Human Resource Management Issues in ECA Countries 1

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1 Human Resource Management Issues in ECA Countries 1 Summary of Findings and Their Implications... 2 Affordability of HRM practices... 4 Employment... 4 Public Enterprise Employment... 5 General Government Employment... 7 Education Employment... 9 Health and Social Protection Employment Wages & Salaries Performance-enabling HRM practices Pay structures Competitiveness Elements of remuneration Impacts of remuneration practices Other HRM Practices Politicization Poor policy and performance accountability Annex 1: Public Administration Data Sources Annex 2: Bibliography In this chapter we examine four human resource management (HRM) issues in the ten ECA Focus Countries, each of which contributes to (i) the affordability of each country s public administration and (ii) the extent to which particular HRM practices are performance-enabling; i.e., contribute to the capacity of entities within a country s public administration to effectively and efficiently carry out their missions. The four HRM issues examined are: (i) employment; (ii) the wage bill; (iii) pay structures; and (iv) other HR management practices. In examining each of these issues, we present both countryspecific and country-group comparisons between the ECA Focus Countries 2 and the Non- ECA Focus Countries 3 We often include other country-group comparisons with subregional groups of ECA countries, with EU15 countries, and with non-eu OECD countries particularly when limited numbers of observations within the set of Non-ECA Focus Countries limit the validity and usefulness of the comparisons that can be made with the ECA Focus Countries. Many of the comparisons for the first three issues are based on a comprehensive pay and employment data base, compiled especially for this research, which builds on some of the data sets compiled for this entire volume. 4 Most of the comparisons for the final issue (other HRM practices), as well as some of the comparisons for each of the first three issues, are based either on a review of countryspecific research undertaken by others or on unique data sources for particular countries (e.g., public/private sector salary surveys in Romania and Russia, among the ECA Focus 1 Prepared by Gary J. Reid (Lead Public Sector Management Specialist) and Jana Orac (Consultant). 2 The ten ECA Focus Countries include: Albania, Armenia, Croatia, Georgia, Kyrgyz Republic, Poland, Romania, Slovak Republic, Turkey, Ukraine. Comparisons omit particular countries, when data is not available for those countries. 3 The seven Non-ECA Focus Countries include: Chile, Ireland, Korea, Spain, Thailand, Uganda, Vietnam. Again, comparisons omit particular countries, when data is not available for those countries. 4 See Annex 1.

2 -2- Countries, and similar surveys in a few other ECA countries; namely, Bulgaria, Serbia, and Moldova). 5 The analysis presented in this chapter looks at both static and dynamic phenomena. Insofar as data permits, we examine variables over the period. Sometimes, data limitations force us to look at shorter time periods within that decade. We examine trends, variances as well averages over this period (or sub-periods), in order to highlight both relatively enduring differences between the ECA Focus Countries and the other comparator sets of countries (usually the Non-ECA Focus Countries), as well as how both individual countries and country-groups have adjusted along key dimensions of each of these issues over that decade (or sub-period). Summary of Findings and Their Implications ECA Focus Countries display considerable variation in their pay and employment practices, much as do the Non-ECA Focus Countries, as well as their OECD and EU colleagues. Moreover, average levels of public employment, pay and the fiscal burden of wage bills differ only modestly from Non-ECA Focus/OECD/EU averages. On the other hand, excessive politicization and underdeveloped webs of accountability mechanisms, both formal and informal, are common features of most ECA countries. These institutional problems undermine efforts to attract, retain and motivate the human resources required for public sectors in ECA countries to meet the challenges posed by a competitive global economy. Moreover, in those ECA countries that have excessive levels of public employment or bear particularly heavy fiscal burdens from their wage bills, these underlying institutional weaknesses typically are important causes of those imbalances. Our findings can be succinctly summarized as follows: 1. ECA Focus countries have, over the period, achieved reasonable overall levels of employment, and overall wage bills that should be affordable, although further reductions in public enterprise employment are probably still warranted. Moreover, a. ECA Focus countries have achieved these fiscally sound overall levels of employment and wage bills through: i. Dramatic, and often, sustained privatization of public enterprises; and ii. In some cases, protracted efforts to modestly but consistently reduce general government employment each year throughout an extended period of time. No country has achieved significant, sustained general government employment reductions through major, one-off retrenchment exercises. 2. ECA Focus countries have salary structures that make it difficult for them to attract, retain and motivate staff with the skills they need, in order to enable their public entities to effectively and efficiently meet their organizational objectives. Average salary levels are only modestly lower, relative to per capita GDP, than is the case in reasonable comparator countries. But the structures themselves 5 Again, see Annex 1.

