Considering "Public Governance Reform" - A mechanism for improving morale and motivation of public servants

TSURU Kotaro
Senior Fellow, RIETI

The greatest challenge in reforming Japan's public sector is the restoration of public confidence in the government. This should involve not only wielding stricter discipline as a "stick" to force public servants to act for the benefit of the general public but devising a mechanism to improve their morale and their motivation to serve the public. Concurrent with the dissolution of long-established rules for personnel management, a new personnel management system that is open and pro-competitive must be established.

Discipline and incentives for pursuing benefits for all

Since the bubble economy burst, Japan has undergone a major adjustment period, often referred to as the "lost 15 years," during which its economic system has been drastically transformed. Changes have not been limited to the private sector. Significant changes also have occurred in the political arena as exemplified by the collapse of the "1955 system," a political regime characterized by the single-party rule of the Liberal Democratic Party (LDP), and the weakening presence of lobbyist politicians representing specific interest groups as well as of intra-party factions resulting from the introduction of the single-member constituency system.

In the meantime, central government bureaucrats in the Kasumigaseki government quarter have lost public confidence and become the target of fierce bashing as a series of serious problems - such as nonperforming loans, the threat of mad cow disease (BSE), and the spread of HIV-contaminated blood products - began to unfold in the 1990s, illuminating the government's failures and responsibility-evading, procrastinating tactics.

Therefore, the primary focus of public sector reform should have been on restoring the public's confidence in the government. The preceding administration of Prime Minister Junichiro Koizumi advocated a shift "from the public to the private sector" and to a "small government," and did produce results. Indeed, the privatization of postal services and highway companies, the realignment of quasi-governmental financial institutions, and the reductions in the number and cost of government employees should deserve some credit. Yet, it is questionable whether all these reforms have been targeted directly at restoring public confidence based on the government's reflection of its past failures.

Seen in this light, the focus of the forthcoming public sector reform should be on government governance. Corporate governance is a mechanism in which shareholders as a "principal" provide discipline and incentives to managers as an "agent." As an analogy, government governance can be described as a mechanism in which the general public (voters, taxpayers) as the ultimate principal provides discipline and incentives for bureaucrats and the government as their agent to act for the benefit of the general public as a whole.

Of course, the actual governance mechanism is far more complex with politics or politicians playing mediating roles between the general public and the government. However, from the viewpoint of strengthening the (direct) fiduciary relationship between the government and the general public, what sort of government governance is desirable?

As discussed in detail in my book, Nihon no keizai sisutemu kaikaku [Economic system reform in Japan], government governance reform can be looked at from two viewpoints. The first viewpoint is concerned with the way in which the general public, whether directly or indirectly, presses the government to impose stricter discipline. For instance, just as shareholders are entitled to vote in a general meeting of shareholders, people can sound off in elections as a "voter" bearing one vote (governance by means of the people's voice).

However, because each voter is entitled to cast just one vote, the public has little incentive to properly monitor the government and the cost of monitoring is inevitably high. And government officials, for their part, are not necessarily willing to disclose information that may reveal government failures as they want to maintain the myth of government infallibility.

Public servant system reform making no visible progress

Accordingly, just as information disclosure by companies is the lifeline for minority shareholders, improving government transparency to enable monitoring by the general public is the sole way to promote civic participation in politics and increase the effectiveness of governance by voice mechanism.

With the inauguration of the Koizumi Cabinet, transparency in government economic policy increased substantially. Decision-making on an overall policy framework was centralized in the Council on Economic and Fiscal Policy, an internal consultative organ of the Cabinet Office, with fairly prompt disclosure on the Internet of meeting materials and minutes. The next challenge is to further build on this foundation and increase the transparency of the government's mid- to long-term economic outlook, which provides a basis for formulating fiscal consolidation measures and economic growth strategy - the two wheels of Japan's economic policy in the coming 10 years.

Concretely speaking, "Structural Reform and Medium-Term Economic and Fiscal Perspectives," a government report released annually each January, must be enhanced in quality, transparency, and accountability. Specifically, it should be mandated that the government's statements on economic forecasts for the forthcoming fiscal year (presented as an appendix to the report) include midyear revisions to the forecasted figures, analysis of impacts that may arise from changes in risk factors and major economic assumptions, ex-post assessment of discrepancies between forecasts and actual outcomes and underlying factors, and so forth.

Also, decentralization should be vigorously promoted with the intent of increasing government transparency. Being closer to the people, local governments are better positioned than the central government in connecting and disseminating information, whereby there is a clearer cost-benefit relation in services provided. As such, residents would find quite significant incentives and merit in monitoring their local government. For their part, local governments would relatively easily sense the increase in public confidence. Thus there exists an encouraging and facilitating environment for the improvement of transparency.

