GOVERNANCE NOTES NOVEMBER FEBRUARY 2017 2018 GOVERNANCE NOTES No.4 No. 6 INNOVATING BUREAUCRACY FOR INCREASING GOVERNMENT PRODUCTIVITY Prepared by Zahid Hasnain and Daniel Rogger Governance Global Practice Improving government productivity is one of the MEASURING PUBLIC SECTOR PRODUCTIVITY main challenges of economic development. Although Productivity is defined in economics as the ratio of consensus exists around the core policies needed for outputs to inputs, with total factor productivity, or the developing countries to achieve equitable growth and ratio of output to all factors of production, being a key reduce extreme poverty, government capability to determinant of long-run economic growth. Measuring implement them and achieve the desired outputs for government productivity is challenging because of the a given set of inputs varies across both countries and absence of market prices for many government outputs policy domains within countries. and the difficulties in identifying quantifiable outputs for Research underlines the importance of the quality of bureaucracy for government productivity. For many government activities. example, 60 percent of the price variation in standard But it is not impossible. Productivity indicators for procurement contracts in Russia is due to the quality a core set of citizen- and business-facing government of individual bureaucrats and their organizations activities are now regularly tracked in Organisation for (Best et al. 2017). If the worst-performing 20 percent Economic Co-operation and Development countries. of bureaucrats can be as effective as the median Indicators include the number of tax returns processed bureaucrat, the government would save 10 percent per cost-weighted inputs, the speed at which drivers’ of its procurement costs. In Nigeria, the quality licenses are issued, and the rate at which social welfare of organizational management across the federal beneficiaries are supported back into work (Dunleavy and government varies substantially. A one standard Carrera 2014). For other activities where it is difficult to deviation increase in the quality of management would quantify outputs, productivity estimates can be derived lead to a 32 percent increase in project completion for common tasks that all government departments rates (Rasul and Rogger 2017). are expected to do, such as the efficiency of budget How can the World Bank help governments innovate bureaucracy for greater productivity? First, expenditure, the processing of human resource policy, government productivity must be robustly measured and the proportion of targets achieved. Across each of to effectively explore its determinants. Second, these indicators, substantial variations are observed much better information on the human capital of across and within government organizations, highlighting government—the numbers, skills, and characteristics that the public sector is fundamentally heterogeneous in of the individuals populating the bureaucracy—is the its characteristics and its productivity (Rasul, Rogger, and most crucial factor in the government production Williams 2017). function. Third, moving beyond these inputs, a transition is needed from thinking about government UNDERSTANDING THE PUBLIC SECTOR LABOR productivity as a “capacity building” problem to an MARKET incentives, motivation, and selection problem for Understanding the determinants of productivity must managing the workforce. Fourth, understanding begin with better data on government personnel, which motivation and selection requires grappling with the in turn requires a better understanding of the public politics of public administration. And finally, digital technologies offer considerable opportunities for sector labor market. What is the distribution of public innovating bureaucracy, although viewing technology employees, their demographic characteristics, and their as a silver bullet is a temptation to avoid. wages and benefits? Information from the World Bank’s 1 GOVERNANCE NOTES FEBRUARY 2018 No.6 Worldwide Bureaucracy Indicators Database is beginning also backfire (Dixit 2002), and many public sector jobs to shed light on this “black box” of bureaucracy. The lack the measurable performance indicators necessary to public sector accounts for 40 percent of formal sector condition such incentives. employment globally, employs more women than the Incentive limitations underline the importance of private sector, has an older and more educated workforce, selecting the “right” workers with high public service and generally pays a wage premium after controlling motivation, particularly since firing underperformers in for observable worker characteristics, according to 2017 the public sector can be difficult, and bureaucrats can