this is the pre-copy editing version of the article appearing in Administration & Society 26:1, May 1994, pp. 48-77.
Reorganizers of the state in Australia, New Zealand, Denmark, and Sweden during the 1980s tried to separate policy making from the production of welfare and other services by introducing market disciplines and competition. Fiscal bureaucrats afraid of rising fiscal deficits and public debt sought to control what they saw as rent seeking behavior and agent abuse of principals in the public sector. They argued these changes would reduce incentives for collective rent seeking behavior and prevent shirking. Fiscal bureaucrats thus sought to control future behavior in the public sector by changing the incentive structures workers and agency managers faced.
Herman M. Schwartz is associate professor of Government and Foreign Affairs, University of Virginia, Charlottesville. He is the author of In the Dominions of Debt: Historical Perspectives on Dependent Development (Cornell, 1989), States vs. Markets: Globalization and the International Economy (Macmillan, 2nd edition 2000) and is currently writing a book on the reorganization of the state in Australia, Canada, Denmark, New Zealand, and Sweden.
I would like to thank Michael Atkinson, Francis Castles, Hugh Compston, Glyn Davis, Brian Easton, John Echeverri-Gent, Christine Ingebritsen, Jytte Klausen, Paulette Kurzer, Matthew Palmer, Steve Rhoads, James Savage, John Uhr and the reviewers for comment and criticism. This research was partly funded by the National Endowment for the Humanities, a Fulbright Fellowship, and University of Virginia Summer Humanities fellowships. All errors remain mine.
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During the 1980s governments in most of the advanced industrial countries tried to slow the growth of their public sector and reduce the size of their fiscal deficit. New governments in Australia, New Zealand, Denmark, and Sweden all attempted major reorganizations of the institutional and ideological structure of their public sectors as part of an effort to control unsustainable fiscal deficits. In all four countries bureaucratic and extra-bureaucratic actors tried to replace existing bureaucratic methods for the provision of government produced goods and services with market driven methods. These reorganizers tried to constitute markets for many public services by separating policy making from policy execution (or service provision). They did this by opening up service provision to competition and by inserting a cash or contractual nexus between providers of services and consumers and funders of services. This separation created the discrete buyers and sellers of goods and services which markets need in order to function. Reorganizers complemented this separation with changes in work practices inside agencies, and between agencies and their funders, that made it possible for agencies to respond to market pressures. Reorganizers claimed that these changes not only would fundamentally change the way the state functioned, but also would constrain rent-seeking behavior which they claimed threatened economic growth and fiscal stability.
The agents, degree and nature of change in this effort to introduce market pressures were all unusual. First, where most of the deregulating and liberalizing governments of the 1980s were conservative, except for Denmark these countries had left wing governments during the 1980s, and in Denmark the conservative government was strongly influenced by the Social Democratic Party. Given left governments, the degree to which market pressures were interpolated into these states was also unusual (Schick 1990). Ideological tides ran in favor of markets during the late 1970s and 1980s. Governments everywhere deregulated private enterprise and privatized many nationalized industries. But these four countries saw more extensive and subtle changes. Rather than simply withdrawing the state from the market through deregulation or the sale of government enterprises, these governments also tried to bring the market into on-going non-commercial state operations, in particular into welfare state. Reorganization thus went beyond the cost-benefit considerations and tinkering typical of most pre-1980s reforms.
The nature of the changes indicate the significance of the subtle transformation which reorganizers sought. Reorganizers restructured the institutional fabric of the state in order to change the behavior of both citizens and public sector employees by changing the incentive structures those groups faced. Reorganizers viewed public sector employee efforts to secure better remuneration and work conditions, more work site autonomy and larger budgets as rent seeking behavior. Reorganizers aimed to insulate the state from this 'rent seeking.' Reorganization of the state in these four countries thus pitted the core of the 'old' state -- the fiscal and executive bureaucracies -- against the 'new' state -- bureaucracies involved in the provision of welfare services and services to industry. This struggle was thus 'the politics of structural choice' writ large (Moe 1990). Reorganizers aimed at fundamentally transforming the behavior of public sector employees, the links among different state agencies, and ultimately the relationship between state and society in order to advance a political agenda in which curbing public sector growth was a high priority.
This paper looks briefly at the political context which made public sector reorganization possible and motivated fiscal bureaucrats to participate in that reorganization. Then it turns to the arguments about rent seeking which reorganizers based in the fiscal bureaucracies advanced to justify their proposed changes. Their ideas did matter, for their arguments shaped the plans for reorganization which politicians ultimately executed. The third section addresses those changes in each country, showing significant cross country similarities. The last section advances some arguments about the politics involved in these changes. For reasons of space this paper will ignore or treat only briefly two important related issues: privatization in its narrow sense -- the selling off of state owned commercial enterprises -- and the motives or proposals of extra-bureaucratic actors. Narrow privatization differed little from privatization elsewhere. What differs here is the introduction of market practices into the provision of welfare and similar services. (1) Extra-bureaucratic actors' motives are treated briefly in the section to which we now turn.
Origins of Reorganization Efforts
In all four countries the reorganization efforts of the 1980s had been prefigured in significant inquiries or reforms launched in the late 1960s or 1970s. These inquiries and reforms occurred concurrent with rapid expansion of the welfare state and state economic intervention.
As early as 1962 in Denmark the "A60 Administration Committee" had recommended a separation of planning and provision, which the 1970 and 1975 Committees on Planning Activities of the Central Administration reinforced. These reforms concentrated policy making into the hands of small ministerial staffs, while setting up distinct departments under each ministry to implement policy. They also raised the service quality and cost issues. The 1971 KorsbĹck Committee decentralized service provision to local government. The 1970s also saw a tax revolt motivated in part by the high costs of the welfare state.
In Australia a variety of federal and state royal commissions made similar recommendations, criticizing the over- bureaucratization of state agencies and their indifference to their customer/clients (Coombs 1976; Wilenski 1977; Reid Report 1983). In the late 1970s the Liberal-National (i.e conservative) party coalition government made strenuous efforts to discipline public sector labor. The Australian Labor Party explicitly campaigned on public service reform in the 1983 election (Australian Labor Party 1983).
During the 1970s Sweden also decentralized service provision to local government while increasing parliamentary supervision of an otherwise powerful bureaucracy. Despite this, the central government mandated an increasing range of welfare benefits as part of an effort to control wage militancy (Pontusson 1992).
