nets, albeit crucial to any poverty reduction progran, must be accompanied by efforts to invest in human resources. 8 TRACK 2: HUMAN RESOURCES DEVELOPMENT The second track in the strategy to reduce poverty is to invest in people. This not only enriches people's lives (considered an end of development in itself), but also lays a foundation for long-term economic growth (a means of development). Thus, human resources development is both a means and an end of development. Both the govemment and the private sector have critical roles to play in human resources development. The human resource needs of populations are best served by public/private complementarities capable of sustaining quality investments in human capital (World Bank, 1993a). Box 3 Public/Private Mix In Social Service Provision And Finance PROVISION PUBLIC PRIVATE * Government funding and * Government services contracted PUBLIC provision; services free at point of to private providers use FiANCE * Government services funded * Private services funded (wholly (wholly or partly) by direct user or partly) by private insurance, PRIVATE charges, private insurance, and direct user fees, and donor agencies donor agencies Source: Adaptedfrom WHO (1991). It is useful to make a distinction between provision and financing. The possible combinations of public and private provision and financing can be represented diagrammatically. Box 3 shows that the private sector can function as both the provider and financier of social services; alternatively its activities can be restricted to either financing or provision. This typology provides a useful conceptual framework for analyzing the public/private mix in the social sectors. However, the reality is often more complex, with a multiplicity of different public and private agencies contributing to both the delivery and financing functions. 9 Private sector agencies can be categorized as for-profit/commercial or nongovernmental/voluntary. These are qualitatively different. Voluntary or nongovernmental organizations (NGOs) tend to be value-driven and oriented toward meeting the needs of the poor, whereas the commercial sector is driven by profit motives.8 9 Box 4 Examples of Private Sector Agencies Private Sector Agencies Commercial Agencies Voluntary Agencies * Private Insurance Companies * International Non-governmental * Drug Manufacturing Companies Organizations (NGOS); e.g. Save the * Private Schools, Universities, Training Children Colleges * National and Local NGOs; e.g. * Private Medical Practitioners (modem BRAC, Gonoshthaya Kendra and traditional) (Bangladesh) * Pharmacies and Dispensaries * Community-Based Groups (CBGs); * Shops and other Commercial Outlets e.g. credit or agricultural coops * Health Maintenance Organizations * Mission/Church Organizations * Trade Unions and Professional Organizations Source: Adaptedfrom Green (1987) and Cernea (1988). The traditional economic justifications for governments subsidizing and delivering social services include: benefits flow not only to individuals but also to society at large (externalities); small private providers may operate inefficiently (scale economies); capital markets for the social services are not 8There is a voluminous literature on the relative strengths and weaknesses of NGOs (Cernea, 1988; Clark, 1994). In recent years, nongovernmental organizations have become increasingly promoted as alternative providers of social services to the state. This is based on the perception that their transaction costs are lower than governments, that they are closer to their clients, that they engender ownership through participation, and that they are more effective in delivering basic services to the poor. However, the reality is more complex. Various studies show that these characteristics are not universal to all NGOs (Tendler, 1984; ODI, 1992), and many NGOs suffer from management inefficiencies and resource constraints (Cernea, 1988). Furthermore, in some cases, NGOs "crowd out" commercial initiatives. 9Nongovernrnental organizations (NGOs) are generally defined as legally constituted, non-governmental, non- profit organizations working in the areas of relief, development (including delivery of social services), and advocacy. Community-based groups or organizations (CBGs or CBOs) are informally structured and exist for the benefit of their own members and/or communities while NGOs have formal organizational structures and exist to meet needs beyond those of their own members and communities. 10 well developed (if not lacking); and public expenditures on social services are used to redistribute income (equity). These reasons, while valid for some social services, are not without substantial qualifications. For example, strong consumption externalities may characterize primary education and family planning but not higher education or out-patient curative care (Jimenez, 1987). There is also no evidence that hospitals in developing countries experience significant scale economies. For example, a comparison of the unit costs of five Malaysian general hospitals of comparable quality indicated no perceptible downward trend in the unit costs of inpatient days as the size of the facilities increased (Heller, 1975). In terms of equity, the evidence indicates that, consistent with public choice theory, progressive redistribution has not always taken place.'° Uniformly low prices has meant that the most costly services (higher education, tertiary care), consumed mainly by the rich, are subsidized the most. This leaves the poor without access to even the most basic services (Jimenez, 1987). Even in the absence of capital markets for the social services and if social services are characterized by public-good features, this does not necessarily justify having the state monopolize their provision. Indeed, except when substantial scale economies exist, monopoly provision is sub-optimal in efficiency terms. Examples of inefficiencies found in public monopolies include disproportionate expenditure on less cost-effective interventions such as tertiary care or higher education, high unit costs, and an inability to ration according to need. In brief, as a general nrle, economic activities are best conducted by private agents because the narket guarantees the efficiency of the production and consumption of these activities. In certain cases, particularly when the net social costs differ from the net private costs (a characteristic of a number of social services), government intervention would be necessary unless the expected cost of government failure is greater than the cost of mnarket failure. The public sector has also an important role in the social sectors for equity reasons. The scope ofthe intervention, however, would be to ensure adequate financing and provision of these services to the poor population, not to directly assume the function of producing and delivering these services. In fact, the public sector would be most efficient in: 1. Providing public goods. The excludability nature of these goods prevents the market (left to itself) from ensuring payment by the user to the provider, resulting in under provision of these commodities by the private sector. 2. Bridging the extenalities gap. Externalities (positive and negative) are pervasive, particularly, in the social sectors. Immunization from a contagious disease, the acquisition of education by '0Public choice theory is a branch of economic theory that addresses why government action may fail to achieve the socially optimal supply of services with public-good characteristics. It explains outcomes that are not socially optimal as due to politicians seeking to maximize their own advantage rather than social efficiency or equity. The experience of many developing, and developed countries, provides varying degrees of empirical support for the public choice hypothesis (Birdsall and Jamnes, 1992). 11 one agent benefits the whole community. The role of the public sector would be to encourage the provision of positive externalities while discouraging that of negative externalities. 