3 -3- a. fail to ensure consistency in the competitiveness of remuneration across positions, b. tend to concentrate too large a fraction of remuneration in elements of salary that are not closely linked to the human capital requirements of the position, and c. often exhibit considerable variability in total remuneration for similar positions because of those non-human capital elements of salary and because assignments of many of those other elements of salary to individual staff are discretionary and not subject to adequate accountability checks. Only a few ECA Focus Countries have made any inroads on these salary structure challenges; and their keys to success have been: (a) targeting the initial rounds of such salary restructurings at a small enough cadre of staff that it is fiscally feasible; and (b) basing those salary restructurings on a careful empirical analysis of the problems created by the existing salary structure. 3. ECA Focus countries are characterized by other HRM practices that further undermine their capacity to cost-effectively attract, retain and motivate staff with the skills they need in order to enable their public entities to effectively and efficiently meet their organizational objectives. Few have made significant inroads on these other HRM practices challenges; but among those who have, their keys to success have been both reform design factors, as well as reform leadership factors. a. Key reform design factors have included: i. targeting such reforms at a strategic yet small enough cadre of staff to be able to address four key feasibility constraints: 1. political feasibility; 2. organizational culture feasibility; 3. critical mass feasibility; and 4. absorptive capacity feasibility; while ii. spearheading such reforms under a banner capable of generating domestic demand for those reforms (e.g., the requirements of EU Accession, or an anti-corruption campaign); and iii. monitoring and publicizing evidence on the immediate impacts of those reforms, so as to both keep reformers focused on the underlying objectives of the reform effort, as well as facilitate the generation of domestic demand for an effective reform effort. b. Key reform leadership factors., not surprisingly, have included: i. political leadership, and ii. technical level leadership. In short, overall employment and wage bill control are largely achieved objectives in almost all ECA Focus Countries. At the same time, very few of these countries has made significant progress on creating either more performance-enabling salary structures or

4 -4- more performance-enabling HRM practices more generally. Lessons from the experiences of the ECA Focus Countries in addressing these HRM issues include: 1. When employment and/or the wage bill are excessive, the most promising avenues for addressing that problem are: a. Privatization of public enterprises: This applies, of course, only when significant public enterprise employment exists; but when that is the case, this is the most reliable means of achieving large and sustainable employment reductions within a relatively short period of time. b. Reforms to the budget process and establishment control systems and procedures, designed to create continuous pressure, on an annual basis, to slowly, but surely, ratchet down general government employment. In short, slow, but steady, systemic reforms aimed at improving establishment and wage bill control effectiveness have proven more effective at sustainably reducing employment and the wage bill than have major, one-off retrenchment efforts. 2. Salary structures should be looked at carefully, and the Bank and the client country should engage in extended analysis and discussion of options for reforming those structures so that they: a. ensure more consistency in the competitiveness of total remuneration across types of positions (subject to the constraint of wage bill affordability), and b. ensure that a larger fraction of total remuneration is determined by the human capital requirements of a given position (skills; knowledge; levels, types and scope of responsibilities), while the fraction of total remuneration determined by other factors (e.g., entitlements based on nonhuman capital characteristics of the staff member) is reduced as much as is politically and socially feasible. 3. Other HRM practices should be looked at carefully, and the Bank and the client country should engage in extended analysis and discussion of options for reforming those practices so that they: a. Ensure meritocratic, depoliticized personnel management practices within a strategic cadre of civil servants a small enough cadre that the needed reforms can succeed, but strategically enough selected that the cadre can actually impact the performance of public entities; b. better link financial incentives for personnel performance to organizational objectives, and c. build stronger non-financial reasons for staff to identify with and energetically pursue organizational objectives. Affordability of HRM practices Employment

5 -5- Public Enterprise Employment 6 Public enterprise employment patterns over the period differ strikingly from the patterns for general government or subsets of general government employment, such as health and education (see below). Most striking within the ECA Focus countries 7, as well as within all sub-regional groupings of ECA countries (Balkans 8, CIS 9, EU8 10 ) are the following patterns (see Figure 1): All groupings of ECA countries achieved dramatic reductions in public enterprise employment in single years, while no non-eca comparator country group achieved such dramatic single-year reductions. All groupings of ECA countries achieved significantly greater overall reductions over the full period than were evident within general government employment, while no non-eca comparator country group achieved such fullperiod reductions. The EU15 11 and non-eu OECD 12 countries, as well as the one Non-ECA Focus country for which complete data were available (Spain), exhibited no such patterns; rather, public enterprise employment within those developed countries remained low and stable throughout this period. 6 Data are drawn from the International Labor Organisation (ILO) online database LABORSTA, downloaded Sept. 2006, and capture actual employment (as opposed to authorized or budgeted positions). This data source provided the most consistent data on public employment over the longest time series for the largest number of countries included in this study. Nevertheless, there are still numerous missing data points. The figures reported herein the period are estimates of employment changes over that period for countries in which there were sufficient annual observations to reasonably project the 1995 and 2004 data points. For the period, only countries for which data for both years was available are reported here. See Annex 1 for more information on data sources. 7 Albania, Armenia, Croatia, Kyrgyz, Poland, Slovakia, Turkey. 8 Albania, Bulgaria, Croatia, Turkey. 9 Armenia, Azerbaijan, Belarus, Moldova. 10 Estonia, Lithuania, Poland, Slovakia, Slovenia. 11 Denmark, Germany, Spain, U.K. 12 Canada, Norway.

