05.06.2011 Feature Article

Applying the Pareto Principle in Governance

Applying the Pareto Principle in Governance
05.06.2011 LISTEN

One of the most critical aspects of organizational development is goal-setting. When organizational goals are set, individuals are expected to align with organizational goals. When this happens, work place spirituality in terms of motivation and productivity are enhanced. It is also a statement of fact that in every organization, it is only a small percentage of the personnel are rate-busters, while the others are less productive. This has been explained. An Italian economist Vilfredo Pareto, observed in 1906 that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas. Business-management consultant Joseph Juran suggested the principle and gave it the name. It is a common rule of thumb in business that 80% of sales come from only 20% of the clients.

The Pareto Principle was enunciated and expatiated by an Italian economist Vilfredo Pareto (1848-1923) in his Manual of Political Economy (1906). The Pareto principle fondly called the 80-20 rule and the law of the vital few posits that roughly 80% of the effects come from 20% of the causes. Accordingly, 80 percent of results come from 20 percent of efforts; 80 percent of activity will require 20 percent of resources; 80 percent of usage is by 20 percent of users; 80 percent of the difficulty in achieving something lies in 20 percent of the challenge; 80 percent of revenue comes from 20 percent of customers; 80 percent of problems come from 20 percent of causes; 80 percent of profit comes from 20 percent of the product range; 80 percent of corporate pollution comes from 20 percent of corporations; 80 percent of work absence is due to 20 percent of staff; 80 percent of road traffic accidents are cause by 20 percent of drivers; 80 percent of your time spent on this website will be spent on 20 percent of this website and so on.

The Pareto Law or the Principle of Least Effort is very useful in measuring workers productivity and quality management. While the Pareto principle is was originally applied to profit-oriented organizations, it has become a relevant principle in organizational management, planning, and decision making and general performance management. The principle is extremely helpful in bringing swift and easy clarity to complex situations and problems, especially when deciding where an organization should focus on and when competing considerations lead to the allocation of scarce values.

The 80-20 Principle can and should be used by every intelligent person in their daily life. It can multiply the profitability of corporations and the effectiveness of any organization or individual. By this principle, a manager or an administrator is reminded to focus on the 20 percent that matters rather than scatter efforts are resources because by the end of the day only 20% really matter. In a strictly capitalism-driven and profit making organization, an integral part of the profit comes from each 20% of the item hence a business man would put effort into the 20% that give you 80% of the sales. It follows therefore that 80% of a company's efforts ala sales come from 20% of customers- hence a good marketer has to cherish the productive 20% and invest huge energies on them.

It is therefore makes good business sense for a good entrepreneur to retain and reward 20% that are winners. Again, a good entrepreneur identifies the top 5-20% who gives you 80% of the profits, and such people are supported, encouraged and motivated. It is against this background that every business or administrative success hinges on a small team of people who buy into and run with the vision of the institution. In politics, this group is called “kitchen cabinet”. The kitchen cabinet is the engine room, while the members are the engineers of ideas, formulators of policies

The principle can also be stated in terms of well-being rather than preferences. Whether the Pareto principle delivers a social welfare function clearly depends on how unanimous the members of the society are. The great advantage of Pareto optimality is that no interpersonal comparisons of utility are needed in the application of the principle; it therefore avoids problems connected with the strength of preferences. The weakness of basing policy on the principle is that it tends to favour the status quo, since only one dissent is sufficient to prevent a change from being a Pareto improvement.

It thus follows that 80 percent of output in company or any organization is produced by 20 percent of input. Put differently. In every organization, “80 percent of contribution comes from 20 percent of the potential contribution available” There is no definitive Pareto 'quote' as such – the above are my own simplified interpretations of Pareto's 80-20 Rule. The Pareto Principle is a model or theory, and an extremely useful model at that. It has endless applications – in management, social study and demographics, all types of distribution analysis, and business and financial planning and evaluation.

Recently, politicians in most advanced economies have used the Pareto principle as a guide to the selection of cabinet Ministers, Commissioners and Heads of Parastatals. The general rule is that in a political system that is in dire need of development, two critical things are involved. The first and the most significant is the appointment of technocrats. Technocrats are people who are experts in their fields of endeavour. When this expertise is translated into practical governance, productivity is increased, efficiency in the allocation of resources is ensured, transparency and accountability are guaranteed and the frontiers of development are pushed forward. Even industrialization cannot be possible without technocrats who craft the goals, objectives and strategic moves with a view to achieving the goals.

The second critical ingredient is to ensure that recurrent expenditure is reduced to the barest minimum. In fact, any administration that exceeds a 30% recurrent expenditure automatically reduces monies earmarked for capital projects. It is when capital projects are executed that Internally Generated Revenue, IGR, will increase. Currently, both the Federal Government and some States spend over 70% of their revenues on recurrent expenditure, leaving very little for capital projects. This can be avoided by reducing some political appointments, avoiding over-rewarding political offices and funding layers of inefficiency. In addition, it requires courage on the part of the Chief Executive to take critical decisions affecting governance because ultimately, he is vicariously liable for any action of commission or omission of government.

I think Obasanjo might have been advised to adopt the Pareto principle. During the eight years of his administration, the Obasanjo administration paraded some of the best brains and technocrats in Nigeria. The administration appointed the likes of Prof. Chukwuma Soludo, Dr. Ngozi Okonjo-Iweala, Dr. Oby Ezekwesili, Malam El-Rufai, Malam Adamu Chiroma; Malam Nuhu Ribadu, Dr. Edmund Daukoru and others who gave robust technocratic pedigree to the administration. The think-tank initiated, formulated and fine-tuned policies that made the administration gain credibility globally – resulting in the debt forgiveness of Nigeria by some international financial institutions. The technocrats also enabled Nigeria to gain the confidence of regional and international institutions. What we regard as the success story of the OBJ days can only be attributed to the application of the Pareto principle. The short period Obasanjo undermined the Pareto principle saw the floundering of the administration.

As most State Governors dissolve their cabinets to inject new blood into their administrations, they should be guided by the Pareto Principle – that is sustaining a team of technocrats to chart the course of good governance. President Goodluck Jonathan and all State Governors should ensure the application of the Pareto Principle in constituting their cabinets. Technocrats are usually guided by high ethical standards in the transaction of government businesses. Chief executives across the country should know that only 20% of crack technocrats can yield 80% or desired results. A political economy where appointments are based on sectionalism, federal character and zoning automatically undermines merit and good governance. Policy formulation and implementation should not be subjected to the rigorism of crude politicking.

Technocrats are people who have the expertise to add 1 plus 1 is 2 and can show in some cases, why the answer may be different depending on the circumstances. In the fifth wave economy, technocrats are the most critical factors of production. Technocrats who have proved their mettle are a sine qua non for good governance and such people are kept to see through the implementation of the policies they have initiated. Only technocrats can be ingenious and innovative enough to understand the dynamics of good governance ala the economy. Only the use of technocrats in government can take Nigeria close to the vision 20; 2020 and the MDGs, and any level of government that ignores technocracy can only do so to the peril of a beleaguered nation.

Idumange John is Deputy President of the Niger Delta Integrity Group, NDIG.

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