downsizing the civil service in developing countries: the golden handshake option revisited

Downsizing the civil service in developing countries:the golden handshake option revisited

JOHN MACGREGOR

World Bank, USA

STEPHEN PETERSON

Harvard Institute for International Development, USA

CLAUDIO SCHUFTAN*

Tulane School of Public Health, Hanoi, Vietnam

SUMMARY

In recent years, more and more calls are being heard in a growing number of developingcountries to downsize their civil services. It is argued that downsizing is needed because of theincreasing shortfalls in government recurrent and development budgets. This situation resultsin underutilized, underfunded sta� and often in the siphoning-o� of donor funds in thedevelopment budget for recurrent expenditure. The main problems addressed in this article arewhy should and how can the civil service in developing countries be downsized. The questions ofhow much to trim the bureaucracy and how to redeploy redundant public servants in the privatesector are also addressed.The article examines alternative strategies for signi®cantly downsizing the civil service. It is

contended that problems in this area are indeed common to many developing countries.Various golden handshake options for civil service leavers receive particular attention. It issuggested that economic jumpstart is a better term than golden handshake to characterize theincentives package o�ered to induce sta� to accept voluntary redundancy.Civil service reform is not presented here as a panacea for all developing countries' ills. The

article makes a number of mostly untried but nevertheless attractive suggestions that bringsome fresh thinking to bear on a di�cult issue. Paths and avenues worth exploring whenstarting to design civil service trimming operations are presented, including some of theirlimitations. The point is ®nally made that this type of downsizing is overdue in many places.The article should be considered as a contribution to demystifying the process of downsizingthe civil service in developing countries. # 1998 John Wiley & Sons, Ltd.

INTRODUCTION

Setting the empirical and conceptual scene

In recent years a growing number of developing and developed countries have beenattempting to downsize their civil services (de Merode, 1991; Langseth, 1995;Synnerstrom, 1995; Balasz, 1996; Panov, 1996; Zussman, 1996; World Bank, 1997).It has been argued that trimming is needed because of the chronic and worsening

CCC 0271±2075/98/010061±16$17.50# 1998 John Wiley & Sons, Ltd.

PUBLIC ADMINISTRATION AND DEVELOPMENTPublic Admin. Dev. 18: 61±76 (1998)

*Correspondence to: C. Schuftan, Box 24, International Post O�ce, Hanoi, Vietnam.

government recurrent and developing budget shortfalls (Fallon and Pereira da Silva,1991). These shortfalls are most acutely seen in operations and maintenance (O �M)expenditures and often lead to rising government borrowing to cover the publicde®cit. This core fact makes oversized bureaucracies increasingly unsustainable.As the civil service sta� complement has risen to absorb rapid growth in the labour

force, the O �M portion of budgets has grown much more slowly, not even keepingup with in¯ation. This situation invariably results in idle sta� with no funds to carryout their functions and often in the siphoning-o� of donor funds from the developingbudget to cover O �M expenditures. For some time now these contentions have beentrue for the majority of developing countries (Ozgediz, 1983; Nunberg, 1989; Toole,1989).

Donor policies often condone oversized bureaucracies. For example, the WorldBank's quick disbursement balance-of-payment support policies allow governmentsto borrow while still sustaining untenable large civil services (Nunberg and Nellis,1990).

The main problems addressed in this article are why should and how can the civilservice in developing countries be downsized. In addition, the questions of how muchto trim the bureaucracy and how to redeploy redundant public servants in the privatesector get due attention. Moreover, it is recognized that downsizing also has to dealwith rede®ning the functions of a trimmed bureaucracy and providing the rightincentives for the downsizing exercise to be acceptable.

These and other issues are dealt with here using some data from Kenya, where thethree authors lived and worked in the early 1990s. Kenya itself (with a population of24 million and a civil service of about a quarter of a million in 1993) had not embarkedon a civil service reduction plan at the time, though. Therefore the article examinesalternative strategies that would have been available. The problems of Kenya's civilserviceÐexcessive sta�ng at lower grades (grades A±G in Kenya), wage compression,low output and low moraleÐare common to many developing countries (Adamo-lekun, 1989).

This is not a case study of how the bureaucracy was trimmed in Kenya; examplesfrom Kenya are utilized in the article only to illustrate what is proposed and tohighlight general principles applicable to downsizing. The options explored are thoughtto be relevant to other countries as well. Suggestions are also made about possible newapproaches to downsizing, including donor-®nancing alternatives. No attempt is madeto make recommendations or to prioritize actions in the process. This is because,when trying to trim the bureaucracy, local decision makers often need assistance todevelop good arguments for downsizing, mostly with only a minimum of hardbackground evidence available to fully legitimize any particular approach beingproposed. Therefore the arguments presented mostly set new boundaries for choosingmore speci®c courses of action in di�erent contexts.

