MODERNIZING THE PUBLIC ADMINISTRATION IN LATIN AMERICA: COMMON PROBLEMS, NO EASY SOLUTIONS Geoffrey Shepherd and Sofia Valencia1

Conference Reforma del Estado en America Latina y Caribe Madrid, October 14-17, 1996

I. Introduction Since the 1980s, the countries of Latin America have committed themselves to a process of profound economic reform. It is no coincidence that this has happened at a time when democratization has made great strides. There now seems to be a virtual consensus that public administrations urgently need to be reformed if the economic and political reform process is to be sustained. The public administrations of many Latin American countries are typically dysfunctional -- over-dimensioned, inefficient, unable to deliver services to the most needy, and bastions of opportunistic behavior. Without effective public administration, how can services be delivered more efficiently? how can the deregulation process continue? how can governments reach the poor? and how can governments function in a way that does not threaten fiscal discipline? The need for reform may be indisputable, but the way to do is not. Unfortunately, reforming the public administration is not a policy objective, such as reforming trade or financial policy for instance, where we have blueprints for reform, or even a measure of agreement on the diagnosis of the problem.

1. World Bank and School of Public Affairs, University of Maryland. This is a revision (October 25, 1996) of the draft presented at the Conference, and comments are welcome. The findings, interpretations, and conclusions are the authors' own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries.

-2This paper addresses ways of improving the performance of public administrations in Latin America, i.e. of those permanent bodies which execute policies made by a political executive or by a legislature. The paper's main concern is how public administrations do their work, rather than what tasks governments should perform. It neither proposes a blueprint nor does it provide a complete diagnosis, but tries to suggest some elements of a framework for thinking about reforming public administrations -- for trying to relate possible solutions to realistic diagnoses. It will do this by: characterizing the generic problems of monopoly and political control that provide the challenge for good public administration; by characterizing the past and present approaches to public administration in the more advanced countries that today provide the principal reference point for reform in less advanced countries; by discussing the causes and consequences of poor public administration in Latin America; and by asking what are the relevant lessons that Latin America should draw from the experience of the more advanced countries. There is an exciting ferment of new ideas and controversy on public-sector reform in the more advanced countries. To combat the inefficiency and inflexibility associated with a traditional model of public administration, some countries are experimenting with new ideas to introduce markets and competition into traditional areas of public administration, in particular to create market-based mechanisms to allow managers greater freedom to manage. Others are attacking the same problem, but in a more evolutionary way that leaves more of the traditional hierarchical structure in place. The empirical experimentation is reflected in a lively debate about the ideas behind the reforms. In this debate, more traditional ideas of public administration are being cross-fertilized by ideas from other fields, especially related theories from the realm of the new institutional economics (public choice, principal-agent analysis, transactions cost theory). A bridge is gradually being built from the practice and theory of reform in the more advanced countries to that of Latin America. The concern expressed in this paper is that this bridge is still only half built. Indeed, the worry is that some of the newer reform solutions for more advanced countries risk being imitated by the less advanced before we are sure that the diagnosis is correct. Indeed, it can be argued that the nature and origin of today's publicadministration problems in Latin America are sufficiently different from today's problems in the more advanced countries that the solutions may also need to be adapted. There is a danger that applying modern reform methods prematurely in Latin America may condemn them to failure in a few years' time. These methods will then be branded with the same criticism that other worthwhile attempts to reform the public administration have in the past met in Latin America. Thus a central proposal of this paper is that we need to build a better bridge.

-3II. The Generic Problem of Public Administration

Good democratic government -- providing the products the electorate wants with efficiency and honesty -- faces several generic problems. It is these problems that explain why governments have been organized as they are -- and why many countries seek further reform. The problems can be grouped under three headings (the last two of these being "principal-agent" problems, i.e. problems of how principals get agents to carry out their wishes).2 First, the public administration mostly provides services for which it is a monopoly supplier. (This is by definition the case with public goods.) Monopoly provides the classical incentive to produce inefficiently. Second, voters' control over politicians (like shareholders' control over private firms' directors or managers) is usually imperfect for several reasons. The collective action of many small agents is difficult. Political institutions purporting to represent voters (political parties, parliaments) do not work without friction. Voters' information on the appropriateness, quantity, and quality of public goods is imperfect. Third, it is similarly difficult for politicians to control public employees (and this is also true for managers of private firms, particularly as firms become larger). The particular difficulty, compared to the private firm, lies in the greater problem of defining and measuring with any precision many of the outputs of public administration, hence the difficulty of monitoring the performance of employees. It is not easy to submit typical government goods and services to the test of the market.

