Why Most Developing Countries Should Not Try New Zealand's Reforms Source:

Why Most Developing Countries Should Not Try New Zealand's Reforms
Author(s): Allen Schick
Source: The World Bank Research Observer, Vol. 13, No. 1 (Feb., 1998), pp. 123-131
Published by: Oxford University Press
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Why
Should
Most
Not
Developing
Try
New
Countries
Zealand's
Reforms
Allen Schick
Duringthepast decadeNew Zealandhasintroducedfar-reaching
reformsin thestructureand operationofgovernmentdepartments
and agencies.Thismodelhasattracted
interestin developingcountriesbecauseit promisessignificantgains in operationalefficiency.But developingcountries,whichare dominatedby informalmarkets,are risky
thatbasicreforms
to
applyingtheNewZealandmodel.Theauthorsuggests
candidatesfor
rule-based
strengthen
government
andpavethewayforrobustmarketsshouldbe undertakenfirst.
Developingand transitionalcountrieshave an understandabledesireto accelerate
publicsectorreformby adoptingthe most advancedinnovationsdevisedby industrialcountries.This interesthas been stimulatedby the New Zealandmodel,which
gives public managersbroaddiscretionto operatewithin an accountabilityframework that specifiesthe resultsto be achievedand closely monitorsperformance.
Duringthe pastdecade,dozensof countrieshavesentdelegationsto New Zealandto
observeits avantgardemanagementpracticesand to interviewgovernmentofficials
on how the new systemsandprocedureshaveaffectedthe cost anddeliveryof public
services.The WorldBankandotherinternationalorganizationshaveshowcasedNew
Zealand'sreformsat variousconferences,and some of the architectsof the reforms
have crisscrossedthe globe extolling the virtuesand portabilityof their country's
versionof results-oriented
publicmanagement.
Despite the interestand the salesefforts,only a few developedcountries(suchas
Icelandand Singapore)haveadoptedselectedfeaturesof the model;others(suchas
Swedenand the United Kingdom)haveembraceda managerialethic without subscribingto the hard-edgedcontractualismthatdifferentiatesNew Zealand'sreforms
fromthose triedelsewhere.To this writer'sknowledge,however,not a singledeveloping or transitionalcountryhas installedthe full New Zealandmodel, although
quitea few havebeenenchantedby the prospectof leapfroggingto the frontranksin
the internationalreformsweepstakes.A few countries(suchas Mongolia)arein the
The WorldBankResearchObserver,vol. 13, no. 1 (February1998), pp. 123-31
C) 1998 The InternationalBankfor Reconstructionand Development/ THE WORLD
BANK
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123
earlystage of adoptingselectedfeaturesof the system,but it is much too earlyto
gaugehow fartheywill go in embracingits basictenets.On the whole, industrialand
developingcountrieshave not implementedsuch reformsbecausethe reformsare
beyondtheirreachor do not fit theircurrentneeds.
I drawthisconclusiondespiteNew Zealand'senormouscontributionto the theory
and practiceof public management.Not only has the menu of reformpossibilities
been greatlyexpanded,but New Zealandhas broughtits publicmanagementmuch
morecloselyinto line with institutionaleconomicsandwith contemporarybusiness
practices.And the rigorwith which the model has been appliedis impressive.This
was not a case in which reformersselecteddiscreteentriesfrom a largemenu of
reforms.The change agendawas driven by ideas that have only recentlyentered
mainstreameconomics,and the ideaswereappliedwith full fidelityto theirinternal
logic. But I do not acceptthe view that New Zealandofferspracticalguidanceon
how developingcountriesshouldsurmountdeficienciesin publicmanagement.
I believethatthereareimportantpreconditionsfor successfullyimplementingthe
newpublicmanagementapproachandthattheseshouldnot be ignoredby countries
strivingto correctdecadesof mismanagement.In contrastto those who take the
positionthatmanagerialdeficienciesshouldbe the drivingfactorin determiningthe
suitabilityof these type reforms,I arguethat they shouldbe deterringfactors.The
greaterthe shortcomingsin a country'sestablishedmanagementpractices,the less
suitablethe reforms.