Why downsize?

There are several sound arguments for civil service downsizing, the main ones being:

. to reduce ®scal de®cits and thus free up domestic resources for the private sector;

. to reduce the e�ect of the super¯uous sta� on management time and overheadfunctions (Fry et al., 1988);

62 J. Macgregor et al.

# 1998 John Wiley & Sons, Ltd. Publ. Admin. Dev. 18: 61±76 (1998)

. to improve public sector productivity by tying personnel levels to adequateand sustainable O �M support (Quah, 1986; Prokopenko, 1989; Binder, 1990;Ban et al., 1992);

. to limit the role of the state to those tasks that cannot be adequately, willingly orpro®tably performed by the private sector.

As a result of the above, it is hoped that downsizing will better balance the private andpublic sectors and foster an economic environment more conducive to the achieve-ment of development goals.

There is another point of view to be pondered, though, when looking at large civilservice complements. One could argue that civil servants are really more ine�ectivethan unproductive. Given that their salaries are so low, the fact that their limited inputsresult in meagre outputs does not exactly ®t the de®nition of low productivity. Fromthis perspective, civil servants may actually and paradoxically be considered reason-ably productive in the strict sense of the word. They may be doing the wrong mix ofthings, though, rendering them ine�ective. What this means is that for a governmentto employ low-skilled civil servants may be a comparatively cheap social welfarefunction. However, such a form of social subsidy has some undesirable e�ects; forexample, large complements slow down bureaucratic processes and consume utilities,commodities and other government resources.

What remains to be proven in downsizing, then, is whether dismissed civil servants'productivity will have a greater positive e�ect on the national economy once they areemployed outside government at market values of labour.

Why a golden handshake?

Strictly speaking, we are not talking here about a golden handshakeÐa term coinedfor the `Fortune 500' managers; the civil service will never be able to o�er anythingclose to a `golden handshake'. We are talking more about an economic jumpstart or anincentive for redundant sta� to voluntarily leave the civil service and start productivelives that better contribute to the growth of the economy (Landau, 1969). Theeconomic jumpstart bene®ts both the individual and the economy. It is in this sensethat our use of the term golden handshake should be understood.In addition to ®nancial incentives to leave the service, the procedures used for

downsizing do not exclude the eventual mandatory dismissal of some sta� (see below).Moreover, it is di�cult to predict whether such an economic jumpstart will also a�ectthe performance of the civil servants left behind, i.e. whether downsizing can makethe government machine work better after trimming.

Large-scale dismissal of civil servants is socially and politically unacceptable and issimply not feasible. Attrition can probably downsize the civil service by about 4±5%a year; this rate may be inadequate. As our calculations for Kenya show below,roughly double those numbers are needed to bring the size of complement to desirablelevels in about 3 years.

Variants of golden handshakes have been tried in several developing countries, butmostly with limited success (de Merode, 1991). It is contended that golden handshakeexercises conducted in those countries have still left many innovative options untried;we will explore them here.

Downsizing the civil service 63


When considering golden handshake options, one has to remember that it is notonly the money the civil servants will ultimately consider, but also security; this may,ultimately, be the more important factor.It seems that any downsizing scheme will work better if the incentives package

o�ered is at least as attractive as (or slightly worse than, but with a perceived futurepotential) staying on for a long civil service career. Although designing and costingsuch a package may not be easy, a few methods may be suggested.

The bene®ts o�ered to civil servants in a downsizing exercise are a national issue.Therefore one has to develop solutions that are compatible with what exists in thecountry. Bene®ts can conceivably be better than those found in the rest of the labourmarket, but not exceedingly so. One can de®nitely not give generous bene®ts toredundant civil servants being asked to leave when othersÐin a national contextÐgetnothing; it is a matter of ®nding a balance (Synnerstrom, 1996).

POSSIBLE NEWAPPROACHES AND THEIR LIMITATIONS

How much to downsize? Determining the magnitude of the downsizing

The decision to downsize is a political one. Once the decision has been taken, twoissues emerge:

. How much downsizing is needed?

. How fast does it have to be implemented to have the desired measurable impact?

In addressing these issues, one must keep in mind that each country situation will bedi�erent and also that the ®nal target may matter less than establishing the speed ofthe desired change. There are simply no generally accepted scienti®c methods tocalculate the number of positions that should be cut; downsizing is more an empirical,pragmatic and political process.