III. Public Administration in the More Advanced Countries Public administrations have emerged as entities distinct from private enterprises to address these generic productive and political problems. In fact, a traditional -- or classical -model of public administration came into being, typically in the nineteenth century, as a response to prevalent political interference, corruption, and lack of professionalism -- lack of honesty, discipline, and competence -- in the then-public service. Broadly, the model -- still intact in its essentials -- uses two "techniques" to foster more efficient and honest government in the public interest, political checks and balances and a hierarchical form of organization and centralized control of the public administration. First, checks and balances are usually embedded in a constitutional separation of powers which provides for specialization of functions, "second opinions" in decision making, and oversight of behavior. Elected politicians in the executive and the legislature have a dominant role in making policies. (Sometimes the legislature is subordinate to the executive, at other times, notable in the US, it is independent.) The politicians oversee the execution of policies, but under rules that limit their interference in the professional public administration. Other institutions, notably the judiciary and an independent public auditor, provide independent, external oversight.
2. For applications of principal-agent literature to the functioning of the public sector, see: Blau (1974); Morgan (1986); Scott and Gorringe (1989); and Lane and Nyen (1995).

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Second, hierarchical and centralized forms of organization of the public administration ("command-and-control") are meant to provide a means of creating professionalized public servants, responsive to a broad political mandate, but insulated from individualized political influence. In its idealized form (more or less as Max Weber defined it), the traditional model is characterized as follows: Organization of business into specialized units where accurate financial and technical information flows up, down and across, commands are obeyed, agencies cooperate, and decision-making is delegated to the appropriate level (including decentralization to politically independent units of government). Qualified personnel are employed on a strict merit basis and under rules that relate pay scales to defined jobs and provide open and fair procedures for hiring, firing, and promotion (and typically offer a system of life-time tenure and other non-pay incentives).

Budgets (planned income and expenditure) are accurately forecast and financial systems check that expenditures are made honestly and in accordance with these budgets. Records are accurate and procedures are codified.

The traditional model has in general worked well, in the more advanced countries, to circumscribe the freedom of politicians and public servants to act outside the public interest and to create a professionalized public service. These countries generally have honest and competent public administrations delivering a wide range of public services.3 But the model is under pressure for several reasons. The system of command-and-control has created its own problems of inefficiency and inflexibility. This has been exacerbated by changed expectations about the role of government. Since the model was originated, there has been a tremendous growth in public expectations of government and in the services it provides. Governments have become macroeconomic activists (after Keynes, etc.). They have constructed welfare states. They have diversified into the production of private goods. As a result, fiscal deficits have become a permanent threat to modern government. Big, sprawling government has been especially susceptible to "capture" by those with incentives to use their specialized knowledge to gain group or personal advantage -special interests or by the bureaucrats themselves.

3. This paper tends to talk of the systems of the advanced countries in ideal-type terms. Of course, political interference, corruption, incompetence, and so on exist in the public administrations of these countries. One could assume that there were nothing more than differences of degree between more and less advanced countries, but we instead assume a threshold effect: on the one side of the threshold the system performs adequately in spite of the weaknesses, on the other side the weaknesses are sufficient to undermine the system.

-5As a result of these factors, the level of political and citizen dissatisfaction with the performance of the public administration has grown in recent decades. For sure, all the advanced countries have experimented to modify the traditional model, though it is difficult to identify any unique pattern (see Laking, 1996). Governments have constantly experimented in new budget techniques, but not always successfully -- indeed, new techniques have often led to a loss of budgetary control. The trend is towards devolving greater authority to managers at a lower level and to increasing the use of performance measures in reporting. Governments have exploited new information and communications technology. More recently, they have exercised greater control over the growth of public employment and they have substantially divested activities that the private sector could more profitably undertake. There is now a variety of new ideas and experiments to modify the model even further. It is convenient to think of two strands, changing the "what" of government and changing the "how" (to use the words of Holmes and Shand, 1995). First, virtually all advancedcountry governments have experimented in a range of efforts to increase contestability (i.e. putting activities back into markets or simulating market conditions), through privatization and corporatization, voucher schemes (where the state finances a service, typically education, but the market provides it), contracting out, government departments charging for their services (even to other departments), transferring funds to users, devolution of activities to lower levels of government. Second, various governments are pursuing a range of options and experiments to change the way they do business (see: Reid and Scott, 1994; Holmes and Shand, 1995; Nunberg, 1995; Laking, 1996). In this ferment of new ideas -- serviced by a lively academic debate4 -- the main themes of reform indicate a greater focus on improving performance (in particular outputs), i.e. a switch in emphasis from controlling inputs to controlling outputs and to greater transparency and accountability. It is premature to talk of any consensus on reform, but there is a coalescence of ideas around a promising, new and radical model, based on some of the above ideas, using market-based approaches that allow greater flexibility to managers in return for better performance. We shall refer to the new approach as "managerialism" (it is also referred to as "the new managerialism", "new Public management", or "performance-based management"). The model promises substantial gains in the efficiency and transparency (hence accountability) of the public administration. It is of particular interest for this paper because of the widespread interest it has evoked in Latin America. The new model imitates the managerial methods of the private sector. On the one hand, this means increasing the discretion of managers by lessening the uniformity and generality of procedural rules. On the other hand, it means adopting, where possible, private-sector yardsticks (indicators of performance, or output, etc.) and methods of transacting (transparent, arms-length contracts). The model aims to solve the problem of political accountability of agencies through well-specified contracts. Replacing hierarchical by