6 % 14.0% 12.0% Percent of Population 10.0% 8.0% 6.0% 4.0% ECA Focus EU8 EU-15 Spain Balkans CIS Non-EU OECD 2.0% 0.0% Figure 1: Public Enterprise Employment per Capita: Country Groups ECA Focus countries, as a group, steadily reduced public enterprise employment throughout the period, by almost half, from 9.1% to 4.8% of population. Similar patterns of reduction were evident in the Balkan, CIS and EU8 country groups; most dramatically within the CIS countries, which reduced their average level of public enterprise employment from 14.8% to 8.8% over that period. EU15 countries, non-eu OECD countries and the one Non-ECA focus country for which full data series were available (Spain), all kept their public enterprise levels of employment stable, averaging 1.4%, 2.1% and 0.6%, respectively over this period. Within the ECA Focus countries, only Turkey failed to achieve dramatic reductions in public enterprise employment (see Figure 2), and that surely reflects the fact that public enterprise employment was only 0.8% of population, the lowest among ECA Focus Countries, at the beginning of the period, which was only about half the EU15 average of 1.4% over this period. The next most modest public enterprise employment reductions among ECA Focus Countries were achieved in Albania, which had only 3.7% of its population employed in public enterprises in 1995, but still managed to reduce this by more than 40%, to 2.1% by The speed of public enterprise employment reductions tended to be greater earlier in this decade, and more attenuated by the end of the period; suggesting that the typical approach was to privatize the large enterprises early, while leaving the smaller ones until later in the downsizing process. Dramatic early reductions were particularly evident in Armenia and Ukraine, which, in 1995, employed 21.9% and 20.7% of their populations in public enterprises, respectively at that time; but reduced those incidences to 10.1% and 13.7%, respectively by 2000.

7 % 20.0% % of Population 15.0% 10.0% Albania Armenia Croatia Georgia Kyrgyz Republic Poland Slovak Republic Turkey Ukraine 5.0% 0.0% Figure 2: Public Enterprise Employment per Capita: ECA Focus Countries General Government Employment 13 Based on the most comprehensive and consistently defined data that could be compiled, the following patterns emerge. When samples are restricted to countries for which a complete time series is available, we are able to make comparisons of subsets of countries from each of the following groups over the period: ECA Focus 14, Non-ECA Focus (Spain only), EU8 15, Balkans 16, CIS 17, EU15 18 and non-eu OECD 19 countries. Within each of these samples, the basic pattern is generally remarkable stability in the levels of general government employment (exclusive of public enterprise employment). Only the two Balkan countries included in these samples (Albania and Bulgaria) and two of the ECA Focus countries (Albania and Poland) showed significant reductions in general government employment over the period. Importantly, the reductions achieved in those three countries were achieved through persistent, modest employment reductions each year, rather than through major reductions concentrated in a 1-2 year period. 13 See footnote Albania, Armenia, Poland, Slovakia. 15 Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia. 16 Albania, Bulgaria. 17 Armenia, Azerbaijan, Belarus, Moldova although the Armenia and Moldova data look suspiciously low. 18 Denmark, Finland, Germany, Spain, Sweden, U.K. 19 Canada, New Zealand, Norway.

8 -8- ECA Focus countries exhibited significantly lower levels of general government employment than either the Non-ECA Focus countries or any of the sub-regional groupings of ECA countries (see Figure 3). This difference was particularly pronounced with respect to the EU15 and the non-eu OECD country samples, and to a lesser extent, the EU8 sample. The latter three groups averaged 10.0%, 9.8% and 7.5% over this period, respectively, while the ECA Focus countries for which the full time-series data was available averaged only 3.5% over that same period. 12.0% 10.0% 8.0% % of Population 6.0% 4.0% ECA Focus Spain EU8 Balkans CIS EU-15 Non-EU OECD 2.0% 0.0% Figure 3: General Government Employment per Capita: Country Groups In virtually all ECA Focus countries that achieved significant general government employment reductions over this period, those reductions were accomplished through continuous modest annual reductions, rather than through dramatic, one-off retrenchment exercises (see Figure 4). This is clearest in the cases of Poland and Albania, but also apparent in the Kyrgyz Republic over the period (data not available beyond 1999). Poland achieved continuous employment reductions throughout the period, dropping from 6.3% of population to 4.2 %. Albania was every bit as relentless in reducing its general government employment, albeit a bit less dramatically, from a high of 5.1% in 1995 to a low of 3.8% by Croatia, for which the employment time series is truncated, is the sole possible exception. Its general government employment fluctuated dramatically from year to year over the period, beginning at 6.9% of population, dropping in 2001 to 6.0%, then bouncing back and forth between 6.0% and 6.3% for the balance of the period. Two of the four countries for which continuous time-series data on general government employment were available for the period showed no obvious trends or swings in their general government employment Armenia and Slovakia although Slovakia did rise modestly

9 -9- over that period, from 4.0% to 4.4%. One of the remaining ECA Focus countries, Ukraine, saw rising general government employment, albeit from a very low base from 1.1% of population in 1995 to 1.5% by 2003, after which it fell back to 1.3% in The other remaining ECA Focus country reported employment data for only three years (Georgia, ), so it is not possible to determine its pattern over the period. 8.0% 7.0% 6.0% % of Population 5.0% 4.0% 3.0% Albania Armenia Poland Slovakia Croatia Georgia Kyrgyz Ukraine 2.0% 1.0% 0.0% Figure 4: General Government Employment per Capita: ECA Focus Countries In short, the ECA Focus countries have displayed both lower levels of general government employment over the period than any of the comparator groups, as well as more significant general government employment reductions. Importantly, virtually all the ECA Focus countries, as well as the one other Balkan country (Bulgaria), who achieved employment reductions did so through consistent, incremental, year-byyear reductions, rather than through big-bang retrenchment exercises. Education Employment 20 When education employment is separated out from general government employment, a similar pattern emerges: Education employment is modest and impressively stable throughout the study period both across and within all comparator groups (see Figure 5). Modest education employment: ECA Focus countries maintained significantly lower levels of education employment than either the EU8 or the non-eu OECD countries (which averaged 3.1% and 2.9%, respectively, over the See footnote 6.