In New Zealand royal commissions in 1977 and 1982 dealt with financial management and taxation, and three successive reviews of public sector pay spanned the 1960s and 1970s, but then Prime Minister Robert Muldoon's heavy hand blocked significant changes (Walsh 1991).
At the end of the 1970s and all through the 1980s a range of external sources, like firms hawking privatization services and intergovernmental organizations like the Organization for Economic Cooperation and Development and International Monetary Fund reinforced the sense that there was something wrong with the public sector. The OECD played a particularly salient role, publishing a range of studies calling for public sector reorganization. These pointed out the growing financial costs and organization difficulties of public sector employment, the political costs of public sector unresponsiveness, suggested widespread introduction of user fees, and called into question the viability of social service provision (OECD 1979; OECD 1987; OECD 1990a; OECD 1990b; Oxley et al. 1990). The OECD and IMF also served as a training ground for bureaucrats on secondment from domestic fiscal bureaus. Staffed largely by economists, their analyses were heavily influenced by public choice theories.
Despite (because of?) these earlier reform efforts, during the 1970s the public sector in all four countries expanded rapidly. Although total public expenditure in all the industrial (OECD) countries had shown elasticities greater than one with respect to gross domestic product, during the 1970s Australia, Denmark, and Sweden had elasticities above the OECD average (OECD 1979).(2) (After lagging during the 1970s, below average New Zealand experienced a rapid increase in its elasticity and jumped above average during the early 1980s.) By the early 1980s the public sector employed nearly one-third of the labor force in Sweden and Denmark, one quarter in New Zealand, and, excluding public enterprise ('GTEs'), about one fifth in Australia. This rapid expansion hit political and economic barriers in the early 1980s as fiscal and current account deficits rose to unsustainable levels (See Table 1).
|Account||Deficit||Government||Employment as %|
|Deficit||Spending||of Labor Force|
Sources: Columns 1 and 2 calculated from Det Ýkonomisk Rćd, Economic Growth in a Nordic Perspective, pp. 316-319, 363-366; Australian Bureau of Statistics, ABS # 5303, Balance of Payments, annual; OECD, Economic Survey -- Australia 1989/90; OECD, Economic Survey -- New Zealand 1989/90; OECD, Economic Survey -- Denmark 1989/90; OECD, Economic Survey -- Sweden 1990/91. Columns 3 and 4 Peter Saunders, "Recent Trends in the Size and Growth of Government in OECD Countries," Public Sector Research Centre Discussion Paper #20, September 1991.
By the early 1980s political coalitions favoring a reorganization of the public sector had emerged in each country. These coalitions linked unions and employers in economic sectors exposed to international trade, former opposition political parties and fiscal bureaucrats. Each sought a different mix of political and economic ends, but all looked to public sector reorganization as an important means to that end. Politicians in these new governments, entering power after long periods in opposition, sought to consolidate a majority by attacking an 'inefficient' or 'unresponsive' public sector; in Sweden they also hoped to defend the legacy of decades of political control by showing they could fix the public sector they had created.
Firms exposed to international competition were alarmed by the way public sector wage demands and rising public debt both boosted taxes. In turn, this created a 'tax wedge' between the wages they paid workers and workers' received wages. The tax wedge made them uncompetitive in world markets while making their workers restive. Furthermore the high cost of non-traded goods, of which the state was the largest provider, also made them uncompetitive by boosting input costs. (3) Unions in this sector sought to restore differentials between themselves and unskilled workers and public sector workers which had been compressed during the 1960s and 1970s (Nannestad 1991; Swenson 1991).
Fiscal bureaucrats, who ultimately supplied much of the content for reorganization, had their own motives. These centered on their institutional roles as guardians of the money supply (for central bankers) and as overseers of public spending in general (for financial ministries). They identified the new state -- the welfare state and its associated client groups -- as the source of rising deficits. They sought more autonomy for the old, core state -- the state of the fisc, courts, and military -- in order to control fiscal deficits. They felt that reorganizing the public sector would help insulate the old, core state from demands generated by clients and providers in the new state. These demands seemed to be the origin of inflation, and rising fiscal and current account deficits. The latter interacted, leading to rising foreign held public debt in each country during the 1970s (Table 1). Fiscal bureaucrats feared the fisc would be crippled by interest payments and become dependent on foreign creditors.
Fiscal bureaucrats played a delicate and dangerous role in these reorganization efforts. In general the more fiscal bureaucrats were willing and able to provide detailed policy advice to governments the greater the degree of change in each country. Although bureaucratic advocates for reorganization could not have succeeded in the absence of extra-bureaucratic allies, fiscal bureaucrats largely shaped the content of reorganization proposals because they supplied the ideas for reorganization. Businesses everywhere called for more 'business-like' states, but their primary interest was privatization and deregulation understood narrowly. They had little to say about the specific shape of a reorganized public sector. Moreover, businesses were in the midst of massive changes themselves, removing any fixed private sector model on which the public sector might model itself (Kanter 1989; Sabel 1991). Politicians and parties also had some ideas about how to change the public sector, but with some exceptions they relied on bureaucrats to furnish details and coherence (Dawkins 1983; Oliver 1989; Andersen 1991). So while business occasionally proposed and while in the end it was governments which disposed, those governments enacted fiscal bureaucrats' programs.
The danger and delicacy for bureaucrats of course came from this provision of content. Any reorganization necessarily creates opposition, and an open role for bureaucrats exposed them to criticisms that they overstepped their role as public servants. Bureaucrats' willingness to come forward with reorganization proposals reflected their own internal unity and the likelihood that change would be successful, thus lessening the chances of retribution later. These interacted: the more likely change would succeed, the more likely bureaucrats were to step forward, and vice versa. In turn both of these reflected structural opportunities and impediments to rapid change in each country. Different constitutional and electoral arrangements regarding proportional representation and districting affected the number and power of parties and thus the kind of majority (or minority) governing parties had. It also affected the nature and number of parties' core constituencies and thus parties' willingness to risk alienating them. Thus despite similar desires, the coalitions favoring reorganization did not fare equally well: in New Zealand, where single member districting created absolute Labour Party majorities, fiscal bureaucrats aggressively advanced a reorganization agenda and reorganization went furthest; in Denmark, where proportional representation led to minority coalition governments, fiscal bureaucrats were more timid and the degree of reorganization was smallest (Schwartz, 1994).