4. The academic debate reflects competing approaches. A Public Choice approach emphasizes the need to constrain bureaucrats' freedom through top-down controls. A principal-agent approach concentrates, somewhat to the contrary, on the use of incentives, analysis, and information to allow bureaucrats more freedom. (See Aucoin, 1990, on the tensions between these.) Some approaches suggesting closer orientation to the client (for instance, Salmen, 1992) often imply a failure of political systems or markets. Other authors stress the limitations of the new managerialism in addressing the problems of advanced countries' public administrations, among them Pollit (1993), Caiden (1994), Moe (1994), Borins (1995), and Savoie (1995).

-6contractual relationships holds out the promise of greater transparency and accountability. Managerialism reduces input controls, but it does not eliminate them, and it changes their nature. Typically, controls become less specific (broader budget categories, for instance) and they shift from ex-ante to ex-post (for instance, explicit contracts, better accounting procedures to reduce malfeasance). They do not necessarily become less complex -- performance contracts, for instance, are complex documents. Since the 1980s, a small number of more advanced countries, most prominently Australia, New Zealand, and the UK, have carried out major, integrated reforms in the spirit of the new model. (Sweden is also on a similar, more radical course of reform.) Australia has redefined cabinet, ministerial, and departmental management responsibilities, to create both stronger central control (through strategic decision making, budgets, and evaluation) and to give greater managerial discretion to departments. The UK has so far devolved two-thirds of public employment to executive agencies in order to separate policy-making and -implementation and to provide those agencies with greater managerial discretion related to performance. The New Zealand case is of special interest. It is the country that has applied the model in the most complete, conceptually rigorous, and integrated way. The New Zealand reforms are characterized by the following main elements.5 Budgets are defined by programs, rather than by inputs. These programs are linked to performance -- or output -- indicators. Accounting practices become more transparent, with the adoption of full accrual accounting (i.e. accounting of assets and production of balance sheets). Hierarchical form of organization and corresponding procedural rules are replaced by greater managerial discretion, greater incentives, and contractual, or quasi-contractual, relationships. To facilitate arms-length, contractual relationships, agencies are separated. Restructuring may separate policy-making and policy-implementing agencies, or it may go further and separate purchasing and providing agencies (health ministry and hospital, for instance). The latter will involve a process of devolution -- privatization, out-sourcing, corporatization. Competition is encouraged among service providers, whether these are public, private, or non-governmental organizations.

Reforms in New Zealand, Australia, and the UK are reaping many benefits of greater efficiency and better services, though not always without controversy. New Zealand and the UK are the only OECD countries that have been able to cut public-sector employment in the 1980s and early 1990s. The general result of surveys in New Zealand and Australia supports the view that the benefits of improved efficiency outweigh the costs. But it appears to be too early for a comprehensive verdict on the desirability or feasibility of the new approach. Because, as we shall argue later, issues of implementing managerialist reforms are of particular relevance to Latin American countries, we need to take special account of the main problems of
5. For a description of these reforms, see Scott and Gorringe (1989), and Scott, Bushnell and Sallee (1990), McCulloch and Ball (1992), and Pallot and Walsh (1996).

-7implementation (for the debate on these issues, see: Pollitt, 1990; Dunleavy and Hood, 1994; Nunberg, 1995; PUMA, 1995; and Laking, 1996). Running a managerialist system is difficult principally because of intrinsic characteristics of the public sector. Many government "outputs", such as government services or policy advice, face an identification problem: outputs are intrinsically difficult to identify, specify, measure, and value. The government's assets are often similarly difficult to value (a national monument, for instance). In the private sector output indicators were introduced more than a decade ago. They were later used in some areas by public administrations in some developed countries, but with mixed results because of the identification problem. Furthermore, effective performance-oriented management also depends on appraising the performance of individuals or small groups in relation to these "outputs", linking this performance to rewards or sanctions. Several developed countries have effectively introduced detailed performance indicators for agencies, but the evidence suggests that they have faced far greater difficulties in appraising individual performance on this basis.