Therefore what measures are there for deciding how far to downsize? First, onehas to make sure that the government is not borrowing from its Central Bank to meetthe payroll. Second, one has to de®ne the ideal mix of salaries (emoluments), O �Mand capital investments (CI) desirable for a new government budget. Third, one has tochoose the best plan of action that will bring one closer to such an ideal mix.

Looking at existing ratios between salaries, O �M and CI is therefore the point tostart to de®ne the above ideal mix for the speci®c local situation. Given under-standable di�erences, a ministry-by-ministry comparison of such mixes makes moresense. Conversely, in the case of the health sector for instance, it is possible tocompare the same ratios for the non-governmental (NGO) sector with those of thegovernment's health sector in the country. This can help come up with a more rationalmix of salaries, O �M and CI.

The value of a methodology that proposes a better mix of percentage personnelcosts, O �M costs and CI is that it helps determine a ®rst downsizing target. Severalavenues seem possible to do this. One could:

. Look for the best practice in other countries that have trimmed their bureaucracyand then± adapt it to the local conditions.



. List the percentages of personnel/O �M/CI in government budgets for a numberof countries; thereafter± rank them from highest to lowest for percentage spent on personnel;± determine the median and quartiles in that ranking, placing one's country

percentage in perspective with others; and ®nally± choose a goal for downsizing using a given other country in the list as a reference.

. Use a Delphi technique (that narrows down dissenting views of a group of experts)with a group of ministry personnel that has worked there for 10±15 years; thereafter± agree upon a base year for which there is consensus that that was a good year in

terms of a more balanced ®scal budget;± look at the percentage mix of P/O �M/CIÐor at least the O �M expenditure

per civil servantÐin that year; looking at these ratios has to be done by sector(by ministry), because it is bound to be di�erent in each, especially for thepercentage spent on personnel;

± apply that percentage of personnel costs to the current budget as a goal to set thedesirable cut-o� point for downsizing; alternatively

± estimate the number of civil servants that would be in service if their number hadgrown at the same rate as the population (or the overall labour force) since thatlast year with a good, more balanced ®scal budget.

. Use a zero budgeting approach based on rede®ned new functions of the bureaucracyand then± look at what these newly de®ned tasks are and how many people would be

needed to perform all of them, for example in a ministry. (This is the moreaccurate but di�cult avenue to follow to reach a quantitative goal for down-sizing. It is a cumbersome task and has the drawback that it assumes allindividuals are equally productive.)

Either of these methods could be used to determine in a rough way a moreappropriate size of the bureaucracy and a quanti®able goal for downsizing. Anexample can illustrate things better. A study of the ratios of labour to O �M in twoministries in Kenya was carried out by one of the authors (S.P.), and when looking atthe Recurrent and Development budgets of both, it was recognized that, in their work,sta� members were using O �M resources regardless of whether the same came fromthe Recurrent or the Development budget. It was then calculated that the preferredlabour to O �M ratio would be 10 :7 for the Ministry of Agriculture and 10 :14 forthe Ministry of Livestock Development. To bring that expenditure compositionbetween complement (personnel), O �M and CI in line with these ratios, personnelemoluments should have been cut by 31 and 55% respectively in the budgets of thetwo ministries at that time. This type of calculation thus proved to be useful to set arough goal for downsizing.A caveat seems to be in order at this point: a more ideal mix of personnel and

O �M is, per se, no guarantee of a more e�cient administration! The improvement ofoverall managerial skills and particularly those of talented managers will still berequired. In other words, by itself, downsizing does not improve service delivery. Itmerely produces a civil service that is smaller, but just as e�cient or ine�cient asbefore.

In fact, a number of e�ciency-oriented measures need to be taken, becausedownsizing per se is not a good enough solution to the ills of the bureaucracy (Wallis,



1989). Zero budgeting techniques may be useful in this whole exercise and it is likelythat external technical assistance may be needed to apply them.

Therefore downsizing also has to do with the function of the state. Before and duringdownsizing, these functions need to be reviewed, leaving the government only thoseresponsibilities that the private sector cannot or is uninclined to undertake. The roleof the government has to be rede®ned to ful®l mostly essential services, leaving toother sectors what they can do better. Rede®nition of functions has to come before anew look at the composition of government expenditure is attempted.

How to downsize

To set preconditions or not to set

It is safe to assume that most developing countries' governments cannot a�ord thetotal costs of golden handshake schemes to trim their bureaucracies. Donors can andshould play a role in inducing selected governments to move towards downsizing theirsta� by providing the needed assistance to ®nance such schemes. Nevertheless, it islikely that they will want some assurances prior to stepping in with such assistance.

Among the preconditions they are likely to insist on are the following: militarybudget trimming (including defence capital investments) and use of the military forsocial service functions; when applicable, decreasing the number of ministries andprivatization of selected government activities and/or services.