Rent seeking and the state
Whence came fiscal bureaucrats' ideas? Intra-bureaucratic reorganizers, primarily concentrated in the finance ministries and central banks in these four states, used critiques of the post- World War II state, and in particular the welfare state, to justify the changes they proposed (direct statements: Finansministeriet v.d.; Dawkins 1983; Australian Labor Party 1983; Treasury 1984, 1987; Kristensen 1987; SAMAK 1989; Sturgess 1991; interviews. Indirect: Easton 1988; Scott and Gorringe 1989; Pusey 1991). These critiques claimed that rent seeking behavior caused uncontrollable growth in government spending and employment, and that problems in agent-principal relations led to poor quality in government services. Indeed, by the early 1980s each of these states was running large fiscal deficits and public dissatisfaction with government services was high. (4) Whether these claims about the origins of these problems are true or not is irrelevant for this paper; what matters here is that these claims about origins ultimately informed reorganization plans. Fiscal bureaucrats largely based their claims on the public choice literature present in the early 1980s and the discussion below reflects this.
Four related issues seemed paramount to fiscal bureaucrats. First, state agencies were subject to capture by their clients, who as particular segments of society were neither isomorphic with the 'general' public nor with elected representatives of that public such as department ministers (Posner 1974; Offe 1984a). Clients thus had incentives to demand socially irrational levels of spending or employment. Second, as bureaucracies, state agencies themselves tended towards a 'self-' or bureaucratic capture leading to non-rational decision making and aggrandizement as their personnel (agents) behaved opportunisticly (Niskanen 1968, 1971, Williamson 1985). Third, despite capture, state agencies often were unresponsive to client needs, over- or under-providing low quality services in an inefficient manner because employees were maximizing their interests rather than public interests (Williamson 1985). Finally politicians often pressured agencies into an inefficient or non-cost effective extension of services, or hampered agencies' ability to pursue their mission (Moe 1990). The first two problems are species of rent seeking behavior; the third is specifically an agent-principal problem akin to rent seeking behavior; and the last combines elements of both (Buchanan and Tullock 1980; Olson 1982).
All of these problems emerge from asymmetries in groups' interests and abilities to organize collectively and to use voice and exit to influence organizations (Olson 1965, 1982; Hirschman 1970). As Olson has argued, successful collective action is more likely when small groups with narrow, well defined interests attempt to claim resources which can then be redistributed within the group; in contrast large groups with diffuse interests find it more difficult to organize in the absence of some kind of coercion. (5) Precisely this asymmetry allows internal groups (bureaucrats themselves) or external (social) groups to capture state agencies in the pursuit of rents, that is benefits which exceed those which a hypothetical free market would have provided. Small groups can effectively use voice to generate political pressure to create or retain a service which disproportionately and perhaps uneconomically benefits themselves. While the taxpayers who finance this service do not benefit from it, they cannot exit from taxpaying, and their large numbers make organizing to use voice difficult.
Fiscal bureaucrats argued that the institutional structure for public service provision reinforces these tendencies towards rent seeking by adding a moral hazard problem (that is, that agents will only pursue principals' interests when those interests coincide with agents' own interests). The information asymmetry between public sector workers as agents and the government and society who presumably are their principals means that public sector workers can use their highly 'asset specific' institutional knowledge (Williamson 1985) to deceive their principals about bureaucratic processes. Non-market mediated provision of services can impede improvement in the level of quality of service provided by state agencies. Where state agencies possess a monopoly over service provision, consumers cannot exit and choose an alternative producer. Market failure does not discipline those agencies. Consumers can use voice to discipline agencies.
But voice is mediated through politicians. Politicians filter demands through legislation, and by directing agencies to create and/or execute policy. (6) This filtering hinders agencies' ability adequately to judge consumer desires or be disciplined when they over or under-estimate demand. It also exposes them to political micro-management as politicians attempt to remedy specific complaints from voter/consumers. Paradoxically filtering also exposes agencies to capture or impels agencies to seek capture in order to open their own information channels to consumers/clients (Offe 1985). In markets purchasing decisions and choice among different providers allow for the exercise of voice and exit. In all four states fiscal bureaucrats allied with incoming governments to try to change the incentive structure bureaucrats, clients and ministers/politicians faced to a more market like structure. Because they viewed public sector problems as the outcome of rent-seeking and moral hazard, fiscal bureaucrats advocated exposing service providers directly to demand (or voice) by separating policy making from policy execution/service provision. Policy making agencies would act as surrogate consumers, making explicit contracts with producing agencies. Alternately, consumers, using mechanisms ranging from outright purchase to vouchers to capitation fees, could purchase services from producing agencies. Rather than being mediated through politicians, voice could now operate directly as 'consumers' chose among different producers. Competition among service providers for contracts or for consumer purchases would prevent internal capture, and force producers to maximize efficiency as well as the gross production of services.
Reorganizers in the fiscal ministries aimed these proposals both at other agencies and at their own nominal principals -- politicians. They claimed this combination of contracting and competition would reduce the opportunities for rent seeking and capture. Reorganizers believed that like private sector firms in competitive markets, producer agencies would refuse to provide services below their true cost of production without an explicit subsidy from the ministry arranging for service. With subsidies made transparent, ministries and politicians would have to seek explicit political approval for any subsidies, exposing rent seeking groups to counter-pressures. Meanwhile competitive pressures from other agencies or private sector firms willing to tender for service provision would restrict opportunistic behavior by personnel in producer agencies. The separation of policy making from execution would minimize the danger of bureaucratic capture.
Reorganizers in general were less enamored of agent-principal theories than public choice theories. But a strong current of agent-principal analyses motivated some changes in Denmark and Sweden, particularly because political parties articulated a vision in which opportunism stood out as the major problem. This vision suggested that consumers be given more choice among public sector providers, that bureaucratic rules governing consumers' behavior be relaxed, and that consumers be made directly into principals by allowing them to manage public sector agencies like day-care centers.