3. Providing information. For many services particularly in health care, private agents are unaware of the true costs and benefits, therefore, are unable to make rational choices. This lends a basis for government involvement in the provision of information (but not in the provision of health care services). Consequently, an increasing role for the private sector may be expected to address government limitations as well as to mobilize additional resources for social sector investment. The potential advantages of increasing the private sector's role in providing social services can be summarized as follows: First, private sector involvement may enhance efficiency11 by increasing competition, strengthening accountability between providers and consumers, decentralizing management structures, and creating incentives for cost-sensitive consumer and provider behavior. Private providers can use funds more flexibly, reallocating them as necessary to reap the highest value from any given program. Second, private sector involvement may increase equity12 by releasing public resources to be targeted toward marginal groups.'3 Private non-profit organizations also often have powerfiul incentives to target and serve low-income communities. Indeed, their capacity to reach the poor identified as one of their key attributes (Cemea, 1988). Third, the private sector can mobilize additional resources for investing in human resources. In most developing countries, the government finances a large proportion of total social sector expenditures, and existing financing mechanisms are not designed to capture the "willingness to pay" amongst consumers."4 As such, social sector spending is largely limited to fiscal resources, which are coming "The term efficiency describes the relationship between inputs and outputs. When output refers to broad societal goals, such as better health, lower fertility rates, and the production of educated manpower for the labor market, the analysis focuses on the external efficiency of the social sectors. When output refers to goals internal to the social sectors such drop-out rates in schools, the focus is on the system's internal efficiency. These aspects complement each other in determining the overall efficiency of the social sectors (Tan and Mingat, 1992). "2Equity means different things to different people. However, it is generally associated with distributional fairness and social justice (Mills and Gilson, 1989). This paper will adopt a working definition of equity as "equal access for equal need". 1 Whether governments reallocate public funds in favor of the poor depends upon political factors. In Brazil, for example, despite the fact that 50 percent of health care expenditures are private, public health funds continue to be spent on public hospital procedures with a large private benefit component for upper-income groups (World Bank, 1988b). '4Willingness to pay for some social services, even among the poor, is well-documented (Akin et al., 1987; Gertler and Glewwe, 1989; World Bank, 1993i), and studies suggest that demand increases as the quality of services improves (Lavy and Germain, 1994; World Bank, 1990c). 12 under increasing strain due to adverse macroeconomic conditions and competition for public funds from other sectors.'5 The resulting declines in social sector expenditures have, therefore, had a negative impact on both the quantity and the quality of social services. This suggests the need for a radical restructuring of the roles of government and the private sector in human resources development. Specifically, it suggests reducing the role of govermments in meeting the human resource needs of population groups who can afford to pay, coupled with more intensive Box 5 Willingness to Pay for Social Services in Developing Countries Policy-makers need reliable information on the likely effect of user fees on social service utilization in order to see whether raising fees is an effective method of improving the delivery of social services and recovering costs. Most of the user fee debate has focused on the price elasticity of the demand for services. However, the ultimate effect of fees on utilization depends on how the funds raised from these fees are used. A growing body of evidence suggests that, if fees are used to improve quality and enhance access to services, they may encourage rather than deter utilization. One study of rural Peru used household data to estimate the likely impact of instituting user fees on secondary school attendance (Gertler and Glewwe, 1989). This found that, as fees are raised, demand becomes more elastic, particularly amongst lower-income groups. However, using the principle of compensating variation, the study also found that households are willing to pay for the operating costs of a new school if it reduces travel time from 2 to 0 hours. Significantly, these results apply to all households, even those from the lowest quartile of the income distribution. Similarly, a study of health care financing in Orgun State in Nigeria concluded that higher fees would not significantly discourage potential users, provided that the revenue was used to purchase supplies, maintain equipment, and build an adequate inventory of drugs. Indeed, usage would be likely to increase (World Bank, 1990c). targeting of public subsidies toward the poor. Cost recovery strategies are especially warranted for services that do not exhibit "public good" characteristics and for which private demand is strong at current prices. Experience suggests that a variety of patterns of public/private complementarities have been successful in meeting the social sector goals of efficiency, equity, and, in some cases, cost recovery. Government monopoly over the finance and delivery of social services may significantly crowd-out the potential contribution of the private sector. The most promsing innovations in human resources development l5 Evidence shows that the social sectors are more vulnerable to cuts in recessionary contexts relative to other sectors; resouces tend to be allocated in favor of sectors with shorter lead times and more immediate benefits (Reimers, 1991). 13 are those that develop hybrid formulas capable of combining the best of both the public and the private sectors. The following sections will review the education, health, population, and nutrition sector experiences with public and private sector provision-financing. It is noteworthy that, although private sector expansion may mean that governments no longer have to perform certain tasks, it also imposes new responsibilities on them. In particular, it requires that governments develop and maintain incentive mechanisms to control costs, maintain quality, and ensure access for the poor. However, so as not to inhibit private sector growth, a careful balance between "carrot and stick" mechanisms needs to be found (Bennet et al., 1994). 14 EDUCATION Issues Education enhances people's productivity and their potential for achieving a higher standard of living.'6 T.P. Shultz (1994) found that, for males in Cote D'Ivoire, an extra year of schooling is associated with a 12.4 percent increase in earnings, after controlling for other factors. A recent World Bank study of Latin Ameiica found that one of the most important factors explaining variations in income distribution among workers was their level of educational attainment (Psacharopoulos et al., 1994). Education also provides non-market benefits, such as reduced fertility and better child health (Cochrane, 1979; Caldwell, 1979). As such, it is a great antidote to poverty and a stimulant of economic growth. Developing countries have made remarkable gains in literacy in the past few decades. Even in low- income countries, primary gross enrollment rates rose from 38 percent in 1960 to 76 percent in 1987 (World Bank, 1991 a). However, more than a billion adults are still illiterate in the developing world (UNDP, 1991). Enrollment rates have stayed extremely low in many countries (Burkina Faso, Ethiopia, Guinea, Mali, Niger, and Somalia) and even dropped in some others (Tanzania and Zaire in the 1980s). Wide gaps in quality persist among countries (Psacharopoulos and Nguyen, 1993). Moreover, within countries, wide gaps persist between male and female groups, between majority and minority groups, and between urban and rural areas. Government and Private Sector Roles The case for involving the private sector in education rests, first of all, on the imperative of sustaining adequate investments in human capital. Over the last two decades, governments have become increasingly unwilling to raise the share of public expenditure spent on education. In some cases, this reflects increasing frustration about the educated unemployed. In others, declining educational expenditures are simply a necessity dictated by economic conditions. Meanwhile, both population rates and the demand for education have continued to grow. As a result, gross enrollment ratios (GERs) in many countries have declined or stagnated. Also, many schools lack basic materials such as textbooks (World Education Report, 1993), and, in view of the positive correlation between student achievement and textbook availability (Fuller, 1985), this has serious implications for the internal efficiency of schools. Colclough (1993) estimates that, in many West and Central African countries, achieving universal primary education at present cost levels would require that public expenditures on primary schooling 16Critics of the concept of human capital have argued that education may identify productive, capacities without necessarily enhancing them (screening hypothesis). However, Cohn, Kiker, and Oliveira (1987), using US data, found no empirical evidence to support this. Moreover, Bossiere, Knight and Sabot (1985) found strong support for the human capital hypothesis in explaining earnings differentials in Kenya and Tanzania. See Psacharopoulos and Woodhall (1985) for a more detailed discussion. 