The New ZealandModel:Governmentby Contract
Since 1988, New Zealandhas implementedan enormousnumberof management
reformsthataddup to an integratedconceptof how governmentshouldwork.That
conceptis expressedin the headingto this section.Virtuallyeveryelementof reform
has been designedto establishor strengthencontract-likerelationshipsbetweenthe
governmentand ministersas purchasersof goods and servicesand departmentsand
otherentitiesas suppliers.Hundredsof contractsareformallynegotiatedeachyear;
the typicalcontractspecifiesthe resourcesthat one side will provideand the performance the other side will produce.Ministersare alwayson the resource-providing
side of the relationship;chief executivescan be on eitherside, dependingon the role
they are playing.A chief executiveprovidesresourcesin negotiatingemployment
contractswith managersbut promisesresultsin negotiatingpurchaseagreements
with ministersand performanceagreementswith the StateServicesCommissioner.
This "newcontractualism"
replacesthe implicitor relationalcontractsthat characterizetraditionalpublic administration.'Contractsconvertthe budget from an
understandingbetweengovernmentandparliamenton the amountsto be raisedand
spent into an explicitstatementof whatwill be done with the resourcesto be made
124
The WorldBankResearchObserver,vol. 13, no. 1 (February1998)
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available.
In a similarvein,performance
theold civilservice
agreements
displace
ethicof trustand responsibility
with accountability
for the resultsexpectedfrom
eachchiefexecutive.
NewZealand
hasgoneto extraordinary
to create
conditions
underwhich
lengths
formalcontracts
arenegotiated
andenforced.It hasrestructured
manydepartments
to decouple
policymaking
functions
fromthedelivery
ofservices.
(Forexample,
the
nationaldefenseorganizationwas split into two separateentities:the Ministryof
whichprovides
Defense,
togovernment;
policyadvice
andtheDefense
which
Forces,
carryout assignedoperations).Under the new system,ministerscan purchaseser-
vicesfromgovernment
or fromanyalternative
departments
publicor privatesupplier.Appropriations
areon an accrualbasis,so thatthefullcostof thegoodsand
isincorporated
services
inthepurchase
price.Infact,topromote
competition
among
suppliers,
appropriations
includeanamountforthetaxon goodsandservices
that
would be paid in a privatetransaction.In a similarvein, a capitalchargeis leviedon
the net worth(asshownon its balancesheet)of eachdepartment.
Thischargereflects the opportunitycost of money and resemblesthe internalrateof returnex-
pectedby firmsfromtheiroperatingunits.
Contract-like
arrangements
havebeenextendedto policyadviceas well,so
thatministers
canopt to obtaininformation
andideasfromconsultancies
and
otherexternalsources.To put alternative
supplierson an equalfooting,the governmentaccordsthe chief executivesof departmentsthe same operatingflexibil-
itythatis enjoyedbyexecutives
in nongovernmental
organizations.
Chiefexecutives are given a block of resourcesfor each class of outputs they contract to
purchase,andtheyhavediscretionto selectthe mixof inputsusedin producing
the outputs. These outputs are specified in detail so that the government can
havereasonable
assurance
thatdepartments
areproducing
theoutputscontracted
for.Underthe presentsystem,whenthe budgetis tabledin Parliament,
each
departmentpublishesa departmental
forecastreportthat, amongotherthings,
specifiestheoutputsit will producein the nextfinancialyear.Shortlybeforethe
startof the year,the outputsarespecifiedin greaterdetailin purchaseagreements signed by the chief executive and the minister purchasingthe services.
Multiple purchaseagreementsare written when more than one minister pur-
chasesservicesfromthe samedepartment.Afterthe yearis done, eachdepartment publishes an annual report that specifies the outputs actually produced,
thereby
thegovernment
enabling
to determine
whether
thetermsofvarious
contractshave been fulfilled.
Beforeassessing
whetherthe New Zealandmodelis appropriatefordeveloping
countries,it is necessaryto considerits effectivenessat home. In my view, organizational performancehas been significantlyenhanced.But this favorableassessment
carriescertaincaveats,some of whichwerediscussedin my reportcommissionedby
theNewZealand
Government
(Schick1996).
