Strategic

Management for Government

Agencies : An Institutional Approach for
title:
Developing and Transition Economies
World Bank Discussion Papers ; 386
author: Girishankar, Navin.; De Silva, Migara
publisher: World Bank
isbn10 | asin: 0821342347
print isbn13: 9780821342343
ebook isbn13: 9780585260969
language: English
Administrative agencies--Developing
countries--Management, Administrative
agencies--Developing countries--Planning,
subject
Strategic planning--Developing countries,
Public administration--Developing
countries.
publication date: 1998
lcc: JF60.G55 1998eb
ddc: 352.3/4
Administrative agencies--Developing
countries--Management, Administrative
agencies--Developing countries--Planning,
subject: Strategic planning--Developing countries,
Public administration--Developing
countries.
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 Page i

Strategic Management for Government Agencies

An Institutional Approach for Developing and Transition
Economies
World Bank Discussion Paper No. 386

Navin Girishankar
Migara De Silva

 Page ii
Copyright © 1998
The International Bank for Reconstruction
and Development/THE WORLD BANK
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
All rights reserved
Manufactured in the United States of America
First printing May 1998
Discussion Papers present results of country analysis or research that
are circulated to encourage discussion and comment within the
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that are not readily available.
The findings, interpretations, and conclusions expressed in this paper
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manner to the World Bank, to its affiliated organizations, or to
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The material in this publication is copyrighted. Requests for
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ISSN: 0259-210X
Navin Girishankar and Migara De Silva are economists in the
Operations Evaluation Department of the World Bank.
Library of Congress Cataloging-in-Publication Data
Girishankar, Navin, 1971-
Strategic management for government agencies: an institutional
approach for developing and transition economies / Navin
Girishankar, Migara De Silva.
p. cm. (World Bank discussion papers; no. 386.)
Includes bibliographical references (p.).
ISBN 0-8213-4234-7
1. Administrative agenciesDeveloping countriesManagement.
2. Administrative agenciesDeveloping countriesPlanning.
3. Strategic planningDeveloping countries. 4. Public
administrationDeveloping countries. I. De Silva, Migara, 1959-
II. Title. III. Series: World Bank discussion papers; 386.
JF60.G55 1998
352.3'4dc21 98-23307
CIP

 Page iii

Contents
Foreword v
Abstract vi
Acknowledgments vii
I. Introduction 1
II. The Bank and Public Sector Management 3
III. A Pareto-Efficient Public Sector Agency 6
Strategic Alignment 6
A Taxonomy of Outputs: Linking External Environment 9
to Core Strategy
Efficient Institutional Arrangements between Principals 14
and Agents
Designing Production Processes and the Organization of 15
Work
IV. Determining the Scope of Interventions 24
Areas of Misalignment 24
Causes of Misalignment 26
Setting Reform Pace: Accounting for the Transaction 31
Costs of Change
Instruments for Realigning Public Sector Organizations 32
V. Building the Capacity to Consolidate Interventions 34
 Step 1. Identifying Opponents, Allies, and Agents of 35
Strategic Change
Step 2. Enhancing Transparency with Effective 37
Information Processing
Step 3. Choosing a System-wide Change Agent 44
VI. Conclusion and Directions for the Future 47
Testing and Operationalizing the Conceptual Framework 47
New Frontiers of Institutional Development 48
Bibliography 49

Boxes
1. The Building Blocks of a Pareto-Efficient Government 9
Agency
2. Taylorism and the Progressive Movement in the United 17
States
3. Reclassifying Type IV Outputs: Chartered Public 26
Schools in the United States
4. Factors Affecting Alignment of Public Sector 27
Organizations

 Page iv
5. Information Processing Institutions and Organizations 29
6. Consolidation Capacity: Building a Ladder of 35
Expectations
7. Does Agency Theory Help Us Clarify the Types of 40
Information We Need?
8. Bank-supported Information Processing Market 43
Development
9. The Bank's Role in Building Effective System-wide 46
Change Agents

Tables
1. Institutional Arrangements, Process Design, and Work 18
Organization
2. Setting Reform Pace and Accounting for Transaction 32
Costs of Change
3. Reform Instruments: Incentives, Information, and 33
Coordination

Figures
1. Intervention-Consolidation Cycles 4
2. Strategic Alignment of Public Sector Organizations 8
3. Taxonomy of Outputs: The Specificity-Contestability 13
Matrix
4. Changing Outputs 24

 Page v

Foreword
During the past decade and a half, the World Bank, in partnership with
member countries, has pursued reforms of state institutions and public
administration in recognition of the changing role of the state in
market-oriented economies. With the publication of the World
Development Report 1997: The State in a Changing World, the World
Bank clearly articulated the notion that "institutions matter" as a
significant determinant of a country's development prospects. This
paper uses this institutional perspective to develop a framework for
the strategic management of government agencies in developing and
transition countries.
The paper argues that strategic change in government agencies is a
process by which line managers continually seek to align core
strategy, internal organizational design, and external environment. It
first provides a working model of an efficient government agency that
allows managers to identify areas of misalignment, which then
become the basis for Bank-sponsored interventions. In helping
managers realign government agencies, the paper recommends that
the Bank employ three sets of instruments -incentives, information-
processing institutions, and coordination mechanisms. Finally, it
illustrates how managers in client countries can systematically
consolidate efficiency gains by mobilizing appropriate stakeholders,
enforcing broad checks and balances to enhance transparency, and
establishing system-wide change agents. Certain new aspects of
institutional reform, namely information processing, are highlighted
and will prove useful to Bank operations and policy research.
The paper should be of interest to all those concerned with the role of
institutions in the development process, public management in
developing countries, and the effectiveness of exteral development
assistance in general.
RUBEN LAMDANY
MANAGER, COUNTRY EVALUATIONS AND
REGIONAL RELATIONS
OPERATIONS EVALUATION DEPARTMENT

 Page vi

Abstract
This paper presents a conceptual framework for the strategic
management of government agencies in developing and transition
economies. The framework, which integrates the New Institutional
Economics, Management Theory, and Public Choice Theory, also
models strategies for providing development assistance in the form of
agency-level interventions for public sector management (PSM). In
the past, PSM interventions such as civil service reforms and
administrative restructuring, were largely linear policy actions that
failed to stress the consolidation of desirable policy outcomes.
However, in recent years, the Bank and its clients have started to
realize that strategic change in government agencies is an iterative
process, which requires an intervention phase as well as a
consolidation phase.
For the intervention phase of Bank-supported projects, the paper first
delineates a working model of an efficient government agency for
which core strategy, internal organizational design and external
environment are aligned or in equilibrium. The paper demonstrates
how the objectives of PSM interventions are ideally based on
assessments of "areas of misalignment" in government agencies.
Misalignment of government agencies results from a variety of
institutional factors inter alia special interests, information-processing
institutions, and path dependencies. Increasingly, the Bank and client
governments are demanding diagnostic tools that measure these
variables.
In realigning government agencies, line managers and donors can use
three types of instruments -- incentives, information-processing, and
coordination mechanisms -- for achieving strategic change. However
the sustainability of strategic change depends on a deliberate and
distinct strategy of consolidating interventions in PSM in government
agencies. A manager's capacity to consolidate reforms depends on
stakeholder support, checks and balances that enhance transparency
and accountability, as well as system-wide technical support for
agency-level change initiatives.
For policymakers, researchers, and operational staff, the ideas
presented in the paper should spark an important debate on the
ramifications of strategic management in the public sectors of
developing and transitional economies. The ultimate value of the
framework will be determined by the Bank's ability to develop
diagnostic tools and instruments that affect change on the ground.
Furthermore, some new concepts introduced in the paper such as
information processing institutions (IPIs) require substantive research
on topics that the Bank and other donors must inevitably address in
the years ahead.

 Page vii

Acknowledgments
This paper is a product of Country Evaluations and Regional
Relations in the Operations Evaluation Department (OED). We would
like to specially thank Arturo Israel, former Head of the World Bank's
Public Sector Management and Private Sector Development Division,
for his guidance at various stages of this project. Professor Douglass
North of Washington University, St., Louis helped us refine several
issues related to institutional change. Malcolm Holmes and the Public
Sector Management Unit deserve a special thanks for sponsoring the
brown bag seminar, where an earlier version of the paper was
presented. We also thank Rogerio Pinto (AFTI2) and Nicholas
Manning (EDIRP) for their peer reviews of the paper. Ed Campos,
Sanjay Pradhan, Mike Stevens, and other seminar participants
provided critical insights and comments, which were duly
incorporated into the paper. Members of OED's Country Evaluations
and Regional Relations Division, particularly Robert Buckley, Jayati
Datta-Mitra, Roger Robinson, and René Vandendries, gave us
meaningful suggestions along the way. Finally, we would like to
express our gratitude to the late Carl Jayarajah, former Principal
Evaluation Officer, OED, for his encouragement and analysis from the
very beginning.

 Page 1

I.Introduction
After nearly fifteen years of experience with Bank-supported
administrative and civil service reforms (CSRs), efficiency and
effectiveness in the governments of client countries remain elusive
goals. Yet, there is growing awareness on the part of the Bank and its
clients that public sector management (PSM) interventions are
necessarily iterative processes. PSM is comprised of a broad range of
interventions from CSR to service delivery innovations. As it evolved
rapidly across OECD and developing countries, PSM began to pose a
major challenge to multilateral development banks (MDBs) and other
interested parties. The challenge MDBs face is to develop a
generalizable model for the development of state institutions that can
be employed with a high degree of quality, conceptual rigor, and
client-focus.
While deriving a general field theory for PSM may be unrealistic,
defining a set of rigorous principles for the strategic management of
public organizations in developing countries is both desirable and
urgently required. In fact, on-going prescriptive and evaluative
research by the Bank's PSM unit, regional departments, the Economic
Development Institute (EDI) and now, the Operations Evaluation
Department (OED), has sought to glean lessons from past OECD
experiences as well as Bank interventions in developing and transition
economies. Well-known OECD experiences from New Zealand and
Australia as well as bold developing country initiatives, namely those
in Singapore, Hong Kong, and Uganda, have stimulated demand for
further development of PSM interventions. Furthermore, cutting-edge
knowledge from emerging fields such as the neo-institutional
economics, transaction costs economics, and public choice theory are
profoundly influencing the next generation of PSM policies. All these
trends point to the need for more rigorous modeling and empirical
analyses of strategic management in the public sectors of developing
and transition economies. The World Development Report 1997: The
State in a Changing World, which represents the most comprehensive
policy document of its kind, has laid a foundation for future policy
research across a wide variety of public sector issues as they relate to
economic development. In this regard, a great deal of conceptual work
remains to be done improving the outcomes of Bank-supported PSM
interventions.
The main purpose of this Discussion Paper is to affect improvements
in the microeconomic aspects of Bank-supported PSM in developing
and transitional economies. Specifically, the paper proposes a model
for the strategic management of government agencies in developing
countries that explains the mechanisms of enhancing efficiency and
effectiveness at the micro-level as well as necessary ingredients for
catalyzing and consolidating these gains at the macro-level.
In recent years, the micro-level focus of some Bank interventions to
improve public sector agencies (e.g., tax and customs administration)
has increasingly been the subject of deserved critique. Among the
many problems with an exclusively agency-focused PSM strategy is
the lack of sustainability of efficiency gains. However, even

 Page 2
those interventions with a ''systemic-focus" have produced mixed
results both in terms of short term and long term improvements in the
efficiency of state institutions. This suggests that systemic PSM
interventions by themselves are not feasible alternatives to agency-
based ones. Furthermore, institutional development of the State is a
complex task that requires the harmonized application of micro and
macro-level instruments. In other words, entrepreneurial managers in
line agencies cannot realize and consolidate strategic change unless
senior decisionmakers create an enabling environment at the systemic
level.
Even as the Bank develops its strategic framework for comprehensive
public sector reforms, it should continue innovations and
improvements in its agency-focused strategies for several reasons.
First, increased technical efficiency in a reformed agency or
department represents an island of success that senior decision-makers
can use to create demonstration effects for other public sector
agencies. Second, the limited focus of such interventions gives
decisionmakers greater room for experimentation with lower political
risk than those associated with comprehensive reforms. Furthermore,
experimentation affords public sector entrepreneurs within an agency
the chance to learn strategic management by doing. Finally, in cases
when the costs of systemic reform of the core public sector are
overwhelming, agency-based interventions can help build the capacity
and institutional knowledge in operational units (i.e., agencies) to
manage systemic change when it does arrive.
With this in mind, Section II begins by defining the broad parameters
of an evolving model for strategic management of public sector
agencies in developing economies. Section III introduces the notion of
strategic alignment popular among management theorists for the
strategic management of public sector agencies. This includes a
conceptual framework for aligning an appropriate core strategy,
internal organization and external environment and identifying areas
of misalignment within the agency in question. The section also
highlights three sets of instruments -- incentives, information
processing and coordination instruments -- that match realignment
strategies as well as a methodology for setting a realistic
implementation strategy based on the analysis of transaction costs.
Section IV, on consolidation capacity, argues that agency-level gains
in efficiency and effectiveness have to be supported at the systemic
level in order to be sustained. We introduce a methodology that Bank
staff and senior decisionmakers in client countries can use to discern
their role in encouraging and sustaining incremental efficiency gains
in public sector agencies. Finally, Section VII highlights areas for
future PSM research that build on the ideas presented in the paper.