15 reach between 3 and 7 percent of GNP. This is rather high a proportion for most of these countries to bear. Hence, sharing the burden with the private sector is urgently needed. Private sector expansion can also be justified on efficiency grounds. Low educational achievement (measured in terms of GERs and completion rates) is often largely attributable to inefficient distribution and use of public resources rather than a shortage of funds per se. Public spending tends to be channeled to schools according to standard funding formulas that do little to encourage efficient use. Staffing rules, pay scales, and allocations for other school inputs are fixed so that school principals have little budgetary leeway. Also, often too little is spent on these other inputs relative to teachers' salaries. This is the case in many African countries (for example, Mali, Ethiopia, Mauritania, and Burkina Faso), where teachers salaries are typically 10 Box 6 times the average per capita income (Colclough, Educational Investment Priorities 1993). and Sources of Finance However, it may be expected that the more a Investment area Source of finance school depends on private financing, through fees collected from students or contributions from the local community or both, the more likely the By level of education school is to use resources efficiently (that is to Primary Mainly public Secondary Public/private mixture provide services in demand at least cost): when University Mainly private people share directly in the cost of a service, they are more likely to monitor costs closely and to By type of curriculum guard against waste. Such vigilance by students General/academic Mainly public and families promotes greater efficiency by Vocational/technical Mainly private/ making school managers more cost- employers mixture consciousness and by creating pressures to make By beneficiary group them more accountable. Furthermore, private Low income/rural Mainly public financing at higher levels of education may also High income Mainly private provide incentives for students to complete their study programs more quickly and behave more By type of activity like "investors" in selecting their degree. Quality inputs Public/paevate Muxtuu Teachers' salaries Public/private mixture Even when public institutions charge no fees, the School construction Public/private mixture incentive for greater efficiency can be generated by allowing fee-charging private institutions to Source: Psacharopoulos, 1990. emerge and survive. Such institutions promote competition in the system and generate information for judging the performance of public institutions. Even if no explicit comparison is made, outright wastefulness and inefficiency in public institutions are less easily concealed from public scrutiny (Tan and Mingat, 1992). 16 Increasing the reliance on the private sector in education may also enhance equity by releasing public resources to be targeted to the poor"'. In most countries, excess demand typically exists in higher education and sometimes also at the upper secondaiy level. Charging user fees in such circumstances would not reduce the demand for education but these private contributions could be used to expand access at all levels. Students from poor families could be protected by loan schemes and scholarships. One study found that, in 12 West African countries, if fees were introduced to cover operating costs and living allowances in higher-level institutions, the savings could then increase the primary education budget by 40 percent. In Togo, the figure is as high as 90 percent (World Bank, 1986). In terms of equity, data for Asian countries show a negative relationship between the extent of private financing and the share of cumulative public spending on education accruing to the 10 percent best- educated students in a generation (Mingat and Tan, 1992). This suggests that private financing tends to reduce the public financing's bias in favor of the elite. The data also confirm a positive relationship between the extent of cost recovery at higher levels and overall coverage of the education system."8 Evidence on the effects of private sector provision on efficiency is scanty since data are lacking. However, a review of studies of private and public schools in Tanzania, Colombia, the Dominican Republic, the Philippines, and Thailand, found the following results (Jimenez, Lockheed, and Paqueo, 1991): * When student background and sample selection biases are held constant, students in private schools outperform students in public schools on verbal and mathematics achievement tests. The unit costs of private schools are less than the unit costs of public schools. Policy Issues In view of the theoretical and empirical evidence reviewed above, a policy package composed of three elements is recommended (Psacharapoulos, Tan, and Jimenez, 1986): Recovering the public cost of higher education and reallocating government spending toward those educational levels with the highest social returns (primary, then secondary education). Developing a credit market for education, together with selective scholarships, especially in higher education. Decentralizing the management of public education and encouraging the expansion of private and community-supported schools. 17Three complementary types of analyses for assessing equity in education are those that (i) evaluate difference in access to specific levels or types of education; (ii) compare the distribution of benefits among people with different education; and (iii) assess who pays for and who benefits from education (Tan and Mingat, 1992). '8The relationship between per capita G(NP and extent of private financing is weak, hence this pattern is not only a reflection of countries' differences in per capita GNP (Tan and Mingat, 1992). 17 Specifically, the policy package recommends that public financing would favor primary education over secondary or higher levels, general/academic education over vocational/technical training, and low- income area schools over high-income area schools. In other areas, the private sector would be encouraged to step in to meet the increasing demand for education and provide educational loans and scholarships. There may also be scope for expanding of the private sector at primary and secondary levels in the form of community-supported schools. Within this policy framework, the government has an important catalytic role to play in improving the way the market for educational services works. This entails setting up complementary institutional arrangements and mechanisms. These include lifting legal prohibitions against non-governmental suppliers of education, easing regulations relating to the setting of fees,'9 and establishing national assessment systems to generate information about school performance and costs. The public sector also plays an important role in facilitating and financing private sector activities, setting teaching standards and curriculum requirements, and providing financial and technical assistance where necessary. For example, the establishment of the National Education Trust Fund (NEFT) in Tanzania by the government, in collaboration with the World Bank and the Norwegian government, has provided funds for private secondary schools to help meet their capital and teacher training costs. In China, central authorities have provided grants to local communities to help meet the extra costs of educating minority groups (Colletta, 1991). Examples There is a long tradition of private sector involvement in education in developing countries. The private sector typically provides as much as 50 percent of educational investment funds, and helps to deliver a host of different types of educational services. Private Finance and Private Provision The schools established in the first half of the century by Chinese immigrant communities in Southeast Asia (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) prove that private financing and provision of education is feasible for children of all age groups, sexes, and income levels (Roth, 1987). In some countries, such as Singapore, the government provided financial assistance to these schools. However, in most, they were privately financed. These schools offered a double curriculur, teaching the Filipino curriculum in the morning and Chinese in the afternoon. The quality of education provided can be gauged by the fact that graduates were eligible to enter either Filipino or Taiwanese universities. Although, the political changes in mid-1976 made the future of these schools uncertain, their existence for decades demonstrates that education at the primary and secondary levels that is privately financed and provided in the context of widely available free public education is academically and financially viable. 