10 -10- period, compared to an ECA Focus countries average of 1.9%); while the one Non-ECA Focus country for which data were available, Spain, maintained lower education employment than other EU15, let alone EU8 countries (averaging 1.5% over this period, albeit with a modest upward trend). Stable education employment: The ECA Focus countries 21 and non-eu OECD 22 samples showed no obvious trends; rather, they were remarkably stable throughout this period, averaging 1.9% and 2.9% of population, respectively over the period. There was a modest upward trend in the EU8 group 23 (rising from 3.1% to 3.3% over the period) and by the one non-eca Focus country for which such data was available for the full period (Spain rising from 1.4% to 1.7% over that same period). There was an equally modest downward trend in education employment within the subset of Balkan countries 24 for which the full time-series data was available, falling from 2.1% to 1.9%. 3.5% 3.0% 2.5% % of Population 2.0% 1.5% EU8 Balkans ECA Focus Non-EU OECD Spain 1.0% 0.5% 0.0% Figure 5: Education Employment per Capita: Country Groups Most of the ECA Focus countries maintained quite stable levels of education employment during the period. The exceptions tended to be the countries whose education employment levels were at the extremes of the ECA Focus countries distribution at the beginning of the period (see Figure 6). The Kyrgyz Republic reduced 21 Albania, Poland, Romania. 22 Australia, Canada, Norway, U.S. 23 Estonia, Hungary, Lithuania, Poland, Slovenia. 24 Albania, Bulgaria, Romania.

11 -11- its education employment from 3.2% of population to 2.8% between ; while Georgia, which employed 2.8% of its population in the education sector in 1999 (the beginning of its available data series), reduced this to 2.3% in 2000, only to let it jump back up by to 2.8%. At the other end of the distribution, Croatia employed 1.6% of its population in education in 1996, but increased this to 2.0% by % 3.0% 2.5% % of Population 2.0% 1.5% Albania Poland Romania Croatia Georgia Kyrgyz 1.0% 0.5% 0.0% Figure 6: Education Employment per Capita: ECA Focus Countries Health and Social Protection Employment 26 Health and social protection employment is similarly modest and stable throughout the study period both across and within all comparator groups (see Figure 7). Modest health and social protection employment: Both ECA Focus countries and Non-ECA Focus countries employ significantly fewer health care and social protection staff than EU and OECD countries. EU15 countries 27 employed, on average over this period, 2.9% of population in health care and social protection, trending modestly upward from 2.9% to 3.1% over this period. Non-EU OECD countries 28 employed 3.3% of their population in health care, on average over this period. ECA Focus and Non-ECA Focus countries, on the other hand, averaged 1.4% and 1.3%, respectively over that same period. 25 Unfortunately, data on education employment in the Kyrgyz was not available beyond See footnote Finland, Spain, U.K. 28 Australia, Canada, Norway, U.S.

12 -12- Stable health and social protection employment: Health and social protection employment has also proven remarkably stable across countries and regions, with some country-specific exceptions. ECA Focus countries 29 trended slightly downward over the period, from 1.6% to 1.2% of population; while the only Non-ECA Focus country for which data over the full period was available (Spain) trended modestly upward, from 1.2% to 1.4%. 4.0% 3.5% 3.0% % of Population 2.5% 2.0% 1.5% ECA Focus Non-ECA Focus Non-EU OECD EU-15 EU8 1.0% 0.5% 0.0% Figure 7: Health and Social Protection Employment per Capita: Country Groups As with education, health and social protection sector employment was quite stable in most ECA Focus countries, excepting Poland and Georgia (see Figure 8). Poland and Georgia underwent fairly steady reductions in their health and social protection sector public employment over the period; Poland dropping from 2.5% of population throughout the period to just 1.5% by 2003; Georgia dropping from 1.6% in 1998 to 0.9% by 2003, while rising modestly to 1.0% in Other ECA Focus countries for which more than four years of data were available maintained essentially stable health and social protection employment over this period. 29 Albania, Poland, Romania.

13 % 2.5% % of Population 2.0% 1.5% 1.0% Albania Poland Romania Armenia Croatia Georgia Kyrgyz 0.5% 0.0% Figure 8: Health and Social Protection Employment per Capita: ECA Focus Countries In sum, public employment levels and changes over the period exhibited the following: 1. Employment Levels a. While ECA Focus countries began this period with dramatically higher public enterprise employment levels than comparator countries, including the Non-ECA Focus Countries, they achieved significant reductions in public enterprise employment over this decade. Still, by 2004, ECA Focus Countries still employed approximately four times as many workers in public enterprises, relative to population, as did EU15 countries 4.8% of population vs. 1.2% (see Figure 1). Thus, further reductions would appear to be in order. b. ECA Focus countries exhibited significantly lower levels of general government employment than either the Non-ECA Focus countries or any of the sub-regional groupings of ECA countries. c. Education employment is modest and impressively stable throughout the study period both across and within all comparator groups. d. Most of the ECA Focus countries maintained quite stable levels of education employment during the period. The exceptions tended to be the countries whose education employment levels were at the extremes of the ECA Focus countries distribution at the beginning of the period.

