The Public Sector in the Caribbean Issues and Reform Options

36 Pages·1996·1.1 MB·English

by  Vinaya Swaroop

Policy Research Working Paper 1609
The Public Sector IneHdernoperKlonsmth.
in the Caribbean .'pcuobulnitcriseesctcoarnsnooftCbaeribbean
sustained.Theprivatesector
IJssues and1 R-r*erI-orm Opti•ons "^iJStaccelerateitsrolein
J 'providingsocial,and^
infrastruc&jreservices.The
VinayaSwaroop publicseaormustbemore
narrowlyfocusedtohelpthe
poorgetbasicservicesandlo
facilitateprivate-sector-led
economicgrowth.
TheWorldBank
PolicyResearchDepanment
PublicEconomicsDivision
May1996
PolicyResearchWorkingPaper1609
Summaryfindings
Thepublicsector'sperformanceintheCaribbeanvaries, care),whichmainlybenefitthenonpoor.Attemptsmust
inreducingpovertyandincreatinganenabling bemadetorecovercostsfromhigh-incomeusersanduse
environmentforgrowth.BarbadosandtheBahamas thatrevenuetoimprovethequalityandquantity(as
havebeenthehighperformers,Guyanaandthe appropriate)ofbasicservices.
DominicanRepublichavebeensluggish,andtheother LessonsfromexperiencesuggestthatmostCaribbean
Caribbeancountriesfallinbetween. countriesneedtoencouragetheprivatesectorto
IntheCaribbeanregion,thepublicsectorisnowthe participatemoreinprovidinginfrastructureandneedto
predominantprovideroftertiaryeducationandhealth provideabetterregulatoryframework.Thegoodnews:
services(universityeducationandhospital-basedcurative thisisalreadytakingplaceinmanycountries.
— —
Thispaper aproductofthePublicEconomicsDivision,PolicyResearchDepartment ispartofalargereffortinthe
departmenttoanalyzetheroleofstateindevelopingcountries.CopiesofthispaperareavailablefreefromtheWorldBank,
1818HStreetNW,Washington,DC20433.PleasecontactCynthiaBernardo,roomNlO-055,telephone[phone],
fax[phone],[email protected].(28pages)
ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasabout
developmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.The
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authors'oumandshouldnotbeattributedtotheWorldBank,itsExecutiveBoardofDirectors,oranyofitsmembercountries.
ProducedbythePolicyResearchDisseminationCenter
Copy'ighledmaterial
PublicSectorintheCaribbean:ContemporaryIssuesandReformOptions
by
VinayaSwaroop*
PolicyResearchDepartment,TheWorldBank
Sendcorrespondenceto: VinayaSwaroop,Nl0-069,PolicyResearchDepartment,TheWorld
Bank,1818HStreet,N.W.,Washington,DC.20433,USA.
Internet:[email protected]@INTERNET
'PublicEconomicsDivision,PolicyResearchDepartment,TheWorldBank,Washington,
D.C. GravetteBrownprovidedresearchassistance. Ihavebenefitedfi-omthecommentsofMichael
Anyadike-Danes,ShantaDevarajan,HamidDavoodi,RajNallari,SteveWebbandMinZhu.

1. Introduction
Governmentsundertakeexpenditurestopursueavarietyofgoals. Amongthese,twooft-
statedpublicgoalsare;Povertyalleviationandhelpcreateanenablingenvironmentwithinwhichthe
privatesectorcanbetheengineofgrowth. Theseobjectivesareapartofthethreemajorfunctions~
allocation,distributionandstabilization~ofthepublicbudgetpolicyoutlinedbyMusgraveand
Musgrave(1989). Accesstoandprovisionofbasiclevelsofeducation(primaryandsecondary)and
preventivehealth-careservices~particularlyiftheyareconcentratedinruralareas~havebeen
recognizedascentraltoincreasingthewelfareofthepoor.' Moreover,educationalattainmentat
basiclevelsandlowinfantmortalityrateshavebeenshowntohaveapositiveeffectoneconomic
growth.^ Theenablingenvironmentconsistsof,amongotherthings,provisionofanadequate,
properly regulated, well-maintained and efficient infrastructure ofairports, roads and ports,
electricity,telecommunications,water,wastedisposalandothersimilarfacilities. Electricityand
waterareessentialinputsintheproductionprocess;goodtransportandcommunicationservicesare
criticalinenhancingthemobilityofgoodsandservices,andsanitaryservicesareneededforwaste
disposal.