19For example, in Cameroon and Colombia, the governments determine the fees charged by private schools (Schieflen, 1985). 18 Another remarkable example of private financing and provision of education is the Harambee School Movement in Kenya. Since Kenya's independence in 1963, the movement has taken on the responsibility for both the firnacing and provision of education through self-help groups. Local communities provide most of the resources for the schools: local materials, voluntary labor, cash, professional assistance, and the personnel to run school committees (Anderson, 1973). The private sector also plays a particularly important role in providing and financing higher technical education in developing countries. It offers a wide array of institutions ranging from multi-disciplinary schools, such as the Asian Institute of Technology in Bangkok, to more specialized institutions, such as the El Zamorano agricultural school in Honduras. Private sector vocational training is also widespread. The schools range from a small typing school in Ibadan, Nigeria or the Nigerian Drivers and Box 7 Education Expenditure by Source of Funds in Selected Developing Countries 1991. Country Public Sources Private Sources South Korea 70 30 Taiwan 83.4 16.6 Indonesia 50 50 Venezuela 73 27 Haiti 20 80 Kenya 62.2 37.8 Uganda 49 51 Note:Figures for Uganda are for 1989/90; Kenya 1992/93. Source: World Bank, 1994e. Maintenance School in Lagos, Nigeria to more sophisticated schools such as the Pilots' Training Center and Aviation Maintenance School in Addis Ababa, Ethiopia. Public Finance of Private Provision In Chile, the introduction of a voucher system in 1980 has enabled the private sector to expand at primary and secondary levels with government financing. Since the 1980 reforms, the share of students in subsidized private schools has continuously grown and currently represents one third of total enrollments. By tying school revenues to school enrollments, the government has provided incentives for both municipal and private schools to compete for students and so to increase efficiency by setting high standards of educational attainment, which influence school choice (Winlder and Rounds, 1993). 19 Belize also has a system of grant-maintained private schools, with denominational schools providing 75 percent of primary places and 50 percent of secondary places. In fact, the government's partnership with the churches has been declared the centerpiece of its education policy (World Bank, 1993j). However, this type of public/private venture is more common in Africa. In Lesotho, churches own and operate 97 percent of the primary schools and 86 percent of the secondary schools, but the government trains, appoints, and pays teachers. A similar system operates in Mauritius. Private Financing of Public Provision Private financing of government schools and institutions is also becoming increasingly commonplace. Private contributions include tuition and other fees, endowments and other donations, and resources generated from income-earning activities such as school production and fund-raising events (Tan and Mingat, 1992). Experience suggests that the lack of a monetized economy need not be a barrier to mobilizing private resources for education as users can pay for educational services in kind. For example, in the Plateau Province of Nigeria, principals accept foodstuffs from parents who cannot pay their children's fees in cash. Korea is an example of a country that charges user fees in education that simultaneously minimizes the "crowding out" effect of public finance and maximizes equity and efficiency in the distribution of government spending on education. Fees are not charged for primary schooling, but 34 percent of recurrent costs are recovered at the secondary level and 46 percent at the university level. The extra resources mobilized from the private sector have enabled the country to achieve very wide coverage at all levels of education. Similarly, Ghana's education sector adjustment progran has succeeded in creating a more cost-effective and equitable system by increasing the reliance on fees, particularly at higher levels (World Bank, 1992b). Finally, the Barbados experience shows that student loans can work in developing countries. In 1977, the Student Loan Revolving Fund was established with the help of the Inter-American Development Bank. Between 1977 and 1982, some 118 loans were provided to students for higher education or post-secondary training. A tracer study conducted in 1982 shows that 80 percent were from families with annual incomes below US$9,000; after completing their studies, 65 percent earned more than that. The student loan program is considered a success since arrears are low and, in 1982, interest payments by graduates covered all administrative costs (World Bank, 1986). 20 Government expenditure by level of education 50 - 45- 40 - 35 - 3 0- W0 0 2 0 ~~~~~~~~~~~~~~~~~~~~~~ rimary C Stecondar U ~ ~ ~ 15 - i~~~~~~~~~~~~~~~~~~~~ Hher a. 0 (0-) 0 to-i~0 . .H U) -14Fi ~4 t 04 LI~~~~~~~~~~4~~1 .4- En Region Source.' Refer to the appendix 21 Public and Private Expenditure as % of GDP 5.0 4.0 - a.~ ~ ~ ~ ~ ~~~~~~k CL~ ~ ~~~~~~~~~~C a 3.0- 0 * Publi 2.0 -PrIve 1.0 0.0 Africa LAC Est. World Mkt. Ecs. Region Sourcec Refer to the appendix 22 HEALTH Issues Despite marked improvements in the health of people in the developing world over the past decades, enormous health challenges still persist.20 Child mortality is ten times higher in the developing world than it is in established market economies, yet over half of this difference (which is related to diarrheal and respiratory illnesses) can be prevented. Every year, conditions that could be inexpensively prevented or cured account for 7 million adult deaths. Maternal mortality in developing countries is 30 times higher than that in the high-income countries. By the year 2000, the increasing death toll from acquired immune deficiency syndrome (AIDS) in developing countries could reach 1.8 million deaths annually, erasing decades of hard-won reductions in mortality. Moreover, the aging of the world's population will place increasing demands on health care systems. Health care systems in many developing countries are inadequately equipped to meet these new and continuing challenges. Health care budgets have declined dramatically in some developing countries over the last 15 years. However, given that health care costs account for 8 percent of total world product (and about 5 percent for the developing countries) and are rising faster than income in many cases, the immediate policy issue is better spending. If the quality of spending is to be improved, several key issues need to be addressed. * First, government spending is biased toward care of low cost-effectiveness (such as surgery for most cancers) at the expense of highly cost-effective services which, incidentally, also benefit the poor the most (such as immunization and the treatment of tuberculosis and sexually transmitted diseases). * .Second, vast sums are wasted because brand-name pharmaceuticals are purchased instead of generic drugs, health workers are badly deployed and supervised, and hospital beds are underutilized. * Third, public spending goes disproportionately to the more affluent consumers in the form of free or subsidized care in sophisticated tertiary hospitals and tax subsidies for health insurance, while the poor lack access to basic care. * Fourth, existing financing and delivery mechanisms do not provide incentives for consumers and providers to behave in cost-sensitive ways, resulting in their choosing the most expensive (and not necessarily the most cost-effective) options available. 