 Page 3

II.The Bank and Public Sector Management

Over the past fifteen years, a wide variety of Bank interventions
attempted to improve the effectiveness and efficiency of the public
sector. At various points in time and in different regions, these
interventions have been rather loosely labeled as CSR, administrative
restructuring, public sector adjustment, and so on. Despite their lack
of consistent nomenclature or design framework, the Bank's use of
new and more nuanced PSM policy instruments has grown steadily
over the past fifteen years. First generation interventions, covering the
1981-86 period, focused primarily on realizing efficiency gains by
cutting CS size and wage bill.1 By the 1987-1993 period, second
generation interventions began to cover a broader range of micro and
macro-level concerns such as organizational restructuring, training,
recruitment, and pay reform. By 1993, the third generation of PSM
support aimed to affect institutional change through legal and
regulatory reform, anti-corruption and good governance strategies.2
This expansion of Bank-supported PSM instruments is part of a larger
trend in central and local governments around the world. In particular,
Anglophone countries of the OECD -- most notably Australia, New
Zealand, and to a lesser extent the UK and US -- have already made
significant financial, technical and political investments in the New
Public Management (NPM). The Bank has experimented with some
NPM measures such as performance-based compensation in select
client countries (Ghana), however, the feasibility of these measures
require more thorough investigation.3 The rapid advance of new PSM
instruments imported by the Bank to developing countries, while
welcome, has not been matched by an equally rapid development of
an analytically-sound strategic framework for PSM reform that is
fashioned to the particular set of politico-institutional and economic
realities in developing countries.
Demand for such a PSM framework is already in great demand as the
Bank and other donors increasingly identify the development of state
institutions as a vital component of their assistance strategies in
developing countries.4 In fact, given the relatively poor performance
record for Technical Assistance Loans (TALs) on public sector
management (PSM), the Bank and other multilateral agencies cannot
afford to delay in operationalizing a strategy rooted in cutting-edge
theory and international best
1 Definitions of first, second and third generation reforms are based on
OED's analyses of Bank ESW and loans across Period I(1981-1986),
Period II(1987-1993), and Period III (1994-1996). We have expanded the
definition used by Lindauer and Nunberg. David Lindauer and Barbara
Nunberg, Rehabilitating Government: Pay and Employment Reform in
Africa. Washington, DC: The World Bank, 1994.
2 Migara De Silva and Poonam Gupta, "A Comprehensive Assessment of
Civil Service Reforms in Bank-supported Lending," Background Paper,
Washington, DC: OEDCR, World Bank, December 1997.
3 Navin Girishankar, "A Review of CSR in World Bank Economic and
Sectoral Work," Background Paper, OEDCR, World Bank, November 1997.
4 World Bank, Sri Lanka in the Year 2000: An Agenda For Action. Country
Economic Memorandum No. 15455, Washington, DC, 1996, p. 13.

 Page 4
practice. According to a recent review of TALs, the primary lending
instrument for such interventions, an average of 52% of PSM TALs
were rated unsatisfactory as compared to an average of 36% for TALs
overall.5 If the Bank is to realize high returns to PSM activity, the
design and implementation of these projects have to be significantly
improved.
The first step in this direction is to arrive at some vision for the ideal
life cycle of a PSM intervention (or any Bank intervention for that
matter). In the past, policymakers of first generation PSM
interventions such as CSRs assumed that linear policy actions with
limited objectives would be sustained automatically, without a distinct
strategy to consolidate reforms. The overriding objective of fiscal
deficit reduction was probably partially responsible for the scant
attention given to consolidating CSRs. In the face of repeated failures
to limit the size of the public sector over time, policymakers became
increasingly amenable to the notion that systemic reform of the public
sector was more emphatically a question of changing the rules of the
game than simply achieving fiscal savings. Changing and legitimating
institutional arrangements that govern operational agencies of the
public sector requires that decision-makers (i) design interventions
and then (ii) actively consolidate the resultant efficiency gains.6
Whether at the agency-level or the systemic-level, development
assistance to state institutions in client countries requires cyclical
policy actions. A cyclical policy action is comprised of an intervention
as well as a consolidation phase, both which are deliberately and
strategically planned by public sector change agents.
The ability to plan and manage the intervention and consolidation
phases of institutional change is a key determinant of a department's
or even a government's strategic capacity. In a more general sense,
strategic capacity can be seen as the ability of entrepreneurs in public
sector departments to continually maximize both efficiency and
5 Heather Baser et al., "Perspectives on Technical Assistance Loans,"
Background Paper, OPRDR, World Bank, 1997, p. 13.
6 Girishankar, 1997.

 Page 5
effectiveness while negotiating an ever-changing environment.7 This
paper attempts to provide the conceptual tools required to enhance
strategic capacity. To this end, the paper defines a working model of a
Pareto-optimal public sector agency; helps systematically identify
areas in which strategic change is necessary; and finally, provides a
methodology for building both agency-level and systemic capacity to
consolidate efficiency gains.
Substantively, the framework for PSM intervention and consolidation
is grounded in those schools of thought which have made a significant
impact on the fields of organizational strategy, public sector reform
and modern corporate strategy. These are the New Institutional
Economics (including Agency Theory and Transaction Cost Analysis),
Managerial Economics, and Public Choice Theory. In supplementing
this neo-institutionalist perspective, the framework also uses
stakeholder analysis in order to help managers appreciate and
capitalize on the politics of institutional change.8
7 This definition of strategic capacity builds on that which is provided by
Allen Schick in his assessment of New Zealand's reforms. Allen Schick,
"The Spirit of Reform: Managing the New Zealand State Sector in a Time
of Change," Wellington, New Zealand: State Services Commission, 1996.
8 The discussion of the manager's role as a political actor in Section IV grew
out of our discussion with Rogerio Pinto.

 Page 6

III.A Pareto-Efficient Public Sector Agency

Before decision-makers can determine how an agency should be
reformed, they must first have some normative model that explains
how organizations maximize efficiency and effectiveness. In this
section, we describe a model for an efficiency-maximizing department
that is supported by a series of analytically-sound arguments from
different schools of thought.
Our model turns on the idea that an organization maximizes its
operational efficiency when internal structures and systems are
fashioned around its core strategy.9 This principle is widely accepted
in corporate strategy and modern theories of firm behavior. Over the
past two decades, this notion has been increasingly applied with
success to non-profits as well as public sector organizations.10
Similarly, a working model of a Pareto-optimizing public sector
organization is operationally meaningful in terms of increasing the
strategic capacity of senior decision-makers to align mission and
organizational design with a dynamic external environment. The
notion of strategic alignment will be revisited after our discussion of
the three layers of an efficient public sector agency -- namely (i)
identifying a core strategy, (ii) institutional arrangements between
principals and agents, and (iii) process design and the organization of
work.
Issues of strategic capacity can be categorized as both substantive and
institutional. Substantive considerations are primarily concerned with
defining the content of PSM interventions or addressing the question
of what interventions should entail. In so doing, substantive
considerations can provide models for senior decisionmakers to
rationally plan the strategic management of government agencies.
However, the availability of substantive models for determining the
scope of PSM interventions does not automatically render planning
either rational or strategically sound. To the contrary, strategic
management of CSR requires appropriate pre-existing institutional
arrangements that provide incentives for decision-makers to use
substantive models that are "consonant and supportive of achieving
better [PSM] outcomes."11 While the issue of pre-existing institutions
is beyond the scope of this paper, Section IV does propose
institutional arrangements during and after implementation that
increase the probability of better outcomes.
Strategic Alignment
9 David Osborne and Peter Plastrik, "Rewriting Government's DNA:
Strategies for Building a Better Public Sector," in The New Democrat.
Washington, DC: Democratic Leadership Council, March/April 1997.
10 Organization for Economic Co-operation and Development. Governance
In Transition: Public Management Reforms in OECD Countries. Paris:
OECD, 1995.
11 Ed Campos and Sanjay Pradhan. "The Impact of Budgetary Institutions on
Expenditure Outcomes: Binding Governments to Fiscal Performance," Public
Economics Division and Finance and Private Sector Development Division,
Policy Research Department, World Bank, June 27, 1996, p. 2.

 Page 7
Alignment of the core strategy, internal organizational design, and
external environment is required for a public sector organization to
maximize both its operational efficiency as well as its effectiveness
(see Figure 2). The strategic triangle, commonly used in management
theory can help conceptualize this dynamic equilibrium. For this, we
require a definition of core strategy, organizational design and
external environment that is easily understood by policymakers and
entrepreneurial managers.
Core strategy refers to the purpose or mission of a particular agency.
The question of whether every agency has a clearly definable mission
may be contentious in some core public sector organizations.
However, for the vast majority of service delivery and even some
policymaking bodies, the concept of a core strategy or even a
relatively vague mission provides the basis for group cohesion, ethos
among public servants, and a conceptual framework for strategic
managers.
Organizational design is comprised of the processes and organizations
of work that enable public servants to fulfill the core strategy of the
agency or department in question. Finally, the external environment of
a public sector agency is rather complex and should not be
oversimplified. It includes the consumers of the organization's direct
outputs as well as the stakeholders within and outside the public
sector who authorize the department's existence and mandate. Such
stakeholders could be interest groups, beneficiaries or consumers of
an agency's services, the legislative and executive branches, the head
appointee of the ministry in which the department is housed, etc.

 Page 8

Managers should be able to achieve an equilibrium in the relationships

between external environment and core strategy, core strategy and
internal organizational design, and organizational design and external
environment. Three conceptual building blocks -a taxonomy of
outputs, P-A arrangements, and organizations of work -- help
managers do this for each of these relationships respectively.
· External Environment and Core Strategy: The taxonomy of public
sector outputs helps managers derive an appropriate core strategy by
clearly defining an output or a particular service. A prior question, of
course, is the ability of department heads or even ministers to
determine the needs of clientele for particular departments.
Effectively assessing the needs of the citizenry depends, in part, on
the representative quality of the regime. It also depends on the ability
of bureaucrats or technocrats to gauge citizens' preferences. For more
immediate clients, such as other departments or agencies, stronger
internal information systems and more effective intra-public sector
coordination are necessary.
· Core Strategy and Internal Organizational Design: Managers should
align the organizational design of their particular agencies with its
core strategy by selecting appropriate institutional arrangements
between principals and agents. In diagnosing problems in a particular
agency, managers should first identify those inappropriate institutional
arrangements that prevent internal structure and systems from being
aligned with their mission. These concepts, as they apply to strategic
change, will be described in greater depth in the following section.

 Page 9
· Organizational Design and External Environment: When
organizations continually design and adapt processes and
organizations of work to evolving core strategies, they essentially
align their internal administrative capacity with a constantly changing
external environment. In fact, the permeability of different work
organizations directly affects the ability of public sector organizations
to respond to key stakeholders or adapt to technological and economic
change. The internal features such as personnel and human resource
systems, in turn, support the permeable design. For instance, lateral
hiring of CS cohort with comparable managerial or technical skills
will be more prevalent in permeable organizations as opposed to
careerist, seniority-based hiring and promotion policies. The
permeability of processes and organizations of work to external
environments should be appropriate to the particular good or service
provided by the department. Certain agencies, by design, are required
to be more insulated, while others are better able to fulfill their
mission by being more porous.
Box 1. The Building Blocks of a Pareto-Efficient Government
Agency
(i) Taxonomy of Outputs
(ii) Efficient Institutional Arrangements between Principals and
Agents
(iii) Designing Production Processes and the Organizations of
Work

The notion of strategic alignment presented above provides a template

for entrepreneurial managers. A more in-depth explanation of these
building blocks of a Pareto-efficient public sector agency -- a
taxonomy of outputs, P-A arrangements, and organizations of work --
is to follow.
A Taxonomy of Outputs: Linking External Environment to Core
Strategy
One of the most effective ways of deriving an appropriate core
strategy vis-à-vis a changing external environment is to delineate a
taxonomy of outputs for a particular agency or department. In the
contemporary lexicon of public sector management, outputs are
considered the "direct product of an organization's activities in terms
of goods and services."12 Therefore, the outputs of certain
government agencies are inputs for others.
The Outputs vs. Outcomes Debate: In policy circles in the OECD as
well as multilateral development banks, there is a growing debate
about the relative value of the output-based management strategies in
public sectors vis-à-vis an outcomes-based approach. According to
conventional wisdom, New Zealand's "outputs-based" public
management strategy has prioritized "technical efficiency" at the
expense of "allocative efficiency.''
12 OECD, p. 158.

 Page 10
Alternately, Australia has opted for enhancing allocative efficiency
and effectiveness by installing a financial management and accounting
regime that emphasizes outcomes. Rather than view these two
examples as diametrical opposites, more recent scholarship suggests
that they are merely different points on a continuum. So, the outcomes
approach is a more nuanced form of outputs-based management.13
Resolving this debate is not the purpose of this paper. However, it
does have a direct bearing on our use of the "taxonomy of outputs" as
a tool for aligning core strategy and external environment. Suffice to
say, both efficiency and effectiveness have been and will continue to
be the central objectives of Bank-supported administrative reforms in
developing and transition economies. As the theoretical and
operational developments in public management in OECD countries
begin to impress themselves on developing countries, one issue is
highlighted in particular, namely accountability. This requires that
public sector managers, particularly senior managers, are held
accountable for the performance of their respective departments.
In OECD countries, the push for greater accountability has been one
part of a bargain between reform-minded elected officials and
bureaucrats. In return for compliance to higher performance standards,
managers are given greater autonomy in the day-to-day operations of
their agencies. These include hiring, recruitment, purchase of inputs,
etc. So in discussing the relative value of the outputs or outcomes
approaches for governments in developing countries, we must answer
the following question: Which system better enables governments to
hold public sector managers accountable for meeting specific
organizational objectives?
From this point of view, it is difficult to hold managers in developing
countries responsible for outcomes of policies, which are significantly
influenced by a number of exogenous factors that are themselves very
difficult to measure. For instance, the influence of informal or
indigenous institutions on policy outcomes in rural areas is difficult to
determine and quantify. Therefore, the outputs-based management
strategy appears to be the better method for steering public sector
organizations in the Bank's client countries, where efficiency is clearly
a crying need.
As a final note, policymakers should be wary of underestimating the
operational and cultural implications of using an output-oriented
approach in countries that are still aspiring to the Weberian ideal of a
traditional, input-based bureaucratic regime. Defining outputs in
government agencies necessarily implies changes in performance
appraisal, evaluation, budgeting, and even the nature and quality of
government information.14 It is easy to see how information on an
government performance can profoundly change public discourse in
developing countries. Specifically, greater awareness of government
13 Campos and Pradhan, p. 24-26.
14 Marsh, Ian. "The Quality of Government Information, Public Opinion, and
Adversarial Politics," in Canberra Bulletin in Public Administration, No. 83,
February 1997, 76-77.

