Adverse selection

Government has announced that it would offer early retirement to public servants in order to reduce the size of the bureaucracy and trim away useless fat. Enough incentives will be offered so that bureaucrats may become entrepreneurs – job creators rather than jobseekers.

But the early retirement program, to be funded by a loan from the World Bank, will be on a voluntary basis. There lies the rub that will probably doom this program at the very least or result in more problems at worse.

We have enough experience with voluntary early retirement programs to know that this result in adverse selection. The community of economists, led by the UP School of Economics, is due to release a position paper making this argument.

Adverse selection is a process that guarantees you will end up with the worst possible outcome.

Over a decade ago, we tried voluntary early retirement under the aegis of what was called the Rasul Law. Instead of reducing the number of public servants, we instead saw an increase in the number of people on the public payroll.

If early retirement from the public service was on a voluntary basis, and enough incentives are offered for it, the tendency is for the talented and highly qualified employees to leave the service and for the deadwoods to stay. This is because the better qualified employees have a broader horizon of opportunities in the private sector. The deadwoods have none.

Talented employees have enough skill and a creative mindset that would make them successful entrepreneurs. Deadwoods, for their part, would rather cling to the wage they have than experiment with fate and dare to reinvent their lives.

The Rasul Law achieved results contrary to what it intended. The public sector lost many bright and creative people. Many of those who took advantage of the early retirement law are now happy they did. They left a dull and low-paying job and exercised their best skills to invent new careers for themselves.

The common denominator of those who remained in the public service went down a few notches. Those who were unemployed anywhere else stayed. Those whose real income was from corruption rather than the official paycheck stayed. Those who will be better paid in the private sector for their merits and their skills left the service.

Because government lost the best and most effective people, it had to hire more to get the job done. Therefore, instead of reducing the public sector workforce, voluntary early retirement further bloated the bureaucracy.

The road to hell, as ancient wisdom put it, is paved with good intentions.

Good intentions do not guarantee good results. We know that. But good intentions are not what is motivating this decision to make early retirement of excess government personnel voluntary.

The motivation is entirely political – which is the consideration that has brought grief to many reform efforts and grand plans we have tried to execute in the past.

The political motive here it to avert early and vigorous resistance from the public sector unions. Such resistance could scuttle a sane reform plan even before it takes off.

We have a strange situation in the public sector. It is not only heavily unionized. Many of these unions are controlled by the political Left.

Over the past few years, these unions – especially those led by the KMU-affiliated Courage – have created stumbling blocs to reform. They have, in 2001, famously resisted reforms in the SSS that might yet save this floundering institution, succeeding in forcing the replacement of the agency’s chairman.

At the NFA, the Courage-affiliated union has slowed down the reform process that would have stifled syndicates in this organization and averted its chronic bankruptcy. At the BIR, the unions have opposed the anti-corruption reforms of former commissioner Rene Banez and lobbied against the reengineering of tax administration that might have raised public revenues more substantially.

An involuntary early retirement program would have been vigorously opposed by the populist unions who play on the fears of the most vulnerable sections of the bureaucracy – meaning those who are otherwise unemployable or who perform redundant functions. The constituencies of the leftist unions in the bureaucracy are precisely those sections of it that are the sources of waste in the public sector.

And so the reform of the bureaucracy is constantly torn between the devil and the deep blue sea.

A voluntary retirement program would result in adverse selection. An involuntary program will be strongly opposed especially by the mediocrities in the public service.

That dilemma has made trimming bureaucratic fat the elusive problem it has been for decades. After so many efforts to trim down the bureaucracy, we always seem to end up with more people on the payroll than when we started.

Like the Gordian knot, this problem can only be solved by the sharp edge of a strong sword.

We need a retirement program that is tightly targeted to extricate the corrupt, the incompetent and the redundant. We need to focus on the agencies that have lost their utility and cut them away without mercy. We need to focus on the personnel who deliver nothing and separate them from the service to avoid continued waste of public resources.

For the bureaucratic reduction program to at least move forward, we need political will. The persons who will manage this reduction program will be vilified by agitators among the public sector unions. They will be burned in effigy, demonized and condemned. They will probably lose all their friends.

They will have to endure all that to get the job done – and the nation will be better off when that job is done.

There is no substitute for awesome political will to cut bureaucratic fat. It cannot be done painlessly. The pain must be properly explained to the public and the program carried out ruthlessly, with the same appetite for pain an obese person must have when he goes to the gym to be healthier than he finds himself to be.

Otherwise the effort will be futile. It will be pointless.

It might even be, because of the hazards of adverse selection, perilous to the quality and effectiveness of our bureaucracy. As in most of the other reforms that must be done quickly, the President must bite the bullet on this one.