Prime Minister on the Political Dimmensions of State Sector Reform - October 7, 1999

Grand Barbados Hotel

October 7, 1999

It is customary to start these presentations with an analysis of a hostile external environment making impossible demands on the capacities of small vulnerable states. It is customary to describe a global marketplace where competition is king and where the locomotive of structural change threatens to run us down, or at best, to leave us spluttering in its wake. It is customary to rehash familiar rhetoric, describe significant trends and events, and ultimately to suggest that we cannot seriously expect "to oppose the slings and arrows of outrageous fortune". It is customary, but fortunately not mandatory, and so I will begin, if you please, at the other end.

If our focus is the political dimension of state sector reform and policy change, then let us begin our science with the body politic. If you will forgive the pun, let us begin with an examination of our internal organs and the responsibility we must assume for the state of the body politic. In public speaking on such matters, there is a dangerous trend, you see, of perpetuating a perspective that does not center ourselves as prime determinants of our common condition, indeed our common destiny. But reform or not, that is the challenge, ladies and gentlemen: not only to explain our troubles but "to take arms against that sea of troubles and by opposing end them". We must start from the other end with a perspective on reform and policy change that accords unto us the responsibility for designing our economic, social and political spaces.

REFORMATION BY DESIGN

I would submit then that, all reform is essentially a process of redesign. More precisely, state sector reform is the redesign of state machinery, and its reflection in new policy orientation. If we see ourselves as the architects of that process, then we must have a design brief. We must know to what end we are reforming, or restructuring, or rebuilding. In short, we should have a vision - hopefully a shared vision - of that future society we wish to inhabit. We also should have a guiding logic that suggests the means through which we can generate economic resources to achieve that end. Hopefully, by the end of this exercise, we will find the means and the end to be mutually reinforcing.

If we start our science as I have described, we may well ask: Why reform at all? The answer I offer runs thus: societies are organic and their needs change with time. While minor adjustments occur spontaneously, there come critical junctures when we must catalogue our changing needs and consciously embrace new strategies to achieve them.

In a nutshell, we need occasional conscious reform to garner and harness our resources to build the future we envision. On this premise, it is our needs that change. While the global environment certainly influences how we procure our needs, as communities we remain wholly responsible for determining what those needs may be.

In this scenario, state sector reform is just one of the tools that civil society may use to achieve its goals. Education is another, as is a functioning justice system and various mechanisms of income redistribution. Societal goals on the other hand, may include raising the standard of living, achieving social equity, building viable communities and preserving the environment that sustains us all. If we fail to define enduring societal goals and to enshrine those goals in long-term policy, then we will fail to situate initiatives like state sector reform within their proper context. The result will be a series of disconnected initiatives and random policy shifts yielding a disfunctional matrix of incompatible and inconsistent institutions.

THE HORNS OF THE DILEMMA

Let us assume that there has been societal evolution beyond the involuntary amalgam of opposing classes that we inherited at independence. Let us also assume a reordering of economic classes has shifted societal needs; that education, adult suffrage, the development of democratic systems, and the growth of an indigenous private sector are evidence of that evolution. If post-independent governments first assumed the role of omnipotent architects of that process, then it stands to reason that modern government, enlightened by its own experience, must now step back to objectively critique itself. But, here lies both justification and dilemma.

As both an agent and a vehicle of change, government has also evolved. At various times its orientation has shifted dramatically. For example, there have been shifts from centralized planning - fashionable in the 60s and 70s - to deregulation and the logic of liberalization. There has been the deligitimation of the Keynesian welfare state and the rise and fall of supply-side, top-down theory. Thatherism, and its alter-ego Reaganonomics, have influenced the multilateral institutions which we perceive as pillars of the international community. There has been the end of the cold war and a storm of economic revision heralded by the capitalist renaissance of the last decade.