Al/en Schick
125
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* The New Zealandmodel emphasizesmattersthat can be specifiedin contracts,
suchas the purchaseof outputs,but givesinadequateattentionto outcomesand
the government'sownershipinterestbecausethey do not fit easily into the
contractingframework.
* Robust contractingdependson voluntary,self-interestedaction. Sometimes,
however,self-interestdefeatsthe government'scollectiveinterest.In the early
yearsof reform,for example,effortsto establisha seniorexecutiveservicewere
underminedby managerswho preferredto contracton an individualbasis.
* Contractualismmay weaken traditionalvalues of public service, personal
responsibility,and professionalism.It can induce managersto take a checklist
approachto accountability-"if it's not specified,it's not my responsibility."
do not themselvescreatearms-lengthrelationships
* Contract-likearrangements
in the publicsector,nordo theyenablethe governmentto toughenits insistence
on performance.In mostcases,governmenthaslittlechoicebut to contractwith
internalsuppliers,typicallyits own departments.If these fail to perform,the
governmentcan sackthe chief executiveand applysome pressure.But it rarely
hasthe exitoptionthatis essentialto the effectivenessandenforcementof private
contracts.
* Chiefexecutives,seniormanagers,andothersattributemostof the improvement
in governmentperformanceto the discretiongiven to managersratherthan to
formalcontracts.Managersdifferon how muchvalueis addedby contracts,but
few think that they have been the main contributorto higher operational
efficiency.
* Contractingis not costless.Negotiatingand enforcingcontractsentailsenormous transactioncoststhathavenot beensystematically
studied,althoughthey
takea deepbite out of operatingbudgets,especiallythoseof smalldepartments.
These concernspoint to the unfinishedbusinessof publicsectorreformin New
Zealand.There is much more to be accomplishedbeforea final assessmentcan be
made. At this earlystage, one is justifiedin acknowledgingthat the countryhas
vastlyenlargedthe stockpileof publicmanagementideasand practices.In promoting internal marketswithin government, it has devised creativealternativesto
privatizationwhile carryingthe pursuitof operationalefficiencywell beyondstandardmarket-typemechanismssuch as usercharges.
Yetone shouldnot losesightof the factthatthesearenot realmarketsandthatthey
do not operatewith realcontracts.Rather,the contractsarebetweenpublicentitiesthe ownerand the owned.The governmenthasweakredresswhen its own organizations fail to perform,and it may be subjectto as much capturein negotiatingand
enforcingits contractsas it was underpre-reformmanagement.My own senseis that
whilesomegainmaycomefrommimickingmarkets,anythinglessthanthe realthing
deniesgovernmentthe full benefitsof vigorouscompetitionand economicredress.
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The InformalPublic Sector
In New Zealand,formalcontractsand internalmarketswere feasiblebecausethe
countryhad a robustmarketsectorand establishedmechanismsfor enforcingcontracts-conditions thatareoften absentin developingcountries,which tend to have
an informaleconomywith relativelyweakspecificationof propertyrightsand other
formalprocessesto regulateeconomicactivity.
Informalityis not a new concept;shortlybeforeNew Zealandembarkedon its
reforms,de Soto (1989, p. 12) emphasizedinformalityasthe distinctiveconditionof
the Peruvianeconomy. Characterizingit "asa grayareawhich has a long frontier
with the legalworld and in which individualstakerefugewhen the cost of obeying
the law outweighsthe benefits,"de Soto found that the informaleconomysupplied
morehousingto Peruviansthan did the government,was the mainsourceof public
to startbusinesseswhen theywereblocked
andenabledentrepreneurs
transportation,
by governmentregulations.He alsoconcludedthat the informaleconomywas inefficient, bred corruption,denied home and businessownersaccessto capital,and
retardedeconomicdevelopment.