data. These aggregate country-level data suggest that, remain in public service for decades. Higher wages can in many developing countries, the public sector has high attract more candidates and higher quality applicants human capital and consumes significant fiscal resources (Dal Bo, Finan, and Rossi 2013), although at the risk but does not achieve expected outcomes, underlining the of having more extrinsically motivated candidates urgent need to improve productivity. if wages are set too high (Banuri and Keefer 2015). Government micro-level administrative data are Relatively high public sector wage premiums, and the also providing a more detailed and nuanced picture of large share of formal employment held by the public the public sector labor market. Data from Bosnia and sector, suggest that a large proportion of workers joined Brazil, for example, show the skill distribution of public for extrinsic and career reasons. Going beyond wage employees can vary considerably across organizations; levels, pay progression and the mix of pecuniary and public employment is often not aligned to needs, as non-pecuniary incentives are important determinants evidenced by significant variation in student-teacher of selection. More evidence is needed on the optimal mix ratios across local jurisdictions; and considerable pay of incentives for the public sector. The public sector is dispersion across staff cannot be explained by education more likely to offer pensions and health insurance than levels, jobs, or years of service, which implies significant private sector employers as well as greater job security, discretion in pay policy. Analyses of these micro-level which also influences the types of individuals that join. data can be used to identify efficiency gains through The distinctive nature of the public-sector labor market better public employment planning and rationalization calls for human resource strategies that focus on of wages as well as to detect potential improvements in selecting individuals with high public service and pro- productivity through better matching of workers to needs social motivation, and sustaining this motivation through and government functions. Without a practical strategy development of esprit de corps and an organizational for allocating staff to required tasks for which they can identity. Simply advertising public sector positions in be most productive, clever mechanisms must be designed different ways can lead to significantly distinct cohorts of to use human capital effectively. applicants (Bandiera, Nava, and Lee 2016). Equally important is creating norms and values FOCUSING ON INCENTIVES, SELECTION, AND based on professionalization, which are the hallmarks CULTURE of a Weberian bureaucracy (Perry and Wise 1990; Increasing productivity needs more than just upgrading Grant 2008). Management practices can have powerful labor skills through current formal training and capacity- influence on these norms and on productivity. The World building efforts. The key requirement is improving the Management Survey (WMS), a rigorous method to motivation and selection system of bureaucrats. In the quantify managerial and organizational practices, reveals private sector, financial incentives have frequently been that the quality of management is the main driver of thought of as the main instrument to achieve these innovation and productivity in firms around the world ends. Performance pay can also be effective in the public (Bloom and Van Reenen 2007; Cirera and Maloney 2017). sector, provided that the incentives are simple and based When applied to government bureaucracies in Ghana on measurable targets. For example, experimental studies and Nigeria, the WMS uncovers considerable diversity in have shown that financial incentives can improve the the quality of management, specifically in goal setting, effort of tax collectors (Khan et al. 2014), school teachers monitoring, targeting, and worker autonomy across (Muralidharan and Sundararaman 2011), and health government ministries and agencies (Rasul and Rogger facility staff (Basinga et al. 2010; Gertler and Vermeersch 2017; Rasul, Rogger and Williams 2017). 