MPIYAKHE DHLAMINI: Bad incentives and monopolies: how to make government better through competition

What happens when people pay no price for being wrong, whether through being voted out or through losing revenue due to losing market share to competitors? You get a perverted system that produces the opposite of the outcomes it was meant to achieve, a system that serves a narrow clique of people but acts as a parasite on broader society. You get something like SA’s public sector, and the parts of the private sector that rely heavily on government. 

SA spends about 6% of its GDP on education, equivalent to about 20% of total government expenditure, and yet the outcomes don’t reflect this. Forget international standardised tests, that we probably spend more money per child in the education system than any other Sub-Saharan African country, while having one of the world’s highest unemployment rates, shows that something has gone horribly wrong. 

Either the skills being produced by our brilliant education system are mysteriously being shunned by the private sector, or the education system is not equipping our young people with the skills they need — despite the sacrifices we make in the form of taxation. 

The KwaZulu-Natal education department is undergoing a process to shut down about 1,000 state schools, mostly rural, that it deems nonviable. These are schools that don’t meet the standards set by the department but that it has tolerated, presumably because there are few other options. Closing these schools is one of the consequences of the country’s deteriorating fiscal position. 

Opposition parties are rightly concerned about what will happen to the pupils at these schools, and it seems the department has no immediate answer due to inherent contradictions in the actions it is pursuing. The claim is that the pupils will be able to take advantage of the scholar transport programme to attend new, merged schools. The problem is that the budget of the scholar transport programme is also being cut.

Keep voting

This failure will be catastrophic for the affected pupils, but failures of central planning like this are common for all governments. China is dealing with ghost cities that were built with government funding during the boom years. As the US government’s social security system is projected to become bankrupt by 2035, it won’t be able to pay out the benefits it promised to beneficiaries who have been paying into the system all their lives. 

In SA, the failure of central planning is made worse by corruption, but the corruption itself is not the core of the problem. When your customers are compelled to pay you no matter the quality of service provided, through taxes for example, there is no incentive to produce better-quality services. The matter is worsened if these same customers don’t even hold you accountable through the political system and keep voting for you every five years regardless of the quality of services they receive. 

The greed that leads to corruption is clearly bad, but those who are greedy and corrupt represent a broader desire to acquire wealth. This instinct is so great that it has often blunted government’s worst authoritarian instincts. Government does not want to kill the golden goose no matter what its “National Democratic Revolution” says, because it gets a cut from each golden egg. Its biggest problem is that it doesn’t know how the goose produces the egg — perverse incentives, economic and political, drive it to choose the most destructive options. 

What is needed — in addition to voters holding government to account through the political system — is a way to change incentives in the public sector. We need a way for politicians to benefit more directly if the economy grows. One idea might be to reserve a fixed percentage of GDP collected via the tax system for politicians. This would be above any salary they draw from the state. 

Need stick

The simple idea is rather than having politicians spend their time thinking about how to steal to make more money, have them thinking about how to grow the country’s GDP so they can also make more money. 

Effective incentives don’t just operate on rewards or carrots, you also need a stick. You need a way for governments’ customers to choose another option if the state fails to provide quality services. As a matter of principle there should thus never be any service over which government has an exclusive monopoly. For anything government does, there should be a private sector actor competing on a fair basis to provide the same service. 

What might this look like? We could start by implementing vouchers for things such as education and healthcare, so that poor people are not forced to use governments’ inferior services when superior options exist in the private sector.

Next, we could convert all grants into a single basic income grant (BIG). But why stop there?

An independent tax and fair distribution agency could collect taxes from South Africans, but these would be given to the people rather than to government. Of course, poor people would get a greater share of the tax than wealthier individuals, but everyone would get something. Then government departments, state-owned companies and government agencies could compete against private alternatives for the funds. 

The exact logistics of this would clearly need a lot of work. But we can agree in principle that the taxes belong to the people — that government does not deserve taxes — the people of SA do. Monopolies that are maintained by force are bad no matter who is running the monopoly, because they incentivise institutions to serve narrow cliques instead of society.

Then we can start to work out the mechanics of this proposal, starting with the low-hanging fruits of voucher systems in some public services and converting grants to a BIG. 

• Dhlamini is a libertarian, writer, programmer and contributing author to the Free Market Foundation. He writes in his personal capacity.