De Soto and othershavefocusedon informalityin the marketeconomy.I believe
thatinformalityis as pronouncedin the cultureof governmentas it is in the marketplace.In fact,the parallelincidenceof informalityin the publicandprivatesectorsis
not happenstance.Norms, practices,and ideasmigratefromone sectorto the other,
as does the deadhandof overregulationand the eagernessof governmentofficialsto
look the otherway in exchangefor favors.The emergenceof open, robustmarketsis
as much a preconditionfor modernizingthe publicsectoras it is for developingthe
privateeconomy. It is highly unlikelythat governmentwill operateby the book
when rulesand regulationsare routinelybreachedin privatetransactions.If New
Zealand-stylecontractsare at one end of the spectrum,then informalityis at the
otherend. And if contractsand the ruleof law areunderdevelopedin businessrelations, it is highly improbablethat they can be effectivelyappliedin the conduct of
the government'sbusiness.It would be foolhardyto entrustpublic managerswith
completefreedomover resourceswhen they have not yet internalizedthe habit of
spendingpublic money accordingto prescribedrules.Many developingcountries
have formal managementcontrol systemsthat prescribehow governmentshould
operate.Thesesystemsareoverseenby powerfulcentralagenciessuch as the finance
ministry,the civil serviceboard,and the procurementagency.On papereverything
is done accordingto rule.The civil servicesystemis basedon a detailedclassification
of positionsand ranks,each with its own job descriptions,skill and experiencerequirements,eligibilityrules,and pay scale.In this formalcontrolprocess,operating
units must obtain advanceapprovalfrom the civil serviceagency (and sometimes
fromthe financeministryas well) beforethey can fill vacantpositions.Formalrules
dictateeverystep in the hiringprocess:announcingthe position, establishingeligi127
Allen Schick
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and
thewinningcandidate,
appointing
applications,
processing
bilityqualifications,
bya central
payandgradelevels.Eachstepis monitored
settingeachemployee's
withtherules.
compliance
agencyto assure
thisis notthewaymanycivilservants
get
however,
Whereinformality
flourishes,
to
orhavecontributed
theyknowtherightperson
theirjobs.Theyarehiredbecause
official
orcause.Because
paylevelsarelow,theymaybeassigned
someorganization
on
whoappear
Manymaybeghostworkers
to onepositionbutbepaidforanother.
andthosewho
butnotatwork;somemayholdtwoormorepositions,
thepayroll
scale
theofficialsalary
showuponthejobmayputinlessthana day'sworkbecause
civilservice
pay.Thustherearetwocoexisting
is a lot lessthana day'sreasonable
To
thatthere
the
other
on
actual
on
formal
say
practices.
based
rules,
systems-one
thattherulesalwaysareignored
or that
is an informal
systemis notto conclude
thesepathologies
it is to
mayoccur.Rather,
flourishes,
although
always
corruption
in
the
case
of
the
civil
to
service,
contributespublicorder;
arguethattheinformality
to recruit
andretainskilledpersons.
thegovernment
it enables
the
hastwobudgets:
Thegovernment
alsoreignsinthebudgetarena.
Informality
which
andtherealonethatdetermines
totheparliament
publiconethatispresented
spending
billsarepaidandhowmuchisactually
budgetpromises
spent.Theformal
fiscalcapacity;
theinformal
macrobudgetfacilitates
thatexceeds
thegovernment's
someof theexpenditures
bytheparliaapproved
economic
stability
bynotmaking
theinformal
oneafterthespending
ment.Theformalbudgetisknownin advance,
document
to
therearetwobudgets,
thetemptation
isfortheformal
occurs.Because
Theprocess
asthe
thusfeedson itself.Inasmuch
beunrealistic
andunachieveable.
thatwillnot
willnotbeimplemented,
officialbudget
whynotcramintoit spending
inwhichtheamounts
Thisbehavior
leadsto cashflowbudgeting,
actually
bemade?
morebycashpayments
thanbytheamounts
authorized
by
spentaredetermined
inwhichthegovernment
several
"rebudgets"
budgeting,
law.Italsobreeds
repetitive
andresources.
timesduringtheyearto aligndisbursements
redtape,unreOntheonehand,it cutsthrough
Informality
is a mixedblessing.
on theotherhand,it opensthedoorto
andbadpolicies;
bureaucracies,
sponsive
Thepositivesideof
corruption
andinefficiency.
institutionalizes)
(andsometimes
deof fiscaldiscipline
in publicmanagement
themaintenance
includes
informality
despiterigidrulesand
of publicservices
andtheprovision
budgets
spiteunrealistic
evasion
ofcivilservice
rules
controls.