 Page 11
operations provides a pretext for beneficiaries to demand more
customer-oriented service delivery. Stakeholder support for greater
access and quality in service delivery could in turn fundamentally
affect the legitimacy of the state. After all, the move towards
specifying outputs in the public sectors of OECD countries emerged
from growing public dissatisfaction with the quality and effectiveness
of public services.15
Defining Outputs: Even if public sector reformers agreed to the
desirability of enhancing accountability through output-based public
management, they would be left with the difficult task of
conceptualizing and operationalizing an outputs-based regime such as
New Zealand's. Traditionally, difficulties in defining the goods and
services of government agencies have led to a variety of costing and
monitoring problems. Public sector managers have to exert significant
efforts trying to attribute different labor and capital costs to various
outputs. Furthermore, under performance-based systems, managers
will be increasingly pressured to measure the marginal contribution of
a given worker in the production of a public good.16 These costing
and monitoring issues are often even more unwieldy in core
policymaking and coordination agencies than in service delivery
agencies.
In addressing these definitional issues, some rapidly reforming
governments in OECD countries, most notably New Zealand, have
employed a set of powerful conceptual tools for identifying and
classifying public sector outputs. The ultimate aim of using these tools
is not only to establish incentives for the production and provision of
these outputs but to maximize the intensity of those incentives for any
particular output.17
One of the most useful ways of defining outputs is to define according
to high and low levels of contestability and specificity (see Figure
3).18 This approach to defining public sector outputs suggests that the
analogy of the firm has been one of the major contributions of
organizational or managerial economics to PSM. A very brief
explanation of the implications of two schools of organizational
economics -- Agency Theory and Transactions Cost Economics
(TCE) -- will explain their respective
15 OECD, 1995.
16 James Q. Wilson. Bureaucracy: What Government Agencies Do and Why
They Do It. New York: Basic Books, 1989.
17 Israel introduced the notion of incentive intensity in 1987. Israel's work on
institutional development represents one of the first attempts to operationalize
institutional thinking for development policy. Arturo Israel, Institutional
Development. Baltimore, MD.: The Johns Hopkins University Press, 1987. It
has most recently been adapted by Robert Klitgaard in his discussions of
incentives and information on development projects and public sector
organizations in general. Robert Klitgaard, "Information and Incentives in
Institutional Reform," in Institutions and Economic Development. ed.
Christopher Clague, Baltimore, MD: The Johns Hopkins University Press,
1997.
18 Robert Laking, "An Approach to Public Management Reform," PSM,
World Bank, 1995, p. 12. Laking borrows this classification system from
Israel (1987). Picciotto (1995) uses "excludability" and ''subtractability" as
criteria for classifying outputs. However, this formulation is essentially the
same as the "contestability" and "specificity" criteria offered by Israel (1987).
For purposes of our strategic CSR decision model, we use the
contestability/specificity criteria for purposes of clarity.

 Page 12
contributions to public sector reform. Both schools of thought assume
that all organizations -- economic, political and social -- are comprised
of a series of explicit (legal) and implicit (informal) contractual
arrangements between the factors of production, i.e., principals and
agents. In a public sector department or agency, for instance principal-
agent (P-A) contracts exist between elected officials and political
appointees, political appointees and senior civil servants, civil
servants and public servants, or even bureaucrats and temporary
workers.19
Agents are contracted by principals to perform a particular function
such as the production of a good or service in a firm or the provision
of a particular public sector service. These functions ideally derive
from the core strategy of the organization and are consistent with the
principals of strategic alignment discussed earlier. The process of
contracting agents is potentially rife with conflicts between principals
and agents due to ex ante and ex post information asymmetry such as
adverse selection and moral hazard respectively. Agency theorists and
TC economists are concerned with minimizing the problems that
principals face in hiring agents (ex ante P-A contracts) and then
holding them accountable to the terms of the contract (ex post P-A
contracts).
These problems primarily involve the dangers of opportunism due to
asymmetric information before the signing of contracts and moral
hazard during the implementation of the contract. In limiting these
uncertainties, agency theorists have focused more narrowly on
selecting and motivating particular agents while TCE thinkers have
sought to identify the optimal governance structures that minimize the
transactions costs of production and exchange within organizations.20
Put simply, TCE teaches that certain types of transactions, particularly
those associated with lower levels of uncertainty and risk of
opportunism, are undertaken most efficiently under contestable or
market-based arrangements. Contestable contractual arrangements are
possible here precisely because the production and provision of the
service can be specified and monitored by the principal with relative
ease. Other types of transactions, which are generally plagued with
higher levels of uncertainty ex ante and ex post the negotiation of
contracts, tend to require rules-based hierarchies given difficulties in
specifying and monitoring performance.
19 Thráinn Eggertson, Economic Behavior and Institutions. Cambridge:
Cambridge University Press, 1990.
20 Jonathan Boston et al. Public Management: The New Zealand Model.
Auckland, New Zealand: Oxford University Press, 1995.

 Page 13

The ability to specify or define an output with precision in the general

absence of barriers to entry for alternate providers (i.e., contestability)
is the normative basis for the specificity-contestablity matrix
presented above. Highly contestable goods are generally those with
lower barriers to entry and therefore, a diversity of potential suppliers
competing with each other in any one or all of the sectors (public,
private, non-profit). For instance, in the United States, legal
representation is a highly contestable outputs because of the high
number of practicing lawyers per capita. The growing number of
"policy professionals" such as economists and other social scientists
enables policy research and advice to become a highly contestable
good. Specifiable outputs are those which can be readily defined.
Such outputs are usually easily monitorable and defined clearly in unit
terms such as the number of reports published or number of
passengers transported by bus. They can also be defined by a clear
objective such as collecting garbage or processing tax returns.

 Page 14
It is important to note that the determinants of specificity and
contestability such as the ability to define outputs, barriers to entry,
levels of uncertainty (i.e., general levels and those specific to a
contract) are both exogenous as well as endogenous. To the extent that
these are exogenous, they are part of the external environment
illustrated in the strategic triangle (see Figure 2). In this way, the
classification matrix for outputs strategically aligns a public sector
department's core strategy with its external environment.
By systematically ranking public sector outputs so as to place
normative value on high specificity-high contestability goods (e.g.,
Type I as opposed to Type III or IV), public sector managers are better
able to define what they want and in turn, agents will have a better
idea of what is expected of them. Clarifying these terms before
negotiating P-A contracts helps limit problems of ex ante information
asymmetry or adverse selection. The next step then is to identify
appropriate institutional arrangements or contracts between principals
and agents that limit expost information symmetry or moral hazard.
Put simply, public sector principals want to limit the uncertainty that
agents will not abrogate their end of the bargain.21
Efficient Institutional Arrangements between Principals and Agents
Departmental managers or any other public sector principals require
institutional arrangements that best signal the success or failure of
agents in carrying out the department's core strategy, i.e., the
production and provision of certain outputs. Institutional arrangements
that are appropriately aligned with the core strategy are the building
blocks of efficient organizational design. Given the varying levels of
contestability and specificity, each type of output has a corresponding
type of contractual arrangement that best signals institutional
performance.
· Type I (high contestability - high specificity) outputs are most easily
subjected to competition and "competition surrogates" in the
production and provision of public goods. The market mechanism
signals the failure of agents to perform at levels required by the
contract. In addition, competitive contractual arrangements force
public entities to face the threat of going out of existence. In order to
survive, these public entities, like private firms, innovate processes,
systems and structures to continually perform at higher levels of
quality and efficiency.22
· Type II (low contestability - high specificity) outputs require regular
monitoring and auditing, which are made relatively easy because of
the high specificity of these outputs.
21 Israel, p. 48.
22 Ibid, p. 100.

 Page 15
· Type III (high contestability - low specificity) outputs, on the other
hand, have specification problems which can be limited by
institutional mechanisms such as professional norms and rigorous
publicly-mandated standards.
· Type IV (low contestability - low specificity) outputs should be
produced under institutional arrangements that account for both low
specificity and low contestability. Generally, a CS requires
bureaucratic, rules-based arrangements that arbitrarily define the
output that an agent is to produce. In addition, the voice mechanisms
for stakeholders help to signal the performance of agents.
Stakeholders may also help policymakers define the outputs as "co-
producers" of social sector goods and services (a special case of Type
IV outputs).
Designing Production Processes and the Organization of Work
Traditional neoclassical theory assumes perfect information and no
transaction costs; so a firm is essentially considered a production
function.23 As a result, this school of thought says little about the
processes that make up the internal structures and systems of a firm or
a public sector organization. However, the ground realities of
imperfect information, transaction costs, behavioral and general
uncertainty, and opportunism clearly require an analytical tool with
greater explanatory power. Therefore, a strategic framework for public
sector reform in developing countries must necessarily build on the
contributions of organizational theory and managerial economics.
Both organizational theory and managerial economics offer numerous
insights into process design and the organization of work in
government agencies. This third leg of the strategic triangle enables
managers to appropriately organize work to the external environment.
In other words, work processes are to be designed in ways that
establish the most effective relationships with external stakeholders.
For instance, competition or competition surrogates require that public
sector organizations are open to and continually sharing information
with the suppliers of a particular output. For Type IV non-social sector
outputs such as intra-public sector regulation, relevant agencies
should be insulated from special interests (and patrimonial influences)
that would threaten to undermine the former's credibility.
For purposes of clarity, we abstract two stylized types of process
designs or organizations of work -- (i) vertical and (ii) horizontal. Our
intention in using these stylized examples is not to produce a
formulaic approach to public sector reform. However, a stylized
approach will enable us to demonstrate how processes can be
designed to maximize effectiveness and efficiency of an organization's
internal design.
23 Williamson notes that "economizing [in neoclassical economics] takes
the form of efficient choice of factor proportions, while issues relating to
the organization of work mainly involve economizing on transaction costs.
The latter rarely surfaces, much less are prominently featured, under the
production function approach." Oliver Williamson, "The Organization Of
Work: A Comparative Institutional Assessment," p. 293.

 Page 16
Vertical Processes and the Taylorist Work Organization: Many public
sector organizations have traditionally undergone vertical processes in
the provision of outputs. While some of these processes are no longer
appropriate for certain outputs, there are many cases in which
hierarchical arrangements are justified on grounds of efficiency and
effectiveness. First, a description of such processes and their benefits
is required.
In vertical or hierarchical production processes, a senior manager or
chief executive generally relies on a pre-determined blueprint to
specifies the marginal contribution of junior staff or casual workers
within a particular department. Each worker's task is distinct and
separated from those of other workers in the functioning of the
department. The individual worker or public servant is expected to
master a particular task and therefore perform the task more
efficiently over time. In this way, a department reaps benefits in terms
of uniformity of output and economies of scale that derive from what
is essentially an assembly line approach. Variability or inconsistencies
in processes and functions within a public sector department are
mitigated by hierarchical arrangements that ensure adherence to
blueprints.
It is also worth recognizing that what Taylorist approaches gain in
terms of consistency, they lose in terms of adaptability and innovation
because the "knowledge content" of each worker's marginal
contribution is limited to the isolated task they are performing.
Process innovation is necessarily slower in vertical processes because
a decision to change the blueprint can only be made by a senior
manager, whom Frederick Winslow Taylor viewed as essentially an
'engineer'. Information about production problems generally has to be
relayed through layers of hierarchy from the front-line to the top of
the department in question. At that point, a senior manager decides on
an alternative blueprint, which he or she operationalizes through a
new set of directives.24
At any rate, the Taylorist work organization's use of a hierarchical
authority in defining and controlling processes as well as its deliberate
restriction of permeability indicates its appropriateness for low
specificity-low contestability outputs. Outputs that require
predictability and uniformity in provision are non-social sector Type
IV outputs such as budgeting, regulation, etc. For instance, budgeting
is a core function that would benefit from hierarchical processes that
are uniform, predictable, and consistent over
24Social choice theory and the "Sen Paradox" in particular, demonstrate
that Pareto efficient outcomes are not possible when some groups or
individuals have informational advantages vis-à-vis others. Put simply, the
"Sen Paradox" shows that any organization that delegates decision-making
authority to more than one subset of individuals will experience either
incoherent behavior or inefficiency for some combination of individual
preferences (Sen, 1970; 1976). For an application of this principle for
Organizational Behavior, refer to Miller (1992).

 Page 17
time. Empirical evidence verifies that the most efficient budgeting
systems in developing countries are usually subject to hierarchical and
transparent systems of control.25
Box 2. Taylorism and the Progressive Movement in the United States
The modern hierarchical bureaucracy in the public sector, particularly in
the US, was historically influenced by Taylor's ideas of "scientific
management." According to scientific management, the ordinary work
of an organization was to be studied on 'time and motion' principles so
as to break down the work into easily learned tasks. The idea was
successfully applied in the mass production economy of the early to
middle twentieth century US, when Taylorist work organizations were
able to "produce very long runs of identical or nearly identical items."1
Borrowing the principles of Taylorism from the industrial sector,
reformers of the Progressive Movement in the early twentieth century
rapidly expanded public sector organizations -- from federal agencies to
public schools -- in order to efficiently mass produce many different
public sector goods and services for a rapidly expanding US population.
It is important to note that the Progressives argued for Taylorism as a
strategy that would insulate rational public sector managers from vested
interests, politicization, and corruption. In other words, Taylorism in the
public sector was a precursor of the modem theory of technocratic
management, which argues for the effective reduction of a public sector
organization's permeability to its external environment.
1 Marc Tucker and Ray Marshall, Thinking For A Living, New York:
Harper and Collins Publishers, 1992, p. 4-6.