David Marquand, Professor of Politics, British MP and author of The Unprincipled Society, offers an opinion on an evolving British economy:

The hallmarks of the restless, voracious global capitalism of today, with its down-sizing, delayering, and casualization, its repeated restructurings and its spreading atomization, are discontinuity, instability and insecurity.

Even for us, the picture is not so unfamiliar. Indeed, we might recognize the danger signs in our own fragile communities which continue to evolve without a relevant development paradigm. As fledgling economies, the Caribbean has danced to the shifting beat of foreign and homegrown political expediency. We have imported instability and mixed results but in general, our significant growth has come at a high social price.

In our own context, the greatest loss has been the abandonment of principles of social equity. The spin-offs remain with us and are now among the chief preoccupations of our young societies: crime, chronic poverty, unemployment, social disintegration. All of these we have tended to accept as inevitable spin-offs of our store-bought prosperity. Now laden with those ills, the quiet clamour to reform state sectors finds us scrambling to recapture a middle ground; an economic and political ideology that is neither pure laisser-faire nor leftist; a moral ideology that is just but pragmatic; that produces economic growth with a social conscience.

The dilemma arises also from our adoption of GDP per capita as the paramount indicator of economic success. It derives also from our recent preoccupation with wealth creation rather than the maximization of social welfare. It arises because we have perpetuated a dependence on external aid and financial inflows and we have unwittingly or otherwise, imported the agendas and the philosophies of the countries from which we have begged and borrowed. We forget sometimes that aid, particularly tied aid, can make us custodians of resources not intended for our exclusive benefit.

LEADING BY EXAMPLE

After three decades of ideological ambivalence, state sector reform in St. Lucia is not only desirable but inescapable. I would like to highlight some specific areas that display classic characteristics.

By way of example, our Government finds itself as a major shareholder in the local electricity utility. But the utility is not a state corporation in the true sense of the word. It is a private company in which the state is shareholder; indeed, it is that terrible thing called a private monopoly. But, it pays healthy dividends to its shareholders including the government. In fact, the company enjoys a price-setting formula that guarantees a specific rate of return to its shareholders. It is not, in the public interest, answerable to any regulator. But if the electorate consists primarily of consumers, then elected government has a responsibility to protect the consumer. If it is the government, then how does government separate its profit maximization shareholder instinct from its paternal role as regulator? This is the dilemma.

We are beginning to find part of the answer in the articulation of new policy; in the creation of a public utilities monitoring unit which will itself be a new hybrid of regulator and enforcer of negotiated contracts with the consuming public. But as we know, the creation of new entities guarantees nothing. Sustained political will to maintain the integrity of such a system is by no means inevitable. Clearly, an articulate, empowered and vigilant consumer protection mechanism needs to evolve from the bottom up. Should Government further divide its loyalties by investing and trusting in such a process?

The solution to tangled loyalties is often a focus on the essential; the original objective. But can anyone remember what that is. Divestment may be an option, but then revenue from dividends fuels the national budget, financing other public goods like education, health services and support for the arts. Which of these is dispensable?

A second example: As the keepers of the social insurance system, governments have a proclivity – as the US Congress knows only too well – to borrow "creatively" from that resource pool. That is a conflict in itself, but even more worrisome is government’s ability to significantly influence liquidity in the private banking system by shifting national insurance deposits. That may not be bad for monetary policy. But consider our case where Government was, until recently, the only shareholder of the National Commercial Bank. That bank just happened to hold the lion’s share of social security deposits and just happened to be where government went to borrow for projects of sometimes worthy and sometimes dubious.

In the first instance, our policy response has been to reduce government influence over the bank by diversifying its shareholding. This we see as a process of increasing autonomy and gradually withdrawing from sectors where direct intervention is no longer justified. The economic dilemma was how to achieve this withdrawal. But the political dilemma was how to fill the space created by divestment. Should only the market decide? Or should privatization be designed to ensure that the national bank remains essentially, the people's bank? Government had to ask itself what unquantifiable, priceless intangibles of our community psyche would we be discarding if we turned exclusively to market forces.