Two additional preconditions would seem rather predictable: no growth in the civilservice once the cutbacks have been e�ected (partly manifested as a hiring freeze) andsavings from the downsizing not being used to write-o� Treasury accumulated de®citsor debt.

The simultaneous hiring freeze to be enforced while downsizing (no new hiring, nore-hiring of lower-grade cadres) is to be understood not in absolute terms, but ratherin terms of ceilings in the budget for total personnel costs, broken down for eachcategory and group. The freeze will have to keep an ethnic (tribal where applicable)and gender balance in the little hiring that would be done, perhaps correcting theimbalances that the downsizing may create. Existing arrangements for recruitmentcontrols need to be examined and tightened if necessary. When applicable, the postsof the civil servants who take advantage of the golden handshake will be deleted fromthe establishment, unless individual posts are considered indispensable.

In addition to downsizing, governments could aim at establishing a clean wage forcivil servants which replaces the present system of base salary plus assorted allow-ances. This is due to the fact that it is the total emoluments bill that needs to beconsidered to work out civil service compensations. One crucial move in this directionis for developing countries' governments to drop housing allowances and divestthemselves of residential real estate, at least in urban areas. This move shouldprobably not be a donor precondition as such, but its implementation should becarried out at the same time downsizing is taking place.

Before trimming, a census of workers will be needed in each government institutionto have an accurate head count of all active sta� and to get rid of `ghosts' in thepayroll. Existing payroll fraud controls will be examined and tightened whenevernecessary. The authors know of such exercises having been carried out successfully inboth Uganda and Kenya.



The experience from Kenya shows that clear accountability and oversight of sta�complements is an obvious precondition not only for donors, but for downsizing towork at all. Proof of periodic checks being carried out on electromagnetic records ofthe government payroll to catch duplications, in¯ated salaries, duplications of bankaccount numbers and other irregularities must be carried out initially and needs to berepeated at least yearly thereafter. This has to be linked to the clean wage recom-mendation above; if not, cheating can occur in the allowances part of the paycheque.

Finally, no matter what downsizing and hiring freeze scheme is followed, it willhave to go hand in hand with powers to e�ect the redeployment of sta� in the country.

What to do with the wages saved from downsizing?

Having clear guidelines on what to do with the savings realized from downsizing is acritical issue. The most attractive option seems to be to put these funds right back intothe budget (not allowing the Treasury to trim or balance the nation's budget at theexpense of downsizing!). This could allow increasing the salaries of the remainingwork force. For instance, 50% of savings realized could go to that and the rest (theother 50%) to increase O �M resources. Contributing to the same end, donors mayhave to show more willingness to pay for some of the O �M costs in their own pro-jects, yet avoiding subsidizing civil servants' salaries in the long run (Langseth, 1995).

Given that a high percentage of the payroll is in the lower job groups, annualsavings in salaries from downsizing 25% of those employees (excluding teachers)could be substantial. Taking Kenya as an example, if the savings were split 50/50 andone half was earmarked for increases in salaries for the higher job groups, the 1990salaries could have been increased by 36% for those groups (H and above) and theother half could have boosted O �M funds by 19%.

An alternative to putting savings realized back into salary increases could be to paysemi-annual bonuses based on performance as a means of introducing an incentivefactor in the emolument structure of civil servants (Perry et al., 1989; SES, 1989;Baker, 1990). Here one has to be aware of risks of nepotism, tribalism, gender dis-crimination, sexual harassment and favouritism in the granting of these performancebonuses. Given national cultural di�erences, the authors have no golden rule torecommend to avoid these negative behaviours.

The dilemma that arises, though, is whether to start by using the savings tointroduce these incentives for the higher job groups rather than for those in the lowerjob groups that remain after the trimming operation. Incentives for the former areimportant to retain good technical cadres when faced with the growing competitionexerted by the private sector (Holzer, 1991). Explicit guidelines will therefore beneeded to keep the good and disincentivate poorly performing cadres in these higherjob groups, encouraging the latter into early retirement. In this sense, pruning the lessproductive individuals in the higher job categories should actually be a parallelexercise to the main downsizing (Anderson, 1996).

Any mix of the above options could become a donor precondition if donor fundsare to be used for the downsizing.

Donor contributions to golden handshake schemes: an endowment, a grant or a loan?

Since donors are increasingly showing willingness to co-®nance civil service down-sizing (World Bank, 1991; Langseth, 1995), it is an attractive idea to explore the



possibility of achieving this goal by setting up an endowment. The interest earned fromthe same could pay for any of the di�erent modalities of the golden handshake weexplore in this article. These include a salary support after dismissal and a single lumpsum payment. This `economic jumpstart' approach supports workers while theyreadjust to their new occupations, thus relieving fears and potential adverse politicalpressures.

