Friday, July 7, 2017

Assurance of service quality with reference to medical education
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Friday, 7 July 2017

The SAITM controversy has foregrounded two issues of broader significance. The first is whether university education is amenable to economic analysis. The second is whether the problem of quality (also described as a problem of ensuring standards) can only be solved through Government supply.

Is university education a service industry?

Many who make their living in the sector feel it is demeaning to treat university education as an industry. Theirs is a noble calling which cannot be equated to the activities of plumbers and beauticians, they believe.

But the evidence suggests otherwise. Large amounts of money are involved, both as capital expenditure and operating expenditure. Trade unions, even those representing those engaged in noble callings, exist. They go on strike, occasionally. Even if not in Sri Lanka, universities raise revenues from multiple sources and suffer budgetary emergencies when they cannot raise enough. One can buy shares in medical establishments which also house persons engaged in noble callings.

That services are given away for no payment does not exclude them from the scope of economic analysis. All that is different is that the buyers are subsidised by tax payers, in Sri Lanka and other countries that offer “free” education, and partially by taxpayers and philanthropists, in other countries. Google and Facebook also give away services. But no claims are made that their activities fall outside the scope of economic analysis as a result.

A right and/or a commodity

Another variant of the outside-economics argument is the positioning of university education within the realm of rights. This leads to the claim that economics does not apply, i.e., that it should enjoy unconstrained funding.

The Universal Declaration of Human Rights (1948) and the United Nations Convention on the Rights of the Child (1989) define rights pertaining to education. The right to basic education is defined as the proponents claim. But that is not the case for tertiary education:

Everyone has the right to education. Education shall be free, at least in the elementary and fundamental stages. Elementary education shall be compulsory. Technical and professional education shall be made generally available and higher education shall be equally accessible to all on the basis of merit.

The reason is that the public benefits of basic education are very high, whereas private benefits outweigh public benefits in tertiary education.

If university education is a right, should it be provided free of charge to all 1.5 million of young people in the 20-24 year cohort at least, not just to the 4% admitted at present to Government universities? It is unlikely that even the 6% of GDP demanded by the university teachers’ trade union could support such an assurance. It costs more to train a medical graduate than an arts graduate. How are decisions about who gets to be a doctor and who gets to be a clerk to be made in the context of justiciable political rights?

A strict application of a rights framework appears impractical. But there is a looser and more realistic way of applying a rights framework. This is to use rights in a metaphorical way. One of the best known examples is Italy’s right to employment, guaranteed by the Constitution, but unenforceable. It may be illustrated in relation to how governments assure a “right” to electricity.

The Government undertakes to make electricity available to all households, but not free of charge. For the most part, the charges are set to cover costs. The Government may provide targeted subsidies to make the service affordable for defined groups. Or it can choose to make up the losses of providing the service at a loss through an untargeted subsidy. Some groups, such as farmers in India, may even be provided electricity free of charge. But none of this takes away from the fact that electricity is a commodity that is supplied subject to normal economic principles.

Quality of service and mode of supply

02How does one know that the doctor cutting open one’s abdomen has the required competence? It is difficult for the patient to be able to make an informed assessment about what could be a matter of life and death. In many cases, the doctor is the one describing the problem in addition to providing the solution. Are these unique to the practice of medicine? Do they require state-monopoly supply?

The competence of an airline pilot is a matter of life and death to passengers. It is difficult for each passenger to make this determination prior to boarding a flight. This problem is solved by the use of credentials and by the use of an enforcement agency such as the Civil Aviation Authority of Sri Lanka.

A modern automobile is a complex mechanism. In most instances, the owner can only describe a symptom. It is the service professional who describes the problem and provides the solution. The customer has difficulty assessing the competence of the service provider. The information asymmetry is as pronounced as in the practice of medicine. It is addressed not by a powerful regulatory body, but by the combination of competition and brand names. The customer has choices in a competitive market. The choice is based on reputation, anchored on brand name. If the service is unsatisfactory the customer will go to a competitor. As more customers become dissatisfied, the brand will lose value.

Thus it can be seen that there are different solutions to the problem of quality under conditions of imperfect information as are common in service industries. None of them require state-monopoly supply and taxpayer funding as claimed by the opponents of private medical education.

Quality of service and competition 

As shown by the example of automobile service above, the burden on the regulatory agency is much less when competition exists. Given the difficulties of implementing effective regulation, it is best to shift as much of the burden as possible through competition to the customers themselves. Quality of service in telecom was atrocious before competition was introduced. It improved after competitors entered the fray and gave customers choice, but it was not good enough. The regulator had to intervene.

However, sample surveys of micro and small enterprises owned by those in socio-economic classification groups C, D and E (i.e., not wealthy) by LIRNEasia in 2013 in Colombo and urban locations in Wayamba showed that the quality of service offered by the telecom operators was far superior to that offered by the monopoly electricity distribution companies. Those who were not satisfied with how their complaints had been addressed were 93% in the case of electricity and 7% in telecom.

This not to say competition is adequate by itself in all cases. Albert Hirschman postulated that poor service quality may be found even in the presence of competition. The mechanism that is supposed to raise service quality in a competitive environment is the loss of customers. As customers exit supplier A because of poor quality, supplier A is supposed to feel the pain in the form of reduced revenues and loss of profit. But if, for some reason, the level of quality offered by each of the competitive suppliers is more or less the same, supplier A will not feel the pain.

Unhappy with the quality of service offered by supplier A, some customers defect to supplier B. Supplier B’s quality is also poor. A certain number of B’s customers will defect at the same time. Not knowing that the quality levels are similar, those defecting from B will go to A, C, and other competitors. Similar forms of “churn” occur at all suppliers. Supplier A loses customers, but also gains customers. The net effect is that none of the suppliers lose significant numbers of customers and therefor will not feel any pain. The signals that would cause service improvements will not be received.

So while competition is always helpful, it cannot in all instances carry the full weight of solving the problem. When the condition of more or less similar levels of quality among suppliers exists along with imperfect information about service quality, extra-market interventions are required. Competition, and the options it gives customers, is still superior to monopoly. It’s just that it cannot do the job all by itself.