Two studies (of which I am a co-author) of Indian pharmaceutical markets may offer crucial insights herein, especially as the seductive call of privatisation grows louder amidst fiscal pressures and populist demands.

The first study dissects the impact of the entry of public pharmacy in West Bengal, India, on private drug pricing. It reveals a fascinating interplay driven by consumer price elasticity. For daily consumption of non-critical medications — where consumers are likely to shop around for the best deal (high elasticity) — we found that the entry of subsidised public options forced private players to lower their prices. However, we saw a different picture for life-saving oncology drugs, where quality concerns outweigh price for consumers (low elasticity). Here, private wholesalers actually increased prices after public entry, betting on the continued willingness of quality-conscious consumers to pay a premium. These results underscore a vital lesson: A one-size-fits-all approach to public sector involvement is dangerously naive. The underlying responsiveness of demand dictates the private sector’s reaction, with potentially adverse outcomes for essential goods when consumers aren’t price-sensitive.

The second study focussed on India’s vaccine market, and unearthed another critical dimension in the mix: the differing responses of domestic and foreign firms to a reduction (rather than a rise, as in the first study) in public sector competition. When the Indian government unexpectedly suspended the licenses of public sector vaccine manufacturers in late 2000s, a window of opportunity opened for private players. Intriguingly, we find, it was primarily domestic firms that capitalised on this, significantly increasing their revenues and product variety, while foreign firms largely stood by. The reason? Our study points to the comparative advantage of local firms in navigating the complex web of political pluralism and local institutions. In a world where “political capture” of governmental machineries by well-connected individuals and corporations such as Peter Thiel, Elon Musk, and Jeff Bezos seems increasingly prevalent, these findings from our second study resonate deeply. Domestic firms, with their established lobbying power and intimate understanding of local bureaucratic and political levers, are better positioned to exploit opportunities arising from shifts in the public sector landscape than their MNC counterparts burdened by the “liability of foreignness”. Overall, our findings suggest that the promise of a level playing field ushered in by privatisation might be a mirage, with local behemoths often the primary beneficiaries.

The two studies also paint a complex picture of the potential ramifications of governments’/public sector’s retreat from governance globally. These ideas are now starting to hit the UK and Europe, with NHS England now facing abolition. While reduced competition from the public sector might initially seem appealing, as a way to unleash private sector dynamism, the reality is far more nuanced.

First, both our studies leave us questioning the ultimate impact on quality and the diversity of choices available to consumers. While private firms might increase product variety in some cases, as seen with domestic vaccine manufacturers, the first study highlights the potential for the disappearance of more affordable options in price-sensitive markets. Furthermore, the focus on profit maximisation in the private sector doesn’t inherently guarantee quality, particularly for essential goods where regulatory oversight becomes paramount. The vaccine study even shows a decrease in the overall availability of basic vaccines despite increased private sector activity, a chilling outcome for public health.

An associated comment is also in order on price volatility and regulation. The differing price responses based on demand elasticity underscore the need for targeted regulations. Simply handing over essential services to the private sector without considering these elasticities can lead to price gouging in markets with inelastic demand, particularly when local firms wield significant political influence.

Thirdly, keeping a watch on consumer and market reactions will be paramount. We are already seeing consumer boycotts of Tesla cars, amid worries of increased inflation with the tariffs, deglobalisation in the US and stock market suffering. If privatisation leads to perceived declines in quality, significant price hikes, or reduced access to essential goods, public backlash in the form of boycotts is a real possibility and could force even efficiency-minded populist politicians to backtrack.

Given these insights, governments must approach privatisation’s siren song carefully and the global governance of public and private goods with caution. The Trumpian era in the US, characterised by a reshaping of federal structures and a focus on deregulation, alongside the global context of large public debts and rising populism, demands a more sophisticated understanding of the interplay between the public and private sectors.

Instead of broad-stroke privatisation drives, governments should ideally finalise their policies after rigorous analyses of underlying consumer elasticity. It would also be important to safeguard consumer interests with quality control of local firms.

The overall takeaway from our findings is simple. Effective governance in the 21st century demands a scalpel, not a sledgehammer, when navigating the complex terrain between public needs and private interests.

Chirantan Chatterjee is professor of development economics, innovation and global health, University of Sussex. He acknowledges the co-authors of the studies cited in this article, Samarth Gupta of IIM-Calcutta, Arzi Adbi of National University of Singapore, and Anant Mishra of University of Minnesota. The views expressed are personal