The ®rst strong argument we want to make again here is that downsizing is in theinterest of long-term development. This is already understood by many donors. Wethink civil service reform has equal or more merit for donors than any technicalproject they support in, for instance, agriculture or health. We think it has apotentially higher return on investments than other sectoral projects. This is becauseit creates an overall enabling public sector environment with more needed O �Mresources being made available to technical cadres to eventually be more e�ective intheir work. We therefore contend that donors should look more closely to fundingsuch downsizing endeavours in the form of either a grant, a loan or perhaps anendowment. We remain convinced that civil service reform is not a riskier venture fordonors than any sectoral project they currently fund, especially when looked at in thelong run. Given the magnitude of the funding required for signi®cantly downsizingbureaucracies, such funding will probably have to be pooled from various donors.

Why were we ®rst attracted to the idea of setting up an endowment fund rather thanfor donors to give a grant or to arrange for a loan? In the case of an endowment fundset up through a multi-donor commitment, the interest generated would pay for atemporary salary support of the dismissed civil servants every year for a ®xed periodafter their dismissal (see illustrative example below).

The endowment, we posit, could be invested in the developed countries and bemanaged by a professional fund manager (outside government). Only the dividends(interests) would then be brought into the country in question. We predict thatinvesting the endowment in local companies would have an in¯ationary e�ect andthat donors would probably be more reluctant to follow such a course of action.

Conversely, an exhaustible fund could be set up that each year which woulddisburse money partly in the form of interest accrued plus a part of the principal, insuch a way that when the downsizing target is reached, the funds are all spent. A fundof the latter type would, of course, be signi®cantly lower.

An endowment fund could also be attractive to donors because they could pulltheir principal out after the trimming operation is completed.

Last, we were attracted because the endowment principal could be movable. There-fore, when 75% or X% of the goal of trimming the bureaucracy had been achieved ina given participating country, the endowment could be used successively to help othercountries do the same. In other words, one could talk of a sort of a movable globalendowment. As said, the endowment idea has to be weighed against a lump sumdonor(s) contribution or a soft loan disbursed over 3 years.

The Kenya example

To illustrate the size of a hypothetical endowment, we did some calculations in sucha way that, at prevailing interest rates in the developed countries in 1993, the endow-ment would have yielded enough cash to give an economic jumpstart to 60,000Kenyan



civil servants, excluding teachers. Those leaving the service over a 3 year period wouldhave roughly decreased the number of employees of job groups A±G by 25% by theend of 1995. The results we obtained were, in a way, not so encouraging:

. Investing the fund in the economies of the developed countries at 7% interest indollar terms, with no capital gains, the endowment would have to be of amagnitude of around US$408 million, yielding roughly US$28 million interest peryear, enough for 20,000 people's golden handshakes.

. At an 8% dividend rate the endowment for 20,000 sta� per year would amount toaround US$357 million, yielding the same US$28 million needed per year.

. If the endowment additionally had capital gains of 5% per annum, the endowmentwould go down to around US$238 million, a ®gure that seems more manageable.Note that the latter level of yieldsÐin the 10±12% per year rangeÐseems entirelypossible in late 1997.

The modality of how to use these bene®ts to give leavers a golden handshake canvary. We chose an option that included:

. full salary for 6 months;

. a balloon payment equivalent to 18 months' full salary in the 7th month and,thereafter, half salary for a further 2 years; for this the endowment would have to beinvested several months before starting the programme to accrue enough dividendsto pay the balloon.

In total, this is equivalent to 36 months' average salary paid over 30 months.As can be seen from this example in Kenya, donor inputs of this magnitude are

rarely heard of, even if one could sell the idea of the movable global endowment.Therefore grants or loans (or mixtures thereof) of the order of US$28 million peryear, over 3 years, would be needed for a country like Kenya to carry out a sizableenough downsizing of its bureaucracy over 3 years using the suggested goldenhandshake modality.

The options presented here have advantages and disadvantages. Together withothers, we do not claim to have ®nal answers to the many questions raised by them(Falcon, 1991). However all the options we do suggest have, we think, some merit tobe explored in each speci®c national context for possible adoption and adaptation.

The golden handshake: a grant or a loan to departing civil servants?

What follows explores available options for golden handshake payment modalities.This includes those in which a part of the package paid to compensate leavers is to berepaid by them.

The question is thus whether payments to them should be in the form of a grant or aloan (the latter soft or hard?) or a combination of the two.

