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Article Summary

Schick, Alan (1998). Why Most Developing Countries Should Not Try New Zealands Reforms. World Bank Research Observer 13(1):123-131.

During the past decade, New Zealand has introduced far-reaching reforms in the structure and operation of government departments and agencies. Developing countries have become very interested in this model because it promises significant gains in operational efficiency. However, these countries, which are dominated by informal markets, are risky candidates for applying this model. Basic reforms to strengthen rule-based government and pave the way for robust markets should be undertaken first.

New Zealand's government agencies are run by independent public managers who contract out all services and are monitored for accountability. Schicks article looks at New Zealand's system, both the benefits and cost, and finds reason that this system would not work for developing countries with large informal economies. Schick begins by describing New Zealand's government contracting system; he continues with a description of the informal markets often found in developing nations, followed by an explanation of why New Zealand's system would not work for developing nations and ending in a list of steps developing nations might follow to promote public sector reform. Schicks central argument is that there are important steps developing nations need to take before they follow the path of New Zealand.

New Zealand's System
There are two reasons that the New Zealand example is important. First, New Zealand has rapidly improved the quality of its government through institutional change. Second, because of the rapid change many countries look to New Zealand as an example of what to do to promote public sector reform. New Zealand has restructured its government to make individual departments more accountable and more efficient. To meet these goals, each department manager has greater flexibility in running the department. The goal is to create competition within government either by allowing departments to contract for services with other government departments, or for departments to contract with the private market. A civil service of accountability replaces one of trust and responsibility. Contracting extends even into the sector of policy advice. Department managers are allowed to choose between hiring private consultants or contracting with other government agencies for policy advice.

There are, however, problems with the New Zealand system in applying a business model to the public sector. First, contracting puts the focus on outputs, but many of the government interests are difficult to put in terms of outputs. How do you measure if national defense is provided? Second, the contract system is dependent on self-interested action, but self-interested action can go against the governments collective interest. Third, because of the importance of accountability managers tend to have the approach, if it is not specified in the contract, its not my responsibility. Fourth, what happens in the case of one agency providing a service to another agency? The agency expecting service has no means of exiting the contract, and taking recourse against the contracted agency, because in the end they are both the government. Because of this lack of recourse, the markets created by public contracting with other agencies are not real contracts in real agencies. Schick suggest that because of this failure of contracts to mimic the real market, New Zealand needs to take further steps in creating independent agencies that can compete. By doing this New Zealand will receive, the full benefits of vigorous competition.

In Schicks analysis, the increased benefits of this system outweigh the costs listed above. However, many managers argue that the improvement in government performance is from the independent managers and not contracting. If this is true, relying on independent managers, but deemphasizing contracts would decrease the massive transaction cost of monitoring contracts.


The Informal System

New Zealand's system is heavily dependent on a strong system of regulating contract enforcement. In many developing nations such a system does not exist. Informal economies exist because the cost of obeying the law outweighs the benefits. Informal economies are at the opposite end of the spectrum compared to New Zealand's contract economy. Informal markets work through bribes, exchange of government favors, and hiring based on nepotism. In an informal system, there are two government budgets: one presented as the official budget, and another that is the official one and which determines what is spent and by how much. The public never knows what is in the second budget, which does not have to exist on paper, but prevents government transparency and promotes corruption, because no one can be held accountable.


Changing the Informal System
What would happen if a developing country with a large informal market adopted New Zealand's system? Giving independent power to corrupt bureaucrats would only increase corruption. Schicks final assessment is that there is an important step in moving toward a contract run government, and that step is creating a formal public sector, where employees get paid for their work. Schick describes three steps in making a formal system.


Progress in the public sector requires parallel progress in the market sector.
Economies operating under informal norms cannot happen at the same time as a formal public sector, because one sector will invariably affect the other. The exception to this is under a colonial system where a formal public sector existed, but the market remained largely informal. Schick cites China and Singapore as examples of economic modernization happening in tandem with government modernization.


Reliable external controls need to be established.
Working under a government that has control over corruption allows managers to build trust between each other and the citizens to whom they are providing services to. Once controls are in place, a public ethic in the public interest will be internalized, and the government can trust managers to act properly.

Politicians must first concentrate on basic public management.
Politicians must first be able to account for money coming into the government before they can be asked to account for money going out of the government. In an informal system money is hemorrhaging. Politicians must be able to stop the money leaking out of the system, before they can learn how to spend it.


While the New Zealand system has benefits and cost, it is important to understand where New Zealand was before it adopted its changes. New Zealand had a formal public sector first. With an established public sector New Zealand was able to develop and try new forms of public management. Developing countries must first take the step of formalizing their public sectors and their markets before they can try new forms of public administration.