14 -14- e. Health and social protection employment is similarly modest and stable throughout the study period both across and within all comparator groups. f. As with education, health and social protection employment was quite stable in most ECA Focus countries, excepting Poland and Georgia. 2. Employment Adjustments a. Reductions in enterprise employment were the most important contributor to employment reductions in ECA Focus countries, while no significant enterprise employment reductions were evident in Non-ECA Comparator Countries. i. All groupings of ECA countries achieved dramatic reductions in public enterprise employment in single years, while no non-eca comparator country group achieved such dramatic single-year reductions. ii. All groupings of ECA countries achieved significantly greater overall reductions in enterprise employment over the full period than were evident within general government employment, while no non-eca comparator country group achieved such full-period reductions. iii. ECA Focus countries, as a group, steadily reduced public enterprise employment throughout the period, by almost half, from 9.1% to 4.8% of population. As noted above, this is still four times the average level of public enterprise employment per capita as in EU15 countries. iv. Within the ECA Focus countries, only Turkey failed to achieve dramatic reductions in public enterprise employment; presumably because its public enterprise employment was already quite low (0.8% of population), and below those of comparator countries, at the beginning of this period. b. General government reductions, when they were achieved, were more modest and more gradual than enterprise employment reductions in ECA Focus Countries, while no significant general government employment reductions were evident in Non-ECA Comparator Countries. In virtually all ECA Focus countries that achieved significant general government employment reductions over this period, those reductions were accomplished through continuous modest annual reductions, rather than through dramatic, one-off retrenchment exercises. Wages & Salaries 30 Wage bill spending does not appear to be out of line as an aggregate among the ECA Focus Countries (see Figure 9). Non-enterprise wages and salaries as a percentage of 30 ECA Focus Countries included in the group wage bill comparisons are the full set less Ukraine and Turkey. Non-ECA Focus Countries included in the group wage bill comparisons are Korea, Ireland, Spain and Thailand.

15 -15- GDP held roughly constant over the decade among the ECA Focus countries, at around 6.3%. This contrasts with the Non-ECA Focus countries, whose average fell from 8.6% in 1995 to 6.1% by 1999, after which it remained roughly constant through 2005, holding at 6.2% by EU8 countries, on the other hand, allowed their public sector wage bills to rise continuously over this period, from 7.1% to 8.0%; while Balkan countries also experienced rising wages and salaries as a percentage of GDP, from 8.9% to 9.4%, despite a dip to 8.0% in % of GDP ECA Focus Non-ECA Focus EU-8 Balkans CIS Figure 9: General Government Wage Bill per GDP: Country Groups High-side outliers among the ECA Focus countries were Croatia and Turkey, while lowside outliers included Armenia and Georgia (see Figure 10). Croatia experienced dramatic fluctuations in its wage bill, beginning the decade at 10.4% of GDP, rising to 12.9% by 2000, and then falling to between 10.6% and 11.1% between Armenia, on the other hand, managed to continuously reduce an already quite modest wage bill, from a high of 3.7% in 1996 to an end-of-period level of 1.7% of GDP. Georgia, which began the decade with the lowest wage bill among the ECA Focus countries, at 1.8% in 1995, saw its wage bill rise continuously to a high of 3.9% by 1999, after which it more or less stabilized, hovering between 3.2% and 3.6% between 2000 and 2004.

16 % of GDP Albania, %GDP Armenia %GDP Croatia %GDP Georgia %GDP Kyrgyz %GDP Poland %GDP Romania %GDP Slovakia %GDP Turkey %GDP Ukraine %GDP Figure 10: General Government Wage Bill per Capita: ECA Focus Countries The most dramatic reductions in the non-enterprise wage bill were accomplished by Albania, which brought its wage bill down from 10.3% in 1992 to a low of 6.3% by 2000, after which salary improvements granted to civil servants and health care workers led to an upward tick in 2001, to 7.0%, followed by a modest but steady decline thereafter, ending at 6.4% by Significant wage bill reductions were also accomplished by Romania, which brought its wage bill down from 7.1% of GDP in 1992 to 4.8% by 1999, and then allowed it to fluctuate between 4.8% and 5.5% for the rest of the period, ending at 4.9% by The most volatile countries included the Kyrgyz Republic, Croatia and Slovakia. Kyrgyz saw its wage bill jump from 5.2% of GDP in 1993 to 8.1% the next year, then brought it down to a low of 4.4% in 2000, after which it rose continuously for the rest of the period, reaching 6.0% of GDP by As noted above, Croatia experienced significant fluctuations in its wage bill over this period, between a low of 10.4% in 1994, peaking at 12.9% in 2000, and ending at 10.8% by Slovakia reached a low of 3.9% by , but then allowed its wage bill to jump to 6.6% of GDP in 1996, and then managed to impose a slow but steady decline for the rest of the period, reaching 5.9% by Crowding out of non-wage current expenditures is not a serious problem among ECA Focus Countries (see Figure 11). Non-enterprise wages and salaries as a percentage of total current expenditures displayed a similar pattern of: (i) lower levels than the Non- ECA Focus countries, averaging 19.8% vs. 32.8% among the five Non-ECA Focus countries for which data was available for the full period; (ii) relative consistency across the period for ECA Focus countries as a group, which contrasted with (iii) a significant decline over the period among Non-ECA Focus countries, dropping from 37.2% to 31.5% by 2003; but (iv) fairly dramatic fluctuations for particular ECA Focus countries Albania, Kyrgyz, Armenia, Slovakia, Georgia and