Thelinkbetweenhumanresourcesandsocialindicatorsofwelfareofthepoorhasbeenthesubjectofalarge
numberofstudies.Forexample,inabenefitincidencestudyofvariouscomponentsofgovernmentspendinginfiveLatin
AmericanandtheCaribbeancountries(Argentina,CostaRica,Chile,theDominicanRepublic,Uruguay),Petrei(1987)
foundthatbasicservicessuchasprimaiyeducationandmostpublichealthinterventionswerestronglypro-poor.Usingdata
onhealthoutcomesandpovertymeasuresfor35developingcountries,BidaniandRavallion(1995)haveshownthat
differencesinpublicspendingonbasiceducationandhealthtendtomattermoretothepoor.
Examiningthegrowthratesin116economiesfrom1965to1985,BarroandLee(1993)foundsecondaryschool
eedcuocnaotmiioensan-dJlaopwani,nfHanotnmgorKtoanhgty,rtahteesRbeepnuebfilciicaloffoKrogrreoaw,thS.ingIanpoarset,udTyai(sweaenW(oCrhlinda)B,anhki,do1ne9s9i3a),oMfahliagyhs-ipaearnfodrTmhianiglAasnida-n
primaryeducationmeasuredbyschoolenrollmentwasfoundtobebyfarthelargestsinglecontributortothepredicted
growthrate.
Copv'iQhlKlItiaterial
TheobjectiveofthispaperistoanalyzehoweffectivetheCaribbean^governmentshavebeen
inachievingthegoalsofpovertyreductionandthecreationofanenablingenvironmentforgrowth.
To examinethis issue the paperaddressesthreemain questions: What hasbeenthe role of
governmentintheprovisionofsocialandinfrastructureservicesintheCaribbean? Whathavebeen
theeconomicandsocialconsequencesofunder-provisionoftheseservices? Howhasthesizeof
publicsectorvariedintheCaribbeanregion? Thelastsectionofthepaperdrawssomelessonsfrom
experienceandbrieflydiscussesan agendaofpublicsectorreformintheCaribbeancountries.
2. Thesizeofthepublicsectorandemploymentpolicies
Intermsofpopulationasameasureofsize,Caribbeancountriesarerelativelysmall. Inmid-
year1992,the14countriessurveyedforthispapertogetherhadapopulationofroughly14million
(excludingHaiti),withtheDominicanRepublicbeingthelargest —7.5million~andthetwinislands
ofSt.Kitts-Nevisthesmallest~justover40,000people. Onlyfourcountriesintheregion~the
DominicanRepublic,Haiti,Jamaica,andTrinidadandTobago~haveapopulationoveramillion.
ThesizeofthepublicsectorintheCaribbeanislarge,especiallyintheOrganizationof
EasternCaribbeanStates(OECS).* Inmostcasesthisisbychoiceratherthanduetoanyeconomic
constraint. Forexample,inGuyana,untilveryrecently,privateprovisionofeducationandhealthwas
^Inthispaper,theterm'Caribbean'referstotheCaribbeanGroupforCooperationinEconomicDevelopment
(CGCED)countnes. Thesecountriesare:AntiguaandBarbuda,Bahamas,Barbados,Belize,Dominica,Dominican
Republic,Grenada,Guyana,Haiti,Jamaica,St.KittsandNevis,St.Lucia,St.VincentandGrenadines,Suriname,and
TrinidadandTobago. Duetotherecentpoliticalandeconomicturmoilandtheinabilitytogetinformation,Haitiisnot
includedinthesample. BesidesHaiti,GuyanaandtheBahamasalleconomiesintheCGCEDgroupareclassifiedas
Middle-income(seeWorldBank,1994a).EconomiesofHaitiandGuyanaarelistedasLow-incomeandthatoftheBahamas
asHigh-income.
*TheOrganizationofEasternCaribbeanStatesareeightinnumberandincludeAnguilla,AntiguaandBarbuda,
Dominica,Grenada,Montserrat,St.Kitts-Nevis,St.Lucia,St,VincentandtheGrenadines.
prohibitedbylawandnocost-recoverymeasureswerepermitted. Inmanysmallindustrialized
economies(e.g.,Denmark,Luxembourg,NewZealand,Switzerland)thepublicsectorisalsolarge
butitismainlyduetotheirsocialtransferpolicies.
