Xenophobia and Indiana Privatization

January 29, 2007

Indiana Writers Group column for Jan. 31 and thereafter
699 words
by T. Norman Van Cott

Dictionaries define xenophobia as fear or hatred of things strange and foreign, including people. In the economic realm, xenophobia manifests itself in animosity toward imports and immigrants. Foreign investors are two-headed monsters for economic xenophobes. Not only are foreign investors the source of capital imports (ugh), the foreign managerial-entrepreneurial skills that often accompany capital imports mean immigrants (ugh) lurk behind the investment.

This double-edged xenophobia fuels much of the opposition to last year’s 10-year transportation investment plan for Indiana. The plan involved, among other things, the state leasing its toll road in northern Indiana to a Spanish-Austrialian group for 75 years, and the state receiving $3.85 billion in up-front cash. The legislation also authorized future road privatization projects, with no restrictions on the nationality of the road-management organizations.

A legal challenge to the lease occurred almost before the ink was dry on the legislation and other challenges can be expected. That, along with the prospect of future road privatization, means the issue is likely to be a continuing one for Hoosiers. If Hoosiers follow the lead of the xenophobes, letting the nationality of the firms administering the roads trump thinking, they’ll be consigning themselves to lower living standards.

A good way to avoid the xenophobes’ rabbit trail is to ask a simple question. Namely, why was the Spanish-Austrialian consortium, known as Macquarie-Cintra (MC), able to submit the high bid for the toll road? The consortium, a profit-seeking entity, was obviously not in business to squander its wealth. Like it or not, MC’s management procedures must have been superior to its counterparts, foreign or domestic, when it came to increasing the road’s value to drivers relative to its operating costs.

Though the company expects to gain as a result of its bid for the road, does that mean Hoosier living standards are undermined? Not at all. Hoosiers benefit in multiple ways. First, don’t forget that the state of Indiana was the recipient of MC’s bid. Accepting the highest bid meant the state had more funds with which to reduce taxes, expand state government services or retire debt. Were Indiana limited to accepting bids only from Indiana road management firms, or only U.S. road management firms, and these firms are well down the list of bidders, that would have meant taxes could not have been reduced as much; government services could not have been expanded as much; nor could as much state debt have been retired.  

Benefits to Hoosiers go far beyond bid differentials, however. To the extent MC’s added profitability owes to its ability to make the road more attractive to toll-road users, these drivers gain. Successful business ventures never capture all the gains arising from their product innovations. Indeed, sellers must offer buyers terms of sale that benefit buyers. Otherwise, buyers don’t buy.

Bill Gates, for example, didn’t become the world’s richest person appropriating all the social gains from his software. Quite the contrary, he became wealthy by conferring benefits, vast benefits, on his customers. It was no different with MC. The latter’s foreign origin is a red-herring as far as drivers benefiting from the company is concerned.

Less apparent, perhaps, was that Hoosiers gained in yet another way by being open to MC’s high bid for the toll road. To wit, Hoosier living standards will also be higher when the company’s higher profitability traces to its ability to operate the road at lower cost. Costs always represent sacrificed alternatives — that is, things given up.

MC’s lower cost meant it required fewer inputs — labor, capital, managerial and entrepreneurial — to operate the road. Those inputs released from road operation have alternative production capabilities. Opting for MC’s operation of the road enables Hoosiers to have the road along with more of other things. Were Hoosiers constrained to choosing among higher-cost Indiana (or U.S.) road-management firms, they’d be cutting themselves off from this source of higher living standards.

So was the MC offering Hoosiers a “free lunch?” No, just bigger helpings. Victory in the economic race goes to societies open to innovation and cost-reducing change. Economic xenophobia hinders access to these sources of economic progress. The xenophobes’ instincts, be it with roads or anything else, are bad for Indiana.

T. Norman Van Cott, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, teaches economics at Ball State University. Contact him at nvan_cott@inpolicy.org.


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