Secondary school principals take a break during Form One selection for
Nandi, Baringo, Elgeyo-Marakwet and Uasin Gishu Counties in Eldoret on
January 26. We see no irony in the middle class paying huge sums to send
their children to private cram schools so that they can get into public
secondary schools. PHOTO | JARED NYATAYA | NATION MEDIA GROUP
My good friends Emma and James recently opened a supermarket in
Githurai. It is one of these new fancy ones on several floors which
include a bakery, a deli, a butchery and the now ubiquitous milk
dispensing machine.
Being a lower income
neighbourhood, they devoted the larger part of the mattress section to
reasonably priced foam mattresses and a small section to pricey spring
ones. To their surprise, the pricey mattresses costing upwards of
Sh25,000 were flying off the shelves than the foam ones. Now, the pricey
spring mattresses occupy most of the space and are more prominently
displayed than the foam ones.
My friends thought they
understood their market. The market told them otherwise, and they
responded accordingly. This rather innocuous episode, which happens
somewhere everyday, provides a profound insight on economics: how the
market allocates resources. Retailers every passing day are factoring in
feedback from customer purchases in their stocking decisions.
This feedback is transmitted through the supply chains determining what and how much will be produced.
The
market is a democracy. Consumers vote for the goods and services they
want. Businesses that get the most votes thrive. Those that do not get
enough go under, and the resources — human and material — are
re-allocated to producing other goods and services. Importantly, the
market does not ask why Githurai residents are splurging on luxury
mattresses. It simply transmits the information that is what they want,
and more of them are made and delivered to Githurai.
Now,
think of the state as a supermarket chain. Every year, the top
management sitting in Nairobi, decides what the shops would sell. Being a
very big customer, suppliers will do anything to have their wares
stocked — discounts, finance and bribes. As is readily apparent, what
will be stocked will be determined by the best deal for management, not
for the customer. Some goods will happen to be what the customers want
but others will end up as dead stock filling up warehouses or sold at a
loss.
Consumers come to shop and fail to find what
they want. Very soon, kiosks pop up around the supermarket. In fact,
some of the kiosks belong to the supermarket staff. Having set up shop,
the workers have an incentive not to replenish stocks so that customers
go to their kiosks. Sooner or later, the supermarket’s stocks will find
their way into the kiosks.
Is this analogy
far-fetched? Not at all. Consider our public health system. When I last
looked at the data which admittedly is a few years back, the government
owned and operated over 60 per cent of the healthcare capacity in the
country, but less than 40 percent of those seeking healthcare services
went there. And this does not include those who were given prescriptions
to buy from private pharmacies or to bring their own supplies. The
majority chose private hospitals, including the “kiosks” owned by public
sector health workers.
FORM ONE SELECTION
For
decades, the government-owned Kenya Medical Supplies Authority has
received millions of aid in dollars to build its capacity to buy and
distribute essential drugs and medical supplies efficiently to no avail.
Yet everywhere you go, private pharmacies have all
the drugs. Even in small towns, you will not go to three pharmacies
without getting your prescription in full. And year after year, the
government and donors continue throwing good money after bad trying to
make a centralised bureaucracy do what the market does effortlessly.
Take
education. The annual Form One selection circus is now behind us. As
always the headlines were grabbed by a few children who excelled in the
Kenya Certificate of Primary Education examination and the controversy
about whether private academies should be discriminated in high school
placement.
CURATIVE HEALTH
We
see no irony in the middle class paying huge sums of money to send
their children to private cram schools so that they can get into public
secondary schools. What is the moral justification for giving some
children better public secondary school education than others? What will
become of the close to 200,000 children who did not get a secondary
school place? We don’t know. What kind of society abandons hundreds of
thousands of 14-year-olds year after year?
No business
in a competitive market would survive this practice, as Uchumi found out
a few years ago. Only a monopoly that is able to increase prices to
compensate for the inefficiencies can. But a private monopoly cannot go
on forever. Sooner or later, customers will vote with their feet, and it
will run out of money.
The state can go on financing
its inefficiency for a long time by raising taxes, printing money and
incurring debts that it can pass on to future generations.
Although
we cannot close bankrupt states, when states become too inefficient and
corrupt, many citizens vote with their feet; they emigrate. Others
“exit” by disappearing into the informal economy where they contribute
nothing and expect nothing from the state.