Butthecostsarehigh;theyinclude
widespread
thetimeandresources
of
andothercontrols,
spentin beatingthesystem,distrust
andinattention
to theoutputsandresultsof
routinized
corruption,
government,
Itwould
andtheperformance
ofgovernment
andofficials.
agencies
publicprograms
civilservants
indevelandproductive
ifsomeofthemostesteemed
notbesurprising
skillstooutarethosewhousetheirentrepreneurial
andmanagerial
opingcountries
wittheformal
controls.
Butwhenbureaucrats
arevaluedfortheirverveinoperating
in thesystemto losesightof the
it is easyforthemandotherstrapped
informally,
128
The WorldBankResearchObserver,vol. 13, no. 1 (February1998)
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publicpurposesthey areservingand the outputsthey aresupposedto produce.It is
only a shortstep from disablingthe controlsto bendingthe rulesfor dishonorable
purposes.
It is a much longer step for them to adopt New Zealand-stylereforms,and a
much riskierone. No countryshould move directlyfrom an informalpublicsector
to one in which managersare accordedenormousdiscretionto hire and spend as
theysee fit. New Zealanddid not makethisleap,andneithershouldothercountries.
BeforereformNew Zealandoperatedunderbudgetsthat controlledspendingand
correspondedto actualtransactions;it also had a civil servicesystemthat governed
how public employeeswere hiredand paid. In otherwords,it had a formalpublic
sector.This is an essentialpreconditionfor adoptingelementsof the New Zealand
model.
The Logic of Development
If contract-basedpublicmanagementis beyondreachand informalityis an unsatisfactorystate of affairs,what can developingcountriesdo to improvegovernment
operations?In my view, significantprogresscan be madethrougha logicalsequence
of steps that diminishthe scope of informalitywhile buildingmanagerialcapacity,
confidence,and experience.This concludingsectionoutlinessome of the key steps.
First,progressin the publicsectorrequiresparalleladvancesin the marketsector.
As long as the economyoperatesaccordingto informalnormsand propertyrights
aredefinedmoreby practicethan by contract,the governmentis not likelyto make
much headwayin installingrule-basedpublic management.There may be special
situations (in colonial regimes,for example)that enable a developingcountryto
establisha skilledcivilservicesystem,modernfinancialmanagement,andothertrappings of formalpublic managementeven though the marketsector is laggingbehind. But the much more typical situationis one in which marketdevelopment
precedesor coincideswith the developmentof robustpublicinstitutions.Singapore
and Chile arecountriesin which economicdevelopmentandmodernizationof public managementhaveproceededin tandem.
Formalizingthe marketsectordoes not ensurereciprocalchangesin publicinstitutions,however.Informalityis as much a matterof cultureas of practice;it defines
socialroles,relationships,and legitimateand expectedbehavior,and it persistseven
when the underlyingconditionsthat gave rise to it vanish.There are quite a few
countriesin which the developmentof the public sector has not kept pace with
economicchanges. These countriestypicallyhavea competitivesectorthat is open,
formal,and lightly regulated,as well as a heavilyregulatedsectorthat dependson
informalcontracts,embeddedtraditions,and governmentprotection.The two culturescan operateindependentlyof one anotherfor an extendedperiod,but sooner
Allen Schick
129
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orlatertheywillbedrivenbyscandal,
financial
orcitizenpressure
mismanagement,
to modernize
thepublicsector.
Second,modernizingthe publicsectormeansestablishingreliableexternalcontrols,
as describedabove.As old-fashionedas externalcontrolsmay seem to be, they are
buildingblocksfor a formal,rule-based,honestpublicsector.Operatingin an externallycontrolledenvironmentis an essentialphasein the developmentprocess.It gives
managersthe skillsto manageon theirown, buildstrustbetweencentralcontrollers
and line managersand confidencebetweencitizensand government,and encourages
managersto internalizea publicethicof properbehavior.As thesebasicconditionsof
formalmanagementtakeroot, it shouldbe possiblefor centralcontrollersto easethe
regulationsby givingline managersbroaderdiscretionin operatingtheirprograms.