Unless an activity can be full privatized or purchased from outside, the government, lacking the ability to sue itself, does not have the full powers of enforcement that a private firm would have. Greater managerial discretion has raised concerns about a possible loss of control. Some people believe that separating agencies sufficiently to encourage arms-length relationships risks a loss of coherence and creates the potential for corruption: they fear that the central authorities will lose control because implementing agencies will have greater freedom to shape their own agendas -- by redefining outputs, for instance -whether this is to increase their business, to shirk, to respond to political demands for patronage, or to seek bribes. The question of how much or what to devolve is a matter of judgement -- of the balance of costs and benefits -- and is clearly difficult in practice.

In addition, the experience of reforming countries suggests three important lessons about the conditions for a successful transition to performance-oriented management. A gradualist approach was adopted in the introduction of the new system. In particular, performance indicators were not linked to budgetary incentives until they were proven effective. It is clear that a necessary condition of a successful transition in New Zealand, Australia, and the UK was the existence of a body of professionalized public servants. The inference from this is that greater managerial discretion, i.e. a relaxation of controls on inputs, can only be given when the professionalism of public servants is sufficient to withstand the opportunistic behavior (i.e. corruption, fraud, patronage, and/or shirking) that discretion invites and when they are capable of managing their resources. Another necessary condition was the importance of maintaining key input controls,

-8namely: effective top-down budgeting; a public service system with some degree of overall management from the center which includes general pay strategies and the selection and development of senior managers; monitoring of personnel spending through controls on classification and remuneration; timely and informative reporting; prior publication and scrutiny of plans and budgets. Many countries remain wary of full-blown managerialist reform (see: Nunberg, 1995; PUMA, 1995; and Laking, 1996). Japan, Germany, and France, notably, have been careful to maintain basic bureaucratic traditions, though with some piecemeal reforms in the direction of managerialism (such as more intensive use of formal evaluation of existing policies, greater use of performance measures, at least in reporting, decentralization, more extensive contracting out of contestable services, and more attention to quality of service). They have maintained a hierarchical tradition on the grounds that it is necessary to ensure the maintenance of an ethic of public service, equitable administration of public law and policy, efficient management of the public service, and control of the size of the public sector and of public finances.

IV. PUBLIC ADMINISTRATION IN LATIN AMERICA For the countries of Latin America to be able to draw lessons from the experience of the more advanced countries, they must able to judge whether the cure is appropriate to the symptoms, and the symptoms to the causes, of the illness. In this section, we indicate the challenges facing public administration reform in Latin American countries and suggest some hypotheses about the origins and the symptoms of a poor public administration. The "productive" challenges that Latin America's governments face, in an age of reform, appear to be greater than those of the advanced countries. (For a stimulating view of these challenges see Naim, 1993.)

-9 First, governments must extend the reach of the basic services they deliver -- education, health, law and order and justice, communications, access to economic assets -- to the poor, who have often been largely excluded from the ambit of the state. Second, very large gains in efficiency are necessary to do this. Third, greater continuity and legitimacy in policy-making and -execution, enabling government to profit more from cumulative experience and institutional memory, are also necessary. Finally, these first three objectives cannot be achieved without a professionalization of the public administration.

But to meet these challenges, Latin American countries may face critical generic problems of government. These countries today have, superficially at least, broadly similar problems to the more advanced countries in terms of over-sized government and fiscal crisis, but the political and institutional obstacles are greater. In many Latin American countries, it is particularly difficult for voters to control politicians. The institutions of democracy have been evolving for a shorter period than those of most of the more advanced countries. Checks and balances, however well inscribed in constitutions, do not work as well.6 In the past, with weaker -- sometimes absent -- democratic institutions, governments, or factions enjoying areas of power within government, have been motivated to serve their own interests, rather than those of citizens. And since Latin American governments have often not had the prospect of enjoying power over a prolonged period, their self-interest has been served more by using their temporary monopoly of power to tax, through patronage and rent-seeking, than to invest in public goods. Modernizing the public administration is thus constrained by an inherited political history.7 (For a more stylized treatment of the issue of political control, see Box 1). It also often appears to be extraordinarily difficult for politicians to control public servants. This is difficult to explain, and one is tempted to conclude that this reflects a broader social problem of the trust that underlies a well functioning civil society.8

6. Constitutions regulate the exercise and transfer of power. But these provisions are not necessarily observed, as Przeworski (1991, page 35) illustrates. "In Argentina, the constitution adopted in 1853 remained, on paper, in effect except for the brief period between 1949 and 1957. Yet in the past fifty years, political conflicts in Argentina have only half the time been processed according to its provisions." To the contrary, "In France, the constitution has been changed several times since 1789; indeed, every major political upheaval has produced a new one. Yet while it was in force, each constitution did regulate the exercise of power and the pattern of succession." 7. For characterizations of political institutions in Latin America, see: Wiarda and Kline (1990); Przeworski (1991); and Mainwaring, O'Donell and Valenzuela (1992). 8. See Putnam (1993) for a discussion, applied to the evolution of regional government in Italy, of how trust shapes institutional performance.

