1999 Fiscal Conference: Sustainable Public Sector Finance in Latin America
Administrative Reform in Brazil
ne of the greatest challenges facing governments in the 1990s has been to reform their political and administrative institutions in response to the demands of the new world order. Economic globalization, resulting from (among other things) the fall of the Berlin Wall as well as from advances in communication and computer technology, has imposed open markets. Meeting this challenge requires the establishment of creative organizations with flexible decision-making systems that can keep pace with the speed and flow of information. In the face of this process, the state-led development model has collapsed.
At the end of the 1980s and the beginning of the 1990s, neoliberal rhetoric was prominent in the debate over alternative roles of the state. The banner of the “minimum state” was raised as a solution to the crisis. However, international experience has demonstrated the fragility of such conservative guidelines in increasingly complex societies. In fact, not one of the developed countries that we studied while planning administrative reform in Brazil had experienced a decline in public expenditures (measured as a percentage of GDP) in recent years. This was especially the case in countries with weak economic performance, high unemployment, poverty, and weak state capacity for implementing public policies.
After successfully fighting hyperinflation, the Cardoso administration decided in early 1995 that the way out of the crisis would be to reconstruct the state to reflect a new management model. Steep cost reduction and control, decentralization, partnership, autonomy, accountability, efficiency, quality, administrative transparency, and accountability were to become fundamental values. These goals were codified in the Master Plan of the Reform of the State Apparatus, drafted by the Ministry of Administration and Reform of the State.
From Crisis to Reconstruction of the State in Brazil
In the previous economic model in Brazil, the state had two basic functions: to decrease the cost of capital production through investment in infrastructure for the private sector, such as steel production, energy, transportation, and road construction (activities that were implemented by public enterprises) and to generate employment and income, especially through patronage or patrimonialism. Production of goods and services to be traded in the market was also important since the private sector arrived late in the country and did not have the capital for big investments. This activity was also performed by state-owned companies. Delivering public services to the citizenry was not viewed as a state responsibility.
Thus, except for public enterprises, the state in Brazil was not designed to perform well. Efficiency was not even mentioned in the article of the Constitution that listed the values that should infuse public administration. The main point of that article was to create employment and treat civil servants in a fair and uniform manner.
It is important to keep this fact in mind when we think about the reconstruction of the state in Brazil. The reform team is not only dealing with fiscal measures such as cutting public expenditures. State reform involves something much more complex—changing the paradigm from a state that intervenes in production and is a depository of personnel to that of a state that delivers public services, formulates public policies, and regulates the private operation of utilities.
In Brazil, the emergence of the state as a producer of goods and services goes back to the 1930s, with the implementation of the federal government modernization project, which aimed to consolidate national industry. To this end, the state increased its intervention and consequently its economic and social functions, resulting in continuous growth of the state apparatus. It should be noted that this increase led to growth in personnel costs and the need to raise revenues and expenditures.
The crisis of the Brazilian state in the 1990s reflected the exhaustion of the interventionist state model. This model, often referred to as import-substitution industrialization, was fundamental to the development of the industrial sector. In addition to the failure of import-substitution industrialization, there is a growing perception that the corporatist model that has infused the Brazilian bureaucracy since the 1930s is no longer working. Rising expectations about the performance of the state have put pressure on Brazil’s public administration to assume a more citizen-oriented approach.
The crisis of the Brazilian state has four basic components. First, there is the fiscal crisis, which reflects the insufficiency of public savings to match the investments that society demands. This aspect of the crisis is more evident now, not only for the federal government but also at the state and municipal levels, because the government can no longer rely upon inflation as a tool of adjustment. It is no longer possible to postpone paying suppliers or to freeze civil servants’ salaries in order to let inflation adjust unbalanced budgets. In addition, the growing financial burden of the social security system became unbearable. The gap between what civil servants contribute and what they receive for relatively generous benefits—including early retirement pensions for workers and their survivors—amounts to approximately US$18 billion per year.
If one looks back thirty years, it becomes clear that the fiscal crisis originated with the indebtedness of state-owned firms, debt that was incurred in the 1970s because of high levels of investment with low rates of return; the international liquidity crisis; the hike in petroleum prices; a decline in interest rates (which encouraged indebtedness) and then their later rise and the debt crisis of the early 1980s; the inflationary corrosion of public revenues; the enormous expansion of domestic debt; and the disproportionate increase in financial and personnel expenditures.
The fiscal crisis has imposed the need for restricting public expenditures during the 1990s. Furthermore, there has been increasing awareness within the government and throughout society that increasing social expenditures didn’t necessarily generate more or better service. The solution for improving the poor quality of government services that the Brazilian public receives is not spending more but spending more effectively. In short, the key is to improve the quality of public expenditures.
It is important to note that in some respects, the crisis had a positive impact on Brazil. For example, the federal, state, and municipal governments are managing their payrolls with newfound austerity. As previously mentioned, they can no longer freeze salaries and delay payments to suppliers in order to balance their books. The crisis proved to be an opportunity to make necessary changes in the public sector. The tasks of modernizing public administration and correcting distortions in the profile and composition of the workforce are now starting to be undertaken. Yet there is still a poor distribution of human resources, with excess personnel in operational and administrative support activities, and a shortage of well-trained technicians specializing in formulating, implementing, and evaluating public policy, which is the central role of the federal government.