The content of reorganization
Fiscal bureaucrats tried to increase competitive pressures on the public sector by separating policy making and service provision through four key institutional changes. (7) Consistent with the idea of separating policy from provision, all of these involved a simultaneous centralization of control over the allocation of gross budgetary resources along with a decentralization of operational authority to use budget and personnel resources. The first change is summed up in the slogan 'let managers manage,' but really meant the reimposition of private sector style wage disciplines on public sector labor. In varying degrees older tenure, seniority, job classification and uniform pay systems in the public sector gave way and managers gained the power to hire and fire, to set fairly individual pay scales (including incentive pay), to set flexible work hours and to determine individual job responsibilities. This change extended to senior civil servants as well.
The second is summed in the phrase, 'management for results,' and involved the reorientation of management attention away from inputs and towards outputs and outcomes. Budgeting and accounting practices shifted from detailed control over inputs to a focus on outputs, and current and capital spending were split. Simultaneously the (sometimes limited) introduction of 'user-pays' principles encouraged managers to recover at least part of the cost of production, particularly when they were allowed to retain part of this revenue. Consistent with these two changes, finance ministries achieved greater control over the budgeting process and, except for Sweden, control over public sector personnel shifted from dedicated public service boards to finance ministries. These changes aimed at reducing the ability of agencies and agency personnel to 'rent seek,' by subjecting personnel and agencies to competitive pressures. Competition or contestability assured that market pressures would force managers to use their new found managerial 'freedoms' to search for efficient production methods.
Third reorganizers changed the machinery of government to make it conform more closely with private sector models of the 'hollow corporation' or 'holding company,' in which planning and implementation are divorced (Greiner 1988; Hjortdal and Wolf 1990). Strategic decision-making, including the allocation of investment resources, was concentrated into small teams who arranged for the purchase/provision of services from both internal and external suppliers, and who themselves 'managed the managers.' Despite the failure of earlier across the board budget cutbacks, reorganizers also used preannounced real budget decreases to increase pressure on managers to increase productivity.
Finally, agencies' monopolies over service provision were abolished or undercut with the introduction of, for example, competitive tendering. All these changes aimed to reduce surveillance costs and the information asymmetries creating moral hazard. Planners/contractors could afford to let implementation agencies be 'black boxes' so long as they could replace them with other (equally 'black box') agencies from the public or private sector in the event of failure to produce the outputs specified by the contract.
What specifically happened in each country? Our discussion will be organized around the four main changes noted above.
The Labour party government elected in 1984 and reelected in 1987 has most thoroughly transformed its state, a process continued and intensified by the National Party government elected in 1990. Both governments relied so heavily on proposals emanating from the fiscal bureaucracy that some local observers talked of a "Treasury coup d'etat."
-- Creating Wage Discipline
Three Acts fundamentally transformed labor relations and the status of managers within state agencies and enterprises. The first of these, the State Owned Enterprise (SOE) Act, 1986, split trading activities run by the state out of regulatory and line agencies, 'corporatising' them as nine major commercial firms. It fully inserted these new SOEs into the market along private lines. While this Act dealt only with these commercial enterprises, it provided a model for other parts of the public sector, particularly after some of these corporatized SOEs were privatized.
The other two acts, the State Sector Act 1988 and the Public Finance Act 1989, were more consequential for labor discipline in the traditional welfare state and 'non-commercial' agencies. Prior to these Acts, agency employee work conditions and pay were governed by the State Services Commission. The Commission set wages and conditions according to centrally determined job categories, without regard to the specific needs of individual agencies. Although nominally public sector wages were not linked to private sector settlements, wage gains tended to follow key national wage awards in the metals sector. The State Service Commission also enforced civil service tenure and complex appeal and grievance procedures.
The State Sector Act 1988 homogenized private and public sector wage fixation and employment rights along the lines of the 1987 Industrial Relations Act (Walsh 1991). The private sector labor relations regime greatly expanded the possibilities for enterprise bargaining while eroding centrally determined wages through compulsory wage arbitration. This changed behavioral incentives for key managers and their employees. Agency and SOE management now had the right to hire and fire at will, to reclassify and redeploy labor, and to set employee remuneration on an enterprise basis. Managers could cut separate deals with their workers on staffing levels, hours worked, productivity bonuses, etc., so long as they were in conformity with basic labor legislation. Because managers were now contracting with the Treasury and Ministries to produce certain outputs, they had an incentive to use these new freedoms. The State Services Commission continued to exist, but now acted as managements' agent in collective bargaining with workers at the enterprise (agency) level. Managers thus could behave like private sector managers in their search for greater efficiency and higher levels of work intensity.
The 1988 State Sector Act also changed managers employment conditions by shifting top managers into a new Senior Executive Service (SES). These managers lost civil service tenure and were placed on two to five year contracts. Their remuneration and career advancement depended on their ability to meet output targets contractually fixed in negotiations with the relevant Ministry. Like private sector managers, the new SES now was personally responsible for the success or failure of their agency.
-- Reorientation to Outcomes
The Public Finance Act 1989 removed input oriented controls over agency behavior and substituted output and outcome oriented controls, reinforcing the change in incentives for managers' behavior (Scott and Gorringe 1989). The Treasury and Cabinet Policy Committee (see below) set hard budgets for agencies, but managers could spend this money freely so long as they achieved the output targets they had negotiated with Treasury and the relevant Minister(s). Success in fulfilling contracts became the basis for judging managerial success. In principle the state, via the Treasury and sitting Ministers, now buys specified outputs (e.g. so many hours of teaching) from different agencies. Formal contracts specify the outputs the 'state' is purchasing (at a given price) from a given manager's agency. Because outputs can be specified with some degree of precision, the Treasury and Ministers can judge the relative success of managers in fulfilling their contracts. These changes also facilitate the monitoring of managers to prevent self-capture by agencies.
Changes in the budgeting process complemented this shift towards output oriented management. The budgeting process changed from a cash basis, line item budget to an accrual basis 'net budget.' Managers could freely spend their budget as they saw fit, and supplement it with revenues from user fees, without having to stick to predetermined 'line item' categories. So long as they did not change their net asset position, they could buy and sell equipment. Any change in their net asset position though required ministerial approval. This new capital investment had to be 'borrowed' from the Treasury or open market and carried interest charges. This allowed managers to make capital-labor tradeoffs, but only in market rational ways which also impeded self-aggrandizing behavior (Ball, 1990).