2012). But badly designed performance incentives can 2 GOVERNANCE NOTES FEBRUARY 2018 No.6 THE POLITICS OF PUBLIC ADMINISTRATION digital technologies bump into bureaucratic structures REFORM and budget and legislative processes that reinforce The politician-bureaucrat nexus is central to the vertical stovepipes (Fountain 2001). functioning of the public-sector labor market and to the The degree of complementary organizational changes motivation and selection of public employees. Politics can necessary for digital technologies to improve government be both an enabler of and an obstacle to bureaucratic productivity varies with the nature of the service and capability. China highlights the strong political activity, and indicates entry points for technology- underpinnings of bureaucratic reforms that were central enabled innovation (World Bank 2016b). For services and to achieving the country’s economic growth, and the activities based on more routine tasks that are easy to different mix of career and financial incentives for senior monitor, such as cash transfers, tax filing, and licensing, and street-level bureaucrats required to achieve these digital technologies can improve productivity rapidly and objectives (Ang 2016). significantly, even in weak governance contexts. But for Politicians are also capable of distorting public sector services that require more discretion from workers and incentives for their own gain (Iyer and Mani 2011). An are hard to monitor, the complementary institutional incumbent leader’s fear of losing power is a critical factor reforms are much more important. behind institutional change (World Bank 2016a), making bureaucratic reform closely interlinked with the incentives CONCLUSION of political elites. The 2017 World Development Report Ending extreme poverty by 2030 and building shared argues “reshaping the policy arena where actors bargain” prosperity will require a public sector workforce that can provide those incentives (World Bank 2017). Partly is dedicated to serving citizens and creating more this relates to shifting the preferences of public officials innovative public goods at massive scale. It must be and their public service identity, and partly it is a product made up of frontline service providers—from doctors of increased transparency. and teachers to agricultural extension workers. But it must also be made up of those who manage, support, INNOVATION IN BUREAUCRACIES and regulate these providers, who channel information, One way to strengthen transparency is through the aggregate the budget, and coordinate relief efforts. Too increased use of digital technologies, which are a major often, the administrators critical to achieving global driver of productivity improvements in the private development work in bureaucratic and uninspiring sector. Governments have also invested heavily in digital structures that do not create the incentives for staff to technologies over the past two decades to improve fulfill their potential, nor innovate for the public good. revenue mobilization, budget preparation, and budget Many of the world’s public officials are not given the execution, and to deliver a variety of services to citizens. chance to truly change the world. The empirical evidence of the impact of e-government That is where the World Bank has a chance to make on productivity is generally positive, though limited, and a transformational impact on global poverty. Every shows that digital technologies can lower the cost of marginal improvement in how the public sector functions tax compliance (Kochanova, Hasnain, and Larson 2016; ripples through society. With no substitute for state Ali et al. 2015), improve the competitiveness of public capacity, attention must turn toward transforming procurement (Lewis-Faupel et al. 2016), and reduce bureaucracies. The World Bank’s approach must be corruption and inefficiencies in government social welfare grounded in the fundamental diversity of government and programs (Muralidharan, Niehaus, and Sukhtankar 2016). in the insights this diversity provides within and across To have impact, digital technologies are best countries. Using frontier data and empirical analysis accompanied by complementary organizational will reveal the heterogeneity of a specific public sector changes (Brynjolfsson and Hitt 2000; Garicano and and allow targeted reforms within the local context. The Heaton 2010). The absence of institutional changes in current expertise and problem-driven approach toward developing countries may explain the poor returns on existing issues in bureaucracies can be enriched by a many investments in information and communication richer picture than has ever been available. Now is the technology, particularly for large and complex systems time to innovate bureaucracy, and change the world. (World Bank 2016b). Cross-agency collaboration continues to be a challenge. The opportunities offered by 3 GOVERNANCE NOTES FEBRUARY 2018 No.6 REFERENCES Ali, M., A. Shifa, A. Shimeles, and F. Woldeyes. 2015. “Information Technology and Fiscal Capacity in a Developing Country: Evidence from Ethiopia.” ICTD Working Paper 31, International Center for Tax and Development, Brighton, United Kingdom. Ang, Yuen Yuen. 2016. How China Escaped the Poverty Trap. Ithaca, NY: Cornell University Press. Ashraf, Nava, Oriana Bandiera, and Scott S. Lee. 2016. “Do-Gooders and Go-Getters: Career Incentives, Selection, and Performance in Public Service Delivery.” STICERD— Economic Organisation and Public Policy Discussion Papers Series, London, United Kingdom. Banuri, S., and P. Keefer. 