Wednesday, November 23, 2011

Hope rests in reforming the pulic sector

President-elect Mariano Rajoy’s announcement on Sunday night that his first action in office would be to meet with Spain’s 17 provincial leaders could spell big news for the debt-ridden nation. Having always grumbled about the cost of decentralization, Rajoy now has the political mandate to wrest duplicative powers away from provinces, making government smaller and more efficient.

Rajoy is hoping Spain can overcome its post-dictatorship fear of central government that has led to a maze of interdependent municipal, regional, and federal bureaus. Today, for instance, one has to visit an office at each level to get a national ID card (submitting paperwork and paying fees at each). The World Bank placed the nation in the 133rd spot for ease of starting a business due to the litany of legal permits required. Spanish people use the term “vuelva usted mañana” to describe the bureaucracy’s slow pace.

The outgoing socialist government cut as much around the fat as it could with hiring freezes and wage cuts but it did not advocate streamlining the levels of government. Indeed, there has never been a publically acknowledged government study on whether it makes economic sense to have different standards of primary education and unique methods of healthcare delivery in each province.

Spain’s public sector predicament is also found in Italy, Greece, and Portugal. A recent analysis by German and Austrian central bank economists found that those countries’ public sectors are 20-60% larger than Germany’s as a share of the work force, without an increased tax base. It also found that they had the lowest public sector performance indicators among EU members. Combined, the two factors are a major drag on overall economic productivity.

Rajoy will begin by altering labor laws to relax hiring and firing standards, removing risk from business owners’ balance sheets. It’s a positive start but let’s hope he and his counterparts in other new governments take advantage of a unique opportunity to change how their countries’ public sector is structured.

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