Public sector reforms have been conducted since the mid-1960s, as the mature welfare states have embarked on one set of reform strategies or another. There is now enough experience of public sector reforms to allow for an assessment of what can be accomplished and how. What are the ends and means of public sector reform?
The making and implementation of public sector reforms may target either public resource allocation or public, sector resource redistri
bution. Besides reforming the supply of goods and services, on the one hand, or the transfer programmes of income redistribution, on the other, there is in addition public regulation, which may be the target for reform by means of various deregulatory schemes.
The three main objectives in public sector reform include: (a) efficiency; (b) equality; and (c) savings. Whereas efficiency tends to be the chief goal when reforming the allocative and regulatory branches of government, equality is the goal when changing the redistributive role of government. However, due to the strong intermingling of efficiency and justice considerations in the construction of public programmes, both objectives usually occur to some degree at the same time.
DEMAND FOR AND SUPPLY OF REFORM POLICIES
Public sector reform raises a number of critical questions about the making and implementation of public policy. What are the goals involved? Can the management of reform policies be successful? Do specific strategies result in determinate outcomes? The rationality of public sector reforms is a relevant aspect, because such policies tend to be driven by blue-prints that change from one time to another.
Public sector reform is a political activity. It is in no way different from other kinds of political activity. The battle over the public sector, its reform and future shape, is a fundamentally contested game, in which there is ample scope for the interplay of tactical behaviour and the self-interests of the various actors. Public sector reform has become an issue that is more or less permanently on the agenda. It is demanded that each government examines its own domains, conducting what is sometimes called 'administrative' or 'institutional' policy-making. But can governments deliver new institutions or improved outcomes?
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In a society with a huge public sector the demand for and supply of public sector reforms may interact to create a policy sector in itself. The demand for public sector reform could stem from a variety of considerations about the public interest, and the supply of public sector reforms could result from a search for more efficiency in public resource allocation or more justice in income redistribution. Equally, various groups may demand or supply public sector reforms for the sake of their own interests. One may expect opportunistic behaviour in the politics of public sector reform.
The fate of any public policy, including public sector reform policies, depends on its technology and the circumstances under which it is introduced. Public sector reform policies may be highly advanced, but the environment may be such that the impact is nil or even the opposite of that intended. Public sector reform may be orientated towards the solution of specific allocative or redistributive problems or it may take on constitutional questions.
Is public sector reform necessarily tied up with cost reductions?
Hardly. Public sector reform could be undertaken for two reasons:
either to introduce institutional reform or to implement cut-backs. Cut
back management would, if successful, achieve savings, whereas reforms of the institutions in the various branches of governments are neutral in relation to savings, because they may be undertaken for the purpose of reducing or augmenting the size of public programmes (Table 6.1).
Table 6.1 Ends and means of public sector reform
Institutional reform Cut-back management
Savings
III
Augmented spending
Public sector reforms have often been focused upon institutional reforms with an intention to increase the resources for various public programmes (type II). As state deficits have soared, the growing fiscal pressure has had the consequence that type ill has become much more relevant, with regard both to allocative and redistributive objectives.
Of the twin ultimate objectives of the public sector (Musgrave, 1959) - efficiency in resource allocation and justice in income distribution - the former has been much more visible than the latter as the major rationale of public sector reforms. Yet, one must ask whether many of the public sector reforms really involved a clear conception of efficiency and its requirements.
THE LOGIC OF PUBUC SECTOR REFORM 145 Although the entitlement programmes tended to expand auto
matically, there exist limits to the ambitions to enhance equality. At the same time, savings in the redistributive state involve tremendous amounts of money, but the impact upon the citizens is tangible. Even when the today's huge transfer programmes are reformed, the changes proposed are often motivated by a concern with the incentive inefficiencies that these programmes may cause. Yet, the policy relevance of savings is of growing significance today.
Two conspicuous types of public sector reforms in welfare states have been decentralization and privatization. The first has introduced changes in the political institutions in the public sector while the second has brought changes in the economic institutions. Both focus on the public sector proper.
Yet, public sector reforms may also be orientated towards the private sector, for instance changing the public regulatory schemes governing various markets. Deregulation has been considered as a vital reform strategy in many market economies with an extensive public sector. In
a sense deregulation implies a shrinking public sector, but the chief aim is to enhance competition in the economy. The strategies of decentralization, privatization and deregulation may result in either public sector expansion or public sector retrenchment. Theoretically speaking, we have three instruments and two outcomes (Table 6.2).
Table 6.2 Strategies and outcomes
Public sector outcomes Decrease Increase
Decentralization I II
Privatization III IV
Deregulation V VI
Type II involves the transfer of tasks from central government to regional and local governments with the intended or unintended outcome of expanding public services. Type IV is a special case when governments transform public enterprises into joint-stock companies where they fully own the equity. It was not until the economic difficulties of the welfare state became apparent that type ill became relevant, hiving off central government functions to the private sector proper. Large-scale deregulation reforms were initiated during the 1980s and, surprisingly, the outcomes could involve increased costs (type IV), as was the case in the deregulation of the financial markets
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in a few countries where, because the state was the lender of last resort, the taxpayer had to cover bank losses due to an unsuccessful deregulation of the financial sector.