ThetypicalpublicsectorintheCaribbeanregioncanbecharacterizedasfollows: Thepublic
sectorislarge,itsserviceprovisionremainsunfocusedandisgenerallyinefficient. Publicsector
employmentislargerthantheneedandthewagebillcontinuestobethemostdominantnon-
discretionaryitemingovernmentbudgets. Thepublicsectorhasbeentheemployeroflastresortwith
alegacyofmajorover-stafiBngatlowerlevels. Itisraretofindworkersattechnicalandmanagerial
levelsgettingpaidwellincomparisontotheprivatesector. Asaresult,itisdifficulttoattractskilled
peopleintothepublicserviceandevenmoredifficulttoretaintheexistingones. Theoverallimpact
ofsuchemploymentpracticesisthatthepublicsectorlacksoneofthemostimportanttools,namely
therequisitehumanresourceskill-mix,toimplementandenforcepublicpoliciesinadesirableway.
Ameasureofthesizeofthepublicsector~theshareofnationalincome(GDP)consumed
bythecentralgovernment~intheCaribbeancountriesisgiveninTableI. Thelastthreerowsof
thetablesupportthehypothesisthatthesizeofgovernmentincreaseswithacountry'sincomethough
thecompositionofpublicspendingchangestoo. TheshareofpublicspendinginGDPislargein
industrializedcountrieslargelyduetotheirsocialtransferpolicies. Levelsofpublicspendinginmany
Caribbean countries are closer to industrialized countries rather than developing countries.
Industrializedcountriesonaveragespendcloseto40percentoftheirnationalincomeongovernment.
IntheCaribbeanthefigureis37percent. Inthelower-middle-incomecountrygroup,towhichmost
oftheCaribbeancountriesbelong,governmentsonaverageconsumeroughlyaquarteroftheir
nationalincome. TheaveragesizeofthepublicsectorintheCaribbean,however,hasdeclinedover
4
thepastdecade. Ifweexcludethetwooutliercountries~theDominicanRepublicandGuyana—
intheCaribbeansample,theaverageratioofgovernmentspendinginGDPhascomedownfrom36.5
percentin 1981-85, to34in 1986-90andtoaround 31 percentin 1991-95. Thesizeofthe
governmentintheDominicanRepublicisrelativelysmallandinGuyanaitisunusuallylarge.
Moreover,whileotherbiggovernmentsintheregionhavegenerallycutdowntheirsizeovertime,
Surinamecontinuestohavearelativelybiggovernment.
Thesedata,however,coveronlycentralgovernmentspendingandtherefore,donotgivethe
pictureofconsolidatedoperationsofthepublicsector. Thiscouldsometimesdistortthestatistical
portrayaloftheresourceallocation. Forexample,inBarbadosthecentralgovernmentrepresents
closeto90percentoftheconsolidatedpublicsectorexpenditureaccountsbutinTrinidadand
Tobagotherestofthepublicsector(i.e.,publicutilities,state-ownedcorporationsandstatutory
bodies)spendsasmuchasthecentralgovernment. Thislimitationinthecomprehensivenessofthe
datacouldaffecttheinterpretationofresultsandtherefore,itisimportanttochecktheindividual
experiencesofthecountries.
InOECScountries,thepublicsectoronaveragehasbeenconsumingroughly35percentof
thenationalincomeofwhichapproximately2percenthasbeengoingtowardsnon-discretionarydebt-
servdce. Governmentsinthesesmallislandeconomieshavebeentheemployeroflastresort,with40
to60percentoftheworkforceworkingforthepublicsector(Ferracho,1994). Onaverage,the
wage-billhasfluctuatedaround55percentofcurrentexpenditurenetofinterestpaymentssinceearly
1980s,withrangesfrom45percentinSt.Kitts-Nevistonearly62percentinDominica. Thereisa
widespreadover-staffingatlower-ranksinthepublicsector. Thishasresultedinunderemployment
andlowproductivitywhileinadequatewagesattechnicalandmanageriallevelshaveledtounfilled
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5
vacancies.