Our reform compromise was to so package and price shares to be accessible to all Saint Lucians. Moreover, we were careful to inform and educate the general public that we considered our primary market. While institutions were also targeted to ensure a successful public offering, there was a definitive pecking order that reserved share allotments for individuals and nationals. Needless to say, we were overwhelmed. The offer was oversubscribed by some EC$11,000,000.00, and the allotment to nationals fully taken up.

By way of a third example, it would be an omission not to mention the recently privatized banana industry. Here was a sector highly politicized, deeply indebted, functionally ineffective and adrift. Yet, the state was fully entrenched at all levels: in policy making, management, marketing, financing, underwriting debt and even in production through a state owned and operated farm. If ever there was a case for reform, this was it; a case that eloquently demonstrates that too much government is as bad as none at all.

If the industry was not to implode, our young government had to resolve some of those inherent conflicts. We moved expeditiously to fully privatize the industry. The intended transformation was fundamental but untested. National welfare was tied to an industry that had become part of the state apparatus but was in serious disharmony with it. The immediate objectives were financial viability, output stabilization, and the rationalization of management systems. But abandoning the industry purely to market forces was unimaginable to many.

The result was a pragmatic design mix that sought to protect existing stakeholders while injecting market-driven decision making. The essential reform objectives have been achieved, and stability has returned. Though the industry is still fragile, at least its shareholders are the banana farmers and its major orientation is a corporate one.

It is instructive that those farmers who at the time scarcely understood equity participation and the apportionment of shares, are now calling for further reforms and more management accountability. We do acknowledge that a particular set of political circumstances made that transition possible, but that is true of most investments, and true of all critical junctures in the economic evolution of states.

On the external side, it is true that global pressures are also forcing efficiency reforms upon us. But that is a matter of timing not ideology. We need efficiency for our own purposes and must see it as a prerequisite for welfare maximization. Inefficiency, duplication and waste delay welfare maximization in any society. We do not need global competition to acquire this truth.

On the other hand we need not be all pessimistic and fatalist. Some markets are global some are not. Some firms are global, most are not. Societies with the lowest wages and the lowest tax rates will not necessarily inherit the earth. Societies with social stability, a strong sense of identity and community, with crime-free streets and quality education are just as likely to prosper. State sector reform should therefore be concerned not so much with naked efficiency but with generating savings for investment in those critical social assets.

Many people are afraid of the very term Public Sector Reform. They are afraid largely because the objectives of such reform are not clearly defined or understood; least of all by governments themselves. Public sector unions typically oppose the process when it is top-down and exclusive. When they cannot meaningfully participate in the process of policy change they cannot believe in its advertised benefits. It is customary for them to conjure up the spectres of massive redundancies and layoffs and displacements. In some sense the reaction is justified because externally inspired reform has traditionally been faceless and impersonal.

However, if we start with objectives of equity, justice and welfare maximization, the process can become constructive and inclusive. In small societies inclusiveness is indispensable. Persons whose livelihoods are likely to be affected, must be consulted and conditioned for change. Unlike larger economies adjustment is not an invisible process; it is, as the young people say, up-front and personal. If as a government, you are sending home single parents of four or five children, you must consider the deleterious effect this has within the communities you are trying to build.

Moreover, based on historical evidence in our small societies and the preponderance of political and personal relationships, people do not expect that processes of redundancy and downsizing are going to be completely objective. Paranoia understandably sets in and the whole process is suspect. This is the political reality of public sector reform.

In our recent corporatisation of the water utility in St. Lucia, downsizing has been accompanied by retraining. Employees have been encouraged to become independent contractors and given state support to establish small independent companies servicing the same utility. There is no inherent conflict if welfare maximization is acknowledged as the ultimate goal.