Public sector reform may be micro- or macro-orientated. The macro
focus is based upon considerations about the overall size of the public sector, whereas the micro-perspective is concerned with the workings of single programmes. Macro-strategies for public sector reform tend to be political in nature, whereas micro-strategies are derived from tech
nical or administrative deliberations. However, the variation in reform - policies cannot be reduced to the simple distinction between a leftist and rightist ideology.
Public sector reform is orientated towards two goals which need not coincide: improved outcomes and cost savings. If the emphasis is upon the former, then the introduction of new programmes, technologies and institutions may be appropriate. However, if the latter is the objective, then simply cut-backs would be the proper tool. Institutional reform is neutral in relation to an increase or a decrease in the public sector.
POLITICAL OR ECONOMIC REFORMS?
Public sector reforms tend to be based on a decentralization approach.
Efficiency in public resource allocation is to be enhanced by increasing the functions, powers and resources of governments at lower tiers. It was believed that public programmes would operate more effectively and in a more flexible manner if they were handled by state agencies at the regional or local level - deconcentration - or preferably by the local government system - decentralization.
The basic model that the political reform strategies were aimed at was the highly centralized welfare state run by means of the employment of strong planning systems. The expansion of the public sector underlined uniformity and standardization aiming at equality in public consumption and income distribution.
In several welfare states the decentralization strategy replaced planning with evaluation, line-item budgets with performance budgets, control with management by objectives, detailed rule systems with framework legislation, supervision with discretion. In some the decen
tralization strategy was also attended by a dramatic increase in the local government sector. At the same time the overall public expansion continued at a rapid rate. Whereas national government concentrated upon the large transfer programmes, local governments became responsible for a large number of allocative tasks.
In the mid-1980s it was realized that a political strategy for achieving public sector reform might not be enough. The revelation of how things stood came in the form of productivity data from both the national government and the local government sectors. Efficiency in
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public resource allocation has two sides, inner efficiency and outer efficiency (Chapter 11). Whereas inner efficiency or productivity can be clearly defined, outer efficiency or effectiveness is a troublesome conception. Not until public sector productivity was measured in the 1970s and 1980s was there a realization of the efficiency difficulties in the public sector.
The productivity problem appeared to be as profound at the national government level as in local government. In some huge local govern
ment sectors the productivity development may be negative just as is the case with the functions for which national government is respon
sible, such as police and justice. Thus, moving resources downwards in the state does not necessarily improve efficiency. Bringing to light occurrence of Baumol's disease (that public sector growth just reflects a negative productivity trend) or of extensive garbage can processes, these productivity scores aroused intensive debate.
It seemed difficult to avoid the conclusion that budget allocation in a market economy could run into profound efficiency problems. The comparison between budget allocation and market allocation is often to the disadvantage of the former (see the overview of the evidence in Mueller, 1989: Chapter 14).
The revelation of productivity difficulties has encouraged a search for other public sector reforms, namely privatization. Although the conduct of evaluation studies was institutionalized in the budgetary processes at all levels of government and although the budgetary processes have been reformed in order to make evaluation reports an essential part of the decision-making process, evaluation was not considered enough.
'Privatization' has been a key term in Western Europe when macro
reforms were launched in relation to the public sector in the 1980s. Yet,
at the micro-level, privatization may mean a variety of things. Several scholars have called attention to the fact that very different reforms are lumped together under this label. The welfare states' versions of privatization comprise a heterogeneous set of strategies (Vickers and Wright, 1988).
Privatization may cover: the sell-off of public ownership to private hands; the transfer of public property from one form into another, such as the creation of a joint-stock company owned by the state or local government; the long-term lease of public infrastructure to private enterprises, including franchising; the employment of decision-making processes like contracting and bidding; the replacement of authority as coordination mechanism with market mechanisms; and the insertion of market incentives into the reward system for public officials. The importance of self-interests has been acknowledged by the recognition of incentive-compatible motivation schemes. Finally, privatization may mean deregulation, or, more specifically, regulatory reform in the legal frameworks that govern different markets.
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Thus, privatization could mean altogether different things from one time to another and from one country to another. Governments of alternative political composition have pursued different privatization strategies. Thus, non-socialist governments have displayed a strong interest in privatization as sell-off or hiving off, whereas social demo
cratic governments tend to look into less far-reaching strategies, for example moving public enterprises towards public joint-stock com
panies or generally towards an acceptance of more market incentives.
Various privatization strategies have been tried all over the public sector. They reflect a wish to balance the heavy public sector bias in the welfare state by the insertion of more market-type decision mech
anisms into the public sector. There has been a search for increased competition in supply and greater choice in demand. However, all these reforms have hardly resulted in a smaller public sector overall.
It cannot be denied that some of the privatization strategies have enhanced productivity and efficiency. The crucial question is whether the resources released by means of efficiency improvements were used to stem public sector growth or were simply moved from one pro
gramme to another. The ambition was often to make programme changes without altering the overall size of the public sector.