The second dimension of the crisis of the Brazilian state arose with the erosion of the model of state intervention in the economy. Regardless of the governing ideology, the model of the state as both producer of goods and services and provider of low-cost production capital is being challenged. The boundaries of privatization in Brazil are still being defined. It is up to the public power to discern what can be privatized, and up to society to exert accountability over this process. The state no longer plays the role of the producer of goods and services (now offered by the market); instead it exercises the functions of regulation of natural monopolies and defender of competition. This does not mean, however, that the thesis of the minimum state is correct. On the contrary, the state has to be strong in forming public policies that meet the needs of the country’s population. As I mentioned previously, in no country has public expenditure as a proportion of GDP fallen. The thesis of the minimum state is not only incorrect but inapplicable.
On the contrary, the state has to establish strong regulatory agencies. Brazil was late in beginning this process. The process of privatizing state-owned utilities was started even before the first regulatory agencies were up and running. We now have to rush to catch up in consolidating these institutions, in a context where most utilities have already been privatized, and there is intense social pressure to have public agencies ensure the quality of the services being delivered.
The third dimension of the crisis of the Brazilian state is related to the challenge of consolidating democracy. During the military regime, there was a significant increase in social demands, which had been unmet for more than two decades. With the process of redemocratization, there was increasing awareness of these social needs. However, the explosion of social demands could not be met due to the fiscal crisis of the state. The result was a combination of both revolt and frustration, as learning democracy has proven to be a difficult process. In a totalitarian regime, it is easy to reform the state: the legislature is closed, the press is censored, individual rights are suppressed, laws are made null and void, and arbitrary measures are imposed. However, in a democratic regime, meeting social demands requires reforms that must be negotiated democratically with various actors. Resistance and lack of understanding are natural, since reforms affect the interests of specific groups. The patronage culture, which still has strong roots in the state and society, is resistant to reforms. The bureaucratic culture also resists change because bureaucrats are aware that reform will diminish their power. In this context, reformers must on the one hand be firm and consistent in promoting needed reforms, but on the other hand they must learn to negotiate and respect the mandate of elected representatives.
The fourth dimension of the crisis of the Brazilian state encompasses the management of the state apparatus. The deteriorating performance of the state apparatus in the past two decades is due mainly to three factors: first, the fiscal crisis, which imposed strong budgetary restrictions and reduced investment capacity; second, the great expansion of social demands as a result of the political process of redemocratization and the emergence of new social and urban groups; and third, the exhaustion of the bureaucratic model of management, which lagged behind the managerial standards of the private sector and failed to respond to social demands.
The country still suffers from a tendency to try to solve cultural and managerial problems by means of issuing new rules and regulations. As I said before, the state was not designed to perform efficiently in Brazil, so the fact that these rules limit the efficiency of public agencies did not apparently worry legislators. Their primary means of fighting corruption was through issuing more and more laws. However, the government has not been effective in stopping wrongdoing. It has also limited state managers’ freedom of action. In addition, because of a complex institutional framework, state procurement procedures are flawed; the government fails to recruit skilled civil servants, offers little training, and has archaic work routines.
Since 1995, the Cardoso administration has been promoting a series of reforms with a view toward overcoming the crisis of the state. We can divide the drive toward state reform into two periods. During President Cardoso’s first term in office, the focus was on constitutional reform. Constitutional Amendment 19 of the Administrative Reform Act removed legal obstacles to significant organizational change. The 1998 congressional approval of the Administrative Reform Act amendment has laid the groundwork for a long-term cap on personnel expenditures and for streamlining civil service at all levels of government. Most of the legislation regulating the implementation of the reform has been passed recently by Congress, and approval of the remaining enabling laws is expected soon. These measures include a law that places a ceiling on payroll expenditures as a share of net revenues at all levels of government and a law mandating the dismissal of civil servants if these limits are exceeded. A number of states and municipalities have reduced spending on personnel to comply with the new law. The federal government, for its part, has taken steps to reduce its payroll through administrative improvements, including steps to identify and correct payroll irregularities. It is currently reviewing federal salary scales in order to achieve greater parity with the private sector as well as taking additional steps to streamline the civil service and introduce additional flexibility in the management of human resources. The goal is to treat civil servants as well-trained, well-paid, motivated professionals. Although these measures are unlikely to yield substantial savings in the short run, they will significantly contribute to improving the quality and efficiency of public administration over time. There are now more training programs for public officials, incentive programs for public school employees, and programs to promote greater managerial autonomy, based on the principles of transparency and accountability. One major element of this initiative was the launching of the professional training policy. Out of a total of 508,000 federal civil servants, 390,000 were trained during the last four years. Together with professionalization, a process of fostering a new culture of public service directed toward better performance has begun.
Currently, the public sector is experiencing a change of attitude, and the great improvement in performance is due to the extension of the entrepreneurial management model. There is now a consensus that it is necessary to promote entrepreneurial management of resources in order to ensure sustainable growth. Budgeting is no longer an act of fiction but is instead oriented toward achieving targets and results. A new emphasis on the training and performance of managers has been incorporated into this process, along with greater transparency and public accountability.