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Text Box 1: Political Organization and Economic Development In the discussion of the state's role in economic development, it is important to ask the question: who is the state? (i.e. who are the people who hold the legitimate monopoly of power in a nation?) Considerations of political economy -- who holds political power in society? how permanent is their hold on power? and how much consensus is there among the national population about what governments should do for them? -- may well be very important in determining how the state behaves in relation to society, the economy and the market. It is useful to posit several theoretical "ideal types" of regime, to see how these issues of power, consensus, and longevity affect states' propensities to accord with the preferences of citizens (and to contribute to economic development). (The reasoning is adapted, via Shepherd, 1996, from McGuire and Olsen, 1996 and Wintrobe, 1996.) First, let us imagine two "pure" forms of state, the one where power is absolute, the other where democracy is perfect. The strong dictatorship. Suppose a very strong dictator with absolute power and sure prospects of staying in power for a long time. Even the strongest dictator needs to pay to maintain his power, so he would use his powers of government to: pay for the repression of enemies and support, or creation, of friends necessary to maintain his power; provide sufficient public goods to assure some future economic growth (to assure that he can continue to tax); and tax as much else as he can for his own use. The perfect democracy. When the whole population has generally shared objectives for government and complies with agreed, democratic rules of the game, there is no need for a government to pay to maintain power or to line the dictator's pocket. Instead, the population is taxed in order to provide an optimal balance between present consumption and the public goods that will assure economic growth. In most real-world cases, power is seldom absolute and democracy seldom perfect. Those who hold power must buy support by redistributing some of the gains. It is useful to suggest two further intermediate forms, the strong and weak pluralist states. These can be, constitutionally, democracies or dictatorships. The advanced industrial economies and the "Asian tigers" generally seem to conform to the strong pluralist state type and most developing countries to the weak pluralist state type. The strong pluralist state. There is broad voter consensus on objectives and rules, and the prospect of long-term stability in these rules. The population is taxed for the purpose both of redistribution to buy the support of more powerful groups (through patronage, state-owned enterprises, subsidies, or favorable regulation) and of investing in public goods. The weak pluralist state. Where power is more dispersed, interests are less encompassing, and the prospects of continuity in government are poor, those who occupy power are, by definition, relatively weak. They must therefore spend a large amount to buy support. Given their expected short time horizon, they will have minimal incentives to provide public goods, particularly those reflecting popular preferences. Citizens have very limited means of getting the state to accede to their needs.

- 11 It is reasonable to argue that this greater severity of generic problems in Latin America is associated with a behavioral profile within public administrations that make them very different from the norm of advanced industrial countries.9 The administrations of Latin America possess formal rules and structures very much consistent with the traditional (hierarchical and centralized) model prevalent in more advanced countries. But actual bureaucratic behavior is different. The best stylized characterization of this, with some exceptions, is one of informality.10

Informality occurs when actual (informal) bureaucratic behavior does not correspond with the formal rules. Though they often appear to be complied with, rules are broken or bent -- the rule of law is absent. Informality is an institutional arrangement with national costs and benefits. Opportunism (corruption, fraud, patronage, and rent-seeking) and inefficiency flourish and are "institutionalized", while the costs of bureaucratic transactions are raised. On the other hand, informality allows some essential transactions to be completed, in spite of the rules.

According to de Soto (1989), informality blooms when the legal system imposes rules exceeding the socially accepted framework and when the state has insufficient coercive authority. (Thus, informality is directly linked to the political and institutional obstacles to good public administration that we mentioned above.) There is often a vicious circle whereby the failure of the state breeds more corrective rules which the reformer applauds (under mistaken formalistic, legalistic notions about how to reform) and which the opportunist applauds (because he knows that reform will be frustrated). Indeed, the existence of many laws -- legal pollution -- can mean the antithesis of the rule of law. Informality seems to reflect the gap between expectations of what the state should be doing and the reality of what it can do.11 Informality presents a dilemma for reforming the public administration. Changing what is on paper does not change behavior. Indeed, the repeated failure of paper -- or legalistic -- reforms encourages informality by fostering the indifference of bureaucrats to new rules.

