The Government Sets Quality Standards for the Private Sector. Really?

Kenyans are unabashedly capitalist. During the cold war, Kenya aligned with the west, even while a large number of developing countries, including our neighbors in Tanzania, leaned left towards the Soviets. With the end of the cold war and the dominance of market-based economic models, Kenya increased further the economic space for the private sector, dissolving government-run cooperatives, opening up markets in which government enterprises previously had a monopoly, and privatizing state-run companies. For the most part, the increased room given to the private sector was well received by the Kenyan consumer. To use the telecoms market as an example, private firms that entered the market saw meteoric growth as Kenyans flocked to their services away from the government incumbent.

Therefore, the recent move of the government to establish a wide reaching standards system for all products on the market, led by the Kenya Bureau of Standards (KeBS), seems out of character with Kenya’s long-established embrace of the market and all things private. Seeing as Kenyan consumers for the most part gravitate towards privately produced and delivered services, is there really a need for the government to add its stamp of approval into the mix? Will it add any real value for the consumer? Will the average Kenyan buyer even care?

The urge among public agencies to create standards systems that govern private sector products is not unique to Kenya. When working with the government of Afghanistan to create a strategy to lead the reentry of its carpet sector - the country’s largest export after poppy and its derivatives - into global markets, I was often asked about what role a formal standards regime should play to facilitate the sector’s growth. My response was: let’s ask the market. In a survey of carpet buyers in the US and Germany (the two largest carpet markets globally), we found that a formal quality guarantee ranked 12th out 13 product attributes to which buyers attributed value. Predictably, design, fiber quality, and price came top. Therefore, the message we took back to the government was that quality is hugely important, but that a formal quality regime - particularly one run by a government - is not.

Why are government quality regimes often not relevant? First, the officers who run them will not have as indepth knowledge of a particular product as the private producer who makes it. A smart and active business person constantly gages customer demand and adjusts her product to respond it, monitors closely what her competition are doing and copies what she likes, and constantly adjusts her product to strike the right balance of price-to-quality. She does this all day, everyday, and most probably nights and weekends too. Up against this, a government bureaucrat will contribute little, particularly as he has to cover a wide range of products and industries. This renders the government’s opinion, or stamp of approval, comparatively meaningless. However, while being of limited utility, obligatory quality standards compliance can be quite costly - there are a range of fees to pay and lines of bureaucrats (who often don’t really know what they are looking for) to manage. This cost is invariably passed on to the consumer through higher prices.

The second reason why government quality regimes are not important is that a hugely effective private quality regime already exists: the market. There are certainly businesses that make shoddy products; however, they do not flourish. There may be a time lag between when a business produces a sub-standard product and when the market punishes the owner for it, but this is often not long. Soon the business’ reputation for poor work is publicized (people talk), customers go to their competition, and the business either remedies its quality issues or closes shop.

Is the market a perfect quality enforcement regime? No. We are more acutely aware of market imperfections and failures now that we were about a year ago, and that markets need to be regulated is taken as a given (and should have been anyway). Laws are needed around things like health and safety standards, establishing minimum standards that all business must offer their customers regardless of the price that the customers are paying. There is also a clear need to ensure that businesses conduct themselves in a way that minimizes destruction of the natural environment. But none of this is actually what KeBS focuses on. These areas of market failure are already regulated and have been for a while, by departments within a mix of ministries such as labour, health and the environment.

Market imperfections around information on quality do not call for heavy handed government intervention. First, information asymmetries correct themselves in time. Second, there is a huge amount of easily accessible information available on businesses and their products on the internet. Sites such as TripAdvisor provide platforms where customers can rate and provide comments on hotels and restaurants across the world, while Amazon does this for the huge variety of products that it sells. So the informational advantage is shifting away from sellers towards buyers. Third, formal quality rating organizations already exist for a range of sectors, such as the AAA diamond rating system for hotels in the US. As industry-focused organizations, often staffed by industry veterans, they know a lot about quality and standards in that sector. Their opinion is well informed, so it is a great means by which to help customers select a product in terms of price-to-quality trade-offs. But these are often privately run and managed organizations to which businesses voluntarily sign up to be rated.

The government can, however, help to facilitate the flow of quality information in the market, particularly where there is not abundant information on different businesses and products available, as is the case in Kenya compared to, say, the US. For example, the government could create a site where different companies voluntarily post their profile and subject themselves public rating and reviews. Companies that consistently please their customers will become well known, those that do not will get found out, and those that choose not to participate will raise eyebrows. What is important is that the judgment passed is that not of a couple of bureaucrats but of a bunch of consumers; the bureaucrats’ job is simply to facilitate the flow of information.

In market economies, quality certification systems are largely unnecessary. Where they are needed, they are most useful when market-determined and customer oriented, as are all good businesses themselves. Government agencies are ill-equipped to play this role, because they understand too little about both the market and customer orientation. Best they stick to basic standards and what we pay our taxes for: good education, reliable healthcare, quality infrastructure and safer homes.

(For an informed and amusing take on why governments are not well positioned to offer quality ratings for hotels, see James Martin at http://goeurope.about.com/cs/hotels/a/hotel_stars.htm)