• Significant administrative reform with significant progress in HR management and public service modernization. This would provide for cuts in staffing by 15–20 percent in federal authorities and 25–30 percent at the regional and municipal levels and sustain the share of non-wage expenditures in total expenditures on core government administration at the level of 36 percent.
2.65 Possible combinations of scenarios with different pay and administrative reform scope are summarized in Table 2.10.
2.66 Based on the factors listed above, we developed a matrix containing 54 potential scenarios (all possible combinations of selected variables). After a brief analysis of the matrix, the scenarios that have inherent inconsistencies and are unlikely to be implemented (i.e., radical pay reforms implemented at a low pace, moderate pay reforms implemented at high speed, slow-paced reforms combined with significant administrative changes) have been removed from the list. The matrix with the description of 36 remaining scenarios that were selected for actual costing-out and analysis is presented in Table 2.11. The basic results (cost estimates) of the simulations for these 36 scenarios are summarized in Table 2.12.
Table 2.10: Possible Scope of Pay and Administrative Reforms Significant Administrative No Administrative Reform Fair Administrative Reform Reform Employment in core Employment in executive Employment in executive government administration branch of core government branch of core government and civilian public sector is administration and civilian administration and civilian increased by 2 percent public sector is cut by 7-20 public sector is cut by 15-percent percent Share of non-wage expenditures in total Attrition rates for civilian Attrition rates for civilian expenditures on core public sector are applied in public sector are applied in government administration is accordance with sectoral accordance with sectoral 25 percent assumptions assumptions Residual public-private Share of non-wage Share of non-wage compensation gap is 50 expenditures in total expenditures in total percent expenditures on core expenditures on core government administration government administration is Minimum pay increase is 30% is 32 percent 36 percent Note: this group of scenarios was Residual public-private Residual public-private found unrealistic and was not compensation gap is 50 compensation gap is 50% included in simulations percent Minimum pay increase is Minimum pay increase is 30 percent percent Employment in core Employment in executive Employment in executive government administration branch of core government branch of core government and civilian public sector is administration and civilian administration and civilian increased by 2 percent public sector is cut by 7-20 public sector is cut by 15-percent; percent;
Share of non-wage expenditures in total Attrition rates for civilian Attrition rates for civilian expenditures on core public sector are applied in public sector are applied in government administration is accordance with sectoral accordance with sectoral 25 percent assumptions assumptions Residual public-private Share of non-wage Share of non-wage compensation gap is 100 expenditures in total expenditures in total percent expenditures on core expenditures on core government administration government administration is Minimum pay increase is is 32 percent 36 percent percent Residual public-private Residual public-private compensation gap is 100 compensation gap is percent percent Minimum pay increase is 20 Minimum pay increase is percent percent Radical Pay Reform Moderate Pay Reform Table 2.11: Description of the Civil Service Reform Scenarios Included in Simulations No. Scenario Macro (share of Pay Reform Pay Reform Admin Reform Code wages in GDP) Extent Pace 1 22.214.171.124. Scenario 1 (high) Radical Medium Fair 2 126.96.36.199. Scenario 1 (high) Radical Medium Significant 3 188.8.131.52. Scenario 1 (high) Radical High Fair 4 184.108.40.206. Scenario 1 (high) Radical High Significant 5 220.127.116.11. Scenario 1 (high) Moderate Low No 6 18.104.22.168. Scenario 1 (high) Moderate Low Fair 7 22.214.171.124. Scenario 1 (high) Moderate Medium No 8 126.96.36.199. Scenario 1 (high) Moderate Medium Fair 9 188.8.131.52. Scenario 1 (high) Moderate Medium Significant 10 184.108.40.206. Scenario 1 (high) Moderate High No 11 220.127.116.11. Scenario 1 (high) Moderate High Fair 12 18.104.22.168. Scenario 1 (high) Moderate High Significant 13 22.214.171.124. Scenario 2 (med) Radical Medium Fair 14 126.96.36.199. Scenario 2 (med) Radical Medium Significant 15 188.8.131.52. Scenario 2 (med) Radical High Fair 16 184.108.40.206. Scenario 2 (med) Radical High Significant 17 220.127.116.11. Scenario 2 (med) Moderate Low No 18 18.104.22.168. Scenario 2 (med) Moderate Low Fair 19 22.214.171.124. Scenario 2 (med) Moderate Medium No 20 126.96.36.199.
2.67 The main findings from the base set of simulations could be summarized as follows:
• Potential fiscal costs of civil service reform are quite sensitive to relative growth rate of private sector wages. A decrease in real wages growth by 1 p.p. leads to about 0.5–0.7 p.p. of GDP in annual budget saving.
• The radical pay reform aimed at a 50 percent residual public-private compensation gap is on average about 1.5 times as expensive as the moderate pay reform that allows for 100 percent public-private compensation gap at the end of the reform process. In addition, the more ambitious the pay reform, the more volatile are its fiscal costs, i.e., they are more sensitive to the changes in other factors.