By introducing user pays principles at all levels, the state completed the construction of markets for public services. Agencies had to pay for inputs sourced from state agencies, including, as noted above, capital. Even in the health and education area user pays was introduced as a principle. For example tertiary students must now pay a charge equivalent to five percent of the cost of their education. While Labour made only marginal changes in health, largely by raising prescription fees, the post-1990 National Party government intends to introduce full market mechanisms into the health sector, allowing competition among public health boards formerly defined on a geographic basis, and between public and private providers. Hospitals and area health boards may be reconstituted as SOEs (Upton, 1991).
In general Labour avoided across the board cuts in agencies' real budgets, although it did cut health and education by 3 percent in 1988 and refused to compensate agencies for a 2.5 percentage point hike in the GST (i.e. VAT) in 1989.
-- Holding Company Model
The government also reorganized relationships among agencies and between agencies and the central fiscal bureaux. The Labour Government centralized financial power into the Cabinet Policy Committee (CPC), in which the fiscal bureaux had a dominant voice. The CPC sat at the apex of a hierarchical set of issue oriented committees, and determined overall budget levels for various ministries. The Cabinet Policy Committee set policy by translating the government's preferred policy outcomes into sets of outputs grouped on a functional basis. It then organized the purchase of these outputs from state agencies, using the threat of private sector competition to discipline agency bids. The post-1990 National Party continued this arrangement, dividing spending control into a Cabinet Strategy Committee, which deals with strategic policy making, and a Cabinet Expenditure Control Committee, which doles out the money and evaluates outputs. Under both systems contracts are intended to bind agencies to specific outputs, allowing Treasury and politicians to monitor the performance of specific agencies. "Successful" agencies, i.e. those with high rates of return and low costs for service provision are rewarded with expanded resources via bigger contracts; unsuccessful agencies are wound down. Institutionally policy advice/making have been separated from implementation into different agencies, with small policy making agencies advising and contracting with larger implementation agencies (Roberts, 1987; Boston 1991).
In general these changes have changed the incentive structure facing employees and agencies by introducing a real degree of competitive pressure including competition from private sector firms. Competition was a clear goal of the fiscal bureaux, and they viewed private sector contestability in the provision of outputs as the key to forcing efficiency gains because it provided reference prices for outputs the state was buying (Treasury 1984, 1987: Easton 1988). Consequently they favored the removal of barriers to entry in all markets.
If New Zealand presents the most far going changes, Denmark presents an example of limited change. Despite the limited nature of change the advice proffered by the fiscal bureaux and thus the intended changes were substantially similar to that in the other three countries. The bourgeois coalition government assuming power in 1982 tried to introduce market pressures into the behavior of state agencies through a series of largely still-born programs labeled privatization, deregulation, modernization, and debureaucratization.(8)
-- Creating Wage Discipline
In December 1982 the bourgeois bloc attempted to introduce contracting out under the label of privatization. Much as Mancur Olson might predict, this ran into immediate opposition from public employees' largest union (FTF), the Socialdemocrats, and the Socialistisk Folkeparti, and was soon dropped. Consequently the bourgeois bloc could not make any substantial changes in the regime governing labor relations. Many public servants retain tenure, homogenous pay scales and access to grievance procedures. Only a very limited form of merit pay has been introduced (Kristensen 1987).
-- Reorientation Toward Outputs
Change thus concentrated on reorienting agencies and particularly managers towards output, because many of the changes could be achieved via administrative changes, not political ones. These changes concentrated in turn on budgeting processes, and resonate with similar changes in New Zealand. First "net" budgeting was substituted for "gross" budgeting. Net budgeting allowed agencies to retain for their own use any revenues in excess of their budget allocation which they collected through user and other fees. Under the old system of gross budgeting agencies had been required to turn over excess revenues to the Finance Ministry. Agencies immediately introduced user fees where ever possible. However, while this reduced pressure on the central state to provide funds, it did not change the internal behavior of agencies much. Many agencies simply abused their monopoly position in the market (e.g. for provision of licenses or postage).
Second, and more consequential, agencies changes from line item budgets to budget 'frames.' As in New Zealand the old system provided for line by line budget allocations without the possibility for shifting funds from one activity/category to another. Under the new framing system, agencies were given an upper limit (a 'frame') on what they could spend on personnel and administrative expenses, but were permitted to allocate funds pretty much as they pleased within those separate frames (Schick 1988). Framing covered only the non-statutory part of spending, including salaries. Framing thus had effects similar to parts of the 1988 State Sector Act in New Zealand.
Net budgeting plus framing partly freed agencies from detailed supervision, allowing the central administration to shift to output oriented monitoring. But the absence of any changes in wage fixation or managers' career paths made it difficult to take advantage of these two changes. While private sector wage bargaining has been getting less centralized in Denmark, there has not been any wholesale change in the law governing collective bargaining as in New Zealand, and public sector wage fixation continues to be a fairly centralized affair (Iversen 1992). Consequently the Finance Ministry has been unwilling to delegate authority over personnel matters to agencies for fear that agencies might hire unfire-able employees. Instead it resorted to a preannounced two percent real reduction in spending annually after 1988 in order to enforce a 12.5 percent reduction in public sector employment by 2000 AD. Combined with framing, this may force some internal reorganization and perhaps unofficial moves towards flexibility in work practices.
-- Holding Company Model and Competition
Efforts to separate policy making from implementation and to centralize financial control also ran into difficulties partly from the stresses of coalition government and partly from resistance from below. The bourgeois bloc first tried to centralize control over budget allocations into a 'coordination committee' in 1982. In the early years of the four party bourgeois bloc this coordination committee forced the traditionally independent ministers to stick to financial targets laid down by the cabinet via the committee. Simultaneously the Finance Ministry's Budget Department tried to insert itself into the other ministries' internal budget making processes. But by the end of 1983 the coordination committee met increasing resistance from individual ministers protecting their turf and from Kommunernes Landsforening (KL, the Federation of City and County Organizations), which ran the agencies that did most policy implementation. Hammered from without by a KL largely representing Social Democratic and Venstre controlled localities, and (as we will see) from within by one of the coalition's major parties, the Coordination Committee became an arena for deal making among competing agencies and groups, not a focus for restraining spending. Instead, coordinated bargaining between KL and the central state determined spending levels (Bentzon, 1988).
