Market gamble, public payoff

January 17, 2003

Mike Emmerich, Gerry Stoker and Dan Corry explain why choice and market principles are key to reforms in public services

The public service reform debate has become inextricably linked, in media eyes at least, with the issue of succession to the leadership of the Labour Party. Yet even if this is a fundamentally important driver of the debate, it is not the whole story. At the heart of the debate is a tension between the concept of national standards and the use of decentralisation and choice as a means of achieving them.

The issue of choice is greatly misunderstood. We know that in a free market those with more cash purchase more expensive goods. For this reason, where government has introduced choice in public services, it has generally done so without allowing an individual's income to buy a better service.

Put simply, the free market creates two or more tiers between providers who succeed and those who go bust, and between customers who can afford the best on offer and those who cannot. The former should cause us mainly practical concerns, the latter is patently unacceptable in public services.

The key question is whether, in using "quasi-markets" but outlawing short-term inequalities for users, we can capture the essential benefit of markets in terms of innovation and cost reduction. The creation of quasi-markets and decentralisation of power and decision-making to local providers will lead, in the short term, to some institutions, such as foundation schools, doing better than others.

It is not so much that a measure of inequity is necessary to create conditions for greater efficiency but that the search itself will lead to different bodies moving at different rates. The real issue here is that as long as funding follows patients according to need, a hospital catering for a predominantly poor population should be able to deliver decent results. The same may not be true in education, where the social mix of students has a bearing on outcomes.

Higher education illustrates the need for choice to be used carefully. The pursuit of excellence should be the core goal of education. Institutions at the cutting edge need to have the resources to enable them to stay there, although there should be incentives to improve at every level.

But it is equally important in public services that the ability to excel is achieved neither by allowing richer parents to pay for the privilege, nor by using deeply socially constructed criteria such as raw exam results as the sole selection criterion. If what works is what matters, then choice and the application of market principles should be the means to an end rather than ends in themselves.

So to avoid further disadvantaging poorer students, the greater the emphasis on top-up fees, the larger and more effective the government's support for scholarships will need to be.

The agenda of public service reform is complex and the options are by definition untried and untested. The current system is not working well, so reform is necessary.

Should differences of approach be encouraged between suppliers and providers, such as specialist schools or foundation hospitals, to enable us to kickstart a change in public services? As standards rise for all, should we risk a modest increase in institutional inequalities in the short term to create a group of forerunners to demonstrate how new models of service delivery can work - models that can ultimately be universally spread?

In principle, we think the answer to both questions is yes and that the consequences of taking this road need not be greater inequalities for service users. But the priority must be to move forward, translating radical ideas into radical change on the ground.

Mike Emmerich is director and Gerry Stoker is co-director, Institute for Political and Economic Governance, University of Manchester ( ). Dan Corry is executive director, New Local Government Network ( ). Corry and Emmerich have acted as advisers to the Labour government.

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