Government Workers in Developing Countries

Governments play a central role in facilitating economic development. Yet while economists have long emphasized the importance of government quality, much less attention has been given to the internal workings of the state and the individuals who provide the public service. Recently however, researchers have begun to explore the personnel economics of the state, and with the use of field experiments. We summarize this nascent literature, by first documenting empirically the stark fact that in most countries throughout the world, public sector employees enjoy a significant wage premium over their private sector counterparts. Moreover, this wage gap is largest among low income countries, which tends to be precisely where governance issues are most severe. We then examine the recent literature using field experiments to explore three aspects of the state-employee relationship – selection, incentive structures, and monitoring. We conclude this survey with directions for future research. Author affiliations: University of California, Berkeley (Finan), MIT (Olken) and Harvard (Pande). We thank Nils Endevolsen and Joyce Hahn for exceptional research assistance. I. Introduction Countries vary in their quality of governance and, unsurprisingly, by almost any measure governance appears significantly worse in low-income countries. For instance, the World Governance Indicators show that low-income countries performed worse than high income OECD countries on government effectiveness (average rank of 17.6 compared to 87.8). For front-line service providers, such as teachers and nurses, a well-known study of 6 developing countries, Chaudhury et al (2006) found that 19 percent of public school teachers and 35 percent of public health care workers were absent at the time of random, unannounced school visits. The absenteeism was worse in poorer countries and in poorer states within India, with the worst absenteeism rates approaching 40 percent. Given the natural role governments play in facilitating development, whether by providing public goods, addressing externalities, or providing the foundation for private property and private enterprise, understanding how to improve government performance is likely to be an important component of improved development. In this chapter, we focus on a particular determinant of government performance: the individuals who perform government functions. We largely focus on appointed civil servants – which we broadly construe to include administrators with effectively permanent government appointments, frontline service providers (e.g. teachers, nurses, firemen, trash collectors, and so on), and contract workers. In many developing countries, poor governance is attributed to these civil servants being lazy, corrupt, or both. Yet, it may be that the poor institutional structure within which civil servants work in these countries is the dominant cause. It may also be that the two interact – poor institutional structures cause the relatively more corrupt and those more prone to shirking to select into public service at a higher rate. Since both institutional structures and personnel selection are endogenously determined, establishing causality becomes a challenge. By providing a clean empirical method for identification, field experiments can help cut the Gordian knot and play an important role in identifying problems in personnel selection and management, in elucidating the causes of these problems, and in highlighting potential solutions. These contributions of field experiments are the focus of this chapter. The chapter is organized as follows. In Section 2, we situate the problem by providing some new descriptive statistics of how the public sector as an employer differs from the private sector. Specifically, we use survey micro data from 32 countries to establish some facts about the relative compensation and fringe benefits of public and private sector workers. The per capita GDP of our study countries ranges from 264.2 (constant 2005 USD) to 45,710.3 (constant 2005 USD), with 19 of our sample countries classified as low income or lower middle income countries by the World Bank. We use these surveys to document the stark difference between the public / private gap in worker remuneration and worker tenure in developing versus developed countries: the public sector enjoys a large wage premium in poor countries, but only a small – or in some cases, zero – premium in developed countries. Public sector jobs are also more likely to provide fringe benefits like health insurance and pensions – but again, the difference is much starker in poor as opposed to rich countries. These stylized facts suggest that the nature 2 The occupational categories of contract workers is typically varied, but important categories in our empirical sample below include teachers, nurses, office cleaners and helpers. of the job and compensation structures are likely to have important implications for how individuals select into the public sector and their subsequent performance and incentive structure. Given these differences, Sections 3, 4, and 5 then describe how field experiments have informed our understanding of the current problems in three arenas (selection, incentive structures, and monitoring) and helped identify potential civil service reforms. In Section 6, we discuss whether the changing nature of technology-driven aids for service delivery may help poor countries create smart governance structures, perhaps by constraining or eliminating human interaction. We then conclude with some directions for future research. II. State Architecture and the Role of Individuals A. Key Features of the State State architecture, the world over, consists of a set of inter-linked institutions staffed by officials. Typically, a mix of constitutional acts and legislative and executive orders define the fiscal and regulatory powers of these institutions. Civil servants, in turn, are responsible for implementing the state mandate. Several key features of the state distinguish its personnel practices from those of the private sector, and here we identify five that are relevant for our analysis. First, the state has a long horizon – absent significant civil conflict, most states throughout the world anticipate collecting and spending revenues indefinitely. This allows states to make long-lived promises to its employees, such as pensions, which may be difficult for the private sector to provide. The longlived reputation of the state as an employer also means that it may be reluctant to renege on such promises; in fact, many promises of the state, such as pensions, survive radical regime change at least in nominal terms. Second, the set of contracts a state can offer its employees is limited. Whereas shareholders can create strong incentives for CEOs to maximize returns, the mechanisms that the ultimate principals -citizens -have at their disposal, namely elections, are much more coarse and limited. Thus, politicians may seek to use jobs, and the wages associated with them, to reward their politician supporters, cronies, and friends. This type of patronage was commonplace before the introduction of civil service systems that standardized pay and hiring procedures. Politicians could also be tempted to use promotions or incentives to exert undue influence on civil servants. These issues are more likely to be an issue in the public sector than in the private sector because of the lack of discipline from the profit motive: the politician only indirectly bears the cost of inefficiency to the extent that voters are less likely to re-elect him because of it, whereas the owner of a firm directly feels the financial losses associated with these types of inefficiencies (Shleifer and Vishny 1994, Boycko, et al 1996). To counteract the tendency for each new politician to replace large numbers of government employees with his political supporters, over time governments have enacted rigid civil service rules that restrict the discretion politicians have over hiring and firing. In fact, these civil service systems are typically much more rigid than their private sector counterparts, with strict formulas defining the hiring criteria, promotion patterns, and wage levels. The United States at the turn of the nineteenth century provides a nice illustration. Prior to the Pendleton Act, federal employment was an important source of patronage. Under this system, these employees did not have tenure and turnover rates were high during changes in administration. After the passage of the Pendleton Act, which Another restriction on contracts is that public sector compensation usually features limited pay for performance. Performance pay for bureaucrats can also create severe multi-tasking problems, where bureaucrats focus on the incentivized dimension of their job at the expense of the non-incentivize dimension (Holmstrom and Milgrom 1979). In practice, while financial incentives for government workers were historically quite common, they had a tendency to lead to overzealous and unpopular bureaucrats who were perceived to abuse their positions in order to over extract from the population (Parillo 2013), which led to a desire among the populace for less strongly incentivized civil servants. Third, the nature of good exchange between the state and citizens is substantially different than with the private sector. Very often, services provided by the state – like schooling and health – are heavily subsidized limiting the competition it faces from other providers. Since there is little competition from other providers, it can make it harder to base worker incentives on simple metrics like volume of services, and the lack of competitive pressure makes direct monitoring of service providers much more important for the public sector (relative to the private sector where competition will to some degree naturall