The second focal point for governance reform is to map out a reform plan which would proactively enhance government officials' morale and motivations to work for the nation as public servants, rather than resorting to a stick-and-stick approach by imposing stricter control and discipline.

In this area of reform, no visible development has been made since the government in 2001 adopted the Guidelines for Reform of the Public Servant System. A new ability- and performance-based personnel management system is now under consideration. However, tasks undertaken by government employees are far more diverse than those carried out by those in the private sector. This and other factors pose serious problems such as the complex conflicts of interest between government officials as agent and their principal (people and politicians), and the difficulty of measuring and evaluating the performance of individual officials. Thus, it is unlikely for such a personnel system to function properly beyond some exceptional cases such as when applied to top-level officials on fixed-term contracts.

This is due to the high probability that the introduction of an ability- and performance-oriented personnel system will ultimately produce undesirable results. For instance, some government employees may begin to concentrate on tasks in which they can easily show their achievements and others might become neglectful of cooperative relationships with colleagues. Flattery, favoritism, and internal factions may become epidemic within central government agencies where these behaviors have been relatively rare.

Open up the personnel management system

As far as the so-called career bureaucrats are concerned, the presence of implicit yet strict "up or out" rules, under which those who fail to be promoted to a senior post beyond the director level are forced to leave, has long been the primary motivation for hard work and competition among peers. The rules, however, have begun to erode in the recent years. Private-sector companies, which used to provide lucrative reemployment opportunities to central government retirees for the sake of securing pipelines to regulatory authorities (under the practice called amakudari) are increasingly reluctant to maintain the practice and restrictions on such reemployment have been strengthened, resulting in the aging of senior officials hence the slower pace of promotion at central government agencies. It should not be overlooked that the decline in opportunities for promotion has been substantially undermining the morale of young bureaucrats.

Accordingly, the establishment of a personnel management system that enables career bureaucrats to stay on until retirement age may further degrade the morale of young bureaucrats who are in their working prime. Meanwhile, "staff posts" for specialists in specific areas of administration, even if introduced, may end up having detrimental effects on the overall morale of government officials if such posts are simply used to accommodate those defeated in the race for promotion.

So then what should be done to build a mechanism to enhance bureaucrats' incentives so they can enthusiastically work on their tasks with a strong sense of purpose?

Some ministries and agencies were integrated as part of major government realignment in 2001. This undeniably resulted in an increase in the number of goals and tasks per ministry or agency, greater complexity of duties, and hence weaker incentives for government officials. Such negative effects of diversification are already being recognized in the private sector with many companies recently pointing to the importance of "selection and concentration."

Thus, each ministry or agency - regardless of its experience with realignment - needs to thoroughly rethink the missions it is required to fulfill in accordance with the changing needs of the times and to consider organizational changes that allow individual bureaucrats to use their expertise and experience more easily and efficiently in the course of their duties, thereby enabling evaluation of their performance. To achieve that end, the possibility of implementing another round of realignment should be introduced.

It is also important to introduce competition elements by opening up the hitherto closed personnel management system; where the basic principle is to internally promote internally bred personnel. One way to do this would be to subject to open recruitment some of the senior posts on the director-general, deputy director-general, and director levels, thus enabling those both within and outside the recruiting ministry - including those from other government agencies and the private sector - to freely apply for these posts. (In South Korea, 20% of the posts equivalent to those on the director-general level in Japan have been made subject to open recruitment as part of its reform implemented in 1999.)

An open recruitment system is expected to favorably impact incentives for internally bred bureaucrats, giving them an opportunity to compete for attractive and challenging posts in a transparent and fair recruitment process by freely demonstrating their abilities, experience, and expertise. As the concentration of policymaking powers on the Prime Minister's Office is becoming the norm in Japan, many central government officials wish to seek a post at either the Cabinet Secretariat or the Cabinet Office so that they can work for the nation without being bound by the interests of the ministry to which they belong. The open recruitment of the prime minister's staff, a new system initiated by Prime Minister Shinzo Abe, can be defined as a first step toward such reform.

Institutional reform toward creating an open and pro-competition system will also increase the attractiveness of becoming a government official as a career choice thereby helping bring more talent to Kasumigaseki. The new Abe administration is being urged to build an efficient government from the viewpoint of enhancing work incentives and the quality of government officials rather than just seeking to reduce overall personnel costs.

>> Original text in Japanese

* Translated by RIETI.

October 4, 2006 Nihon Keizai Shimbun

October 31, 2006