Why devolution can reform our systems

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. [email protected]