17 -17- Romania,, including (iv) upward trends (albeit with considerable volatility) apparent in Slovakia and Georgia, and (v) a downward trend (again, with considerable volatility) in Romania (see Figure 12). 40.0% 35.0% 30.0% % of Current Expenditures 25.0% 20.0% 15.0% ECA Focus Non-ECA Focus EU-8 Balkans CIS 10.0% 5.0% 0.0% Figure 11: Wage Bill as % of Current Expenditures: Country Groups The upward trends exhibited by Slovakia and Georgia are simply bringing them closer to the middle of the pack among the various groupings of ECA countries, since both started the period at the bottom of the distribution of wage bill spending, both as a % of GDP, as well as a % of current expenditures. In Georgia s case, increased wage bill spending increased both as a % of current expenditures, as well as a % of GDP. In Armenia s case, the wage bill increase showed up only in an increase in the share of current expenditures devoted to wages and salaries; while its already low wage bill spending as a % of GDP actually declined over this period, from 2.6% in 1995 to 1.7% in 2004, having dropped as low as 1.3% in 2003.

18 % 30.0% 25.0% 20.0% 15.0% Albania Romania Kyrgyz Slovakia Croatia Poland Georgia Armenia Ukraine 10.0% 5.0% 0.0% Figure 12: Wage Bill as % of Current Expenditures: ECA Focus Countries In short, wage bill spending does not appear to be seriously crowding out other types of spending in the ECA Focus countries when compared to the Non-ECA Focus countries. Moreover, wage bill spending as a share of current expenditures by ECA Focus countries, as a group, was quite similar to the various sub-regional groupings of ECA countries, all of them, except the Balkans, hovering around 18%-20%, while the Balkans averaged just under 24% over the period. The flip-side of these comparisons is spending on other goods and services as a percentage of current expenditures. ECA Focus countries averaged 28.4% over the period, while the Non-ECA Focus countries averaged only 23.2% over the period. 31 The Balkans and EU8 countries tended to have other goods and services spending as a percentage of current expenditures closer to the Non-ECA Focus countries (both groups averaging 22.4%) while the CIS countries displayed, on average, higher levels of non-wage current expenditures (averaging nearly 40%) (see Figure 13). Again, this evidence suggests that crowding out of other types of current expenditures by ECA Focus countries, and particularly by CIS countries, is not a problem, if the Non-ECA Focus countries are taken as the standard The shorter time period for the Non-ECA Focus countries reflected in these figures was chosen simply to get as large a sampling of those countries as possible with data for all years covered. Even so, only four of the seven Non-ECA Focus countries (Korea, Ireland, Spain and Thailand) had sufficient data to be included in these calculations. 32 At the same time, there is, as was the case with wages and salaries, considerably volatility over the period for individual ECA Focus countries. This volatility was greatest in Armenia and Georgia, with Armenia trending up, and Georgia trending down (neither consistently).

19 % 45.0% 40.0% 35.0% % of Current Expenditures 30.0% 25.0% 20.0% ECA Focus Non-ECA Focus EU-8 Balkans CIS 15.0% 10.0% 5.0% 0.0% Figure 13: Other Goods & Services Expenditures as % of Current Expenditures: Country Groups The very high CIS spending on non-wage current expenditures, coupled with (a) their relatively low levels of wage bill spending as a % of GDP, particularly in Georgia and Armenia, and (b) their low levels of general government employment (again, particularly in Georgia and Armenia) suggest that some of these countries may either be understaffed or seriously compromising their ability to attract and retain qualified staff due to a failure to offer attractive enough salaries (see Figure 14). Armenia s significant reduction in wage bill spending as a % of GDP (a 35% decrease over the period), coupled with essentially stable general government employment (it fell from 0.9% to 0.8% of population), suggests that Armenia may have significantly reduced its capacity to attract and retain qualified staff over this period, since average remuneration would appear to have dropped by about one-third. Whether Armenia employs adequate numbers of staff or too few is not so obvious. Georgia s wage bill spending per GDP, on the other hand, rose by 78% over the period (from 1.8% of GDP to 3.2%), but the data does not allow us to identify its employment changes over that same period; 33 so, it isn t possible to conjecture sensibly about whether they have been able to improve public sector remuneration or not. 33 Employment data is available for Georgia for only three years during this period, , during which time Georgia s general government employment remained reasonably stable and quite modest, at around 0.7% of population.

