April 21, 2011

Losing ballast for a faster recovery: Slashing the government

Almost every developed country worldwide is nowadays fully immersed on its own fight for economic recovery. But this fight is made tougher by high unemployment rates, sovereign solvency doubts, inflation and financial speculation. The resultant situation is hard to tackle for governments: they need their economies to grow but they must ensure they are solvent and responsible, thus being a stable soil for said recovery to grow on. 

I am not going to discuss the measures for economic growth here, but the ones used to keep the state under control. These measures to try to lower government spending range from budget cuts, the end of some subsidies, establishment of debt ceilings, social services restrictions... to issuing (more) debt to be able to keep public spending at actual levels. Some of these moves are smart, some of them are insane, specially the debt issuing one... But all of them are late, very late.

2011 data from The Heritage Foundation , The Wall Street Journal via Wikipedia 
In the last decades we have grown accustomed to bigger and bigger states, with a never-ending growth in civil servants, entities, organizations, committees... Just have a look at the table above on the column for Government expenditure in percentage of GDP and you will see some unbearably high numbers (I will come back to analyze this table in a future post). This growth in size and cost was associated with the growing complexity of running a state in modern times, the never-ending appearance of new social measures and so on. Everybody let the parasite grow deep inside us, and when the ride was smooth nobody seemed to care about the extra weight that was being placed on the shoulders of the economy. But what now that we are on one of the bumpiest sections of this one-way road that is history? No matter how much horsepower your car has, if you start putting rocks in the trunk its performance will fall to the ground.

Stopping the government growth and its crazy spending is not enough, we must shrink its size and cost to reasonable levels. But how do you shrink a government without stopping its functions?
The answer is very simple, outsourcing of all administrative and non-strategic functions and services. In the case of governments though, outsourcing can not be applied out of the box. You must first 'get rid' of the public entity who is doing these services/functions/tasks now. This is done by privatization. Yes, I said the forbidden word (hit its wikipedia entry if you want more insight). Privatization, that much feared concept for those complacent civil servants around the world who spend most of their work hours playing solitaire. If you are one of them I am sorry but you can close this article now, you are not going to like what comes next. If you are of the working type you will feel valued and have nothing to worry about a privatization coming near you.

Every company out there has objectives to accomplish, so-called 'mission statements' that try to express in a commercial, marketing-approved, way what the company is here for. Why should public entities be different?
Place them under competitive pressure, make them thrive to perform, feel the fear of being replaced by someone who can do the same work in a more efficient way... Look around and you will see this quest for efficiency is a native part of the world we live in; if you cannot see it just think of human evolution. So why should not public entities follow the same set of rules?

At this point, detractors of privatization (mainly civil servants themselves) would argue that if this was to be done it would mean a lot of layoffs here and there. They are right, but my point is: if they were redundant or not useful when employed, what is the problem taking them to effective unemployment? It is cheaper to pay them unemployment than the full salary package and benefits of a civil servant. On top of this, being unemployed should make them aware they should look for a job in the private sector, were inefficiency is not tolerated.

On the other hand, the benefits of privatization of non-strategic services would be massive. Apart from the increased efficiency and the flexibility to change vendors in case one did not comply with what was agreed; the newly available budget would open an enormous scope of possibilities for governments. All the savings coming from this outsourcing process could be directed to other, more useful, purposes. This would result in more possibilities in social welfare, better services, new and/or better infrastructures... To sum up, a better country to support a stronger economy. 

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