Horizontal Processes & the Networked Work Organization: A growing

body of literature suggests that flatter production processes and
networked organizations typically emerge in the context of an intensely
competitive external environment. It is no coincidence that many "high
performance work organizations" in globally-competitive high tech or
manufacturing markets are made of flatter and more collegial
production processes. The need to constantly incorporate best practices
and to benchmark performance vis-à-vis market leaders requires that
high performance organizations be permeable to outside people, ideas
and clientele.26 Permeability itself affects internal organization as noted
above. As opposed to vertical processes that stress predictability and
uniformity of output, horizontal processes -- decentralized decision-
making and managerial autonomy -- are designed to capitalize on the
adaptability, flexibility, and the rapid rate of innovation that derive from
a highly competitive external environment. Such arrangements demand
greater accountability from managers, who in turn are forced to
negotiate a continually changing external environment.
25 World Bank, World Development Report 1997: The State In A Changing
World. Washington, DC: World Bank, 1997, p. 45-51.
26 Don Tapscott. The Digital Economy. New York: McGraw-Hill, 1996.

 Page 18
Another feature that distinguishes vertical and horizontal processes is
the "knowledge content" of the marginal contribution of a given
worker. As noted above, in hierarchical organizations, the knowledge
content is limited by strictly defined, repetitive job tasks.
Alternatively, in flatter processes and "networked" organizations,
there is a greater emphasis on learning by doing. The interactive and
learning aspects of work allows for variability (i.e., increases) in the
knowledge content of a worker's marginal contribution to the
department's functions over time. This is operationalized in a number
of ways. Workers are organized in teams that collaborate, innovate,
and share ideas as they produce a good or service. In other words,
"rules of the game" provide incentives for workers to train each other
and mentor younger workers.27 It does not end there. In more
advanced networked organizations such as Volvo's production
facilities, each worker comes perform and therefore understand
virtually every other job within the "production process." Emerging
information technologies increase such opportunities as they level the
transaction costs of team work within a firm or a public sector
agency.28 The benefits of collegial organizations of work are clear
when rapid innovation is an inherent part of the organization's
success.
Table 1. Institutional Arrangements, Process Design, and Work
Organization
Output Institutional Process Design
Arrangements and
Work Organization
Type I Competition Horizontal
(Networked)
Type II Reporting and Audit Horizontal/Vertical
Type III Professionalization and Horizontal/Vertical
Standardization
Non-social Bureaucratization, Vertical
 sector Reporting and Audit (Taylorized)
Type IV
Social sector Stakeholder Management Horizontal
Type IV (Networked)

From the point of view of public sector reform, the lessons of

networked, high performance work organizations in the private sector
are invaluable. Just as the
27 Ibid.
28 Ibid, p. 52.

 Page 19
Progressives argued for the creative adoption of scientific
management's techniques by national, state and local governments in
the early twentieth century, future-oriented reformers have ample
reason to argue for a similar absorption of industry's best
organizational practices by state in late twentieth century. Clearly, all
public sector organizations will not be able to simply replicate the
organizational design of a globally competitive, high performance
work organization. Nor should they attempt to do so especially if the
institutional arrangements are not consistent with their particular core
strategy and external environment. Having said that, it is important to
note that ideas such as permeability (with all its implications for
organizational design) have proven and will continue to prove
beneficial for public sector organizations that are attempting to
improve both efficiency and effectiveness. The evolution of the flatter,
networked organizations in highly competitive environments suggests
that their organizational design is well-suited to Type I outputs (high
specificity-high contestability) that are most efficiently produced by
using competition or competition surrogates.
There is, however, a twist to this story and that concerns certain Type
IV outputs. Social sector goods are a special case of Type IV goods.
While they suffer from low contestability and specificity, they
paradoxically require a level of sensitivity to human development
which hierarchical bureaucracies have often failed to provide.29 A
much more permeable organization with necessarily interactive
processes of production and provision affords the sensitivity that
social-sector Type IV goods need. More porous institutional
arrangements should facilitate participation and ownership by the
beneficiaries or consumers of these outputs. For instance, in many
developing countries, governments are increasingly planning and
implementing educational, health, and environmental services in
collaboration with rural NGOs and civic organizations. When
hierarchical, rules-based arrangements fail to satisfactorily specify
social sector outputs or signal the performance of the agents, "co-
production" by external stakeholders and public servants has proven
more effective.30 This requires public servants in social-sector
agencies to evolve work organizations that utilize a network of co-
producers in the planning, implementation and monitoring phases of
output provision.
The Question of Culture: Clearly organizational design is not simply a
question of redefining institutional arrangements or contracts between
principals and agents. A more realistic framework should take note of
the myriad informal institutional arrangements that support and
inform questions of organizational design and reform. Professional
ethos, conventions of loyalty, and the overall organizational culture
make up the various institutional arrangements that govern various
modes of provision such as competition, standardization or
bureaucratization. Ideally, norms and informal rules should reinforce
incentives provided by formal systems and structures. For instance,
Taylorist organizations of work such as those associated with
budgeting or regulation will evolve
29 Our discussion of the "paradox of Type IV goods" grew out of a
conversation with Arturo Israel, April 1997.
30 Elinor Ostrom, "Governance of Local Communities," Conference Paper,
Mexico, 1996.

 Page 20
professional norms that emphasis loyalty to seniors and vertical lines
of control because these cultural factors provide consistency to
uniform, repetitive functions that engender regulation and budgeting
with credibility and predictability. It is likely that civil servants in
these regulatory bodies will take on the traditional, hierarchical roles
to ensure consistency with the rest of the core public sector and
establish vertical quality control process throughout the agency they
manage.
Similarly, networked public sector agencies that produce social sector
Type IV or Type I outputs will evolve norms that emphasize the
modern managerial ethos that provides greater flexibility in return for
increased productivity. Rather the relying on loyalty to hierarchy and
senior civil servants, public employees are likely to consider
themselves free-floating professionals with a set of transferable and
marketable skills as well as a code of ethics that is applicable to a
variety of settings. In other words, skilled public servants are likely
identify more strongly with the professional norms of technocrats (or
in the case of the social sector, with a broad range of stakeholders)
rather than a particular senior manager.
Networked organizations that are more permeable to their external
environment experience their own set of stresses. They will have to
devise additional mechanisms to ensure consistency and loyalty to the
core strategy of the organization as they attract public servants who
have already adjusted to a more flexible labor market for their skills.
For instance, the increased incidence of competitive, lateral hiring in
New Zealand has coincided with increases in the amount of time and
resources allocated to inculcating newly-hired public employees with
the expectations of their particular department and the government.31
Increasingly, formal arrangements such as Work Improvement Teams
are being used to routinize collegial, networked interactions between
public servants. Singapore was the first country to create public sector
analogs to the private sector's employee involvement organizations
(EIOs). These public sector EIOs allow staff from varying levels to
discuss problems of quality and then cooperatively devise strategies to
improve the efficiency and effectiveness of their particular output or
service. Other countries such as Malaysia, India, and Botswana have
followed Singapore's lead in employing institutional arrangements
that formalize and reinforce the cultural implications of networked
work organizations.32
A related concern for reforming governments and more specifically
their Ministries of Public Service is the need to socialize civil servants
in ways that capitalize on this new drive towards accessibility to
clients and openness to competition. Any civil service or public
service ethos built around greater permeability will have to find new
ways to inculcate some notion of the ethics of public office, the
common good, or the national interest. In general, public sector
reformers will have to be cognizant of the
31 Based on a discussion with Nick Manning, Economic Development
Institute.
32 Mohan Kaul, "Civil Service Reforms: Learning from Commonwealth
Experiences," in Civil Service Reforms in Francophone Africa. eds. Ladipo
Adamolekun et al., World Bank Technical Paper No. 357, Washington, DC:
World Bank, 1997.

 Page 21
types of stresses, strains, and requirements that organizational
redesign places on loyalty, norms, ethos and culture within their
departments and agencies. The significance of institutional
arrangements that fall under the rubric of organizational culture only
increases when we deal with organizations that occupy the ''mushy
middle", i.e., in between either the Taylorist or Networked extremes.
Hybridized Processes and Work Organizations: Public sector
organizations in this "mushy middle" typically produce and deliver
neither Type I nor Type IV outputs. According to the logic of this
framework, the production and provision of Type II and III outputs are
the ones most likely to be governed by hybrids of Taylorist and
Networked work organizations.
We established that Type II or high specificity- low contestability
goods are best produced using P-A arrangements such as reporting
and auditing. Since they have no competitive arrangements that
enhance efficiency or signal performance, Type II outputs are best
produced using efficient vertical processes and Taylorist work
organizations to generate economies of scale. In addition, Type II
outputs such as the processing of tax returns generally need to be
uniformly and consistently produced to ensure equity and impartiality
to the citizen clientele. Hierarchical arrangements provide that
uniformity, but their provision must be transparent in order to ensure
proof of impartiality or equal treatment. Transparency is best realized
by rigorous reporting and auditing to signal the performance of public
servants who are producing Type II outputs. Managers can capitalize
on the high specificity of these outputs to setting up effective audit
and monitoring systems.
Type III or low specificity-high contestability outputs require a
distinct organizational design. Their contestable nature avails Type III
outputs such as policy advice to competitive or market-oriented P-A
arrangements and therefore, flatter processes. To a great extent, the
production of outputs and services such as policy advice or legal
representation are more effective in collegial and collaborative work
environments. This is particularly the case when the government is
not only regulating the competition in the provision of the outputs, but
is also a participant in that competition. Under these circumstances, a
department's own employees may bid for a contract and therefore, will
be forced to outperform and underbid their private sector competitors
(see the example of the Phoenix city municipality's garbage collection
function). New competitive pressures on public sector departments are
akin to (albeit less intense) those faced by high performance work
organizations. Innovation is required to increase the efficiency of
production processes. Managers, faced with the threat of external
competition, are likely to opt for flatter processes that reduce the time
required to innovate front-line operations.
The key feature of the Type III is the difficulty in specifying, defining
and evaluating their performance. For example, in the case of
government consulting services or policy advice, which use flatter
processes for production, managers will have a difficult time defining
precisely what the service is and therefore, determining whether

 Page 22
the quality of policy advice was in fact satisfactory. In addressing this
definitional problem, managers and policymakers should establish
publicly-mandated standards for the content and performance or
quality of outputs. Standards-setting and standards-enforcement
functions within a public sector agency also plays a significant role in
shaping the culture and ethos that affects the public servants in
question. Similar to other forms of regulation, standardization
generally requires a centralized, highly cohesive authority that can
guarantee uniformity, predictability, and credibility in the standard-
setting process. So the production of a Type III output such as policy
advice is a case where flatter production processes for competitive
service delivery (i.e., the use of consultants) are tempered by
hierarchical systems of quality control such as policy coordination
unit under the Prime Minister's Office.
For certain Type III outputs, professionalization can serve as a partial
replacement for hierarchical enforcement of publicly-mandated
standards. For example, healthcare is highly professionalized with its
own code of ethics, standard operating procedures, independent
institutions for doctors, nurses, public health specialists, and medical
technicians. The need for safety and public health standards will
clearly exist, but is tempered by the enforcement of rules and
professional standards germane to healthcare providers such as
doctors, nurses, therapists, etc. The same is true for public legal
representation, another Type III output, whose specification problem
is limited in part by the historical development of the legal profession,
which has its own set of norms, ethics, and conventions.
Professionalized Type III outputs afford more room for networked or
collegial work organizations to evolve because the traditional core
public sector standards setting bodies play less of a hands-on role.
Production process and organizations of work are the means by which
public sector organizations not only fulfill their functions but also
align with their external environment. Work organizations determine
the type of interaction (including the type of information exchanged)
between citizen-clients and public employees of a particular agency.
The appropriateness of organizational design shapes the quality of a
government agency's relationship with the primary beneficiaries of its
services.
The State After Outsourcing? Having described a model for an
efficiency-maximizing public sector department, it is worth making a
larger analytical point. There is a prevalent notion that after a variety
of public services have been outsourced, the remaining "irreducible
core" state or public sector will be inherently hierarchical.33 Another
popular view is that contracting out service delivery functions will
essentially render the State obsolete. Both these views obscure a great
deal of complexity. First, the model presented above does, however,
speak to design questions within the core. A great diversity of non-
hierarchical and hybridized arrangements could emerge over time
within the public sector. Second, curtailing the State's role in direct
provision of goods and services does not render it irrelevant or even
less relevant. Contestable arrangements
33 Picciotto, p. 11.

 Page 23
such as bidding and tender require the State to play a more effective
and active role in standardization and regulation. Both these functions,
like all other aspects of strategic alignment, clearly require significant
capacity. Research into short and long range policies to enhance this
strategic or alignment capacity of entrepreneurs and senior managers
in the public sector is currently being conducted by various members
of the Bank's own PSM consortium and should be developed as
quickly as possible.