Whereas mainly national governments have employed market-type decision mechanisms in a cautious manner in order to raise revenues, some regional or local governments have initiated grand-scale public reforms called the introduction of 'internal markets'. Many govern
ments has changed the methods for calculation of service charges, transformed public enterprises into joint-stock companies and deregu
lated markets, often succeeding in increasing economic efficiency.
However, the changes involved in the internal market strategy are far broader than the emphasis upon more bidding, contracting and new calculation methods for economically correct charges (see Chapter 8).
CUT-BACK STRATEGIES
Political and economic strategies have been used in relation to the allocative branch of government in order to promote allocative efficiency. Although cut-back policies may be used in relation to the public provision of goods and services, they seem to be more reliable instruments for achieving considerable reductions in the social security programmes. The objective is then hardly efficiency but simply cost reductions due to state financial difficulties.
Cut-back strategies have been initiated within both central and local governments in the welfare states. Especially when the financial problems began to become overwhelming around 1990, there was more talk about straightforward cut-backs than institutional reforms enhancing efficiency. Whether cut-backs can be made in such a way that the same services are provided or that the quality of the services
THE LOGIC OF PUBUC SECTOR REFORM 149
are not impaired is fundamentally contested. Cut-back management is neutral in relation to efficiency and inefficiency in the public sector.
Cut-back strategies reduce the costs for the public sector. If the overall aim is to bring down the size of government, then cut-backs in the redistributive branch of government can be trusted. It may be argued whether transfer payment cuts amount to public sector reforms.
This partly reflects the ambiguity of the term public sector reform. Is each and every change of the public sector a reform? It also expresses the difficulty of identifying a measuring rod in relation to social security systems. If the general objective is social justice, would any cut-back always lead to less social justice?
Public sector reforms in the redistributive branch of government may reflect changing images of justice. When state income is plenty, equality of results may be preferred to equality of opportunity.
However, in times of financial pressure, the egalitarian ambitions may be less strong. In any case, cut-backs in transfer payments may be motivated simply by a lack of resources. What can a welfare state do when deficit spending and the accumulated state budget soars?
A general argument for cut-backs in the social security systems advocates that overall economic output will rise if the transfer payments are made less generous. If the state delivers an almost 100
per cent guarantee to the citizen for various kinds of temporary income shortages, can the economy really operate in a normal fashion?
Reductions in the redistributive state have one advantage ahead of cut
backs in public consumption, namely even marginal reductions in the social security benefits result in huge savings. Perhaps all welfare states will have to move towards a general level of 70 per cent coverage in the different income maintenance programmes.
FROM EX ANTE TO EX POST GOVERNANCE
Almost all West European countries engage today in public sector reform. Each and every government elaborates upon a so-called administrative policy, that is, a policy that will outline how public sector reforms are to be made and implemented. The most discussed public reform policies include two different approaches: (1) external privatization, or the hiving off of public sector activities to the private sector; (2) internal privatization, or the employment of market-type decision mechanisms within the public sector. These two approaches, although very different in terms of strategy and implications, have the same source, namely the critique of what one may call the ex ante governance framework.
It is claimed that management techniques should replace the traditional tools of government, that is, public administration. Actually, the so-called management approach covers various methods that are not necessarily of equal value or practical relevance (Eliassen and
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Table 6.3 Ex ante and ex post governance
Ex ante model Planning Control
Minute regulation Line-item budgets Means focus Steering
Collective incentives Taxation
Authority
Ex post model Evaluation Discretion
Framework legislation Block grants
Management by objectives
Measurement of outputs and outcomes Individual incentives
User fees Exchange
Kooiman, 1993). The same observation may be made with regard to the drive for privatization, which also includes many different elements (Wright, 1994). Whereas privatization focuses upon cutting back the size of the state in favour of the private sector, the management approach looks at the reform of the public sector from within, replacing the tools of traditional public administration with public management or market-like decision mechanisms.
The attraction of the privatization approach and the management perspective derives from the general phenomenon of state failure. The difficulties that extensive public policy-making and policy implementa
tion give rise to have been experienced in several types of states. The most conspicuous problems have been found in the command economies, which after all relied the most upon the state. However, severe problems have also been experienced in the welfare states and in the countries which practise so-called economic statism. The resurgence of market values is apparent in the 1990s in both rich and poor countries, as well as in advanced economic countries that have practised Keynesian macro-economic policy-making.
Internal privatization or the introduction of the management approach for the governance of the public sector stems from several sources such as the abandonment of the Weberian model of public administration and the rejection of the planning model for policy
making as well as the disbelief in top-down implementation. Actually, a number of trends in both administrative theory and in real life imply a rejection of the general model of public sector governance called here the ex ante perspective. Instead the variety of public sector reforms implies a very different governance model, to be named the ex post perspective.
Let us try to pin down in a systematic though perhaps somewhat schematic manner the differences between the ex ante model and the ex post model (Table 6.3). For each recommendation in the ex ante model there is a counter-proposal in the ex post perspective. The two models differ entirely in the way that they structure the work of public