Venstre's and the Conservative's different ideas about reorganization and their different social bases also divided the coordination committee. The Conservatives wanted to centralize power into the new committee. Representing the same kinds of large, export oriented firms which had backed corporatization in New Zealand, the Conservative Party appropriated Finance Ministry ideas and advanced 'koncernledelse' -- business-like management. This implied basically what corporatization in New Zealand had implied, namely making agencies function like businesses, albeit businesses which happened to be state-owned. Within the fiscal bureaucracy the Finance Ministry's Budget and Personnel departments also advocated centralization, and after 1987 began enforcing the two percent reduction in the personnel budget frame (Hjortdal and Wolf 1990).
But Venstre, which controlled many local governments, was ambivalent about this, preferring instead to hamper central government through real cuts in taxation. Venstre, which represented small urban business and farmers, campaigned for deregulation, narrow privatization, and tax relief. Neither program gathered much public support, and only a few laws were removed and a few operations privatized (Bentzon 1988; Rys Nielsen 1989; Christiansen 1991).
Despite these conflicts, negotiations between the central state and KL did lead to a decline in the public share of GDP, bringing the deficit under control by 1986. But the impasse also opened up a space for experiments deriving more from a principal- agent view of the public sector's problems, and which mimicked the effort to separate policy making from execution. To compensate for an end to spending growth the central state, under the 'free city' (fri kommunerne) experiment, permitted some localities to ignore regulations in an effort to focus on substantive outcomes. It also allowed these local governments to concentrate on specific local social problems rather than centrally determined problems. Functionally, this mirrored the policy/implementation split sought by reorganizers in New Zealand. But substantively the cities used this space to engage in a number of experiments which brought consumers into the public sector to run (so-called brugerstyring) and to let local agencies manage themselves (selvforvaltning). Rather than attempting to control rent seeking per se, these changes tried to raise consumer satisfaction with public services.
In Australia the Australia Labor Party's (ALP) 1983 electoral victory accelerated processes already underway during the prior Liberal-National Party coalition government. This produced outcomes intermediate to those in New Zealand and Denmark, although Australia's federal structure makes a definitive statement impossible. Arguably the three largest Australian states each deserves its own section, as these states are as large as the other three countries examined here and display almost as much diversity. The Commonwealth (federal) government has put forward a softer version of New Zealand's changes, involving less privatization and fewer layoffs. At the state level, responses vary from Tasmania's (usual) torpidity to an almost New Zealand-like set of changes in New South Wales under the Greiner Liberal government in the late 1980s. Here we will concentrate on changes at the federal level, with an occasional glance at state level similarities.
-- Creating Wage Discipline
The Australian state decentralized control over internal personnel matters in two stages, and significantly changed the legal regime governing personnel practices for public servants. The 1984 and 1986 Public Service Acts exposed personnel to market pressures by reducing the number of job classifications and allowing managers to redeploy or hire and fire labor at will. The 1984 Act also shifted control over staffing levels from the Public Service Board to the Ministry of Finance, while the 1986 Act removed the right to appeal promotion decisions for the Senior Executive Service. From December 1984 to June 1990 the Commonwealth public service shed about 10 percent of its staff. As in Denmark, this decrease partly reflects 'flattening the hierarchy,' as the federal government is largely involved in planning and funding programs which state level employees actually carry out. But at the state level as well, the public service employment has fallen, and casual employment, particularly in New South Wales, has increased (Evatt Research Center 1989; Dept. of Finance 1990). Unlike New Zealand, Australia has retained a fairly centralized wage setting system.
-- Reorientation to Outcomes
As in New Zealand and Denmark input oriented control was relaxed in favor of control over global budgets and specification of outputs. The Financial Management Improvement Program (FMIP) and its subsidiary Running Costs System and Program Budgeting introduced in 1984 devolved spending authority to managers in ways functionally equivalent to budget framing in Denmark and the changes wrought by the 1988 State Sector Act in New Zealand. Managers have strict cash limits for personnel and other administrative expenses, but they can allocate this cash as they wish. Old line item controls on administrative costs and to an extent on staffing levels are gone. Managers can move a limited amount of expenditure forward and backward in time. The combination of the FMIP and the hire/fire provisions of the 1986 Public Service (Streamlining) Act gave public sector management essentially the same powers as in New Zealand. At the state level New South Wales has been most aggressive in changing work practices in this direction, followed by Victoria and Queensland.
The introduction of portfolio budgeting in 1987 and the simultaneous imposition of an across the board annual 1.25 percent reduction in budgets reinforced the reorientation of control towards outcomes and managerial flexibility. Portfolio budgeting brought together functionally related areas previously dispersed across several ministries, and allowed ministers to make trade offs among different program inside a given portfolio. Portfolio budgeting also permitted agencies to retain any savings they made over and above the 1.25 percent 'efficiency dividend' (i.e. cutback) and to use those retained funds to reward individual productivity. As in Denmark, the Federal government's inability fully to transform work practices largely controlled by other levels of government motivated this mandatory cutback.
-- Holding Company Model
Structurally, control over spending has been concentrated into an Expenditure Review Committee, dominated by the Department of Prime Minster and Cabinet. The ERC strictly holds departments to multi-year 'forward estimates' of their spending. As noted above the Ministry of Finance now controls over all staffing levels. Similarly the 1987 Machinery of Government reform consolidated 27 departments into 16, partly to eliminate middle management jobs, and partly to subordinate departments controlled by old style social liberals to those controlled by the new style SES (Pusey 1991). Further centralization is hampered by the existence of factional fights inside the ALP akin to those in the coalition in Denmark, and to divisions between the Ministry of Finance (responsible for budgetary matters) and the Treasury (responsible for economic advice and monetary issues).
Consequently the separation of policy making from execution is much closer to New Zealand than to Denmark in Australia. Michael Pusey's (1991) fine-grained study of the Senior Executive Service elite reveals a commitment to flatter hierarchies, increased central control over spending levels (but not details), and a reorientation towards outputs via portfolio budgeting -- in short a complete change in the geist of the Australian federal public service. Equally important, competitive pressures have been placed on agencies through a combination of full cost recovery user fees and pressures to contract out. As departments now charge each other for services, an opportunity exists for private sector firms to compete with internal public sector sources of goods and services.