State
failure like this can go on unacknowledged for a long time until a
serious crisis hits; Haitian earthquake, Ebola, Boko Haram, Libyan
uprising and others. Only then does it become painfully and often
tragically evident that the state is a hoax.
How would a
society that finds itself with such a state go about reforming it? If
we agree that the market does a reasonably good job of allocating
resources, then it stands to reason that it would make sense to make the
state behave — to the extent possible — like the market.
The
essence of the market is that it is demand-driven. It is consumers who
decide what will be produced. The ideal reform then would be to devolve
decision making to the individual. We could for instance, convert the
annual government budget into vouchers and give each individual a bundle
for the goods and services they are entitled to, which they would in
turn use to purchase these services from providers in a competitive
market. The service providers would, in turn, submit the vouchers to the
government for settlement.
This would, of course, be
easier to do for some services than others. It’s not difficult to see
how this would work for services like curative health, education and
policing and very difficult to implement for public health and national
defence.
In such a system, we would determine how much
education each child is entitled to and every child would get a voucher
of equal value. We could also divide the annual public curative health
budget by the number of citizens.
Each citizen would
get a voucher to buy health insurance of that amount. No need for an
inefficient dysfunctional public health infrastructure.
Two
things to note, though. First, this reform model is not the minimalist
state advocated by the political right in the west. What it does is to
separate the state financing things from state provision of the same.
Second,
the fact that it advocates private provision does not automatically
mean it is pro-business. There is nothing to stop beneficiaries of the
services financed by the state from organising self-provision in a
non-profit way. Indeed, in this country the alternative to the state in
the provision of health and education services is not business but civil
society be it communities (Aga Khan, Guru Nanak, Social Service League)
or religious organisations (Mater Hospital, Catholic, Strathmore,
Daystar, Baraton Universities) or voluntary organisations (Nairobi
Hospital, Gertrudes). But we do not have the luxury of constructing
states by design. What we have to do is reform a historical one, and one
that is totally unfit for purpose.
The Kenyan state
as we know did not come about because our forbearers felt the need for
one. It is an imposition, an instrument for domination and exploitation,
and an extremely effective one that enabled one per cent of the
population to appropriate, at its peak, a quarter of the income. This is
the principal purpose that the tribal chiefs who inherited it have used
it for, and why the wars to control it are vicious.
SHAREHOLDER MANAGERS
In
economics, we call the problem we are trying to solve a principal-agent
problem. The principals’ (citizens, shareholders) interest is to
maximise value. Agents (managers, public officials) interest is to
increase their own wealth, power and prestige.
The
principals cannot monitor the conduct of agents all the time. It would
be very costly, and often the agents know more than principals. They can
and often conceal the truth by cooking the books or hiding information.
They bribe those we engage to watch them such as auditors and lawmakers
and intimidate whistle-blowers.
Let’s revisit the
supermarket chain analogy. The solution lies in aligning the interests
of shareholders and customers on the one hand with those of the managers
on the other.
One way is to make managers
shareholders. This is an improvement but it does not necessarily solve
the problem. Owner-managers often steal from outside investors.
The
better alternative is to franchise the shops. As business owners, the
franchisee’s interest is to make his or her unit as profitable as
possible, which means being responsive to customers.
MONOLITHIC STATE
Typically,
the franchise owner makes money from fees and mark-ups on merchandise
sold to the franchisees, hence the parent need not incur heavy costs
monitoring how the franchisees run the business other than ensuring they
are maintaining standards.
Devolution is the
political equivalent of franchising. It portends transformation of a
monolithic, dysfunctional and inefficient state that is preoccupied with
maximising the wealth and prestige of rulers to one that is responsive
to the needs and delivers value for money to citizens.
But
as I hope I have demonstrated, it is not the ultimate. We ought to cede
to the state the power to make only those decisions that it is not
practicable or economically efficient to do for ourselves as individuals
and families, businesses and civil society.
The state
ought to do only that which we cannot do for ourselves. Even then, when
we delegate to the state, it should be at the lowest level possible.
What the village can do, the village should do.
David Ndii is the Managing Director of Africa Economics. Ndii@netsolafrica.com
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