 Page 24

IV.Determining the Scope of Interventions

The model of an efficiency-maximizing public sector department
presented above turns on the notion of strategic alignment. From this
basic analytical viewpoint, the scope of PSM reforms will be
significantly shaped by the areas of misalignment between a
government agency's core strategy, internal organizational design, and
external environment at any given point in time. The aim for Bank
operational staff and line managers in client countries to (1) identify
types of misalignment (i.e., inappropriate processes vis-à-vis core
strategy) in an agency, (2) ascertain the reasons for the persistence of
misalignment over time, and (3) chart out a realistic set of objectives
for intervention.
Areas of Misalignment
Pinpointing the areas of misalignment is relatively self-explanatory
and basically requires a strategic audit of a particular department's
core strategy, organization design, and external environment. In fact,
periodic strategic audits provide a means of identifying opportunities
for achieving Pareto optimality in public sector agencies.
The function or purpose of a service delivery agency changes over
time in response to evolving external conditions such as technological
change, private sector development, fiscal crises, or different types of
political pressure. Realigning core strategies with a changing external
environment essentially speaks to the need to reclassify outputs within
the specificity-contestability matrix discussed earlier. Our efficiency-
maximizing model places normative value on high specificity-high
contestability or Type I outputs (see Figure 4). So reformers can
achieve Pareto optimal outcomes with regards to organizational
mission by identifying opportunities to increase either specificity or
contestability in ways that maximize the number of Type I outputs
provided by the department in question.34

34 This introduces a measure of dynamism into Laking's and Israel's

original formulation of output classification.

 Page 25
Take the example of Type II and IV outputs, which are difficult to
subject to competition or competition surrogates. In the early 1980s,
the city of Phoenix, Arizona embarked on several bold experiments in
competitive service delivery of public goods. Garbage collection, a
low contestability-high specificity (Type II) output, was historically
provided by local city government. Phoenix city government's
monopoly over garbage collection proved to be both inefficient and
expensive relative to other cities of the United States. The tax revolt
of the late 1970s and early 1980s placed severe fiscal constraints on
cities like Phoenix. These new pressures forced city planners to
identify opportunities to increase efficiency in the delivery of services.
In this context, they considered privatizing the collection of trash
since private firms in the area had proven to be much more cost
effective.35
At the same time, city officials recognized that wholesale privatization
could involve abdicating the local government's mandate to maintain
public standards for trash collection. So, they devised a plan by which
public sector garbage collectors would participate in competitive bids
with private companies for fixed term contracts. While it is important
to recognize the impetus that fiscal crisis gave for introducing
competition in garbage collection, the institutional capacity of the city
was also a key factor in establishing these "new rules of the game."
For example, the city government required the capacity set new
formal and informal rules for comparing competitive bids as well as
granting or revoking contracts. Finally, the identification of
inappropriate P-A arrangements governing service delivery as a
source of misalignment between core strategy and organizational
design was fundamental to the overall reform.
Over time, even some Type IV goods can be subjected to significant
reclassification. In the United Kingdom and United States, public
education has undergone clearer product definition and enhanced
competition in service delivery. While public education still cannot be
considered a Type I good, policy entrepreneurs in the US have been
using a variety of methods to artificially stimulate a competitive
service delivery system while maintaining high and common
standards for learning. The "charter school" movement is one such
experiment that has gained popularity in over 20 states (see Box 3).
35 David Osborne and Ted Gaebler, Reinventing Government: How the
Entrepreneurial Spirit Is Transforming the Public Sector. Redding,
Massachusetts: Addison-Wesley, 1992.

 Page 26
Box 3. Reclassifying Type IV Outputs: Chartered Public Schools in the
United States
Reformers in local school districts in the US are increasingly
experimenting with "charter schools." Under such an arrangement, any
public entity such as a municipality can charter a public school
organized by teachers, parents and other community members.
According to the terms of these contracts, "charter schools" have to
meet performance and content standards within a certain time period.
Performance standards and content standards are meant to limit the
specification problem in public education. For instance, the main
component of performance standards is the average level of student
achievement as measured by standardized examinations.
In addition, by allowing other public entities to charter public schools,
this new system breaks the school board's historical monopoly over
public education. A chartered school district operates on the basis of
open enrollment. So students are free to attend any public school and
the "money follows the student" as per pupil expenditure. In this way, a
measure of contestability is introduced as schools compete to attract
increased numbers of students (and a larger budget) by performing at
higher levels. Students and their parents are then attracted to the best
performing schools. In turn, schools that do not meet performance
standards lose their charters and turned out of the market. In this sense,
public education moves closer to a Type I good. Its actual classification
depends partially on the success of performance standards and the
ability of charter schools to mimic a competitive market.1
1 Finn, Jr., Chester E., Louann A. Bierlein, and Bruno V. Manno,
''Charter Schools in Action: A First Look,"
http://www.edexcellence.net/index.html: Educational Excellence
Network, January 1996.
Causes of Misalignment
Misalignment, which is essentially a form of inefficiency, occurs when
the taxonomy of outputs, P-A contracts, and organizations of work are
not mutually reinforcing. In such cases, institutional arrangements may
not be appropriate to the type of output an agency or department is
sanctioned to provide.
Country experiences as well as a vast academic literature in public
administration, public choice theory, management theory, and the
various neo-institutionalist perspectives have provided a wealth of
insight into the political economy of institutions and institutional
reform. For the purposes of this paper, we have crystallized a list of key
variables influencing the strategic capacity and alignment of public
sector organizations such as agencies and departments (see Box 4).

 Page 27
Box 4. Factors Affecting Alignment of Public Sector Organizations
· Special and Vested Interests
· Informal Institutions
· Information Processing
· Mental or Conceptual Constructs
· Path Dependencies

Special and Vested Interests: The notion that vested interests within
and outside the state can undermine the capacity of public sector
institutions to maintain both efficiency and effectiveness is not novel.
This has been a consistent argument in the study of political economy.
However, in the last two decades in particular, the significant
academic and political antecedents of Public Choice Theory have
generated a revival of critiques of the bureaucratic state's tendency to
create and perpetuate vested interests that hinder the evolution of
efficient and effective systems of governance. Some Public Choice
theorists have been particularly concerned with the role of self-
interested bureaucrats -- vested interests within the state -- who may
undermine the democratic character of the state over time.
This discussion is relevant to the public sector reform model because
it notes the tendency of vested bureaucratic interests to either directly
or indirectly resist strategic alignment initiatives such as outsourcing
production of Type I outputs such as road maintenance. Resistance to
alignment from within the public sector can be manifestations of the
desire to protect turf, maintain patterns of formal and informal
exchange, or reproduce advantageous power dynamics within or
across agencies. Resistance to change from the outside can be equally
formidable as special, highly vocal interests have a stake in
maintaining certain policies and therefore, the implementing agencies
for these policies. For instance, domestic producers of textiles may
organize in favor of protectionist trade policies such as quantitative
restrictions on imports. They would accordingly resist PSM
interventions in customs and licensing agencies that would enhance
efficiency and transparency. At any rate, the overall effect of
successful resistance is the persistence of inefficient modes of
production and provision for particular outputs. Potential gains in
efficiency as well as effectiveness (such as the relevance of a
particular output to beneficiaries) are foregone.
The academic literature on the bureaucratic politics is vast and beyond
the scope of this paper. Suffice to say, this particular cause of
misalignment should eventually be incorporated into the
implementation strategy for PSM interventions. Often, co-optation of
various bureaucratic interests in the short run is one of the only ways
of achieving strategic change (see Section IV).

 Page 28
Information Processing: Major theoretical developments in the
economics of institutions and information have increasingly
compelled policymakers to devise strategies that strengthen state
institutions by reducing transactions costs and improving the
availability of relevant information to various stakeholders. Public
sector entrepreneurs should be cognizant of the transactions costs
associated with institutional change itself. The transactions costs of
strategic institutional change, while difficult to measure, are
influenced by the availability of relevant information for managers,
workers, and other stakeholders.
According to North (1990), "the information that entrepreneurs
receive and the way they process the information" shapes the
perceptions of potential entrepreneurs in private and public sector
organizations. These perceptions in turn shape entrepreneurs'
decisions to affect changes in the "existing institutional framework."36
From this vantage point, we argue that policymakers should consider
the notion of information-processing as an important determinant of
entrepreneurs' ability the identify the need and opportunity for
change.37
For purposes of both theory and policy, we make a deliberate
distinction between information processing institutions and
organizations (IPIs & IPOs). This distinction, which at first may seem
overly semantic, is based on the NIE view that institutions constitute
"rules of the game." Institutions provide incentives for the evolution
of structures or socio-economic groupings, namely organizations, that
enforce (and potentially change) these rules. If IPIs are the formal and
informal ways in which information is processed, then IPOs are the
processors of the information. Identifying IPIs and strengthening IPOs
can help stakeholders (i.e., citizens, elected officials, senior
bureaucrats, and entrepreneurial line managers) measure the
performance of public sector agencies.38
In designing interventions to support IPOs, members of a reforming
government's aid consortium should be cognizant of (i) the types of
information available to public sector employees and their clients and
(ii) the ways in which information is processed. Ex ante assessments
of IPIs & IPOs should eventually become standardized components of
the institutional environmental assessments (IEAs) proposed in the
Bank's Africa
36 North, p. 8.
37 We derived the notion of information-processing from Professor Douglass
North's analysis, in Institutions, Institutional Change, and Economic
Performance, of entrepreneurs' mental models as factors influencing
institutional change. After further discussions with Professor North, we
defined information processing institutions and information processing
organizations as potential tools for policymakers in both OECD and
developing countries.
38 For a more in-depth discussion on the importance of accountability and
transparency in consolidating reforms, please refer to Section IV.

 Page 29
Region.39 In addition, the Bank and other donors should consider
developing systemic information processing strategies as part of
institutional reform agendas. These information processing strategies
should essentially focus on limiting information asymmetries between
principals and agents.40
Box 5. Information Processing Institutions and Organizations
Information Processing Institutions Information Processing
(IPIs) Organizations (IPOs)
· Informal Learning · Mentoring Arrangements
· Interactive Learning · Team-based Tasking of
Work
· Monitoring and Evaluation · Auditing and Evaluative
Bodies
· Publication of Performance Results · National Perfbrmance
Review Agencies
· Demand-driven Analysis of Policy and · Think-tanks, Research
Government Operations Institutes
· Client and Consumer Feedback · Watchdog NGOs and
Private Firms

Informal Institutions: Historically, development policy has assumed

that formal institutions have a greater impact on organizational
performance than informal rules. Implicit in this argument is the view
that changes in formal rules directly shape changes in informal rules.
While theoretical and empirical work on formal rules of committee
formation in Congress supports this notion, the relationship between
formal and informal rules is not unidirectional.41 Informal norms
within government agencies in developing countries often provide
more powerful incentives or disincentives to performance than do
formal rules.
39 Rogerio Pinto with assistance from Angelous J. Mrope, "Projectizing
the Governance Approach to Civil Service Reform: An Institutional
Environment Assessment for Preparing a Sectoral Adjustment Loan in the
Gambia," Washington, DC: World Bank Discussion Paper 252, 1994. Also
refer to Mamadou Dia, "Civil Service Reform: The African Experience,"
in Civil Service Reform in Latin America and the Caribbean, Washington,
DC: World Bank Technical Paper Number 259, 1994.
40 In Section IV, we introduce the idea of designing interventions that enable
the development of information processing markets (IPMs) that produce and
analyze information regarding public policy and the performance of public
sector agencies. This notion is relevant to accountability and transparency
enhancing measures. The historical development of IPMs and their role in
improving the quality of governance in OECD countries warrants further
investigation and research.
41 Kenneth A. Shepsle and Barry W. Weingast, " The Institutional
Foundations of Committee Power," in American Political Science Review. 81,
1987, p. 85-104. Also refer to Migara De Silva, "Institutions and Economic
Development," Working Paper, St. Louis: Business, Law, and Economics
Center, John M. Olin School of Business, Washington University, 1993, p. 3.

 Page 30
This is especially true of many post-colonial public administrations
around the world where the official Weberian rules of bureaucracy
coexist with informal patrimonial relations. For instance, tender and
bidding procedures for service delivery contracts may be governed by
formal rules intended to maximize cost efficiency and product quality.
Nevertheless, public sector officials managing the bidding process
may favor NGOs or private firms that are owned by members of their
own clan, caste or extended family with little regard for efficiency and
cost criteria. Therefore, in identifying the causes of a public sector
department's misalignment, decision-makers should conduct a
patrimonial profile of the institutional environment in question.42
Mental or Conceptual Constructs: NIE recognize the power of ideas
in influencing the actions of entrepreneurs change agents. As noted
earlier, entrepreneurs within government agencies influence the "rules
of the game only after they identify appropriate windows of
opportunity. North (1990) argues that mental constructs or mental
models strongly shape entrepreneurs' abilities to identify windows of
opportunity and reform institutions to enhance efficiency and
performance. In fact, North attributes the failure to capitalize on
opportunities for institutional change to the skewed perceptions or
inappropriate mental models of potential change agents.43 One of the
most important aspects of development policy is shaping the ways key
stakeholders think, i.e., influencing the ways in which they learn and
acquire knowledge. Ideally, MDBs should introduce ways of learning
or processing information that positively influence the evolutionary
path of institutions take over time.
The mental or conceptual constructs of senior public managers and
civil servants can be discerned by observing public statements,
interviewing high-level policymakers and civil servants, reading
political platforms, and finally through policy dialogue with the Bank
and other multilateral agencies. Effective ways of influencing the
mental models and conceptual constructs of potential reformer in
client governments include non-lending activities such as economic
and sector work (ESW), intense training sessions in policy analysis,
presentation of rigorous cross-country analyses to senior policymakers
in the reforming governments, joint research projects with indigenous
research institutes, as well as effective articulation of ideas via the
popular press and media. Ultimately, conceptual models for public
sector reform should be continually updated and vigorously
incorporated in the Bank's lending and non-lending services.
Path Dependencies: Finally, path dependencies are the consequences
of small events or chance circumstances that shape a particular
historical process. Certain path dependencies increase the transaction
costs of organizational change.44 For example, the
42 Pinto, p. 19.
43 Douglass North, Institutions, Institutional Change, and Economic
Performance. New York: Cambridge University Press, 1990, pp: 8, 20.
44 North, p. 93-4.