The user fee principle has been extended into the welfare sector as well. In education recent reforms have set universities into open but limited competition with each other, with private institutions and with institutions abroad. Furthermore, through the Higher Education Service Charge, students are expected to contribute a percentage of their future earnings to cover the costs of tertiary education (Robison and Rodan 1990). Means testing in the health sector has gotten more extensive.
Competition in the provision of more typically commercial services and goods (trading enterprises) has also increased through a combination of privatization, deregulation and contracting out. This process has tended to produce corporatized public sector firms rather than going the second step, as in New Zealand, to full privatization.
Change in Sweden also falls somewhere between that in New Zealand and Denmark in terms of quantity. It also differed in significant qualitative ways from that in the other three countries until the accession of the Conservative (Bildt) government in 1991. Where federalism constrained change in Australia, the Social Democratic Party's (SAP) unwillingness to go all the way to open markets constrained change in Sweden. The SAP put forward reorganization proposals based much more on principal-agent problems than on rent seeking. Still, the overall thrust of policy was the same: to expose personnel to competitive pressures even if that was limited to competition among public providers. The Bildt government plans to introduce full public-private competition and significantly deregulate the economy.
-- Creating Wage Discipline
As in the other three states, Sweden tried to introduce a more flexible use of public sector labor. But this was done in ways that at first enhanced public sector workers' operational flexibility and control over their own jobs. that avoided the threat of redundancy. The SAP government created a new Ministry for Public Administration (Civildepartmentet) in 1982, and then cut a deal with public sector workers. Workers agreed to be redeployed and to work more flexibly in return for guarantees of new jobs and training if they were made redundant (Gustafsson 1987). From 1985 until 1988 the Civildepartment tried to increase worker participation as a way of increasing productivity, accepting the risk of 'opportunist agents' in order to benefit from happier, engaged workers (von Otter 1983; Premfors 1991; Saltman and von Otter 1992). But in 1988 the Finance Ministry successfully placed one of its former deputy ministers as head of the Civildepartment, initiating a change in policy.
Against the will of the public service union, the Civildepartment also attacked the so-called double imbalance in public sector wages in order to bring public sector productivity and wages more closely into alignment. Wage differentials increased in order to attract skilled labor, particularly holders of human capital, and wage setting was decentralized to the localities that do most implementation in order to hold down non- urban wages (Wise 1992). This led to greater militancy by public sector unions by the end of the 1980s. Unlike the other three states though, there was no effort to set up a special corps of administrators along the lines of the Australasian SESes.
-- Reorientation to Outcomes
SAP policy also aimed at decentralizing policy making to local government, and as in Denmark introducing elements of consumer management. As elsewhere this was reflected in changes in budgeting processes. Block budgeting (aka budget framing) already existed for most state agencies involved in commercial activities (Affarsverken). This was expanded to local government via three- year block grants (Schick 1986, 1990). Freed from central control, many local governments, particularly those not controlled by the SAP, resorted to widespread contracting out. About 15 percent of public consumption is now contracted out (OECD 1991). User pays also became widespread for non-welfare state agencies. Virtually all locally owned public providers of goods and services were formed into corporations charging users on a full cost recovery basis for publicly provided private goods. The Bildt government intends to extend this to health and education as well.
-- Holding Company Model
Sweden also separated policy making and implementation. The central state shifted away from issuing detailed rules to localities and instead allowed them to pursue various means towards centrally determined 'outputs' of services (Premfors 1991). This included functional consolidation of local agencies previously fragmented over a number of central ministries and the concentration of policy setting over public administration into the new Civildepartment. As in Denmark a number of localities were granted complete operational autonomy on an experimental basis.
The SAP introduced limited degrees of competition through 'kollektiv-kappestrid' -- public or socialist competition -- as a means towards more responsive services (SAMAK 1989). This strategy came out of the SAP's understanding that the public sector problem was an principal-agent problem more than a rent seeking problem. The segment of the SAP that controlled the Civildepartment from 1984 to 1988 thus favored giving public sector workers more operational autonomy, but subjecting them to consumer pressures by removing service monopolies. Thus in health care, for example, people were allowed to seek service from any provider. The SAP wanted to benefit from market driven productivity increases, but not in a way which would undercut the universality and public-ness of the welfare state, the centerpiece of their long post-War tenure in office. Consumers were permitted a 'choice' between different public sector producers, particularly in the health sector. But the SAP only grudgingly permitted competition from e.g. cooperatives of parents in day-care, or cooperatives owned by their employees. Despite this, many of the typical 'responsiveness' problems associated with agents setting work schedules for their own rather than consumer convenience were solved (Saltman and von Otter 1992). The Bildt government intends to introduce full competition from private service providers.
Did these reorganizations work from a strictly technical point of view? A brief overview of each country suggests that public sector growth has slowed or been reversed, and that efficiency has increased, with commensurate effects on the fiscal deficit. During this period total public sector employment in New Zealand declined by roughly 80,000, with the core public service losing about 29 percent of its staff. Some of this represented the effects of privatization. The fiscal deficit fell from 9 percent of GDP in 1984 to a fairly consistent 1 or 2 percent from 1988 to the present. The public sector's share of GDP has risen to about 39 percent as the government balanced the budget 'upwards' via tax increases, but net of interest payments it has fallen.
Reliable statistics on Danish government employment are not available. Fiscally, Denmark has held spending at roughly 1983 levels in real terms for four years, turning its 9.2 percent of GDP deficit into a 3 percent surplus by 1986. But in the absence of further reorganization this deteriorated over the next six years and Denmark has a 4.2 percent of GDP deficit projected for 1991. The public sector's share of GDP has fallen from its 1982 peak of about 60 percent to about 54 percent.
In Australia, from December 1984 to June 1990 the federal government shed about 10 percent of its staff, while state government employment fell slightly. Fiscally Australia went from a 7 percent of GDP public sector borrowing requirement and a 4.1 percent federal deficit in 1984 to a 2 percent surplus in 1989, before falling backing into deficit during the 1991/92 recession. Under its 'trilogy' policy, the government has tried to keep the ratio of public spending, taxation and deficits to GDP constant after bringing them into balance in 1987. In fact, public spending net of government trading enterprises fell about 5 percent of GDP from 1984 to 1989. The greatest change occurred at the federal level, where real spending fell by amounts ranging from 0.2 percent to 4.4 percent 1983 to 1989.