20In 1950 life expectancy in the developing countries was forty years. By 1990 it reached sixty-three years. During that same time span, the percentage of children who died before age five dropped from 28% to 10%. Small pox, responsible for 5 million deaths in the early 1950s, has been eradicated entirely. Vaccines have significantly reduced the occurrence of measles and polio. - 23 Box 8 Policies for Improving Health Care To better meet the challenge of improving health care in the developing countries, the World Bank Annual Report 1993 proposes a three-pronged approach to government policies. First, recognizing that the household, and nobody else, makes the ultimate decision to allocate its resources to various ends which include health care, government needs to provide a framework that guarantees and enhance the effectiveness of that decision making. This policy is built on exploiting the complementarities between the macroeconomy, education, and the health sector; and includes: 1) growth policies to increase the poor's income and to reduce poverty; 2) increased investment in schooling, particularly for girls; and 3) policies to promote the rights and status of women through political and economic empowerment and legal protection against abuse. Second, focus health spending on correcting for market deficiencies, on more cost-effective programs that are used more extensively by the poor. This implies the following public spending directions. 1) Reduce emphasis on specialized care in tertiary facilities, specialist training, and interventions that provide little gains relative to the money spent.; 2) Finance and ensure delivery of a package of public health services that would be undersupplied by the market due to externalities. This package generally includes preventive and primary care measures such as control and treatment of infectious diseases and malnutrition; prevention of AIDS, environmental pollution, and certain risky behaviors such as drunk driving. 3) Finance and ensure provision a package of essential clinical services. The comprehensiveness and composition of the package is determined by each individual country given the epidemiological conditions, preferences, and income. 4) Improve management and government health services through such approaches as decentralization of administrative and budgetary authority and contracting out of services. Third, promote greater diversity and competition, especially by enabling and encouraging the private sector in the financing and delivery of health services. This includes: 1) Encourage the private sector to finance and provide insurance (with adequate cost containment incentives) for all discretionary services. Whenever, possible, encourage the private sector to deliver the essential clinical services. 2) Encourage suppliers (both public and private) to compete in both delivery of clinical services and provision of inputs, such as drugs, to publicly and privately financed health services. Domestic suppliers would not be protected from international competition. 3) Monitor the private insurance markets in order to ensure incentives for wide and equitable coverage and cost containment. Monitor the privately delivered health services to ensure safety and quality. 4) Generate and disseminate key information conducive to the efficiency of the private sector. These include information on provider performance, on essential equipment and drugs, on the costs and effectiveness of interventions, and on the accreditation status of institutions and providers. 24 Government and Private Sector Roles The case for private sector involvement in health, as in other social sectors, rests on the need to: (i) sustain adequate investment in human capital in the face of tight budgets; and (ii) increase efficiency and equity.2' Increasing private sector involvement in the provision and financing of health care can be expected to increase efficiency by creating incentives for cost-sensitive consumer/provider behavior, for competition among different types of providers, and for the decentralization of management structures. For exarnple, a selective user fee policy may deter over-utilization,22 signal to consumers the relative importance of different types of care, and encourage the appropriate use of the different levels of the health system;23 the dismantling of the state monopoly over drug procurement and distribution may reduce waste resulting from theft and spoilage (see Box 9); and competition between different types of providers may create incentives to improve the quality of service provision to attract fee-paying clients. Furthermore, although it may appear that free health care makes it easier for the "poor" to afford services, the reality is that the non-poor are usually the main beneficiaries. Sixty to eighty percent of public funds are absorbed by urban, hospital-based care. Even if services are available in every area, the rich inevitably enjoy more of the subsidized care since they are more able to afford the travel and time costs (World Bank, 1987; Nguyen, 1996). A policy combining selective user fees with privatization policy may enhance equity by releasing public funds that can then be used to extend services to underserved population groups and by removing much of the inequitable subsidy inherent in free care for the rich. Government financing of public health services is warranted on the grounds of market failures (for example, consumption externalities). However, private financing of certain kinds of preventive and curative care, such as in- and out-patient treatments and drug sales, may be appropriate. In these cases, 211t is argued that governments are unlikely to perform as effectively in the future as in the past. This is because, while past public sector successes in reducing mortality came about via programs providing "public goods" (for instance, vector control), further health improvements depend more upon public expenditures being targeted toward the poor. Evidence suggests, however, that govermnents tend not to target the poor, but to fund services with a high benefit component to higher-income groups (Birdsall and James, 1992). 22A study of the impact of user fees on utilization in Swaziland found that a user fees policy may deter "non- frivolous" rather than "frivolous" use (Yoder and Herman, 1985). However, in theory, pricing structures may be designed to help patients differentiate between essential and non-essential expenditures. 23Any move toward greater use of fees in the health sector, however, must address the question of how to protect the poor. Options for targeting subsidies to the poorest include; (i) sliding fee systems (Philippines) with social worker verification; (ii) central certification systems (Thailand); and (iii) targeting through self-selection and price discrimination (Singapore). The latter involves the provision of different levels of inpatient services at hospitals that are clinically equivalent but have different amenities. The obvious trade-off for each method is between the cost of the test and the amount of leakage it allows (Griffin, 1992). 25 positive externalities are negligible since most benefits accrue to the individual. Furthermore, willingness to pay for these goods is well-documented (Akin et al., 1987; World Bank, 1990c). Box 9 Improving the Selection, Acquisition, and Use of Drugs The Roles of the Private and Public Sectors Pharmaceuticals play an important role in health care and the treatment of illnesses in both industrialized and developing countries. Consequently, developing countries spend more than a quarter of all health expenditures on pharmaceuticals, about US $44 billion (both public and private spending) in 1990 or US $11 per capita (Saxenian, 1994). The impact of this spending, however, has been greatly restricted due to shortages, theft, and spoilage; inappropriate drugs being prescribed and purchased; and unnecessarily high prices being paid by governments and consumers. In particular, state monopoly of drug procurement and distribution has proved to be inefficient and wasteful. Increasing the efficiency of pharmaceutical spending is imperative to increase the availability of essential drugs and to reduce costs. There are plenty of opportunities for governments to rationalize drug expernditures. Policy options include the promotion of: (i) essential drugs lists; (ii) quality controls; (iii) generic drug substitution; (iv) education and training for prescribers and consumers; (v) cost controls. In addition, significant efficiency gains may be generated by lifting protectionist policies