20 % 60.0% 50.0% 40.0% 30.0% Albania Romania Kyrgyz Slovakia Croatia Poland Georgia Armenia Ukraine 20.0% 10.0% 0.0% Figure 14: Other Goods & Services Expenditures as % of Current Expenditures: ECA Focus Countries In sum, wage bill spending and changes in it over the period exhibited the following: 1. Wage bill spending does not appear to be out of line as an aggregate among the ECA Focus Countries. 2. Crowding out of non-wage current expenditures is not a serious problem among ECA Focus Countries. 3. The very high CIS spending on non-wage current expenditures, coupled with (a) their relatively low levels of wage bill spending as a % of GDP, particularly in Georgia and Armenia, and (b) their low levels of general government employment (again, particularly in Georgia and Armenia) suggest that some of these countries may either be understaffed or seriously compromising their ability to attract and retain qualified staff due to a failure to offer attractive enough salaries. Performance-enabling HRM practices Pay structures Averages are not out of line with comparator countries. Average public administration pay relative to per capita GDP in ECA Focus countries is comparable to that found in EU15 countries (only one Non-ECA Focus country had such data available), and modestly below those found in the EU15 and Balkans (see Figure 15). Within the general public administration, wages in the ECA Focus Countries relative to per capita GDP were about 18% lower than those found in EU15 countries. Comparable data were

21 -21- not available for the Non-ECA Focus countries. This pattern is similar, albeit at lower levels, for education and health & social work staff, although data for salaries of such staff in the EU15 countries is not available. Within the ECA Focus countries, education and health workers receive, on average, only 72% and 67% of what general public administration staff receive. In the EU8 countries, these ratios are 77% and 71%, respectively; while within the Balkans group, these ratios are 84% and 88%. CIS countries are significantly less generous in their pay for teachers and health care workers, providing them average salaries of only 53% and 43% of their general public administration staff, respectively. Comparable ratios could not be calculated for EU15 countries due to the absence of data on education and health and social worker salaries. In sum, average salary levels within the public administrations of the ECA Focus Countries, as well as within their education and health & social care cadres, are moderately lower than is the case in EU15 countries, averaging about 18% lower Public Administration Education Health & social work ECA Focus EU8 Balkans CIS EU-15 Figure 15: Average Wage Relative to GDP per Capita: Country Groups Compression ratios are not out of line. A step in the direction of providing evidence on salary structures is to examine vertical compression ratios, i.e., the ratio of total remuneration for staff in the highest ranking positions within a particular career ladder to total remuneration for staff in entry level positions within that same career ladder. Figure 16 summarizes evidence on such vertical compression ratios for civil service positions within a number of ECA countries, as well as several EU and OECD countries. For the three ECA Focus Countries for which such data are available, the vertical compression ratios fall within roughly the same range as do those in the five EU15 countries for which data is available 34 between 3.0 and 5.2 for ECA Focus Countries, between 3.7 and Ireland, Germany, France, U.K. and the Netherlands.

22 -22- for EU15 countries (data available for only one Non-ECA Focus Country -- Ireland). In short, while ECA Focus Countries may want to consider further decompressing their salary structures, such a policy does not appear to be what most clearly distinguishes them from salary structure practices in sensible comparator countries. These ratios give a sense of the prospects for salary growth over the course of a career within a particular career stream in a given public administration; in this case, the civil service. That is certainly more helpful than simple average ratios of public administration remuneration to some given comparator, such as GDP or a particular sector of the economy. But even these ratios are less helpful than one needs, since they fail to clarify whether competitiveness of remuneration maintains some rough consistency across human capital requirements of public administration positions. Civil Service Compression Ratio Estimates Moldova Slovakia Kazakhstan Kyrgyz R. Russia Czech R. Macedonia Serbia B&H Croatia Ireland Germany France UK Netherlands Figure 16: Civil Service Compression Ratios In response to these limitations in conventional indicators of the competitiveness of public sector remuneration, a number of ECA countries have undertaken surveys of public and private sector salaries, in order to provide systematic evidence on the pattern of competitiveness of public sector remuneration practices across positions requiring different types and quantities of human capital in order to shoulder different levels and scopes of responsibility and authority. While in many cases, these surveys have been undertaken as a one-off exercise, it will be important for ECA countries to institutionalize the administration of such surveys on a regular basis (e.g., every year or every other year), and make a practice of incorporating the evidence produced by those surveys into both annual salary adjustment deliberations, as well as more in depth reviews of salary structures, which may occur more infrequently or irregularly. The surveys that have been undertaken have revealed a pattern that has been found in developing countries throughout the world. Key characteristics of that pattern are:

23 Competitiveness of total remuneration within the public administration tends to fall as human capital requirements rise Discretionary elements of remuneration vary considerably, but tend to become more important the greater are the human capital requirements of a position, surely in no small part in an effort to address the pattern of increasingly uncompetitive base pay as human capital requirements rise Seniority-linked pay is often large, thereby undermining efforts to ensure consistency in the competitiveness of salaries across positions Elements of salary advertised as performance-related vary in their magnitudes across countries, as well as across positions within any given country, and elicit mixed reactions from politicians, managers and other staff. On the one hand, they are viewed as an important device for rewarding good performers. On the other hand, their assignment to individual staff is often viewed as less than fair and not accountably linked to true performance. 38 Competitiveness Such public/private surveys have been undertaken in no fewer than eight ECA countries, and at least one of those countries (Macedonia) is in the process of institutionalizing such surveys as a regular part of the annual work program of the State Statistical Office. 39 A few examples from some of those surveys can serve to illustrate the above noted patterns in the competitiveness of public sector salaries (exclusive of SOEs). Table 1 provides a summary of the findings of the Bosnia-Herzegovina public/private sector salary survey, undertaken in It reveals that both basic pay as well as net total compensation fall as human capital requirements of positions rise. The pattern is more pronounced for the Federation than for the State, but it is the same pattern in both cases. Significantly, the State actually pays at or above private sector levels within the lower three ranks summarized in these tables. This is not an unheard of pattern within developing countries. 40 Moreover, it is a pattern that surely creates significant pressures to hire within those lower skilled ranks, particularly if political patronage is a common practice. At the other end of the skill spectrum, the less competitive salaries among the high skill positions make it difficult to attract and retain those higher level managerial and professional skill sets. 35 Reid and Scott (1994); Belman and Heywood (2004); Hay Group (2006); Gorodnichenko and Sabirianova Peter (2006); Kenward (2004); Lienert (1998); C 3 Management and Economic Consulting (2006). 36 Reid and Scout (1994); Nunberg (2000); PriceWaterhouseCoopers Public Service Pay Policies in Sub Saharan Africa draft (2004). 37 Hay Group (2006); Reid and Scott (1994). 38 OECD, Performance-related Pay for Government Employees: Main Trends in OECD Member Countries, GOV/PGC/HRM(2004)1, Human Resources Management Working Party Meeting (7-8 October 2004); OECD, Performance-related Pay for Government Employees: Executive Summary (Paris, France: July 2005). 39 Bosnia-Herzegovina, Bulgaria, Serbia, Russia, Moldova, Albania, Romania and Albania. 40 Reid, Gary J. and Graham Scott, Public Sector Human Resource Management: Experience in Latin America and the Caribbean and Strategies for Reform, Green Cover Report No , Public Sector Management Division, Technical Department, Latin America and the Caribbean Region (World Bank, Washington, DC: March 14, 1994).

24 -24- Table 1: Bosnia-Herzegovina Public/Private Sector Salary Survey Findings (2005-6) Net basic pay in the private sector versus State and Federation (KM) As % private sector median Private sector State Fed State Fed Job titles Median P25 P75 Head of function / middle management 1,900 1,100 2,500 1, % 37% Senior professional 1, , % 44% Experienced professional , % 68% Basic professional , % 83% Administrative staff / clerk % 61% Manual worker % 73% Net total compensation in the private sector versus State and Federation (KM) Head of function / middle management 2,050 1,321 2,915 1, % 49% Senior professional 1,621 1,102 1,894 1, % 59% Experienced professional 1, ,489 1, % 81% Basic professional ,330 1, % 97% Administrative staff / clerk , % 84% Manual worker % 97% A similar pattern is evident in the other public/private sector salary surveys. To illustrate, consider Table 2, which reveals an identical pattern of decreasing competitiveness as human capital requirements rise in Bulgaria. In Bulgaria s case, average competitiveness is lower than in Bosnia-Herzegovina s case; surely reflecting in part a higher political priority attached to public sector salaries in Bosnia-Herzegovina than in Bulgaria. But other factors are undoubtedly at play as well. The important point is the pattern of decreasing competitiveness with rising human capital requirements, which undermines efforts to attract and retain qualified staff at the higher skill levels precisely those levels that are most important for effectively managing public entities. Table 2: Bulgaria Public/Private Sector Salary Survey Results (2002) Benchmark Job Level Ministries Job Reference Total Salary 25th %- ile (Lower Quartile) Private Sector Median 75th %- ile (Upper Quartile) Ministries position salary as % private sector median Junior Expert JE % Senior Expert SE % Chief Expert CE % Head of HOS %

25 -25- Benchmark Job Level Sector Department Head Ministries Job Reference Total Salary 25th %- ile (Lower Quartile) Private Sector Median 75th %- ile (Upper Quartile) Ministries position salary as % private sector median HOD % Director DIR % A similar survey in Romania found this same pattern of consistently declining competitiveness of public sector salaries as skill requirements rose. Entry level civil servants earned 59% of comparably skilled personnel in Romania s private sector, while high level managers earned only 19% of their private sector counterparts. This pattern was replicated in base pay, although in a slightly more attenuated form (base pay falls from 56% to 20% of private sector base pay for the same two types of positions). 41 Russia, on the other hand, provides an example of a slightly different pattern, but still one which fails to ensure consistency in the competitiveness of public sector remuneration. Table 3 reveals that in Russia, the least competitively paid positions (among those covered by the survey) are the upper level professional and middle level management cadres. In short, one can expect Russia s public administration to be plagued by a missing middle ; i.e., difficulty in attracting and retaining qualified staff is likely to be particularly acute among those upper level professionals and middle level managers. Table 3: Russia Public/Private Sector Salary Survey Results (2003) Benchmark Job Level Civil service (USD per month, gross) Russian Foreign Foreign Private Private Private Sector Sector Sector (Median) (Lower (Median) Civil Service as % of private sector median in: Russian Foreign Quartile) owned owned Deputy Minister 985 3,442 4,817 5,816 29% 17% Head of Department 721 2,200 2,984 3,642 33% 20% Head of Section 302 1,555 2,003 2,793 19% 11% Chief Specialist 165 1,070 1,592 1,941 15% 9% Leading Specialist After 1-2 years ,242 24% 12% 41 Hay Group, Consulting Services for a Comprehensive Private/Public Survey in the Romanian Civil Service (April 7, 2006), p. 61.