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Public Sector Pay and Employment Reform: A Review of World Bank Experience


B Nunberg  (1989)
52 pages (2.94 MB)

As developing countries began to feel the economic squeeze of the 1980s they moved to address excess public expenditure. One area which the World Bank (WB) and the IMF have sought to reform is disproportionate spending on civil service wages. The rapid expansion of WB attention to this area left a paucity of analysis of lessons learnt on the effects of reform. In 1989 Barbara Nunberg attempted to provide an interim review of the Bank’s experience from 1981-1987, concentrating on pay-reform in central government.

While the countries examined were heterogeneous, four principle problems characterised their public sectors: an excessive overall wage bill; an excess of personnel; erosion of salary-value in real terms; poor individual wages leading to an inability to recruit/retain highly-qualified people. The Bank’s principle instrument for reforming this area were Structural Adjustment Loans (SALs) which specified means to reduce the wage bill.

The Bank’s work highlighted the following points:

  • Simply freezing the salaries of public-sector personnel will not necessarily rectify the problem, but may create hardship as inflation devalues wages, and also makes it more difficult to retain good people
  • While the overall wage bill is too high, it is often divided among too many workers, thus rendering each worker poorly paid. The economy is therefore drained while ministries under-perform
  • Governments are loath to reduce employment, and would rather increase personnel and reduce wages than visa versa. It is consequently difficult to recruit and retain the most qualified people
  • Reform efforts in more autonomous institutions with greater access to higher levels of government are generally more successful
  • While SALs are effective at stimulating reform, conditionality must be continuous throughout the medium term, and reform must be supported by ancillary support programmes.

Reform is a political process, and the Bank must factor the politics of reform into its work if it is to succeed. Success also depends on governments being in control of the process, and not feeling that reforms are being imposed from outside. Furthermore:

  • The Bank cannot merely work on reducing public-sector employment without also considering redeployment, retraining, and pension or redundancy costs
  • Before any policies are enacted an overall strategy must exist to ensure that wage-bill reduction does not counter other development programmes, both from within the Bank and from other institutions (e.g. IMF)
  • Policies must be preceded by a thorough examination of non-wage allowances, the ability of the labour market to absorb redundant workers and the effect on such areas as the social security system
  • Bank staff require specialised training to encompass the skills required for pay and employment operations, and in some cases skilled personnel may need to be specially recruited
  • The Banks should consult and study the experiences of other institutions, as well as governments in both the developed and the developing world.

Source: Nunberg, B. 1989,'Public Sector Pay and Employment Reform : A Review of World Bank Experience', World Bank discussion papers 68.

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