This process,however,can bearfruitonly if the controlsareexercisedin a fairand
realisticmanner.In the caseof civilservicerules,this meansthatpaylevelsriseas the
economydevelops,the numberof ghostpositionsdeclines,andpublicemployeesare
given opportunitiesto acquirenew skillsand advanceprofessionally.If theseconditions areabsent,learningwill takeplace,but it will be pathological:how to beatthe
system,how to outmaneuverthe controllers,how to get paidwithoutreallyworking,
and so on. Realismmustalsopervadebudgeting,anotherarenathatoften is infected
by pervasiveinformality.The budgetpresentedto the parliamentmust be one that
can be implemented,not a politicalwish list that promisesmore than the government intends to spend. Moreover,agenciesmust inculcatethe habitsand ethic of
spendingaccordingto the planslaid out in the budget.In otherwords,the budget
must be treatedas an implicitcontract.Only then does it makesenseto convertthe
budgetinto an explicitcontract.
Third, politiciansand officialsmust concentrateon the basic processof public
management.They must be able to control inputs beforethey are calledupon to
controloutputs;they must be able to accountfor cash beforethey areaskedto account for cost;they mustabideby uniformrulesbeforethey areauthorizedto make
theirown rules;they must operatein integrated,centralizeddepartmentsbeforebeing authorizedto go it alone in autonomousagencies.
Once the basicshave been mastered,the public sector should be organizedaccordingto the principlesof internalcontrol. Externalcontrol and New Zealandtype managerialdiscretionare not the only options for organizinggovernmental
operations.Internalcontrolis a thirdpossibility.In a formalsense,internalcontrol
refersto the systemsandproceduresusedby agenciesto assurecompliancewith rules
and to safeguardpublicassets.In a behavioralsense,internalcontrolmeansthat the
rulesareacceptedas fair,workable,and legitimate.Without this normativeunderpinning, no systemof internalcontrolcan be effective.
In practice,internalcontrolgivesmanagersbroaderdiscretion;it shiftsthe focus
from ex ante controlto ex post audit, from controlof individualactionsto control
within a broadband,fromreviewingspecificactionsto reviewingsystems.It means,
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for example,that civil servicerulesdictatethe total numberof positionsor the total
within broad employmentcategoriesand that operatingdepartmentsmake their
own hiringdecisionssubjectto oversightby centralagencies.In the financialsphere
it meansthat if funds are available,agenciescan makepurchases,authorizetravel,
and takeotherspendingactionswithout obtainingpriorapproval.
Singaporeillustratesthe progressionfromexternalto internalcontrolsand thence
to New Zealand-typearrangements.
On gainingindependenceand for manyyears
afterward,Singaporehad a line-itembudgetthat specifiedthe positionsto be filled
and the items to be purchased.During the 1980s block budgetswereadoptedthat
shifted the governmentfrom externalto internalcontrol, and in the mid-1990s a
"budgetingfor results"systemwas adoptedthat implementsseveralelementsof the
New Zealandmodel.
Singaporeprovidesanotherlesson for countriesseekingto advanceto the first
rankof developingcountries.The processof developmentdoes not haveto stretch
out over generations.If developmentproceedsin a logical order,progresscan be
rapid,especiallyif modernizationof public institutionsadvancesapacewith modernizationof the marketsector.To many developingcountries,New Zealandis at
the cuttingedge in publicmanagement,but theywill not get thereby takingshortcuts that turn into deadends.
Notes
Allen Schickis a consultantin the PublicSectorGroup,PovertyReductionand EconomicManagement, of the World Bank.He wrotethis articlewhile on assignmentto the EconomicDevelopment
Institute.
1. The term is takenfrom Davis, Sullivan,and Yeatman(1997). See especiallyMatheson(1997)
in that volume.
References
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Davis, Glyn, BarbaraSullivan, and Anna Yeatman,eds. 1997. The New Contractualism?
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Harperand Row.
Matheson,Alex. 1997. "The Impact of Contractson Public Managementin New Zealand."In
Davis, Sullivan,and Yeatman,eds. (1997), pp. 164-79.
Schick,Allen. 1996. "The Spiritof Reform:Managingthe New ZealandState Sectorin a Time of
Change."Reportpreparedfor the State ServicesCommission,Wellington, New Zealand.Processed.
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