large numbers, even long after job separation. Using scarce budget resources on them seems at odds with poverty alleviation efforts. But the alternative to compensation could simply be lack of restructuring.

If they were perfectly designed, compensation packages for redundant workers would turn them indifferent to job loss, thus making economic reforms optimal in the sense of Pareto. However, the experience suggests that the design of these packages is far from ideal. Examples of over-compensation and under-compensation abound, sometimes within the same downsizing program. Packages are often based on precedents, such as the number of years of salary, or of months of salary per year of service, offered in other countries or sectors. A more sensible basis to assess the amount of compensation needed to achieve indifference is the analysis of microeconomic data on the earnings redundant workers could hope to make after separation. This analysis is feasible in developing countries, and several methods can be used to compute the loss in benefits as well (Assaad, 1999; Chong and Rama, 2001 a).

A downsizing program can be seen as an investment operation, with compensation packages and other related expenditures representing the up-front spending, and benefits being reaped over the years. But some important costs and benefits can be hidden. For instance, some analyses omit to consider among the costs of downsizing the unfunded liabilities created by early retirement programs. More importantly, the distinction between financial returns and economic returns is often ignored. The difference between the two can be substantial, as shown by a case study on the Algerian retrenchment program (Ruppert, 1999). Financial returns compare costs and savings from the budget perspective, whereas economic returns measure the impact on aggregate output. In particular, economic returns take into account the employment alternatives of retrenched workers. Economic returns can be low when there are limited employment alternatives, as in the one-company town setting (Rama and Scott, 1999). On the other hand, they could be very high when restructuring activities such as ports or telecommunications, whose inefficiency is a hindrance to other sectors.

As regards permanent programs to help workers cope with job loss, the most obvious example is unemployment insurance. In fact, there are a growing number of voices calling for the set up of this program in middle-income developing countries. This recommendation may surprise at a time when unemployment insurance is under fire in industrial countries, due to its adverse incentive effects. Several studies have shown that long-lasting benefits encourage the unemployed to stay out of a job. For this reason, some suggest to adopt a mandatory savings account program instead. This program can be part of the old-age pension system, especially when pension benefits depend on past contributions. In this case, workers can add any unused savings to their old-age pension account, and "borrow" from their old-age pension entitlement in the event ofjob loss.

In the case of developing countries, however, both the adverse incentive effects of unemployment insurance and the merits of individual savings accounts might be overstated. When the informal sector is large, it is very difficult to monitor that the beneficiaries are really unemployed. Therefore, unemployment benefits create an incentive to stay out of the formal sector while benefits last, not to stay out of a job. As 21