which shield national pharmaceutical producers from international competition, and by restructuring public/private roles in the procurement and distribution of drugs. To support competitive procurement, several elements need to be instituted: (i) competitive tendering intended to attract as many potential suppliers as possible; (ii) a drug registration system that permits new products that meet the country's quality standards to be easily registered; and (iii) the development of specialized procurement and pharmaceutical technical skills in order to carry out the first two elements. Source: World Bank, 1993a These arguments are supported by existing empirical and anecdotal evidence. For example, in Zimbabwe, the introduction of by-pass fees at hospitals reduced over-loading and so increased the internal efficiency of the public health system. In Jamaica, costs declined and service quality improved when housekleeping and food services at a public hospital were contracted out to private firms (Griffin, 1989).24 In Malawi, greater managerial efficiency in mission hospitals has led to their being designated as district hospitals (Gilson et al., 1994), and several Tanzanian surveys have found that NGO-run facilities function more effectively than those run by the government. In 24In some cases, however, the contracting out of non-clinical services has increased rather than reduced costs due to an absence of competition between private firms, for example, in Lesotho (Bennet, 1992). 26 particular, drugs are more readily available at NGO facilities and the voluntary sector stafftend to have greater technical skdlls (Andersson-Brolin et al., 1991; Kanji, 1992; Mujinja et al., 1993).25 In Tunisia, governments have reaped efficiency gains by converting public hospitals into semi-autonomous foundations or private enterprises. These foundations are less restricted by public sector procedures in managing their budgets and in hiuing and firing staff Finally, in Chile, private hospital care has been expanded while government subsidies have been targeted toward the poor (Griffin, 1989). Policy Issues The experience of the past decades suggests the need for a three-part approach to improving the health of people in developing countries. * fostering an environment that enables households to improve health; * recovering costsfor tertiaryfacilities and less cost-effective interventions and targeting public resources toward a package of public health services and a package of essential clinical services; and * promoting diversity and competition in the delivery of health care services. Promoting competition entails three key steps: * encouraging the development of social or private insurance (with incentives for equitable access and cost containment) to cover clinical services outside the essential package; * encouraging suppliers (both public and private) to compete to deliver clinical services and provide inputs, such as drugs, to publicly- and privately-financed health services. * ,generating and disseminating information on provider perfornance, on essential equipment and drugs, on the costs and effectiveness of interventions, and on the accreditation and status of institutions and providers. Within this policy framnework, the government's role as facilitator, and coordinator of private sector activities is critical.26 The World Bank's 1993 World Development Report on Health recommends that attempts to promote competition in the health sector would be accompanied by efforts to strengthen the regulatory capacity of the public sector. In particular, six potential problem areas that should receive greater attention include: 25A fourth Tanzanian survey (Gilson, 1992), however, identified weaknesses that included too few outreach activities. 260ther agencies or groups that may play a role in regulation include professional bodies, insurance agencies, and consumers (WHO, 1991). 27 Box 10 Government and Private Sector Roles in Water Resources Nearly 1 billion people in developing countries do not have access to clean water, and 1.7 million lack access to sanitation. This has major implications for the health and quality of life of these people. In particular, it accounts for 200 million cases of schistosomiasis, 900 million cases of hookworm, and 2 million child deaths from diarrheal diseases each year. For decades, governments have resorted to public funds to invest in and upgrade the quality of water and sanitation services. As sensible as it may seem, this government-monopolistic approach has been problematic due to institutional weaknesses, distorted policies, and misguided investments (Briscoe, 1992). Operating efficiency tends to be low (for example, in Manila, almost 60 percent of water produced by the utility is not accounted for) and government subsidies tend to benefit the non-poor disproportionately (for instance, in the Dominican Republic, the poorest 20 percent of the population receive a subsidy that is one- third less than that received by the richest 20 percentile). The above experience suggests the need for a new approach to water and sanitation - specifically, a switch from a supply-driven strategy to one in which households (rich and poor) are offered choices by different types of providers. This entails the decentralization of management and delivery structures, greater reliance on pricing, and more participation by beneficiaries and the private sector (both for-profit and non-profit). Evidence suggests that the private sector (including community organizations) is more efficient in delivering services. For example, in Bogota, Colombia, the unit costs of the components in the billing system contracted out to private companies are one-fifth of those provided by public providers (Briscoe, 1992). In Pakistan, the performance of the 200,000 private tubewells has far surpassed that of the 13,000 government tubewells. Higher quality service motivates users to contribute to maintenance and operating costs, opening up new sources of private capital for water resource development. In urban areas, various different types of public/private complementarities exist. Under concessionaire contracts, government facilities are leased to private operators who contribute investment capital and who operate and maintain the facilities for a fixed period. For example, in East Java, Indonesia, a major construction project has been contracted to the Bromo Consortium. The concession agreement includes the construction of a 65 km pipeline and its operation for 15 years. Management contracts allow the contractor to assume overall responsibility for operation and maintenance, whereas service contracts entail the contracting out of specific operational services such as meter reading, billing, and pipe maintenance. EMOS, the water utility for Santiago, Chile, has promoted competitive bidding for a host of operational activities and has reduced public employment and costs and shortened response time as a result. In rural areas, Water User Associations (WUAs) are assuming an increasingly prominent role in the management, operation, and even financing of supply systems. For example, in Colombia, by 1980, 80 percent of the rural population had access to safe water, largely attributable to complementarities between the National Institute of Public Health (INS) and community organizations. The INS provides design standards, instruction materials, and technical assistance for maintenance problems. The community participates in designing the project, elects the Administrative Committee, raises funds through social activities, and provides materials, labor, transport, and cash for construction. Source: World Bank, 1993h 28 (i) Over-provision Private providers tend to respond to financial incentives by increasing the quantity of care they provide instead of ensuring that they provide the best possible care to the patient (supplier-induced demand). This is a manifestation of information asymmetries between providers and consumers - a market failure endemic to the health sector (Mills and Gilson, 1988; Nguyen, 1994).27 In Uganda, new small private clinics and commercial pharmacies have created a culture in which patients associate good care with the availability of injections and other drugs, regardless of whether these treatments are appropriate (Askmwe and Lule, 1993). In Thailand, the expansion of the private sector has led to excessive investment in high technology equipment to attract fee-paying patients, and this equipment has had to be over-used to cover the costs of acquiring it (Nitayaramphong et al., 1993). (ii) Cost escalation Private providers also tend