 Page 31
colonial regimes fostered professional ethos among civil servants that
stressed the importance of maintaining law and order while
maximizing the efficiency of labor and resource extraction. This ethos
was reflected in colonial civil servants' relations with the citizenry.
Suffice to say, notion of a "customer orientation" in the delivery of
services was alien. In post-colonial societies, the path dependencies of
state-society relations do restrict the emergence of a public service
ethos based on demand-driven principles of modem public
management.45 In any case, historical analyses of public sectors
explain in part the reason why misalignment of public sector
organizations are reproduced over time. In addition, reformers who
are cognizant of path dependencies are likely to develop more
complete and realistic reform strategies.
Setting Reform Pace: Accounting for the Transaction Costs of Change
A key aspect of any public sector reform is setting an appropriate pace
for realignment. Even if we assumed that areas of misalignment were
correctly identified and the scope of reforms determined, a department
may not have the institutional capacity to absorb change. To a great
extent, an organization's capacity to absorb change is determined by
the transactions costs associated with that particular institutional or
organizational change. Reformers, who propose to reclassify outputs
or redesign organizations of work, should account for these costs in
determining realistic reform pace. The notion of permeability,
discussed earlier, provides some insights into how reformers can
predict the ability of their agencies or departments to internalize the
transactions costs of change.
At one end of the spectrum, the high degree of permeability typical of
"high performance work organizations," fosters a change-friendly
ethos in networked work organizations that support the provision of
Type I outputs. Such organizations have effectively institutionalized
the lower levels of transactions costs associated with change.
Consequently, open or permeable public sector organizations like New
Zealand's can sustain a higher reform pace within a relatively shorter
period of time.46
At the other end, low permeability, associated with Taylorist work
organizations for Type IV, non-social sector outputs, generates an
ethos that prioritizes uniformity and conservatism. Interaction outside
these pre-determined lines of vertical control carry very high
transaction costs (see Table 2). When reformers do attempt to change
such hierarchical departments within a short period of time, they tend
to face significant implicit and explicit resistance. Policymakers are
then forced to adopt a more gradualist approach to reform.
45 Girishankar, Navin. "Paradigmatic Reorientations in the Analysis of
Decentralization: The Case of Lok Jumbish," John F. Kennedy School of
Government, Harvard University, 1995.
46 Tapscott, 1996.

 Page 32
Table 2. Setting Reform Pace & Accounting for Transaction
Costs of Change
Process Design & the Transaction Costs of Pace of
Organization of Work Process Change Reforms
Horizontal (Networked) Low Rapid
Horizontal/Vertical Low/High Rapid/Gradual
Horizontal/Vertical Low/High Rapid/Gradual
Vertical (Taylorized) High Slow

Instruments for Realigning Public Sector Organizations

Up to this point, the discussion has focused on developing a set of
concepts and a common language that the Bank and other parties can
use in planning the reform of public sector agencies and departments.
However, the conceptual antecedents of institutional reform have little
utility without a range of instruments with which reforms can
operationalize reform agendas. Listed below are three types of
instruments that entrepreneurs can use to strategically align the public
sector organizations that they manage. A more detailed explanation of
existing instruments has already been provided in a variety of World
Bank publications on pay and employment reform as well as civil
service reform.47 The purpose here is to simply provide an outline of
the instruments that managers should employ to operationalize the
framework that is the subject of this paper. Since the objective of this
paper is largely conceptual, it will not attempt to operationalize the
strategic management model in any detail.
Table 3 provides a general outline of the types of instruments needed
to operationalize the strategic management model. This outline
reflects the influence of the NIE perspective (and therefore, our
model), which emphasizes limiting information asymmetries and
increasing the intensity of appropriate incentives. Both sets of
instruments should be appropriately shaped to support the institutional
imperatives of either Taylorist or Networked organizations.
Information and incentive instruments, while necessary, are not
sufficient to ensure efficiency and effectiveness. In other words, the
new managerialist reforms that are sweeping over public sectors
across the world, and particularly in the OECD, must still be
engendered with a "public" quality. Coordination
47 A variety of the public sector specialists within the Bank have
contributed to a growing body of knowledge on the various instruments
that reformers should employ to provide incentives of performance.
Notable contributions include work by Lindauer, Nunberg, Schiavo-
Campos, and Stevens.

 Page 33
between line managers and central authorities is essential government
change processes are to be in line with publicly-mandated standards
and objectives.
Table 3. Reform Instruments: Incentives, Information, and Coordination
Instruments Creating Taylorized Creating Networked Organizations
Organizations
Incentives Wages Wages
· Decompressed wages · Wages reflecting private sector
· Rigid job classification rates
· Flexible job classification
Recruitment Recruitment
· Careerist hiring systems · Greater reliance on consultants and
· Meritocratic entrance exams outsourcing
for civil and public servants · Lateral hiring
Culture Culture
· Vigorous socialization of · Less stress on socialization; greater
civil servants and public emphasis on codes and ethics for
employees to build internal mobile "public policy professionals"
cohesion · Ethos more dependent on
· Ethos dependent on loyalty professionalism rather than loyalty
to hierarchy · Work improvement teams
· Vertical lines of control
Information · Internal auditing and · Consumer surveys
Processing reporting · Greater scrutiny by external IPOs
· Publication of results · Decentralized, market-oriented
· Evaluation by internal bodies dissemination of information about
· Centralized dissemination of policy and government performance
relevant information
Coordination · Rules enforced by · Reliance on reporting, regularly
centralized ministries through scheduled meetings between line
senior civil servants managers and secretaries

 Page 34

V.Building the Capacity to Consolidate Interventions

We began with the notion that PSM operations should ideally undergo
a cyclical process of intervention and then consolidation. In Section
III, we provided a conceptual framework for determining the scope of
these interventions. Here we propose a framework for enhancing
government capacity to consolidate the efficiency gains from these
interventions. This "consolidation" methodology identifies both
institutional checks and balances as well as stakeholder relationships
that make the strategic management of public agencies possible and
sustainable.
In one sense, a government's capacity to consolidate efficiency gains
in line agencies is a function of ex ante commitment to the
development of state institutions. Virtually all Bank interventions
across sectors are concerned with strengthening state institutions.
Only in the early and mid-1990s did the Bank fully recognize that
"imperfect commitment" to policy objectives was a major factor in the
poor implementation record of development projects.48 Unfortunately,
this realization has been late in coming to agency-level and systemic
PSM interventions where issues of "borrower commitment" are
arguably most important. Evidence of the complexity of PSM-related
Technical Assistance Loans (TALs) in combination with less
emphasis on building client ownership have contributed to the highest
"projects-at-risk" ratios among TALs overall.49 Implicitly, a
governments' ability to implement and internalize PSM innovations
depends on its early ownership of the objectives of Bank-supported
interventions.
Ownership of micro-level PSM interventions requires that client
governments understand the political dynamics of strategic change in
public organizations. In other words, it demands that the objectives of
PSM interventions be clearly linked to political, economic, and
bureaucratic interests. PSM experts have increasingly recommended
mechanisms that make "adherence" to the new rules of the game (i.e.,
the rules of strategic management in public organizations) binding.50
Client governments, and specifically line managers in executing
agencies of Bank operations, continue to face a nagging question: how
do reformers make the efficiency gains of PSM interventions stick? A
variety of answers -- from fostering "strong political will" to using
"participatory project identification" -- have emerged over the years.
Ultimately, both agency-based and systemic PSM interventions should
be designed after a thorough analysis of interests, stakeholders, and
political processes.
For this purpose, we have developed a simple three-step process of
raising the expectations of stakeholders that PSM interventions will be
vigorously implemented. These are (i) identifying opponents, allies,
and agents of strategic change interventions,
48 Picciotto, p. 14.
49 Baser et al, 1997.
50 Ed Campos and Sanjay Pradhan, 1996.

 Page 35
(ii) enhancing transparency to support interventions, and (iii) choosing
a systemic change agent to further agency-level change processes
across the public sector (see Table 5).
Box 6. Consolidation Capacity: Building a Ladder of Expectations
Step 1. Identifying Opponents, Allies, and Agents of Strategic
Change
Step 2. Enhancing Transparency to Support Reform
Step 3. Designating A System-wide Change Agent

Step 1. Identifying Opponents, Allies, and Agents of Strategic Change

It is widely recognized in the new political economy literature that
poorly-timed announcements of policy reforms or any institutional
change often enable vested interests to rapidly mobilize in opposition
even when the proposed change would result in Pareto efficient
outcomes.51 Similarly, the failure to build ownership of institutional
change during the project design stage can also spark the coalition
formation among groups that felt excluded or alienated from the
reform process.52 Both ideas can be easily applied to the case of an
entrepreneurial manager in a government agency. Whether at a
systemic or agency-level, entrepreneurs face the same dilemma of
eliciting stakeholder participation in the project cycle for PSM
operations without being stymied by opponents of change processes.
For PSM interventions, vested interests such as public sector unions
are closer to policymaking bodies and therefore can mobilize with
greater speed. Even without formal announcements of PSM reforms,
public sector employees are privy to a wide variety of informal flows
of information. It is safe for entrepreneurial managers to assume
significant opposition from interests within the agency as well as other
government workers who fear the spread of "strategic change" fever
to other agencies of the public sector.53 Likely opponents should
clearly be identified behind closed doors so as not to alert the
opposition. If resources are available, it would be useful for
entrepreneurial managers and their ministerial-level allies to model
the various scenarios that could result from the politics of strategic
change.54 Even when sophisticated simulation models are
51 Eggertson, 1990.
52 A clear example of this second scenario was the evolution of the Clinton
Administration's proposed health care reforms of 1994.
53 Girishankar, 1997.
54 Increasingly, academics and policy experts have adapted quantitative
political risk analysis models for the purposes of policy reform. Michael
Reich, "Applied Political Analysis for Health Policy Reform," PolicyMaker
2.0, Computer-Assisted Political Analysis, Harvard School of Public Health,
http://www.polimap.com/applied.html, 1996.

 Page 36
not available to line managers, a basic ex ante assessment of political
support and opposition should prove invaluable.
Entrepreneurial managers and senior-level decisionmakers supporting
the overall direction of Bank-supported institutional reform should
identify allies, change agents, and opponents. Allies are primarily
those stakeholders within the bureaucracy who would benefit from a
restructured or redesigned department or ministry. Such stakeholders
could include younger public servants who would benefit from new
performance-based compensation systems such as gainsharing rather
than traditional seniority-based policies. Allies could also be
identified within coalitions outside the bureaucracy who are currently
lobbying for reforms across the public sector or in particular agencies.
For instance, during the tax revolts of the 1970s and 1980s in the US,
broad-based coalitions agitated for significant tax cuts at the national,
state, and local levels. These stakeholders were increasingly
concerned about the efficiency rather than the absolute levels of
public expenditures. In developing countries, growing numbers of
middle-class taxpayers, concerned about the efficiency of government
spending and the quality of public services, could potentially form
similar coalitions. Special interest groups may also form powerful
coalitions in opposition to proposed changes in the structure of
government agencies if they feel it would affect policy outcomes. For
instance, environmental groups may agitate against downsizing
measures directed at the US Environmental Protection Agency.
For change-conscious managers, it may be worth taking this
stakeholder analysis a step further. To borrow a favorite metaphor of
New Zealand's new public management leaders, Bank-supported
interventions can be seen as a series of principal-agent relationships or
contracts. On the one hand, senior government officials are the
principals of a particular type of change process, which their agents,
i.e., line managers, carry out at the micro-level Likewise, the
objectives of these PSM interventions such as the type of restructuring
or numbers of employees to be retrenched can be considered the terms
of the contract between reformers and their line managers.
Within government agencies, senior managers are themselves
principals, who ''employ" a series of agents to plan, orchestrate, and
consolidate strategic change. This accounts for the popularity of
consultants in both private and public sector restructuring efforts.
They can be hired to carry out a very specific set of objectives without
conflicts of interest. They are agents with one principal, i.e., the senior
manager. They can push change agendas in ways that deflect the
political costs from the principals of these initiatives. This borrows
the idea of "efficient nuclei" (introduced by Schiavo-Campo), in
which a core group of change agents introduce new rules of the game
within a public organization as opposed to "enclavists," who bypass
existing institutions.55 It is advisable that managers ensure that these
change agents within their agencies are technically-sound and
therefore considered objective. Hiring technocrats or specialists for
these change adviser roles is advisable in order to depoliticize the
change process as much as possible.
55 Schiavo Campo, 1994, pp. 13-14.