Moreover, one can ask whether the payment should be all in one lump sum paidupfront or whether the golden handshake should rather pay the equivalent of theleaver's monthly salary, or a part thereof, for a given number of months. Altern-atively, a third option may be more desirable: monthly salaries could be continuedwith a balloon payment after 6, 12 or 18 months of leaving the service. The monthlyemolument can then be cut by a signi®cant percentage after the balloon payment.This last option is based on the assumption that, after some time, the leaver may havea better idea where and how to invest his/her money.



The system could also be set up on a decreasing sliding scale: for the ®rst 3 monthsthe employee would get 100% of his/her salary; for the 4th to the 6th month, 75%; forthe 7th to 9th month, 66%; for the 10th to the 12 month, 50%; and from the secondyear on, 33%. The progression chosen could also be slower, perhaps over 18 or24 months. This monthly emolument would go up proportionately if remaining civilservice employees got a salary rise.

Should it be decided that the balloon payment is to be a loan and not a grant, theloan could be managed in a `Grameen Bank-like' fashion, requiring groups of three ormore civil servants to take joint responsibility for repaying. The loan could bedisbursed in two instalments ®rst to establish a repayment capability.1

Several further questions arise at this point. Would a grace period be necessary? Ifso, for how long? Would the investment projects the leavers have in mind be reviewedbefore getting their money or would the loans be given with `no questions asked'? Onecertainly does not want to create a new bureaucracy to manage the downsizingexercise.

Could private institutions manage the loan under contract with the government orwith the donorsÐfor example, an NGO already in the business of granting smallcredits? Would direct loans actually be necessary at all or is it better and cheaper forthe government to just establish a collateral with donor funds and channel theleaversÐas borrowersÐto a state or private bank?

We are keenly aware that a loan system, as opposed to a grant system for theupfront or balloon payment, may simply not be attractive enough to the majority ofleavers who have no entrepreneurial inclinations. If an upfront grant were given,would the grant be related to the leaver's salary? Higher-paid servants would thus geta bigger grant, raising issues of equity. This risk would be reduced if the balloonpayment were a loan.

FinallyÐcultural biases aside and discounting probable adverse reactions to such apropositionÐwould it be viable to give part of the upfront lump sum or balloonpayment to the wives of male leavers?

As said earlier, this article does not intend to have answers to all these questions.However, the questions stimulate the type of creative thinking that we contend isneeded to come up with the best mix of options for a variety of di�erent possiblecontexts.

To give incentives or to dismiss

In general, launching a survey on a sample of the targeted group of civil servantsÐasking them what inducement(s) they would deem necessary to make them considerresigningÐwould be of great help to better set the terms of a golden handshakepackage. The results could not be taken fully on their face value, but would helpplanners design something that approaches the preferred ®nancial options as voicedby the target group.

Should the golden handshake or economic jumpstart be given as an option orshould it dismiss civil servants regardless of their wishing to join voluntarilyÐorshould it use a combination of the two approaches? We seem to agree that it is

1`Grameen Bank-like' is here used as an adjective denoting mostly the spreading of risk as an alternative tocollateral required by the lender.



desirable to start the process as a voluntary operation and thenÐwhen interestwanesÐadd a forced dismissal component. Putting up a credible threat or broadhints of dismissal could improve the performance of civil servants, leaving behindwhat in North American English has metaphorically been called a `lean and mean'civil service (Perry, 1991). The procedures for disciplinary cases to become ®rstcandidates for the dismissal operation should be worked out in advance and used.Perhaps they could receive fewer bene®ts than civil servants in good standing. Thiswould especially apply for sta� having been involved in fraud, theft or misappro-priation of funds or with a history of alcohol abuse or absenteeism. Dismissaloperations should ideally target the least productive employees of any level or jobgroup. A `last in±®rst out' policy may otherwise have to be adopted for such anoperation.

Beware that a `witch hunt' may develop from this dismissal operation, includingone with ethnic, gender or other discriminatory overtones. A special appeals com-mittee may be needed to arbitrate in such cases.When launching an incentive-based golden handshake operation, a deadline will be

required. Civil servants should know that dismissal will be a certainty at the end of aset deadline if the trimming exercise has not reached the expected targets.

A good system of publicity around the downsizing exercise, openly explaining alloptions, will decrease levels of apprehension among civil servants. Essential serviceproviders in the organization, even at lower grades, who apply for the golden hand-shake may be granted approval only after a suitable replacement has been found. Thegender bias issue needs very special attention in downsizing. It is even conceivable toslant the bias in favour of more often keeping women in lower job groups.

Other implementation issues

Alternatives on how to set up the payment system for the golden handshake

It is interesting to note here that in Ghana, World Food Programme commoditieswere used for quite a few months as part of the severance package given to civilservants being dismissed. In Uganda, UNDP funds were used to downsize the army(Langseth, 1995).