to respond to profit incentives by raising their prices when demand is inelastic. For example, researchers found overcharging to be rife among Bombay private practitioners (Yesudian, 1993). In the U.S., competition among hospitals contributed to a costly "technology arms-race" (Nguyen and Derrick, 1994). (iii) Moral Hazard and Adverse Selection in Insurance Markets Both overutilization and cost escalation tend to be exacerbated in countries with extensive health insurance.28 Clients who are covered by insurance may respond to incentives to over-use health care services (moral hazard). Altemnatively, people may opt to join a scheme only when there is a high probability that they will require treatment (adverse selection). For example, a Prosauld pre-payment scheme in Santa Cruz, Bolivia, had to be phased out due to over-use by participants (Fiedler, 1990), and an evaluation of the CAM pre-payment scheme in Burundi found that people were unwilling to join the scheme until they fell ill (Hanson et al., 1993). (iv) Failure to promote Public Health and Equity Public health is concerned with preventing disease and promoting health. Concern with profits leads private practitioners to fail to promote preventive practices (maybe, because these would reduce morbidity and, hence, the number of consultations). For example, in Malaysia, the private sector concentrates on hospital care, with little participation in less lucrative preventive activities (WHO 1991).29 The for-profit sector also allocates 27Lal (1994) challenges the notion of "market failures" endemic to the health sector, arguing that there is no essential difference between health care and many durable goods markets. However, while it is true that other markets also suffer from market failures such as imperfect information (for example, the used car industry), this does not invalidate the point that there are special characteristics that distinguish health care from other goods. These include the irreducible uncertainty of the health market and the lack of a natural limit on costs. Lal also argues that the dangers of imperfect information are minimized in the health sector by the "trust" involved in the doctor-patient relationship. However, this is not borne out by experience. The incentives for over-subscription that were created by the introduction of a user fee policy in the Boga health zone, Zaire, is a case in point (Goodman et al., 1993). 28Theoretically, health insurance rotates the demand curve for health services toward being more price inelastic. For example, the rapid growth in health care expenditure in South Africa has been partly attributed to an increase in the number of people covered by health insurance (Bennet et al., 1994). 29It is also well documented that conmmunity financing schemes tend to lead to a curative bias in health care consumption (Abel-Smith et al., 1988). 29 health care goods and services on the basis of ability to pay. As a result, for-profit providers tend to be located in urban areas and to serve higher income groups. This pattern is sharpened by insurance schemes that tend to cover only those who work in the formal sector. Box 11 Proportions of Health Sector Expenditure by Public and Private Sectors in Selected Countries COUNTRY PUBLIC PRIVATE Malaysia 77% 23% Chile 56% 44% Sri Lanka 53% 47% Iran 63% 37% Notes: Dates of country data: Malaysia 1983, Chile 1990, Sri Lanka 1987, Iran 1991 estimates. Source: WHO, 1991 (v) Attraction of professionals out of the public sector Large differences in income between public and private workers are common and may lead to a "brain drain" to the private sector. For example, in Zimbabwe, two thirds of the physicians and state registered nurses work in the private sector. Alternatively, personnel may undertake activities in the private sector in addition to public sector work, possibly resulting in the neglect of their public duties. (vi) Poor quality of medical practice Private for-profit providers often work under isolated conditions where they are not subject to peer reviews of their work. Such isolation may erode medical skills and endanger professional ethics. For example, one evaluation of prescription patterns in Bombay showed that few private practitioners knew that the World Health Organization had recommended drug therapies for tuberculosis and leprosy (Uplekar, 1989). Government interventions may include monitoring private sector charges, inspecting private health facilities, prohibiting certain insurance practices (such as cream skimming and denial of insurance due to preconditions), introducing a "bonding" period for professionals trained at public expense, and controlling quantity and distribution of health care through payment mechanisms (for example, capitation/co-payments) and tax incentives. For example, Mexico, Malaysia, and Pakistan offer tax relief to encourage providers and insurers to locate in rural areas, and Nigeria and Iran have provided incentive payments to encourage private practitioners to offer preventive services (WHO, 1991). Some countries, such as Thailand, Nepal, and Pakistan, offer financial incentives to retain public sector 30 staff, others have introduced training schemes to maintain the standards of care. A training program for pharmacists in Nepal appears to have been quite successful (Kafle et al., 1992). Examples The private sector has a long and extensive involvement in the financing and provision of health care in the developing countries. Tables A and B show that, in some countries, a high proportion of total expenditure on health already comes from the private sector, and private agencies may provide as much as 31 percent of hospital beds. The private sector has also become increasingly involved in tackling specific problems such as drug abuse and HIV/AIDS. Thefor-profit private sector typically includes the individual practices of modem physicians, uncertified "quack" doctors, traditional practitioners30, hospitals, pharmacies. The non-profit sector includes mission/church-based organizations, NGOs, and different types of employer-based or specialist groups (Green, 1987). The latter play a particularly important role in health care delivery. For example, it is estimated that mission/church organizations provide around 50 percent of total services in Uganda and 30 percent in Zambia and Ghana (Bennett, 1992). NGOs also play a predominant role in providing care for the elderly, the disabled, and the terminally ill. Private Finance of Private Provision In most developing countries, for-profit services are financed by out-of-pocket payments, in the form of user fees or contributions in kind such as voluntary labor or materials. Voluntary organizations, however, are increasingly depending upon out-of-pocket payments to survive. The Boga health zone in Zaire, run by the Anglican church, finances 75 percent of its recurrent costs through a user fee system. Exemption mechanisms exist, however, and evaluations indicate that no client is turned away if he/she cannot pay. The remaining costs are met through other community contributions and the Church Health Services (Goodman et al., 1993). Prosalud, a non-profit network of 17 community-sponsored health centers in Santa Cruz, Bolivia, is 91 percent self-financing. It cross-subsidizes preventive care and free services for the poor with revenue generated from more lucrative services, such as gynecological and dental examinations (Fiedler, 1990). Outside Latin America, private insurance coverage in developing countries is generally limited. Health insurance does exist in Asia and Africa, but the largest plans (China, Korea, the Philippines) are financed by obligatory payroll taxes and thus should not be considered part of the private sector.3" Critics of insurance schemes argue that, due to the difficulty of providing coverage in rural areas and in 30Traditional practitioners occupy an important role in providing health care in developing countries, particularly in Africa and Asia (Claquin, 1981). The ratio of traditional to modem health practitioners has been estimated at nine to one in Sri Lanka, seventeen to one in Indonesia, twenty-five to one in Ghana, and twenty-eight to one in Nigeria. Furthermore, evidence suggests that the traditional sector is flourishing in urban areas (Heggenhougen, 1988). 