Box 2, quoting Riggs' (1964) description of the problems of a would-be reformer faced by a nonperforming filing system, provides a synthetic example of informality in a developing-county public administration and the dilemma this poses for reform. Informality in the public sector has not been newly discovered, though it may by
9. The characterization is based on the general literature, but in particular on information available at the World Bank on the following countries: Bolivia, Chile, Ecuador, El Salvador, Honduras, and Peru, with comparable information for Belize, Jamaica, and Trinidad & Tobago. 10. We are indebted to Allen Schick for his insights on informality in the public sector in Latin America. 11. Riggs (1964) expounds a concept of "formalism" -- a term frequently used to characterize Latin America's legal systems -- more or less the same as informality: laws that are not put into practice.

- 12 now have become overly forgotten. We will briefly characterize informality in greater detail in terms of the non-delegation (centralization) of decision making, the general informality of procedural rules, and the informality in personnel and financial-management systems.

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Text Box 2: Informality I: the Filing System "Suppose we find a chaotic filing system in a central government bureau. We decide what is needed is new equipment, an improved classification scheme, trained file clerks, and revised regulations. After these changes have been made, we discover that little improvement results, although our model leads us to think that these reforms would solve the problem. "We then push the matter further and discover that the reports which are filed are badly out of date, compiled in response to an antiquated questionnaire, and prepared by unqualified clerks who give inaccurate information. Consequently, the higher officials find them useless and don't bother to read them. Since the offices which prepare the reports know they won't be read, they see no need to invest effort in improving the design of the questionnaire or providing better replies to old questions. "This means of course that there is a little or no demand for reports from the filing section and, therefore, no incentive for the clerks to keep the reports in good order. Moreover, since the higher officials do not read the reports, they cannot set up criteria for throwing away unneeded materials, hence the clerks dare not discard anything, since they are personally liable for any losses. The files, then, become the repository of vast accumulations of unused reports, a situation which can scarcely be corrected by new filing procedures and equipment. "The existence of such a situation might seem paradoxical because, surely, the central office must want to know what its subordinate units are doing. We may learn that significant communication takes place largely through oral interviews rather than through the mountainous accumulation of paper. The reasons for and consequences of this situation might take us far afield, into the nature of the personal relationships between these officials and the content of their communications. It might be found that what they have to say to each other cannot be put on paper because it concerns office "politics", loyalty and disloyalty to cliques, and the disposition of extra-legal perquisites. Perhaps, also, the policies to be implemented by the bureau are not clearly defined so that forms with significant questions cannot, with the best will in the world, be properly framed. "The example chosen may be extreme, but it should illustrate the dilemma of the administrative technician - the records management specialist, let us say - when called upon to correct the evils of a chaotic filing system in a formalistic bureau. His technology takes for granted the existence of an effective demand for good written communications. The most modern and scientific procedures and equipment will not remedy the situation if such a demand does not exist." (Riggs, 1964, pp. 17-18)

Decision-making processes are concentrated among a small number of people and

- 14 agencies and the benefits of delegation (and of contact with end-users) are foregone. This reflects an absence of cooperation and trust. And yet, decision making is also fragmented since technicians at lower levels often hoard technical information. The formal rules of procedure are excessive, because managers do not trust public employees. Yet they are of limited effect, either because an excess of rules means contradictory rules (sometimes reflecting a legal framework that has been designed in pieces that do not fit together), or because there is no effective mechanisms of enforcement and written rules can simply be ignored. Very often, when one law is seen to be ineffective, another is enacted, typically with insufficient effort to annul the effect of the first -- hence a piling on of "legal pollution". One effect is to minimize the number of administrative interactions (i.e. transactions): agencies do not coordinate, information is hoarded. Another effect is to encourage informal solutions. If line-ministries do not work, new agencies outside the formal administrative structure are created. If career public servants are ineffective, ad hoc appointments are made to do the job. Another effect, of course, is to encourage opportunistic behavior (corruption and shirking).

Merit-based personnel rules are circumvented in favor of procedures that allow employment for reasons of patronage or personal trust. Typically, the merit system is used as a cover to practice patronage or to choose employees who will be personally loyal. Or else the system is circumvented through ad hoc appointments. The rules for setting and executing budgets often have little meaning. Budgets are unrealistic: unexpected increases in spending and sudden decreases in revenues are the norm. Information from agencies on expenditures is inaccurate, often deliberately so. Thus the budget as executed does not resemble what was originally planned. Box 3 provides Caiden and Wildavsky's (1964) synthetic description of the vicious circle of fiscal uncertainty and informality characterizing budget systems in developing countries.