Details on whether the golden handshake will be a one-time lump sum paymentonly or a percentage of the employee's salary to be paid over Xmonths, and details onwhether to include a balloon payment at all, will be highly country-speci®c. Whetherthe government will set up the system, as opposed to a bank, will also vary.

A couple of additional questions come up at this point of the analysis. How candonors, eventually footing part of the bill, be satis®ed that the trimming is actuallyhappening? What proof could they insist on getting about the sta� reduction process'sprogress? Among other things, they could:

. Look at the government's monthly payroll and disburse their funds for the goldenhandshake instalments only as they have proof of reductions in the civil workforce.

. Have civil servants get a severance certi®cate and draw all their golden hand-shake bene®ts from an entity that has donor control, e.g. a savings account in acommercial bank.2

2The scheme would thus e�ectively be ®nancially administered outside the government.



. Place advertisements in the local newspapers announcing the option for lower-grade civil servants to leave their employment and become eligible for a package ofbene®ts. Interested civil servants would then resign, get their severance certi®catesand go with them to designated banks and begin drawing funds as per theadvertised package. The reaction of civil servants would then be observed for a fewmonths. If there were very few takers, a new advertisement in the papers wouldpresent an improved package deal and the reaction would be observed again. Thetakers of the ®rst package would automatically become eligible for an upgrade tobring them up to par with the new package. This can be repeated two or threetimes, if necessary, until the package is attractive enough to reach the desired rate ofprogression and percentage of reduction in the lower-grade sta�. Should thepackage elicit a response bigger than expectedÐbeyond what had been planned for®nanciallyÐit would be made clear to civil servants that either the system will workon the basis of `®rst come±®rst served' or a lottery system will have to be set up.

One should be very clear that the risk of losing the good people ®rst is unavoidable.However, this may not matter. The preferred option would still be a minimal accept-able incentives package followed by mandatory severance if the voluntary downsizingdoes not result in the expected reduction.

Social security (retirement) bene®ts would still accrue to the leavers at retirementage according to the prevailing regulations in the country. They are deemed to be theirrights. This should be made clear to civil servants as part of their severance packagebrie®ng.

Pilot operations research projects are advisable in adopting any of theseapproaches. One could start by dismissing some 500±1000 civil servants underdi�erent dismissal schemes, with tracer studies over 2 years. Such pilot schemes havethe advantage of getting an overly apprehensive government interested, allaying fearsabout the political costs and helping identify di�culties in the implementation of alarge programme later.Finally, we totally discounted the feasibility of any plan that would o�er any kind

of government bonds or papers (as opposed to cash) as part of the payments for thedownsizing operation.

To phase or not to phase

The possibility for a staged approach to launch a golden handshake scheme also exists.One could:

1. Go to a four-day working week, giving one day o� to civil servants choosing toleave and adding one more working hour to each of the four remaining workingdays. These servants would then be expected to identify or start some economicactivity during this transition period, in anticipation of severance.3

2. Use a hypothetical goal to discuss the number of civil servants one wishes to trim,e.g. taken from the experience of another developing country that has achievedbetter P/O �M/CI ratios or from a Delphi group discussion (as described earlier),and proceed with the downsizing exercise along these lines.

3As far as we know, this has not been tried anywhere, but it certainly has merits to see whether thee�ciency of the bureaucracy su�ers or improves.



3. Fine-tune this goal using the country's own experience gained during downsizingunder the stage 2 goal; some more sophisticated method(s) can also be applied.4

The point we emphasize here is that there is no excuse for delaying the launching ofthe downsizing exercise with the pretext that the ideal mix of P/O �M/CI is still beingstudied!

How to redeploy public servants to the private sector?

To train or not to train

It would be desirable to know what assets, connections, skills and therefore prospectslower-echelon civil servants have. A survey could be designed and carried out to thise�ect prior to starting downsizing operations. This would give a better idea of whatcivil servants intend to do if and when they leave. Quite a bit could be learned thatcould in¯uence the ®nal characteristics of the golden handshake package.If the leavers are to be absorbed by the existing market economy enterprise sector in

large enough numbers, these severed civil servants should have the option to betrained prior to (or at the time of) taking up their new activities in that sector. Thequestion is, at whose expenseÐthe new employers', the government's or the donors'?Training may or may not thus become part of a golden handshake scheme and a smallpilot training fund could be set up for this purpose (Paul, 1983).On the other hand, it is not a bad idea to earmark part of the savings in salaries

achieved by downsizing to be used to upgrade the technical skills of the remainingsta�, i.e. giving in-service training to those who stay.