31Social security may be considered part of the public sector. Even if governments only make a small contribution to the scheme, it endows the social security agency with the power to tax. 3 1 the urban informal sectors, insurance schemes may exacerbate existing inequities in access and quality (Vogel, 1990). However, a number of innovative cormmunity insurance schemes demonstrate that these difficulties can be overcome. The well-known National Dairy Development Board program in India illustrates the efficiency of a private community insurance scheme. Started in the mid 1940s, it now comprises more than 4,500 Box 12 Proportion of Beds in Public and Private Sectors in Selected Countries COUNTRY PUBLIC PRIVATE Chile 74% 26% Malaysia 88% 12% Mexico 78% 22% Iran 83% 17% Nigeria 69% 31% Notes: Public includes beds belonging to social security institutions. Private includes beds owned by NGOs. Dates of country data: Chile 1990, Malaysia 1990, Iran 1991, Nigeria 1989. Source: WHO, 1991. cooperatives with over two million members (NICH 1984). In the 1970s, the Board created a health insurance program whereby the co-op system provided basic prepaid health care to its members, especially to mothers and infants. By 1982, 82 villages had signed up for maternal and infAnt care insurance and 30 villages had supplementary feeding programs for malnourished children under the age of five. In China, cooperative medical insurance for those who live in rural areas covers about 80 percent of the population. The main beneficiaries of these services are poor and lower-middle class peasants. Public Finance of Private Deiy= Some govenments have attempted to incorporate aspects of market systems into the public sector through "contracting out" arrangements. This policy option is useful in countries where a limited income base makes the private financing of services difficult. For contracting out to be a feasible option, however, the public sector must have the managerial capacity to handle the contracting process. It is also desirable that there would be a number of potential contractors who compete against each other (WHO, 1991). 32 Examples of countries that have experimented with contracting out are Chile, Malaysia, Mexico, Nigeria, Zimbabwe, Colombia, and Malawi. Malaysia contracts out certain clinical services such as radiotherapy, CT scans, and X-rays, and, in Colombia, the Social Security Institute contracts for beds in private hospitals. In Zimbabwe, the Ministry of Health contracts out to a rnining hospital to provide Box 13 Private Sector Responses to the HIV/AIDS Pandemic An estimated 9 million people worldwide carried the AIDS virus in 1990; as many as 26 million could be infected by the year 2000. More than 80 percent of those infected live in developing countries (World Bank, 1993b). Because the HIV/AIDS pandemic primarily targets the most productive members of the labor force, it has profound economic implications. As the epidemic advances, changes to the population profile will exacerbate existing skill shortages and create new ones, thus threatening productivity. In addition to the loss of skilled labor (which takes years to replace), absenteeism because of illness, caring for the sick, and mourning the dead will also affect productivity in a profound way. In the face of these challenges, private companies in developing countries are beginning to take steps to help contain the epidemic. In some cases, this stems from genuine humanitarian concern, in others, from "enlightened self-interest". In Thailand, where the infection prevalence rate has reached an estimated one in fifty, business representatives are active members of the National AIDS Committee and corporate logos appear on AIDS information posters, leaflets, and television/radio spots. A beverage company, Krating Daeng, prints AIDS information for distribution with its popular soft drink, and Kodak provide slide shows for factories, schools, and villages. Companies such as Robinson's Department Stores have initiated AIDS prevention programs for their staff, fearing increases in medical costs and loss of middle-management skills. In Brazil, Companhia Vale do Rio Doce (CVRD), an international company comprising mining industries and operating in nine states, has also initiated a AIDS prevention campaign. This consists of training "monitors" to familiarize small groups on HIV/AIDS. Their efforts are supported by the production of education leaflets, printed T-shirts, key-rings, badges, and a video library with films on AIDS. CVRD has also organized events such as "A Day for Life" and "A Week for Life"; the latter brought together 700 people in Rio de Janeiro. Some 13,500 people have been reached, including both employees and people in the wider community. Source: The Panos Institute, 1992. care for the general population, and, in other countries, such as Malawi, mission facilities are designated district hospitals. There has also been a move toward the contracting out of non-clinical services to the private sector. For example, in Malaysia, laundry, catering, security, and garbage disposal are all contracted out to private companies. In other instances, no formal contract exists, yet governments provide support for the private sector in the form of subsidized materials, trained personnel, transport facilities, financial grants, and social 33 security contributions. For example, in Tanzania, a government subsidy of 7,500 Tanzanian shillings per bed is provided to all eligible mission and NGO facilities, and, in Uganda, government staff are seconded to church facilities. In Brazil, services financed by the social security fund may be purchased from the private for-profit sector. This has fostered an enormous expansion of health maintenance organizations. Between 1961 and 1979, more than 200 HMOs were organized. Similarly, in Chile, those who choose the public social security scheme can opt to receive private health services through a voucher system (World Bank, 1987). More covert forms of government support are provided through tax subsidies and exemptions: in Ghana, members of the Christian Association of Ghana (CHAG) are exempted from paying import duties on drugs, dressings, equipment, and other items and, in Nepal, some NGOs receive tax exemptions for goods and services on the recommendations of the national NGO coordinating body. Lastly, in Africa and Asia, where traditional medicine remains an important part of the health care system, governments have begun to finance training schemes and programs that promote the use of traditional practitioners to complement modem health care. Successful examples include using healers to screen for malaria and distribute anti-malarial drugs in Thailand, to promote modem contraceptives in Kenya, and to distribute condoms in Zimbabwe and Uganda. Traditional birth attendants have also been enlisted by the government to improve pregnancy outcomes in Bangladesh. Private Finance of Public Delivery Private finance of public services may take the form of private insurance, user charges, and contributions in kind. The provision of private care in public facilities is also increasingly commonplace. For example, in Mozambique, government medical staff run "special" clinics in urban government facilities outside of normal working hours (WHO, 1991). The resources generated from these clinics help meet the operating costs of the public facilities. Examples of successful attempts to mobilize private resources to finance the public sector include the Thai Health Card Program and the Guinea Bissau Community Insurance Scheme. Both are pre- payment schemes that have succeeded in extending insurance coverage to rural areas. The Thai scheme, established in 1983, now covers 30 percent of the rural population. Cards are provided free of charge for those who cannot afford to pay, and moral hazard is avoided by the implementation of a carry-over scheme, which rewards people for not using curative services by charging less for their health cards the following year (Nitayaramphong, 1991). The Guinea Bissau scheme provides pre-paid essential care for villagers, and, by 1991, it had achieved almost universal coverage. Payments are made annually by villagers into a collective fund known as the "abota". Adverse selection is avoided by levying a fine on those people who decline to make a contribution until they became ill (Chabot et al., 1991).32 32The future of this scheme is now in question, however, due to drug price inflation (Hanson et al., 1992). 34 Public and private health expenditures, 1990 10.0 -_ 9.0 8.0 - IL 7.0- 0 0w 5.0 - Private U 4.0 -l Public a. 303 UTotal health 2.0 -_ _ __ _ _ 1.0 0.0 L) I- W0 0 CL~~~~~0 2 ~~~0. 0 a) Region Sources: World Development Report 1993 and Government Finance Statistics Yearbook 1992 35 Private health spending as a percent of public health spending, 1990 160.0- .~140.0- a.~~~~~~~~ cL 120.0- 0 00.0_ o80.0- a. 60.0 0 40.0 - 20.0 0.0 -1 0 iz