Swedish public employment has been stable since the early 1980s. The fiscal situation shifted from a seven percent deficit in 1982 to a 5 percent surplus in 1990, but then deteriorated sharply as the recession of the early 1990s hit Europe. Total public spending has fallen from its peak of roughly 66 percent in 1982 to about 60 percent in 1990.
None of this suggests anything more than an indirect connection between reorganization and an elimination of 'rent- seeking.' Growth could have slowed for other reasons as well. However in all four countries public sector workers' wages have lost ground relative to private sector workers' wages, and in Australia and New Zealand real wages have fallen as well.
The absence of a direct connection does not obviate the importance of fiscal bureaucrats' ideas, however, for these reorganizations were not simply technical exercises. Rather, reflecting political purpose and will, they also were what Terry Moe (1990) calls efforts at structural choice. Reorganizers tried to use institutional changes to constrain the future behavior of state agencies by changing the mix of incentives governing individual and agency behavior. The occasional effort to introduce consumer participation and worker self-management in Denmark and Sweden shows that alternative ideas based in principal-agent theory could have led to different outcomes than those brought about by the prevailing public choice theories.
Fiscal bureaucrats clearly intended for these administrative changes to decrease the power of small groups, particularly public sector workers, to seek rents, and to break up potential political coalitions between small groups of consumers and providers. Instead, to continue using E. S. Savas' (1987) language, fiscal bureaucrats and their extra-bureaucratic allies attempted to construct alliances of consumers, arrangers and/or financers of public services against producers of public services in order to push through reorganization. Whether or not public choice theory accurately captures the motivations of public sector workers and consumer groups, the process of reorganization has changed the political terrain on which they stand by changing the 'incentive structure' they face.
Politically the creation and insertion of a cash nexus between consumer groups and public sector producers also makes it difficult for consumers to capture state agencies. Shifting to markets changes the incentives for collective action. When non-market mechanisms determine the content, quantity and sometimes style of service provision it makes sense for consumers to organize to demand specific services, and to log-roll with other groups, including 'insider' producers, in order to maximize spending on their particular services. Consumers can rationally expect that they will gain more from this spending than they might lose from the incremental tax increase (present, or through deficits and debt, future) needed to fund it. Shifting to the purchase of service, even via vouchers, creates a tighter connection between personal taxes and service provision, precisely by removing that connection from inside the state. User-pays principles in an environment of competition (and thus the assumption of least cost provision of services) means that users have to bear the cost of additional services. As in markets, demands for additional quality or for services more closely tailored to consumers' needs should now take the form of 'exit' to other providers/firms rather than voice to politicians. This relieves the state of responsibility for service quality and to a certain extent quantity. It makes private decisions about what 'public' services will be consumed, shifting responsibility to the consumer.
This shift to market pressures inside the state also imposes discipline on the group fiscal bureaucrats really seem to fear most: other public servants. Even more so than consumers of public services, producers possess the compactness of numbers and the identity of interests that facilitate collective action in defense of the rents reorganizers claim inheres to their work conditions. By opening service provision up to competition, fiscal bureaucrats can constrain producers from expanding this rent seeking activity and also pitting them against one another through market competition. Competitive pressure, whether from other public sector producers trying to maximize their income under the new competitive regime or private producers, limits the ability of any given group of public sector workers to protect job and pay conditions diverging from the general level in society. Increased competition does constrain pay demands to levels in line with productivity increases, and contracting out can simultaneously expose public sector workers/agencies to the same kind of international competition firms in the exposed sector face. Indeed, multinational firms have entered the market in, for example, municipal garbage collection in Australia and in Sweden's health sector.
Finally the political nature of reorganization can clearly be seen in its limitation to areas outside the old state. The core activities of the old state -- policing, taxes, and most of all the fisc and central bank -- remain largely untouched by the intrusion of markets. As many in New Zealand have noted, no one in Treasury has ever suggested that the Treasury's functions be contracted out. Introducing markets in fact tends to build a moat around these old core functions, insulating them from demands by other parts of the public sector for more money. Creating markets in the welfare state thus represents one of several possible responses to the fiscal stress that most industrial country governments experienced in the late 1970s and early 1980s.
Though this article describes events in four small countries, the lessons are not small. The conditions each country faced in the early 1980s -- recession, fiscal deficits, sustained, perhaps increased demand for services -- all inhere to state and local government in the US and elsewhere today (Osborne and Gaebler 1992). In Britain, where these fiscal conditions emerged in the late 1970s, and where the language of public choice theory is also pervasive, reorganization of the welfare state has proceeded along similar lines, particularly after the Local Government Act 1988. The old administrative state is likely to lose further ground to the market driven state over the next decade.
(1) This distinction is artificial because all social welfare services could in principle be produced privately (as many are in the US), and many accepted government services in areas with so- called natural monopolies are also amenable to private, albeit regulated, production. I maintain this distinction because most analysts typically separate out government owned businesses from social services and natural monopolies.
(2) In layman's terms, a one percent increase in GDP led to a greater than one percent increase in public spending; in Sweden, 1973-1978, for example a one percent increase in GDP led to 1.62 percent increase in public spending. The unweighted OECD average 1973-1978 was 1.36; the unweighted average for these four countries was 1.45. All four countries lay above the median elasticity.
(3) The Australians, for example estimate that non-tradeables account for about 30 percent of the production cost of Australian exports.
(5) But see Offe (1984) for an argument against any 'single' logic of collective action.
(6) Some argue that a disjuncture between consumer demand and service provision is good where consumers' limited time horizons might lead them to underconsume 'merit' goods like education and preventative health care, whose benefits are only apparent over long periods of time. See Therborn (1987) for a systematic argument.
(7) The usual caveat applies here, especially with regard to federal Australia: change has not occurred in all policy areas (yet?), nor evenly across policy areas. But there is sufficient similarity to warrant the general assertions made here.
(8) The coalition comprised two large parties, the Conservative Peoples Party and Venstre (Agrarian) Party, and two small parties, the Christian Peoples Party and the Center Democrats. After the 1988 election, the two smaller parties were ejected in favor of a middle sized, socially liberal but fiscally moderate party, Det radikal Venstre. Highly fragmented and lacking an absolute majority in parliament, this coalition in practice governed at the sufferance of the largest party, the Social Democrats. Much legislation reflected compromises between the Conservative Party and the Social Democrats. In 1993 the Social Democrats assumed power again.
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