2015. “Pro-Social Motivation, Effort, and the Call to Public Service.” European Economic Review 83:139–164. Basinga, P., Paul J. Gertler, A. Binagwaho, Agnes L.B. Soucat, Jennifer R. Sturdy, and Christel M.J. Vermeersch. 2010. “Paying Primary Health Care Centers for Performance in Rwanda.” Policy Research Working Paper 5190, World Bank, Washington, DC. Best, M., J. Hjort, and D. Szakonyi. 2017. “Individuals and Organizations as Sources of State Effectiveness, and Consequences for Policy Design.” NBER Working Paper No. 23350, National Bureau of Economic Research, Cambridge, Massachusetts. Bloom, Nicholas, and John Van Reenen. 2007. “Measuring and Explaining Management Practices Across Firms and Countries.” Quarterly Journal of Economics 122 (4): 1351–1408. Brynjolfsson, E., and L.M. Hitt. 2000. “Beyond Computation: Information Technology, Organizational Transformation and Business Performance.” Journal of Economic Perspectives 14 (4): 23–48. Cirera, X., and Maloney, William F. (2017). The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up. Washington, DC: World Bank Group. Dal Bo, E., F. Finan, and Marin A. Rossi. 2013. “Strengthening State Capabilities: The Role of Financial Incentives in the Call to Public Service.” Quarterly Journal of Economics 1169–1218. Dixit, A. 2002. “Incentives and Organizations in the Public Sector: An Interpretative Review.” Journal of Human Resources 37 (4): 696–727. Dunleavy, P., and L. Carrera. 2014. Growing the Productivity of Government Services. Cheltenham, UK: Edward Elgar. Fountain, Jane E. 2001. Building the Virtual State: Information Technology and Institutional Change. Washington, DC: Brookings Institution Press. Garicano, L., and P. Heaton. 2010. “Information Technology, Organization, and Productivity in the Public Sector: Evidence from Police Departments.” Journal of Labor Economics 28 (1): 167–201. Gertler, P., and C. Vermeersch. 2012. “Using Performance Incentives to Improve Health Outcomes.” Policy Research Working Paper 6100, World Bank, Washington, DC. Grant, Adam M. 2008. “Does Intrinsic Motivation Fuel the Prosocial Fire? Motivational Synergy in Predicting Persistence, Performance, and Productivity.” Journal of Applied Psychology 93 (1): 48–58. Iyer L., and A. Mani. 2011. “Traveling Agents: Political Change and Bureaucratic Turnover in India.” The Review of Economics and Statistics 94 (3): 723–739. Khan, Adnan Q., A.I. Khwaja, and Benjamin A. Olken. 2014. “Tax Farming Redux: Experimental Evidence on Performance Pay for Tax Collectors.” Quarterly Journal of Economics 131 (1): 219–271. 4 GOVERNANCE NOTES FEBRUARY 2018 No.6 Kochanova, A., Z. Hasnain, and B. Larson. 2016. “Does E-Government Improve Government Capacity: Evidence from Tax Administration and Public Procurement.” Policy Research Working Paper 7657, World Bank, Washington, DC. Lewis-Faupel, Sean, Yusuf Neggers, Benjamin A. Olken, and Rohini Pande. 2016. “Can Electronic Procurement Improve Infrastructure Provision? Evidence from Public Works in India and Indonesia.” American Economic Journal: Economic Policy 8 (3): 258–283. Muralidharan, K., P. Niehaus, and S. Sukhtankar. 2016. “Building State Capacity: Evidence from Biometric Smartcards in India.” American Economic Review 106 (10). Muralidharan, K., and V. Sundararaman. 2011. “Teacher Performance: Experimental Evidence from India.” Journal of Political Economy 119 (1): 39–77. Perry, James L., and Lois R. Wise. 1990. “The Motivational Bases of Public Service.” Public Administration Review 50 (3): 367–373. Rasul, I., and D. Rogger. 2017. “Management of Bureaucrats and Public Service Delivery: Evidence from the Nigerian Civil Service.” The Economic Journal 128 (608): 413–446. Rasul, I., D. Rogger, and M. Williams. 2017. “Management and Bureaucratic Effectiveness: A Scientific Replication.” Working Paper S-33301-GHA-1. International Growth Center, London, United Kingdom. World Bank. 2016a. Making Politics Work for Development: Harnessing Transparency and Citizen Engagement. Policy Research Report. Washington, DC: World Bank. ———. 2016b. World Development Report 2016: Digital Dividends. Washington, DC: World Bank. ———. 2017. World Development Report 2017: Governance and the Law. Washington, DC: World Bank. GOVERNANCE GLOBAL PRACTICE Guiding Results through Public Institutions Governance Notes captures knowledge derived from World Bank engagements and technical and financial assistance requests. The views expressed are those of the authors and do not necessarily reflect the views of the World Bank. For more information, contact: askgov@worldbank.org. 5