Though Governments are responsible for generating an acceptable level of growth within the economy, that growth is not an end in itself but a vehicle to higher standards of living for its citizenry. Sound public sector reform is a science of achieving more growth with the financial and human resources available not only within the service but across the economy. Its merit lies in the need to generate savings for immediate and future investment. To start the argument for reform with the arbitrary decision tool that wages and salaries should be below 50% of recurrent expenditure, is to tell only half the story.

While a leaner public service may be a good thing, a meaner public service is anathema to progress. That is why we propose to make our ministries responsible for the detailed design and implementation of their own reform programmes. This is the concept of subsidiarity that is also the core logic of local government. The critical element is to agree on a set of over-arching principles and approach reform through consensus and communal effort.

We accept then that state sector reform must deliver higher levels of societal welfare if it is to be worth pursuing; if indeed it is to be politically feasible. We also know that recent history is full of free-market heroes - all of them in developing countries - who saved the economy and lost the election. So reform with civil unrest is not an option.

Nevertheless, conscious reform remains desirable and can be reconciled with reducing the role of the state. We can agree that the notion of a pervasive state machinery extending its octopoid tentacles into all facets of individual and corporate life is inherently repugnant. But that does not suggest that government should abandon its social conscience. On the contrary, state reform should free the political apparatus to focus more acutely on restoring social capital and protecting intermediate community institutions in a new economic era.

As always, there is need to strategically manage the political side of the process. If the rationale and methodology of reform are not clear and defensible, there will soon be cracks of doubts and indifference in the party rank and file. Under public pressure, indifference soon turns to denial and repudiation, leaving the architects of reform weakened and isolated. In the pragmatic world of politics this is suicidal. Change has to be negotiated. It requires leverage and compromise, and these are best invoked from a position of strength. Hence, the value of clear defensible principles, transparent methodologies, and built-in communication systems. In politics, information is indispensable for keeping fellow partisans committed to any long-range implementation process. Public debate is also useful, but if it to be constructive, it cannot be all spontaneous and uninformed.

To conclude, firstly, it is the responsibility of government to encourage and facilitate a process of evolution at social, economic and political level. Hence the importance, in our own context, of reestablishing intermediate institutions like local government: so that citizens through the application of democratic principles, can regain collective control over the imperatives of daily life within their own communities.

Secondly, state sector reform for better governance must ensure that relevant capabilities exist within the body politic, and that subsidiaries are empowered to receive the mantle being returned to them. Clearly, it would be counter-productive to abandon those functions of central government for which capacities have not yet been developed at the local level.

Thirdly, the maturing civil society retains a pivotal role for the state. However, like the parent of a maturing family, the state must know when to let go, when to trust, when to gracefully relinquish centrist control in order to strengthen its constituents. This, the state must do gradually and responsibly, exploring alternatives which are viable in our social, economic and political context.

In this regard, we are very fortunate to live in largely tolerant, pluralistic societies. Here the nuclei of kinship and community still integrate to form strong, resilient communities. We are small enough to see both sides of the argument and big enough to find viable compromises. If this is true, then the hardest tasks of reform are already tackled.

Fourthly, policy change is necessary and desirable but only as a pillar of a stable environment for necessary for development. Its significant value lies less in its existence as a final product, and more in the ongoing process of communication that brings it to life and sustains its vitality. As an articulation of societal goals, public policy is not to be confused with government edict, handed down and arbitrarily enforced. Policy-making, like law-making should be objective, and emanate from consultative processes. Only this way can policy earn its legitimacy by representing the collective interest.

Finally, we return to our first premise of taking responsibility for determining the circumstances of our own development. Above all, we must manage our economies efficiently and effectively; not because global trends demand conformity, but to generate surpluses to fund our own development in the manner we see fit. We may always need trade and capital inflows to buttress our efforts, but our ability to import resources on our own terms will be substantially improved if we create an environment where we leave ourselves some options.

I am honoured by your attention and thank you sincerely for this brief opportunity to share these thoughts with you.

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