Absorption in the private sector

The best way to increase the absorptive capacity of the private sector is throughprivate sector promotion policies and some deregulation. Such measures should goalong with the civil service reform.

In any case, the rate of downsizing should be kept at a reasonable fraction of therate of new workers entering the job market. This is not usually an insurmountableproblem. In Kenya, for example, even 40,000 dismissals per year (double the ®gurethat was proposed earlier) would only have been equal to 10% of the growth of thelabour force in 1993. An overall policy environment for private sector growth wouldmake a far larger than 10% di�erence in the rate of job creation.

The capabilities of the private sector to absorb this labour are certainly notunlimited under present circumstances in most developing countries. The absorptivecapacity of this sector needs to be estimated more precisely during the preparatorywork to be carried out for the downsizing. Macro and micro-economic factors willhave to be taken into consideration in the latter exercise.One of the potential areas of economic activity these redundant civil servants can

be geared towards, particularly in Africa, is the small-scale agricultural sector that iscurrently applying more modern technologies.

4For example, zero-based budgeting that looks at workloads and performance standards, orapproximations thereof (Glen, 1990; Fox, 1991).



The Kenyan example can illustrate the magnitude of the absorption capacityrequired by the private sector. The increase that would have been needed in thecountry's economic expansion to absorb roughly 20,000 former civil servants per yearwould not have been that great in the early 1990sÐit would have meant increasing theKenyan labour force by approximately 5% every year for 3 years.

Otherwise, should incentives be considered for potential employers of former civilservants? Foreign exchange retention propositions for exporters, as well as tax breakincentives considered for ®rms that hire dismissed civil servants, are potentially verydangerous. We predict that companies will tend to dismiss their old sta� to hire thesecivil servants to become eligible for these economic incentives.

Finally, also note that the concepts discussed here for trimming the bureaucracycan also be applied to a downsizing exercise in parastatal organizations.

CONCLUSIONS

A major concern to keep in mind is that probably no more than 25% of the lower-echelon government employees are entrepreneurial enough to start up a business ifdismissed and given some lump sum or balloon payment. Of particular concern iswhether these are the 25% that would leave if incentives for resigning were given, thusleaving behind a conceivably less productive sta�.

This concern brings us back to the central question of whether one should onlystrive to cut the bureaucracy or, at the same time, strive to launch the leavers into(independent) economic activities in the private sector. Of course, these economicactivities include wage employment in the private sector, and a good number ofleavers are expected to ®nd private sector employment.

Civil service reform is not a panacea for all developing countries' ills. Downsizingdoes lower the complement and thus lowers public debt. It does have the potential toimprove the e�ciency of the bureaucracy through higher salaries and the increasedavailability of complementary O �M funds. On the other hand, the economicjumpstart measures proposed can cushionÐbut only cushionÐthe economic impacton those leaving government employment (Nunberg, 1990).

Entrepreneurial civil servants, those who perhaps already have outside economicactivities, will most probably look forward to getting help to make a smooth fulltransition to the private sector. Less entrepreneurial or non-entrepreneurial civilservants will be more reluctant to move, but cash is still the only incentive that will®nally make them leave.

Six to eight months after the proposed balloon payment, a loan facility may beopened speci®cally for those 20±25% who we expect will make it in business venturesafter leaving. This entrepreneurs' fund, with donor start-up capital, could beadministered by an NGO. The monthly golden handshake emolument, if stillreceived, can be used as partial collateral by potential borrowers.It is not to be forgotten that downsizing by itself does bring about signi®cant

savings, such as less government housing subsidies, less o�ce supplies, less trans-portation and utilities costs, and many other savings. However, massive dismissalsÐwhich is the shortest route to trimmingÐare, we said, unacceptable not onlypolitically, but also in terms of social justice and fairness.



We are aware that we have here mostly made a number of attractive but untriedsuggestions that bring some fresh thinking to bear on the increasingly urgent task (andchallenge) of trimming bureaucracies in developing countries. Given the implicationsit has for the economy of a country as a whole, downsizing the civil service is at leastas appealing a `development' project as traditional, sectorial development projects.

Every country is di�erent and this article has suggested paths or avenues worthexploring when starting to design civil service trimming operations. Importantquestions have been brought up, for which national policy makers will have to ®ndanswers. We have shown some additional ways to think about what needs to be done.

The political constraints to downsizing will still, for a long time to come, be the coredeterminant to getting downsizing processes even seriously explored, let alone started.However, downsizing is overdue in many places and ours is a contribution to demystifythe process with a hope that this will remove some of these constraints and unjusti®edfears.

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downsizing the civil service in developing countries: the golden handshake option revisited

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