 Page 37
Allies clearly play an important role, which is best left independent of
technocratic change agents, who will leave once the process has been
completed and institutionalized. Later in our discussion , we expand
the "efficient nuclei" idea to an intra-public sector market for efficient
nuclei with the power to demonstrate new rules of performance-
orientation.
Step 2. Enhancing Transparency with Effective Information
Processing
As managers make preparations for strategic change with the support
of ministerial-level reformers, they should consider establishing
checks and balances (inside and outside a particular agency and
bureaucracy at large) that will monitor and reinforce change
processes. In the Section III, we argued that IPIs and IPOs influence
entrepreneurs' ability to identify opportunities for institutional change.
In so doing, IPIs and IPOs have a significant effect on the probability
that an institutional framework will evolve towards the Pareto optimal
ideal defined earlier.
Our concept of information-processing stands to gain much from the
new institutionalist literature on voting. With his "impossibility
theorem" (1951), Kenneth Arrow proved that the outcomes of
majority-rule voting did not depend so much on the preference of
voters as it did on the sequence of votes. More recent work on
"structured-induced equilibrium" by Shepsle and Weingast (1981)
concludes that the institutional structure of rule-making bodies in
Congress limit both the number of alternatives subject to voting as
well as the number of voters. The outcomes of voting are determined
by the agenda of voting or the universe of choices open to voting,
which are in turn circumscribed by those in power.56
Similarly, the developmental outcomes of collecting, processing and
disseminating information about a particular government agency are
partially determined by the institutional structures governing
information processing. To borrow a metaphor from Shepsle and
Weingast (1981), IPOs are the "gatekeepers" or agenda setters for the
politics of government performance, which have numerous direct and
indirect effects on policymaking, service delivery, and governance
functions of the state. For instance, the perceived performance of a
particular agencies could affect the budgetary allocations it receives in
the future. Given these high stakes, IPOs are contested and even
politicized arenas where various stakeholders vie to shape the rules of
information-processing and therefore, the path of institutional
development in government agencies. .
In most OECD countries, for instance, political interest groups invest
significant resources in shaping the ways in which the media covers
issues that have a direct affect on their interests. The well-known roles
of "spin-doctors" during political campaigns or press secretaries
during an administration's tenure in the US are some of the more overt
examples of how stakeholders try to influence IPIs. Less obvious IPIs
are those that report on the performance of government agencies and
measure the outcomes of policy.
56 Eggertson, p. 67.

 Page 38
These institutions often have a more direct influence on stakeholder
perceptions and institutional development than the media. The ways in
which audit and oversight bodies, evaluations bodies, and even
research institutes process information have major implications for
budgetary allocations across sectors as well as within agencies. For
instance, the types of indicators used to monitor the performance of
law enforcement agencies affect the incentives of prosecutors and
federal officers and therefore the public's perception of the quality of
the services they provide.
Despite its present popularity, transparent information in and of itself
is not necessarily compatible with sound technocratic decisionmaking
and successful PSM interventions. For instance, ill-timed "information
leaks" about PSM interventions to the media could jeopardize
negotiations between reformers and public sector unions over the
terms of restructuring proposals. Alternatively, influential think-tanks
could solidify support for interventions by publishing reports, which
project that long term efficiency gains of strategic change outweigh
the short term costs of administrative restructuring (i.e., severance
payments for retrenched workers).
In building government capacity to consolidate PSM interventions,
development policy should aim to amplify IPIs that encourage
managers to pursue strategic change within public sector
organizations. In other words, the processing and dissemination of
information about strategic change in government agencies should
limit the ability of opponents to frame issues narrowly and form
coalitions against efficiency-enhancing reforms. In taking a longer
term view, MDBs and client governments should aim to generate a
virtuous cycle in which IPIs such as monitoring mechanisms first
enable managers to identify opportunities for strategic alignment.
Strategic alignment enhances the performance of agencies, which is
then evaluated and reported by other IPIs (e.g., evaluation units,
operational auditors) to a series of stakeholders including senior
bureaucrats, Cabinet ministers, the executive, and the general public.
It is crucial that reformers employ a viable framework to
systematically shape how information is made available and processed
during a PSM intervention cycle. For this purpose, there are two ways
of enhancing transparency or processing information that also broaden
and deepen political support for change. Public reporting and
evaluation of interventions potentially enhance an agency's ability to
legitimate and consolidate strategic change initiatives.
Public Reporting: Public reporting, when institutionalized, legitimates
strategic change processes among various stakeholders within and
outside the public sector. It also increases scrutiny of strategic change
by a particular manager. Furthermore, publicly reporting aspects of
the negotiation between change-friendly managers and their
employees familiarizes stakeholders (especially the public) with the
key issues and obstacles facing those directly involved. In the process,
change-friendly stakeholders' come to expect that change is imminent.

 Page 39
In that sense, publicly reporting the ways in which reforms were
designed as well as the status of on-going PSM reforms is a partial
outgrowth of public choice theory and its critique of the bureaucratic
state. According to many Public Choice theorists, the tendency of
bureaucrats to centralize power in the hands of the state threatens the
democratic character of the regime.57 There is a continuous tension
between the special interests of bureaucracy and those of the citizenry.
The political economy of administrative reform is concerned about the
danger that bureaucrats themselves become vested interests that
directly or indirectly resist strategic alignment or the attainment of
Pareto-efficient outcomes within public sector organizations.
Entrepreneurial managers often have tremendous difficulties
overcoming bureaucratic resistance to change efforts precisely
because resistance is not easily identified. Even the most astute
manager is not able to comprehend all the complexities of
bureaucratic politics. One of the main constraints on managers' ability
to understand and direct strategic change is the lack of necessary
information about the actions of employees, who are supposed to
undergo it. Entrepreneurial managers face a classic problem of
information asymmetry vis-à-vis the employees of their respective
agencies. On a systemic level, senior bureaucrats, multi-lateral
donors, elected officials, and citizens find themselves in a series of
principal-agent relationships governing the strategic change of
government agencies. All these principal-agent relationships are
hampered by the dangers of information asymmetry and moral hazard.
Specifically, each group of principals that is closer to the actual
change process within an agency enjoys an advantage in terms of
access to information regarding the agency's workers ability align core
strategy, internal organizational design, and external environment. If
we were to assume that public employees were rational, self-interested
beings, then this condition of asymmetric information opens the door
for different forms of abuse including the use of change processes to
re-establish patrimonial relationships or increase particular units' share
of budgetary allocations, etc. Public reporting is designed to create
veto points outside a particular agency that limit employees' ability to
forge inefficient institutional arrangements over the provision of
public goods and services.
Many strategic change processes or PSM interventions involve
downsizing bloated agencies. In such cases, public reporting clearly
explain the criteria used to decide on numbers of public servants to be
retrenched. Stakeholders should also know whether the process of
determining these criteria was consultative or unilateral. As
mentioned earlier, this type of public reporting generates scrutiny.
More importantly, it creates veto points as citizens or clients of an
agency begin are better able to form a judgment about the
performance of their "agents," i.e., public employees. Among other
things, public reporting raises expectations that agencies will operate
more efficiently and effectively. Managers' failure to meet these rising
expectations generates opposition in
57 Aucoin, Peter. "Aucoin, Peter. "Administrative Reform in Public
Management: Paradigms, Principles, Paradoxes, and Pendulums," in
Governance: An International Journal of Policy and Administration. Vol.
3, No. 2, April 1990.

 Page 40
its own right and therefore, raises the transactions costs of not
implementing public sector reforms.
Box 7. Does Agency Theory Help Us Clarify the Types of Information
We Need?
A PSM intervention can be seen as a contract between a public sector
manager and a series of change agents within and outside the
department. These change agents could be new hires, management
consultants, as well as employees of the executive agency responsible
for all interventions. Information about the four following issues can be
made available, but as noted earlier, revealing such politically-sensitive
information may undermine technocratic decisionmaking.
· Principals and agents of PSM interventions
· P-A relations during the granting of intervention "contracts"
· Terms of the intervention "contract"
· P-A relations during and after the implementation of interventions
Consider a strategy for enhancing the transparency of retrenchment
policies. First, Principals and Agents of the retrenchment should be
clearly identified within a particular department. Revealing the
identities of principals and agents to the broader public may lead to
political instability. If there were broad support of retrenchment
policies, publicity would be a more viable option. Official legislation,
press releases, and media coverage are some ways of enhancing the
identification process.
Second, during the granting of "contracts'' concerning PSM
interventions, the criteria and methods used for downsizing should be
open to the scrutiny of stakeholders. For instance, are realistic
budgetary and macroeconomic assumptions used to determine
downsizing targets in the CS? Is the process of determining and
announcing layoffs consultative or unilateral? After the establishment
of a CSR contract, the actual terms of the intervention such as the
quantitative targets of a retrenchment or the projected levels of
severance should be available to all interested parties within the CS and
to the media (under stable regimes).
Finally, information about the implementation of PSM interventions
should be collected, scrutinized, processed, and disseminated through
monitoring and evaluation. Timely feedback from monitoring and
evaluation of CSR implementation enables decision-makers to either
curtail measures that are likely to fail or continue with vigorous
implementation of interventions that show signs of success.

Evaluation: Evaluation also limits a line manager's vulnerability to

adverse selection before choosing an agent or moral hazard after
choosing one within his or her own department or agency. Any
entrepreneurial manager within a public sector department is likely to
face myriad obstacles in implementing interventions such as direct and
indirect resistance or others that have been discussed earlier. These
challenges, particularly resistance to change or co-optation of PSM
interventions, are likely to be more intense and overt in developing
countries, where alternatives to public sector employment are few and
far between. In order to correct these forms of information asymmetry
and hold their employees accountable to intervention objectives,
managers should use evaluation

 Page 41
within an agency as a way to monitor the progress of change
processes. This use of intra-agency evaluation techniques is well-
established in governments where managers have a significant degree
of autonomy as in the case of Australia.58 PSM interventions
sponsored by the Bank should encourage periodic evaluations by a
body outside the agency in question.
For an entrepreneurial manager, evaluation of PSM interventions
provides an opportunity for monitoring strategic change as well as
catalyzing institutional learning. In addition to manager, senior
government officials, and multilateral donors can use evaluation
results to identify higher return instruments for affecting strategic
change in government agencies. There are many ways to evaluate
change processes with government agencies. In the short run, staff
surveys, focus groups, and reviews can easily be conducted by the
change advisors of the manager. Over time, desirable strategic change
should register in increased output efficiency of an agency as well as
improved performance of operational units, teams, and individual
employees. It is worth noting that emerging information technologies
are offering managers new ways for monitoring and evaluating a
variety of processes within and across government agencies.59
While it takes time for information technologies to be used at the
agency-level in many developing countries, there is much room for
experimentation. In some cases, elected officials are important allies
in encouraging the use of technology to affect change in state
institutions. Most of the times, it is as simple as letting public
employees know that there are a pair of eyes watching the way they
work and how well they perform. For instance, the Chief Minister of
Andhra Pradesh has pioneered combined the use of modem
telecommunication technology with weekly surprise spot-checks to
basically raise the costs for government workers of poor performance
or non-performance. With a cellular phone and laptop computer in his
possession, Naidu accesses appropriate websites and electronic
mailboxes to monitor the implementation progress on development
projects across the state. Troubled projects are met with speedy
inspections by the chief minister himself. The speed and
unpredictability of these inspections has government workers at the
very least concerned about the consequences of poor performance.
The Bank itself has gradually focused on the importance of evaluation
capacity in borrower governments. OED and Regional departments
have begun developing capacity building initiatives for evaluation and
monitoring. Focusing these efforts in a central agency such as the
Directorates of Aid Coordination under the Ministry of Finance
allows borrowing governments to develop information-processing
capability in the center. This can then be transmitted and developed on
demand-driven basis across agencies to help line managers that
demonstrate the leadership to affect strategic change.
58 Brian Howe, "Evaluation and Change: Priorities and Practicalities," in
The Canberra Bulletin of Public Administration, Belconnen, Australia:
The Royal Australian Institute of Public Administration, December 1990.
59: Mark Nicholson, "Dragging India's Bureaucracy Into A Paperless
Millenia," London: Financial Times, March 26, 1997.

 Page 42
Facing the Reality of Constrained Capacity: To this point, our
discussion of transparency assumes a great deal in terms of a
government's institutional capacity as well as political legitimacy. In
countries where Weberian bureaucracies are relatively established, the
use of public reporting as well as monitoring and evaluation is viable.
In other countries, however, the fragility of formal state institutions
(i.e., the public administration, the legislature, and judiciary) raise the
stakes of transparency and accountability measures, often rendering
PSM interventions politically unpalatable. In such cases, it is simply
not feasible to recommend that a government agency employ
measures such as transparency enhancement that could threaten the
state's legitimacy.
From a purely technical point of view, transparency measures
implemented without adequate institutional capacity and political
capital could easily backfire. As a result, reforming agencies could
suffer serious setbacks, rendering them as ineffective as they were
before PSM interventions were implemented. For instance, in some
countries of the LAC region, government agencies have introduced a
variety of interventions designed to increase output efficiency and
transparency. However, the public outcries in response to reports of
corruption generated severe pressures for bureaucrats and public
employees. To insulate themselves from these pressures, bureaucrats
devised a variety of control mechanisms which became so
cumbersome that they undermined the initial objectives of the PSM
interventions.60 Such experiences only highlight the need for greater
research into the relationship between information-processing and
stakeholder support for Bank-supported interventions in general.
Arguably, recommendations to enhance the transparency of state
institutions within Bank literature have been primarily exhortative
rather than technocratic. This raises the question of incentives for
enhancing transparency in developing countries in which the state
have been historically insulated from the exercise of voice and exit by
formal and informal norms. In these settings, line managers and
bureaucrats face strong disincentives against making either
operational inefficiencies or corrupt practices transparent. Adverse
reactions for clients and citizens could potentially undermine
bureaucrats' status, tenure in public bureaucracies, and more
fundamentally, the prevalent rules of the game of service delivery.
Rather than simply exhorting public administrations to make
operations more transparent, the Bank should approach the lack of
transparency of state institutions as a problem of government's
monopoly over information.
Changing the Way We Think About Transparency: Much of the
literature on transparency assumes that the government is the
monopoly provider of relevant information about the performance of
state institutions and is mired in a perpetual "conflict of interest"
dilemma mentioned above. An alternative approach is to view
60 Gary J. Reid, "Performance-oriented Modernization of the State in
Developing Countries: Considerations for A Realistic Implementation
Strategy," Madrid: Reform of the State Conference, 1996. Also refer to
Geoffrey Shepherd and Sofia Valencia, "Modernizing the Public
Administration in Latin America: Common Problems, No Easy Solutions,"
Madrid: Reform of the State Conference, 1996.