To characterize informality is not, of course, a complete diagnosis of problems of public administration in Latin America. There are other important elements such as low wages and skills and a corrupted wage structure which, though no doubt linked with informality, have not been mentioned above. Moreover, our characterization of a dominant mode of informal behavior has been stylized and generalized. In reality, informality is a world-wide phenomenon of public administration in developing countries, and it is not absent in the advanced countries. Not all Latin American countries are the same. Chile, notably, is a country where, through a long process of construction and reform, informality has been reduced, and practice today has advanced close to that of the more advanced countries (see Valencia, forthcoming). Like Chile, the small English-speaking countries of the Caribbean, inheritors of the Westminster tradition of government and administration, also provide an interesting foil. These countries tend to have clearer legal frameworks (with less overlap between agencies), a more professionalized public service, more centralized and better enforced personnel and financial controls, and less opportunistic behavior than typical Latin American countries. Indeed, the control system works to the point that effective centralization and the inflexibility associated with this is -- somewhat as in the more advanced countries -- one of the principal problems that reformers have to tackle in the English-speaking Caribbean and in Chile.

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Text Box 3: Informality II: the Budget System "Governments that are too strong for the liberties of their subjects may nevertheless be too weak to budget effectively. The weakness of government in poor countries lies at the heart of their budgetary troubles. Unable to collect taxes in sufficient amounts, and lacking control over a significant portion of the resources they do collect, governments work in a perpetual aura of financial crisis. When the moment comes to separate rhetoric from reality, the finance ministry usually bears the burden of decision. Fearful of being blamed when the money runs out and anxious to respond to what it sees as real priorities for existing governments, the finance ministry desperately seeks protection against the unexpected. Maintaining liquidity becomes the main motive of its activities. Under normal conditions of extreme uncertainty (if not plain ignorance), this understandable desire leads to the sequence of the conservative estimating devices, the repetitive budgeting, the delays in releasing funds, and the inordinate amounts of paper work that we have already described. These procedures accomplish their purposes at first; a surplus is protected for the time being, the finance ministry is able to adapt to changing circumstances by delaying decision, and the causes of uncertainty are pushed onto the operating departments. They respond, in turn, by trying to stabilize their own environment. Departments withhold information on unexpended balances, thus increasing underspending, in order to retain some flexibility. They become more political because they must engage in ceaseless efforts to hold on to the money ostensibly allocated to them, lest the finance ministry claw it back. Ultimately, they seek their own form of financing through earmarked taxes, or they break off to form autonomous organizations - a sequence of events encouraged by foreign donors seeking stability through creating recipient organizations with whom they can have more predictable relations. Because the official budget is not a reliable guide as to what they actually can spend, departments are not motivated to take it seriously. Padding takes on huge dimensions, and it reinforces the tendencies of the finance ministry to mistrust departments and to put them in a variety of straitjackets." (Caiden and Wildavsky, 1974, page 302) The dominant diagnosis that many Latin American governments are making today, and have often made in the past, is that their public administrations suffer from over-control. This diagnosis is, to an extent, shared by the international financial institutions. This diagnosis says, at least implicitly, that the traditional approach to public administration has failed. Hence the attractiveness of the new market-based approaches to managerial flexibility. (Curiously perhaps, there are also other diagnoses, recognizing similar symptoms in different countries, but proposing different causes -- a civil war here, cultural idiosyncracies there.) There has been a variety of approaches to reform -- better laws, development of autonomous agencies (fully or partially outside the legal structure of the public administration), investment in systems and hardware (financial-management systems notably). To an extent the different approaches imply different diagnoses. None of the approaches has so far proven particularly successful, and the

- 16 problems have persisted.12 The diagnosis of over-control may be over-hasty. Clearly, there is over-control, but we would propose that it is a symptom of informality -- of low compliance -- rather than a cause (although there is an obvious vicious circle of controls and low compliance). By the same token, one might argue that, far from having failed, the traditional model was only installed in name (i.e. in written laws), but that what operated in fact was an informal system. Applying modern techniques of management, in isolation, may not get at these problems of informality. Furthermore, problems in the political arena may limit or undermine their implementation.

V. SOME COMMENTS AND CONCLUSIONS The paper's conclusions, at least as far as the direction of reforms should go, are modest. Our conclusions concern first, diagnosis, and second, policy suggestions. On the first topic, we suggest that the bridge should be completed: the spotlight of diagnosis should shift towards less advanced countries, so that appropriate solutions can be married with appropriate analysis. The diagnosis should be completed in two related areas. We believe that the consequences of political and institutional differences between more and less advanced countries will warrant further study in the context of reforming the public administration. There is, for instance, a range of theoretical and empirical literature, a bit dispersed among the disciplines and sub-disciplines, on governance and economic development which could be better directed to Latin America and its public administration problems (see, for instance, McGuire and Olson, 1996, and Wintrobe, 1996). We also believe that it will prove profitable to think about public administration problems within a framework emphasizing informality (and its opposite, the rule of law). It is time to revive the diagnosis of informality that exists in some of the public administration literature. It also seems clear that informality in the public administration mirrors the informality of the broader society. Thus it would make sense to apply some of the broader methodology and analysis of informality. (The informality literature is problematic, but the work of Peru's Instituto Libertad y Democracia, as reflected in de Soto, 1989, provides an excellent starting point.) A diagnostic based on observed behavior (and the reasons for it), as well as laws, should provide a better basis for reform. For an example of this approach -- the formalization of real property rights in Peru -- see Box 4.