• Sub-federal budgets would have to carry a much larger share of the overall fiscal burden, associated with the reforms. About two thirds of the total incremental costs would become responsibility of subnational authorities.
• The scenarios with both radical and moderate pay adjustments result in significant pay decompression in HQ-based civil service, from the current ratio between average wages in Top and Junior Groups of 2.5 to 5.2–8.3 in 2006 and to 6.8–8.in 2010.
• The sensitivity of fiscal costs to the pace of pay reform implementation is relatively low.
• Both radical and moderate pay reforms would not be affordable for the budget system if they are not complemented by administrative adjustments.
F. OUTCOMES OF CIVIL SERVICE REFORM IN LIGHT OF CROSS-COUNTRY COMPARISONS 2.68 In this section we intend to validate various reform options using several monitoring indicators, which allow placing some expected reform outcomes in a broader comparative framework.
2.69 Section D of this Chapter suggested several indicators based on international public sector statistics that may be used as tentative guidance in analyzing and evaluating the results of our estimates. One of these indicators was a ratio of average federal government administration wage to GDP per capita. The results of simulations suggest that this indicator falls within the interval between 1.8 (moderate pay reform in case of unchanged share of real wages in GDPscenarios 29-36) and 2.4 (radical pay reform in case the real wages growth rate is 2 p.p.
higher than the GDP growth ratescenarios 1–4). These are more or less in line with the indicators for LAC (2.5), lower than the world average (3.0), and higher than the average ratio for OECD (1.6), and ECA (1.3) (see table in Annex 2.4). The results suggest significant increase in this indicator as compared to the baseline of 2002 (1.2).
2.70 Another relevant indicator is the number of core government administration employees as a percentage to population, which in our simulations varies from 0.8 percent to 0.9 percent, which is quite close to the baseline value (0.87 percent of population in 2002). This indicator is in line with the numbers for civilian employment in central and subnational government in Poland (0.7 percent), Bulgaria (0.8 percent), Ukraine (1.1 percent), and India (0.9 percent), but it is significantly lower than in Mexico (1.4 percent) and Brazil (1.6 percent), let alone the high-income OECD countries where government employment varies between 2.9 percent of population in Australia to 6.9 percent in the United States. The only country in our sample where the ratio is significantly lower than in Russia is Kazakhstan (0.5 percent).
2.71 A similar ratio for the number of health and education employees suggests that by the end of the proposed reforms the number of these employees may vary between 6.0 percent of population (in case no administrative reform is implemented) or 4.2 percent (in case the administrative reform takes place), while the 2002 baseline is 5.6 percent. The cross-country data vary greatly, but it is clear that implementation of administrative reform will bring Russia closer to OECD averages (3.4 percent) with the closest comparators in transition economies group being Hungary (4.5 percent), Kazakhstan (5.1 percent), and Ukraine (3.9 percent). By international standards, employment in health and education sectors will still remain quite high, but, on the other hand, the specifics of Russia (i.e., vast territory most of which has low density of population) may justify a higher employment in public services. Indeed, in Canada the indicator appears to be 5.0 percent, in Australia and the US–3.8 percent.
2.72 Generally, the brief comparison of the simulation results with international statistics suggests that the reform scenarios implying administrative reform would bring about considerable general improvements to the structural characteristics of both Russian civilian public sector and core government administration employment as compared with the current status.
G. SUMMARY OF SIMULATIONS: ANALYSIS OF SELECTED REFORM SCENARIOS 2.73 The analysis presented in Section F and Annex 2.6 allows narrowing down the number of reform scenarios that could be potentially implemented within the middle to long-term time frame. In this Section we would: first, discuss these potential policy constraints, and second, concentrate on the analysis of the relatively viable reform options.
2.74 Our simulations show that it is unlikely that by 2010 the budget would be able to afford a radical decrease in the public-private compensation gap for the entire core government administration employment and civilian public sector. In case when the residual public-private gap amounts to 50 percent, the additional budget expenditures caused by the reform would account for about 2.1 to 3.3 p.p. of GDP in annual extra costs, as compared to 2003 expenditure levels, depending upon a future wage growth rate in the private sector.
These figures, although not very high in the international context, are still unlikely to be affordable for the Russian budget, especially for sub-federal budgets that would have to accommodate most of the necessary increase in budget expenditures. In fact, these estimates do not capture other important costs, such as the need for a parallel and similar in magnitude increase in financing of the police and armed forces, which will result in even higher fiscal pressures. Hence, in our view, the scenarios assuming radical pay adjustment for the entire civilian public sector employment (scenarios 1-4, 13-16, and 25-28) should be excluded from further consideration.
2.75 Secondly, implementation of the administrative reform component and, more specifically, employment adjustment in the civilian public sector is critical to the success of the broad civil service reform agenda. Pay adjustments not complemented by administrative reform efforts, even in case of moderate pay adjustment, would result in unaffordable growth of budget expenditures (by 2.8–4.2 p.p. GDP as compared to the 2002 baseline). This leads us to exclude scenarios with no administrative reform actions (scenarios 5, 7, 10, 17, 19, 22, 29, 31, and 34).
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