Privatization Wages

Is the privatization of land good?  The answer to that question used to be simple.  Any student of basic economics can tell you about the tragedy of the commons, where shared grazing space is depleted or congested by overuse because no one person has the motivation or power to limit access.  The solution?  Privatization.  If you privatize the grazing land, many of the overgrazing and congestion problems will disappear as someone now has the power and motivation to limit access.  At least, this was the straightforward answer for nearly fifty years until a Nobel Laureate named Elinor Ostrom came and turned conventional wisdom on its head.

Ostrom’s career was dedicated to showing that there are some cases in which community management of a resource could actually lead to more beneficial outcomes for a community than if an outsider gained private ownership of the resource.  Suddenly the benefits of privatization didn’t seem so straightforward.  Community management of the commons was in vogue and privatization of resources was considered a relic of imperialism or latent colonial ambitions.

This has led to great gains for many communities.  With control over their own resources they have been able to manage and retain the benefits of those resources within their community rather than seeing benefits flow to distant outsiders.  But keep in mind that it has not always worked. Good management by a community may come at the cost of improvements to that resource that could increase returns to resource use.  The solution, then, to combining good management and increasing returns is to have the resource privatized by an outside third party.

That is the theme uniting several recent research projects. The first has demonstrated that a private owner with a long time horizon may manage a resource so much more efficiently than a community that the loss of control is offset by the increased wages paid to the community.  Thus, while community members may no longer get free access to the resource, their increased pay more than compensates them for this loss.  Another project shows how, in some cases, communities fail to make the necessary investments in their resource to improve long-term returns to resource users,  largely because resource users cannot coordinate their investment when there are incentives to free-ride.  However, a private landowner would be able to make the necessary investment to shift to a higher overall level of returns.

Combining the findings of these two projects suggests an interesting possibility:  privatization of a resource might benefit local users not because they were managing the resource poorly to begin with, but because a private owner has a longer investment horizon.  This allows the private owner to make investments in the resource that raise overall returns from that resource – returns that then can flow to community members in the form of higher wages.

Why does this matter?  Among other reasons, it provides a possible motivation for the use of private funds in large-scale conservation projects.  Many conservation projects pit locals against outsiders who want to limit their access to traditional resources in the name of conservation.  These fights often lead to failed conservation projects. This research suggests that privatizing a traditional resource allows a conservation group to make the investment required to turn it into a sustainable ecotourism operation.  Doing so increases returns to the resource which would benefit locals through higher wages. Both the conservationists and the locals accomplish their goals, and both end up better off.

This research will not end the debate over the merits of privatization.  If anything, it will only add fuel to the fire by suggesting new benefits to privatization.  However, in the real world the theoretical superiority of one approach over the other is irrelevant.  What matters is how the choices over resource management effect people on the ground. This new research provides one more piece of evidence that conservation based on privatization can benefit both conservationists and local communities.  In a world in which both are increasingly marginalized, that can only be a good thing.


Image Credit: Hein Waschefort via Wikimedia Commons


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