 Page 43
information processing as a service that can be subjected to (and often
is already subject to) some form of competition. Ultimately, this
approach aims to develop information processing markets (IPMs) in
which competitors aim to provide the most timely and accurate
information about the performance of state institutions to a diverse
clientele, comprised interest groups, professional associations, the
private sector, and civil society. IPMs are made up of competing IPOs
or firms, most of which operate both inside and outside the public
sector.
Box 8. Bank-supported Information-Processing Market
Development
Catalyzing the development of IPOs would provide an important
avenue for building an economy's capacity to limit problems of
information asymmetry such as moral hazard in the functioning of
government agencies.
The Bank should offer start-up grants (subject to a competitive
bidding) to develop IPOs inside and outside the state. The
Institutional Development Facility (IDF) Grants could be modified
to provide start-up costs to identify and fund IPOs. Technical
assistance in the use of information technology, investigative
reporting, applied research, and building public opinion could also
build the capacity of these nascent organizations. From a political
economy perspective, owners and employees of IPOs would have a
tangible stake in providing timely and relevant information about
operations in government agencies for interested clients. This opens
the door for coalition formation between those who run IPOs and
those agitating for strategic change of government agencies.
Eventually, the Bank should consider using ESW and adaptable
lending instruments for the development of information-processing
sectors in developing economies. Sectors such as these would
operate like transaction sectors, which are made of firms that sell
transaction services to private and public sector buyers.1
1 Douglass North and John Wallis, "Measuring the Transaction
Sector in the American Economy, 1870-1970," in Long-Term
Factors in American Growth, Vol. 51 of the Income and Wealth
Series, eds., Stanley L. Engerman and Robert E. Gallman, Chicago:
University of Chicago Press, 1986.

From audit bodies and special commissions to NGOs, professional

associations, and think tanks, IPOs investigate, analyze and report on
public sector activities. The growth of Internet-based US "firms" can
be seen as an example of rapid IPM development. These firms process
and deliver information on the performance of government
institutions, good governing practices, and emerging policy issues in
healthcare, education, social security, worker training, and the
environment.61 The scope for IPM development in developing and
transition countries is arguably large given the
61 Hanna and Boyson note that information technology in advanced
countries has been a driving force behind government's shift from
command-and-control management to competitive, market-oriented
enhancement of service delivery and governance: Nagy Hanna and Sandor
Boyson, Information Technology in World Bank Lending: Increasing the
Developmental Impact, Washington, DC: World Bank Discussion Paper
206, 1993.

 Page 44
high demand for information about government policies and
performance. For instance, private sector growth in these countries is
partially dependent on the transparency of regulatory policies and
processes. The positive externalities of developing an information-
processing sector in the Bank's client countries promise to be
extensive as both public and private sector managers require access to
large amounts of information about both the state and market for
effective decision-making.62
Step 3. Choosing a System-wide Change Agent
The third and final step in building a government's capacity to
consolidation strategic change initiatives is to complement agency-
based PSM interventions with a system-wide agent to catalyze,
monitor, and identify opportunities for strategic change. To
conceptualize, implement, and consolidate strategic change from
scratch on an agency-basis without investing in central strategic
capacity would be short-sighted and inefficient. Furthermore, it does
not establish any mechanism by which lessons learned from one
agency's change process are recorded and applied to other agencies.
As a result, institutional learning from the numerous interventions of
donors is never collected or consolidated. The Government's base of
knowledge about its own institutions is never built, and is consistently
dissipated.
The objective of the Bank's PSM work should be to affect change on
an agency-basis while simultaneously building central or systemic
capacity to affect strategic change where and when it is necessary.
The most direct way of building government's "central strategic
intelligence" about institutional reform is to designate or create a high
profile central unit such as the Aid Coordination Unit in the Ministry
of Finance or a unit under the Council of Ministers in Eastern
European transition countries. As the nerve center of the government
for reforming state institutions, this system-wide change agent (SCA)
will have the ability to support specific interventions in particular
agencies, identify the opportunities for change in other agencies, and
finally, serve entrepreneurial line managers who request strategic
advice. Armed with the conceptual framework discussed in Section III
and specific knowledge of its agencies, the SCA has the potential of
providing the "transformative nuclei" to agencies that are undergoing
change processes. These nuclei or individual change agents would
then return to the SCA, document lessons learned, and build on
existing body of PSM knowledge within the government.
While few governments in developing countries have gone as far as
establishing an in-house management consulting facility, the idea is
not so far-fetched. For instance, establishing a SCA under the General
Secretary of the Council of Ministers is being discussed in Albania,
where the Government lacks any central strategic planning
62 Nagy Hanna, The Information Technology Revolution and Economic
Development, Washington, DC: World Bank Discussion Paper 120, p. 4-5.

 Page 45
capacity.63 Such a measure serves a dual purpose by (i) creating high
profile stakeholders, who are change-friendly technocrats, and (ii)
building a government's own technocratic foundations for modem
PSM. While creating stakeholders in the SCA that support change
processes in line agencies is politically savvy, forming a new
bureaucratic interest alone cannot serve any substantive purpose
unless it is constituted to deliver sound technocratic advice to
entrepreneurial managers.
In that sense, it is useful to think of the SCA as a central, in-house
management and strategic consulting unit. Its role include (i)
identifying opportunities for reform, (ii) servicing the needs of
entrepreneurial managers, and finally, (iii) providing coordination and
oversight for PSM interventions overall.
· Identifying Opportunities for Reform: Since their "clients" are
essentially reform minded senior managers across the public sector, it
is logical that the SCA should devote some efforts to identifying
agencies, departments, and other governmental bodies that are
potential candidates for reform and strategic realignment. A variety of
methods could be employed to keep abreast of the needs of various
departmental managers. The SCA should be provided the mandate to
perform diagnostic work such as strategic audits, manpower audits,
and functional reviews of various agencies and departments on a
regular basis. This diagnostic work would provide the basis for
building a central reservoir of knowledge on the mission,
organizational design, and external environments that various
agencies face. This vision for the SCA essentially means that it would
replace international donors in providing strategic and conceptual
support for agency-based strategic change.
· Serving the Needs of Entrepreneurial Managers: After receiving the
well-publicized findings of the SCA's diagnostic work, line managers
should contract the SCA to conduct more intensive strategic audits
and even send "transformative nuclei" to take a "hands-on" approach
to strategic change. Eventually, purchaser-provider arrangements
between managers and the government's SCA would provide impetus
for the evolution of an internal market for strategic services. The
''cost" of SCA's consulting services should be met on a matching
basis.
Even when managers are not inclined to do so, the SCA can
generate significant pressure for them to adopt efficiency-
enhancing change initiatives by periodic publicizing the results of
strategic audits of line agencies.
· Providing Coordination and Oversight for PSM Reforms: The third
type of service that a SCA provides is system-wide coordination and
oversight. In other words, it harmonizes micro-level or agency-level
change initiatives with system-wide priorities for enhancing efficiency
and effectiveness of state institutions. This is done in two ways. First,
reporting directly to the executive, the SCA provides up-to-date
63 Navin Girishankar, World Bank Support for State Institutions and
Public Administration Reform in Albania: 1991-1997, Background Paper,
OEDCR, Washington,. DC: World Bank, January 1998.

 Page 46
information about the operations of government agencies. It is also
able to provide strategic advice about opportunities for system-wide
comprehensive PSM reform. The executive can then consider the
operational efficiency of government agencies as an important
variable in policymaking. Second, as the central liaison for
coordinating external assistance on PSM interventions, the SCA will
be able to direct external resources to agencies that are either
strategically important or likely deliver the highest return to the
development dollar. Finally, the SCA serves as an able counterpart to
the many donors attempting to fund PSM interventions, often in a
supply-driven manner.
Box 9. The Bank's Role in Building Effective System-wide Change
Agents
Clearly, the three-fold role of the SCA outlined above requires a
significant investment of resources, time, and technical expertise in
building a modern, in-house consulting group to service the needs of
public sector entrepreneurs. Whether renovating existing units under
the executive or the Ministry of Finance, the Bank can use lending
instruments such as TALs or IDF grants to effectively create a
"fiercely meritocratic" body of technocrats. These technocrats should
be multi-faceted with state-of-the-art training in public management
or related fields, experience in government or private sector
organizations, and most importantly, willing to take on the often-
times unpopular role of change agents.1
1 Schiavo-Campo, 1994.

An effective SCA must be technically sound and "fiercely

meritocratic." To make this a reality, the Bank should recommend an
aggressive recruitment policy that attracts and develops the best
possible in-house experts in public management, public expenditure
policy, organizational behavior, institutional economics, and business
administration. Clearly, both monetary as well as non-monetary
incentives are required to attract staff to jobs that may actually be
unpopular in the eyes of most other public servants. A rigorous
socialization process for new recruits is absolutely necessary to
generate an esprit de corps and loyalty to the SCA mission of strategic
change. In most cases, the SCA may have to recruit civil servants and
other public servants internally. Such strategies have been discussed in
the Bank's policy dialogue with clients in the past. For instance, in
Laos, a reformist government initiated a specialized personnel policy
for public servants, who would be specifically used as "CS
developers."65
65 World Bank, Lao People's Democratic Republic Country Economic
Memorandum. No. 12554-LA, Washington, DC, 1994.

 Page 47

VI.Conclusion and Directions for the Future

This paper represents an attempt to develop a neo-institutional
framework for modeling the strategic management of government
agencies in developing and transition economies. This conceptual
framework offers entrepreneurial managers, senior decisionmakers,
and MDBs working in developing and transition economies the
following tools:
· A Dynamic Model Of A Pareto-Efficient Public Sector Organization:
This model turns on the notion that public sector agencies must
strategically align mission, organizational design, and external
environment in order to achieve Pareto efficient outcomes for
government operations.
· A Methodology For Setting A Reform Agenda: By identifying areas
and causes of misalignment, managers are able to pinpoint areas that
require PSM interventions. In this regard, the framework recommends
a variety of institutional assessment tools, which could greatly enrich
the quality and scope of the Bank's lending as well as its economic
and sector work (ESW).
· A Framework for Consolidating Reforms: Finally, the paper offers a
three-step model for developing a government's capacity to
consolidate strategic change. The framework for consolidation
notably recognizes the role of stakeholders and the need for checks
and balances in sustaining strategic change. By introducing the idea of
information-processing, we provide some new ways of
conceptualizing oft-cited governance themes such as transparency and
accountability. In addition, some of the insights such as information-
processing could be readily applied to institutional problems in other
sectors.
The primary contribution of the paper is to further develop the Bank's
conceptual knowledge of how efficient government line agencies
operate. However, the conceptual framework presented in this paper
will realize its full value only after it is tested empirically and then
operationalized in Bank lending and non-lending services.
Testing and Operationalizing the Conceptual Framework
In the short run, operationalizing this neo-institutional framework is a
two-step process. First, the framework should drive a new generation
of Bank-sponsored empirical research on government agencies across
client countries. Such empirical work should analyze random and
purposive samples using the methodology presented in Section III.
Case studies would document the existing relationships between
mission, organizational design, and external environment in order to
identify areas of misalignment. Second, the findings from this
diagnostic work, particularly common areas of misalignment in
government agencies (and their causes), should provide a basis for
Bank PSM strategy for agency-focused PSM interventions. Lending
and non-lending services should be designed in accordance with the
insights of institutional diagnoses and assessments.

 Page 48
The Bank is currently developing and consolidating its knowledge and
expertise in institutional assessment through the Institutional
Assessment Thematic Group. Among other things, the thematic
group's work synthesizes the contributions of PSM, participation,
social development, and sector policy experts. This knowledge base is
designed to serve task managers and other operational staff with best
practices for institutional assessment and development. New
diagnostic tools developed from our conceptual framework such as
strategic audits would support the work of the thematic group in this
regard. In turn, the tools could be rapidly disseminated to task
managers through the thematic group's knowledge management
system (KMS).
New Frontiers of Institutional Development
One of the most important concepts presented here is the notion of
information-processing institutions and organizations. While IPIs and
IPOs are subject to agenda control like rule-making bodies in
legislatures, they are nevertheless crucial mechanisms for enhancing
transparency of government processes such as service delivery,
budgeting, and regulation. Furthermore, IPIs and IPOs provide a
means for enhancing transparency by supporting the development of
competitive information-processing markets (IPMs).
These topics comprise largely uncharted territory for policy
researchers. The advent of the information revolution has greatly
enhanced the role of firms whose primary product or service is
processed information. While there has been some research on the
"transaction" sector in US history (North & Wallis; 1986), researchers
have generally failed to investigate the role of IPIs and IPOs in
promoting or supporting economic development. Initial observations
suggest that the information revolution is fast transforming the ways
in which citizens, businesses, and government interact developed
countries. Such changes will only highlight the rudimentary state of
research in this area. Insights into the economic value of IPMs could
significantly influence Bank operations in countries that suffer from a
serious dearth of information either about government or private
sector activity. From the point of view of catalyzing rapid economic
development, the Bank's researchers should thoroughly investigate the
potential role of international donors to support growth of the
"information-processing sector" in developing and transitional
economies, where the demand for timely and accurate information
about the policies and performance of government is arguably highest.
For policymakers, researchers, and operational staff, the ideas
presented in the paper should spark an important debate on the
ramifications of strategic management in the public sectors of
developing and transitional economies. The ultimate value of the
framework will be determined by the Bank's ability to develop
diagnostic tools and instruments that affect real change on the ground.
Furthermore, some new concepts introduced in the paper such as
information processing institutions require substantive research on
topics that the Bank and other donors must inevitably address in the
years ahead.

 Page 49

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No. 353 Telecommunications Policies for Sub-Saharan Africa.
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No. 354 Saving across the World: Puzzles and Policies. Klaus
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No. 358 China's Non Bank Financial Institutions : Trust and
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Albrecht, Terry Chuppe, Susan Selwyn, Paula Perttunen, and Tao
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Dermot Gately and Shane S. Streifel
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