Public Sector Restructuring: The Institutional and Social Effects of Fiscal, Managerial and Capacity-Building Reforms

There have been tremendous pressures in the 1990s to change the character and functions of the state in developed and developing countries alike. Multilateral financial agencies and neoliberal analysts question the state’s nationalistic, hierarchical, redistributive and interventionist character, which they believe is partly responsible for poor service delivery and economic performance in many countries. They seek to transform the state into a market-friendly, lean, managerial, decentralized and customer-oriented institution. However, the core elements of reforms are sometimes contradictory as different social forces drive them in different contexts. There are tensions between, on the one hand, concerns for market efficiency and deregulation, and issues of accountability and equity, on the other.

This paper provides an overview of the major issues, trends and problems in public sector reform. The Programme of Action of the World Summit for Social Development does not spell out concrete strategies of public sector reform for achieving the goals of poverty eradication, employment promotion and social integration. The state’s capacity to produce the desired results was generally taken for granted. But will efforts to reform the state along pro-market lines facilitate governments’ pursuit of development? Are states likely to assume and sustain their responsibilities in providing good, affordable services to their citizens?

The paper addresses these issues in seven sections. The first section introduces the basic argument. Section II examines four global issues that are driving public sector reforms: financial globalization, fiscal deficits, the adjustment programmes of multilateral agencies, and democratization. Sections III to VI discuss the various components of public sector reform, which are fiscal stability, managerial efficiency, capacity building and public accountability. Reforms dealing with fiscal stability apply to all states, although they may vary across countries. In general, fiscal reforms are the most consistently pursued reforms, and have implications for public sector employees, state capacity and social development. They deal with issues of downsizing or expenditure reduction, privatization and tax reform.

Public expenditure reforms reflect differences in expenditure patterns, with the reforms in industrialized countries focusing on welfare and social services and those in developing countries on capital expenditures and government administration. Privatization, a central component of downsizing, is now a global phenomenon. More than $300 billion worth of state assets were transferred to the private sector between 1988 and 1996 around the world. Governments are surely disengaging, even if unevenly, from direct ownership of public enterprises. There are however, welfare, unemployment, ethnic and nationalist problems associated with privatization. The data suggest that although governments grew, albeit slowly, up to the early 1990s, it seems that for some regions, central governments were beginning to shrink in the mid-to-late 1990s. The massive cuts in education and health provisioning suffered by low-income countries in the 1980s have not been sufficiently offset by the efforts of the 1990s, which seek to protect social sectors from state contraction.

Reforms in the area of managerial efficiency focus on organizational restructuring and introduction of market or quasi-market principles in the delivery of services. They address three main issues: decentralized management and creation of executive agencies out of monolithic bureaucracies; performance contracts for employees; and contracting out of services to the private sector. The most comprehensive reforms in efficiency promotion are in OECD countries, with Australia, New Zealand and the United Kingdom as the lead reformers. However, aspects of these reforms are being applied in many developing and transition countries, especially those that are heavily donor dependent. As these reforms deal with institutional issues, there is often a wide gap between expressed goals and concrete outcomes. Pre-reform methods of work, weak capacity, and market failures constrain policy implementation. Capacity-building reforms are restricted largely to developing countries, especially the “least developed countries”, most of which are in Africa. They address issues relating to the technical capacities of civil servants in policy analysis and implementation; management of recurrent costs to ensure sustainability of projects; and pay reforms to motivate staff. Despite their importance in promoting development and other reforms, capacity-building reforms have not received the sustained attention they deserve.

Section VII concludes the paper by focusing on three issues that may help ensure that reforms are accountable to society and sensitive to the political realities of states, especially those with weak institutions. First, public sector reforms need sound political pacts or coalitions. The vast majority of countries that are implementing reforms are also grappling with complex programmes of democratization, which seek to lay the ground rules for the way their societies are governed. There are governance issues that have not been satisfactorily resolved in a large number of low-income countries, which raise serious questions about their capacities to implement far-reaching state reforms. In most cases, the drive for reform is more external than internal as governments are forced to meet conditions set by donors for loan disbursements. Market-oriented managerial reforms will be difficult to implement in countries that have not established a professional civil service. Without this, market reforms may further fragment the state systems of low-income countries and encourage more corruption therein. However time-consuming they are to promote, dialogue and coalitions, or social and political pacts, are essential elements of effective modern statecraft. They facilitate the establishment of sound and durable administrative systems.

Second, reform governments and multilateral agencies should also try to understand and support some of the enduring missions of states, which are nation-building in multi-ethnic societies, rapid industrialization with an appropriate role for the state in facilitating the process, social equity and wealth distribution. Although costly mistakes were made in the past in many countries, these goals are at the heart of the aspirations of broad masses of people seeking to create developmental, humanistic and harmonious societies. The failure to pay sufficient attention to them in the last decade-and-a-half of market reforms may go a long way in explaining the high incidence of failed states, civil wars and stagnant development in large parts of the world today. Third, for reforms to be institutionalized and serve the public good, they must also allow pressures to be brought to bear on public managers in service delivery. Among the instruments that have emerged for the attainment of these goals are Citizens’ Charters, Ombudsmen and service delivery surveys. Parliamentary plurality, press freedom, independent judiciaries, mass-based political parties and civic action are also central to public accountability.