InJamaica,governmentspendingasashareofGDPhasremainedintherangeof35to40
percentoverthepastdecade. Ofthisnearlyone-thirdhasbeenspentforinterestondebts;whilemost
ofthedebtisowedtoforeignlenders,abigchunkofthedebtservicehasbeenpaidondomesticdebt
onwhichtheinterestrateismuchhigher. Currently,thecentralgovernmentemploysroughly8
percent(excludingtheemployeesatpublicenterprisesandutilities,whosenumberisnotaccurately
known)ofthecountry'sworkforcedownfrom14percentintheearly1980s. Thecompositionof
civilserviceisbottom-heavy. Whilethewagebillin1994-95accountsforover50percentofthe
government's discretionary current expenditure (i.e., net ofinterest payments), managerial,
professionalandtechnicalstaffarepoorlypaidwithsalariestypicallyhalforlessoftheprivate
equivalent. Asaresult,ithasbeendifiicuhtoattractmanyprofessionalsintothecivilserviceas
indicatedbyasignificantnumberofunfilledkeypositions.
InTrinidadandTobago,theconsolidatedpublicsectorincludingthepublicservices, public
utilitiesandstateownedenterprises,islargeandhasbeenthechiefbeneficiaryofoilincome. Oil
windfallssignificantlyincreasedthesizeofthepublicsectorwhichbecamethecountry'slargest
employer. Duringtheperiod1986-90,theconsolidatedpublicsectorcontrollednearlytwo-thirds
ofthecountry'seconomicactivity. Atitspeakin1987,30percentofthetotallaborforcewas
employedinthepublicsectorandcloseto15percentoftheGDPwasdevotedtowagesandsalaries.
Inthepastseveralyears,thegovenmienthastakenstepstostreamlineandrefocusthepublicsector
toasmallerandmorestrategicrole. In1994thesizeofthepublicsectorspendinghascomedown
to33percentasaratiotoGDP. Thegovernmenthasalsotakenstepstodivestandprivatizea
numberofactivities. Since1988,publicsectoremploymenthasbeguntodeclinewithitsshareinthe
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totallaborforcehoveringaround28percentintheearly1990s,anddecliningfurtherto22percent
by1994. Thecompositionoftheworkforce,however,continuestobebottom-heavyandthewage
structureneedsrevision. Whileonaverage,publicsectoremployeesarepaidcloseto60percent
morethanintheprivatesector,wagecompression~lowratiosbetweenthehighestandlowest
employeesalaries--isamajorprobleminthepublicsector. Compensationisalmostdoublethe
prevailingmarketwagesatlowerlevelsinthepublicsectorbutatprofessional,technicaland
managerialranks,compensationisasmuchas50to70percentlowerthanintheprivatesectorwhich
makesitdifficulttoattractandretainedqualifiedstaff
DespitetheprogressmadeunderitsEconomicRecoveryPrograminitiatedin1988,Guyana~
theonlyCGCEDeconomybesidesHaitithatisclassifiedasLow-income~continuestohavean
exceptionallybigandubiquitouspublicsector. Notonlythecountryhasthebiggestpublicsectorin
theregion(seeTable1),itisalsooneofthelargestintheworid. Oneconsequenceofthislarge
publicsector—largerthanGuyanesecouldorwouldpayfor~hasbeenthecountry'sheavydebt
serviceburden. In1989thecountrypaid31percentofitsGDPindebtservice. Whilepaymentshave
declinedinrecentyearsduetodebtwrite-offsandrescheduling,debt-servicecontinuestotakeaway
nearly15percentofthenationalincome. Recenteffortstocontroldiscretionarypublicexpenditures
havehadsomesuccess. TheshareoftotalcentralgovernmentexpendituresinGDPdeclinedfrom
66percentin1989to38percentin1994andthenon-interestcurrentexpendituresdeclinedbynearly
25percentofthe1989level. Thepublicsectoremploymentstructureissimilartomanyother
countriesintheregion;itisrepletewithmanualandclericalworkersbutlacksenoughprofessionals.
Personnelemolumentsdecreasedsteadilyduringthelate1980sandthewagecompressionratio
deterioratedfrom9:1in1987to6:1in1990. Theimpactofsuchwagepolicieshasresultedin
Copv'iQhlKlItiaterial