Coordinating for Cohesion in the Public Sector of the Future

Outsourcing and decentralization effects on public sector size

In this research we found that outsourcing was not associated with a reduction in the public sector size as regards expenditure and employment either in the short or long-term. In contrast, fiscal and administrative decentralization, measured as the ratio of expenditure and public employment decentralization, as well as the autonomy of the sub-central government, do seem to lead to a smaller public sector as regards expenditure, both in the short and long-term. We do not find, however, that decentralization led to a reduction in public sector employment. These results may indicate that the observed decline in public spending in the late 1980s and 1990s may not necessarily be truly associated with NPM-style reforms but, rather, simple cost-cutting reform.

This is not to forget that NPM pursued not only a slimmer public sector, but also, a more efficient and effective public sector, aimed at increasing consumer satisfaction and choice. Clearly, though outsourcing did not lead to a smaller public sector, if public sector working conditions, service quality improved, and/or social welfare was strengthened, this could be interpreted as a benefit of such a policy. If, however, the increase in government spending was not accompanied by such improvement, this could suggest the existence of high transaction and coordination costs and the appropriation of social income by the private sector (the so-called “hold up” effect), or, that the private provision of public goods does not necessarily entail efficiency gains.

For a comprehensive view of these results see COCOPS working paper 4

This page has been modified on 17 January 2012