12. For a review of the persistent problems of public sector reforms in Latin America see: Rothwell (1972), pp. 119-120; Heady (1984), pp. 281-85; and Hopkins (1991).

Text Box 4: Informality III: Formalizing Property Rights in Peru In Peru, customary, or informal private ownership of real - 17 property (i.e. without legal recognition) is widespread. Most of this property formally belongs to the state (in the case of settlements in the urban periphery) or to defunct agrarian cooperatives. Peru now has a new system of property administration, so far operating only on a limited basis, to legalize, or formalize, ownership. The experience may suggest ways of reducing informality within government. The method was to work back from the final public service required, to study why formal processes went wrong in practice, and to provide thorough-going solutions that re-work laws, processes, and agencies. Informal owners have had to wage a long battle to convince the state of the legitimacy of their claims to ownership. That battle has now been won in principle, yet the state is still unable to formalize ownership -- i.e. issue and duly register a legal title -- because of the failure of its own agencies. The Ministry of Agriculture and the municipalities were meant to issue titles to public land. But inefficiency, opportunism, and politicization in these agencies made this difficult. The courts then had to validate any new title issued, but they showed the same failings. A validated title would then have to be registered, but the real property registry mandated the use of expensive notaries (a tight monopoly in Peru), used antiquated techniques, and also imposed bureaucratic road blocks. As a result of these cumulative obstacles, formalizing titles proved virtually impossible. In the early 1980s the Institute of Liberty and Democracy (ILD), a private think-tank, started studying informal property rights, as part of a larger study of informality in Peru (see chapter 2 of de Soto, 1986). The method was to confront the legal (theoretical) process of formalization, the actual (informal) process, and the characteristics of customary ownership and the informal institutions underpinning this. This method required substantial empirical investigation, using participative techniques, at the level of the local communities which provided the institutional basis for customary ownership. In the late 1980s, the government passed into law ILD's proposals for the new system of property administration. This system has several features: a new registration law and registry using community-level information -- i.e. customary law -- to establish ownership rights, and circumventing notaries and, in many cases, the judiciary; mass registration campaigns to tap local knowledge of property rights and lower the unit costs of formalization; and a modern, but inexpensive system of land information. At first, the new registry benefitted from an autonomous status within the government, allowing substantial managerial efficiency. But the government till recently did little to keep it alive, largely because of the opposition of lawyers and notaries to the new system. ILD kept it alive with the help of funds from foreign donors and foundations. Most recently, the registry's main support has come from a private firm interested in providing loans using newly registered property as collateral. The government is now taking a more active role in developing the new system. In its short life the new system has achieved impressive results. 300,000 properties have been registered at a modest cost. New registrations already appear to be bringing results for owners, many of whom are now investing in building improvements, using their properties as collateral for loans.

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Second, we suspect that to try to introduce new market-based approaches before putting in place the conditions for those approaches to succeed runs a grave risk of failure. Even if an apparently centralized system appears to have failed in the past, we see little alternative but for reform to start with systems of central financial and personnel control that are effectively enforced, including an effective top-down budgeting system, some residual central control over personnel, timely and full reporting, and scrutiny of plans and budgets. This is the starting point of professionalizing the public service. Without this, attempts to introduce more performanceoriented forms of management are likely to fail. (See Reid, 1996, on the steps necessary to make managerialist reforms work in Latin America). By suggesting, as this paper has done, that modernization of the public administration is closely linked to political development, a reform program is also bound to raise the issue of political reform. (Indeed, democratization can be interpreted as the process of installing fair and enforced rules of the game.) This paper is not the place to pursue that topic directly. But more technical approaches can also help, at the margin at least. Technical reforms can contribute to political reform if they increase the information available to the public, provide public undertakings on service standards, create mechanisms for the government to "listen" to clients, or technically strengthen other branches of government, such as the legislature or the office of the auditor general. To end on an optimistic note, the strong wave of political and economic reform in Latin America provides precisely the context in which public sector modernization can proceed.

- 19 REFERENCES

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