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File picture of vegetables. The writer asks: "How much do we know about what we buy"?
Iceland’s most active volcano erupted on May 21, 2011. The next day on May 22, Iceland had to close down its international and domestic airports, because the air space was a blackout with ash clouds fumes from the volcano.
Ash clouds began to spread across Europe, and covered the skies so that during May 22-25, most of the airports in the Northern and Western Europe were also closed; thousands of flights were cancelled, and planes were grounded. Air travel passengers – those who were not only in Europe but also outside Europe, who had flights to Europe as well as via Europe – got stuck for many days wherever they were.
Among those whose flights got cancelled was a Sri Lankan passenger, Dr. Panduka Karunanayake who also got stuck in Toronto. His flight from Toronto to Colombo via London was cancelled too. He had to spend a week or so until the flight operations came back to normal.
Panduka is from the Medical Faculty of the Colombo University. Nevertheless, his economic insight into his own medical field and even beyond it has marvelled me whenever I got into chats with him. He knew how to explain the underlying causes of many “under-developed” healthcare issues in the country from an “economic” point of view.
Global health
Sometimes it is not an enjoyable experience to get caught up for doing nothing in a city far away from home – in fact, as far as in Canada on the other side of the globe. Weather was pleasant towards the end of the spring, but it was still far too cooler by the Sri Lankan standards.
While looking for some useful things to do, by accident Panduka came across a notice. It was about a conference under the theme “Global Health” that was scheduled to be held at the University of Toronto. He decided to attend it because it is somehow related to “health” in the first place and, he never knew anything called “global health” in the second place.
The conference didn’t have anything to do with “health” after all. There was nobody attending it from the field of “medicine”, except Panduka.
It was all about promoting new health technology – particularly the equipment and machines, in developing countries by replacing its old technology; this means that it was a conference for training and inspiring sales representatives. The audience in the conference comprised young graduates in the social sciences, law, business and commerce, who were looking for career opportunities mostly in developing countries.
They learnt about the new health technology which is embodied in new machines, manufactured in advanced countries, and about how powerful and effective this new technology is. Therefore, for new career opportunities for the graduates they should master the innovative marketing strategies to promote new technology which intended to supersede the old technology in developing countries.
Buyer and the seller
The issue that I have chosen to deal with today is that “how much do we know about what we buy?” and, that “how much opportunity do we have to know about it?”
Economics is all about “transactions” between two parties, or in other words, a matter of “demand and supply”. The best outcome of any economic transaction which would satisfy both parties – the buyer and the seller, depends on “to which extent the transaction takes place under competitive conditions.” One of the important elements of a “competitive condition” is about “how much the two parties know about the transaction” that they are involved in.
Let’s have a look at the transaction between a patient and a doctor, before we move onto its global outlook. How much does a patient know about the transaction that he is involved in – about the diagnosis of his health issue, the prescription that he receives, and the drugs he purchases, the alternative options he has, and the value of the money he spends? The answers to these questions vary under different circumstances.
Obviously, it is impossible to educate a patient to the extent that the doctor or the pharmacist knows the subject. However, in some societies or in some situations, it is either a regulatory requirement or ethical norm that the patient should be informed well about all these matters.
Doctors take time to educate the patient. Prescriptions are in the language known to the patient. The pharmacist issues a description of the drugs with pictures and side-effects. But in some other societies and in other situations, it is different; patient doesn’t know what he gets, and why he gets it, what will happen after getting it, and whether it is worth what he spent!
Asymmetric information
Anyway, this is an economic issue known as “asymmetric information” problem that exist in most of the economic transactions. Even if you buy a mango fruit on the pavement, there is greater probability that you don’t know what you bought. Then, it is even a greater problem, when you have to secure services in professional and technical fields such as medicine, law, architecture, teaching, engineering, and many others.
Asymmetric information problem occurs, when one party to an economic transaction possesses greater knowledge than the other party. This is usually the case when the seller of a good or service possesses greater knowledge than the buyer; the reverse case is possible too, but not common.
Asymmetric information issue is, however, not necessarily always a bad thing, because it is “specialisation” that every society needs. Apparently, it is impossible for any individual to be a master in every field.
Everybody chooses mostly one area of “specialisation” which promotes creativity and innovation in that particular field – an important factor of progress and development of an economic activity or an economy of a nation.
When the innovation and creativity progressed through specialisation, it also provides a competitive edge over the buyers. The continuous innovation and increased sophistication in advanced technology can widen the information gap between the sellers and the buyers.
Centre-periphery relations
The modern “tropical medicine” was primarily an invention (discovery of new knowledge) and innovation (application of new knowledge) in the Western world – a non-tropical region. They found malaria, syphilis, sleeping sickness, bilharzia in the tropical countries and got infected too, which provided them with a massive market for tropical medicine.
At the turn of the 20th century, when greater cooperation among countries became necessary and possible, tropical medicine gradually metamorphosed into International Health. This was epitomised by health organisations and gave rise to what is known today as International Health Regulations.
Therefore, the Western countries continued to invest in research and development (R&D) in the area of health and medicine, serving the massive markets around the world. They undermined or replaced the stagnant indigenous knowledge as well as their own outdated technology, sustaining the market for new technology.
The issue can be looked at from different angles too: One of the influential angles is through “centre-periphery” relations under which the relations between the advanced (the Centre) and the under-developed (the Periphery) countries are “exploitative” in favour of the former and against the latter.
The major problem of the centre-periphery theories was that they did not lead to any pragmatic solutions or to successful discontinuity in such relations. In an overall assessment of the so-called centre-periphery relations, however, strengthening such links appeared to have been much more productive than discontinuity; hence, integration and globalisation started thriving even in developing countries.
Market obstacles
There is one more question to ponder: How then, can the markets be competitive – an area where the proponents of the “market economy” get punched? I am sure the proponents of “neo-classical” or “neo-liberal” thoughts were aware of the fact that markets are not competitive. Otherwise, they wouldn’t have proposed “symmetric information” as an assumption – if both the seller and the buyer know it well, then the market is competitive and the outcome is optimal.
The losses of the asymmetric information can be minimised and the benefits of specialisation can be maximised only by getting closer to competitive markets. The real issue is how to get closer to the competitive markets by eliminating the obstacles. (The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).