A Prescription Rejected: Market Solutions to Problems of Public Sector Governance

PETER MUNK CHRISTIANSEN* The New Public Management includes the idea of incorporating market mechanisms in public sector governance. In the Danish case, market reforms have scarcely been used; private sector supplies of public services have not increased during the last decade. The lack of success of market reform in Denmark is explained by the strong institutions of traditional public sector governance operating at the micro-level. Formal and informal hierarchy and formal and informal corporatism hold a strong grip on public sector governance. The very decentralized structure of the Danish public sector decreases the importance of central government in terms of reform strategies. Strong interests and institutional constraints keep reforms in the Danish public sector within a hierarchical mode of governance. During the 1980s, all Western countries experienced a wave of public sector reforms. The headlines and ideological bases were strikingly similar in most countries, but reforms were not the result of a grand design (Aucoin 1991; Metcalfe 1993; Rouban 1993; 1993a; Pierre 1993). Although reforms were pursued with varying enthusiasm under different conditions and with different results, it has become common to talk about The New Public Management as a collection of ideas and practices that emphasize competition between service providers, a new mix of state and market under the provision of collectively financed services, decentralization, freedom of choice for citizens, and more responsive management, just to mention some of the more prominent keywords (Hood 1991b). The ConservativeLiberal cabinet that came to power in Denmark in 1982 marked a political and ideological break with the impressive public sector growth over the previous two decades. During the 1980s, successive minority cabinets, all led by Conservative PM Poul Schlter, stayed politically committed to reducing the tax burden and to modernizing the public sector according to the so-called Modernization Plan of 1983 (Ministry of Finance 1983) and its successors. The plan primarily paraphrased elements of reform from the New Public Management wave, i.e. devolution of budgets, governance by the market, free choice for consumers, changes in the financing of public services, increased responsiveness towards consumers, deregulation, better management,

*University of Aarhus, Denmark Governance: An International Journal of Policy and Administration, Vol. 11, No. 3, July 1998 (pp. 273295). 1998 Blackwell Publishers, 350 Main St., Malden MA 02148, USA, and 108 Cowley Road, Oxford, OX4 1JF, UK. ISSN 0952-1895

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and new technology. During the 1980s, local and regional governments, which control about two-thirds of Danish public consumption, also adopted a range of reform ideas consistent with the ideology of the New Public Management. In 1993, a Social Democrat-led majority cabinet came to power. The ideological wrapping has changed, but so far the main elements of the reform strategy of the previous cabinets have not. It is almost a truism to say that public sector reform is a risky and failure-prone endeavor. The interesting research objective is to link the institutional set-up with the content and consequences of reform. The distribution of resources, powers, and available strategies between users, producers, bureaucrats, and politicians systematically affects the course of action in public sector reforms. This article takes its point of departure in a framework of analysis of the distribution of powers in traditional public sector governance and shows that in the Danish case strong and enduring micro-level institutions keep the vast majority of collectively financed public services production within a hierarchical mode of governance. Despite a broadly accepted reform rhetoric, public sector reform in Denmark is more a history of continuity than of breaks. This article assesses reform strategies of the last decade with respect to their effectiveness in combatting problems of public sector governance with special emphasis on the use of market mechanisms. It shows that the lack of success in introducing market mechanisms is due to the distribution of power imbedded in the hierarchical structure of governance. This article does not include reforms of public companies such as railways, telecommunications, and postal services.1 The article first introduces some of the core institutional constraints on the choice of public sector reforms. It then provides an outline of some major problems in public sector governance and the policy responses to these problems within the last 1015 years. The capacity to manage overall public expenditures has been somewhat improved, but the capacity to affect public sector efficiency has not really increased. The third section assesses the introduction of market reforms, mainly those aiming at privatizing the producers role. It shows that nothing has really happened despite political rhetoric in favor of contracting out. The last section on the politics of using the market shows how the strong institutions of formal and informal hierarchy and formal and informal corporatism have systematically favored hierarchical modes of governance. The article thus argues that institutions at the micro-level are of decisive importance when reforms in public sector governance are introduced and implemented.
THE INSTITUTIONS OF HIERARCHICAL GOVERNANCE

Based on recent rational institutionalist theory, the following briefly sketches the elements of a model that points to some core traits of hierarchical governance. The model helps predict the outcomes of public sector reforms.

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Recent institutionalist theory is based on two fundamental claims. Individuals are primarily self-interested and rationalalthough limited by cognitive capacity and uncertainty. The demands on rationality need not be very restrictive. In Ostroms words, we need only assume that actors . . . compare expected benefits and costs of action prior to adopting strategies for action (1991, 243). It more or less follows from the assumption of self-interests that individuals are also opportunists. In Williamsons words, they are . . . self-interest seeking with guile . . . (1985, 47). Individuals are constrained by institutions which are formal and informal as well as rules and norms that guide individual behavior by prescriptions and incentives. As a consequence, institutions provide individuals stability and predictability with regard to social behavior (Ostrom 1986; 1990; 1991; Shepsle 1989; North 1990). At the same time, institutions reflect the power of the actors who established them. Institutions are established to satisfy individual needs, not social well-being (Knight 1992, passim; North 1990, 48; Geddes 1995). Thus, institutions are biased in favor of some actors and in disfavor of others. Institutions are also objects of strategic action from individuals in pursuit of distributive advantages (Knight 1992). Powerful actors may take advantage of a situation to change institutions in their own favorif the payoff is positive. Traditional public sector governance is said to be structured by four types of institutions: formal and informal political and bureaucratic governance, referred to as formal and informal hierarchy and formal and informal corporatism.2 Formal hierarchy is the conditio sine qua non of public sector governance. It is also the archetypal mode of traditional public sector governance (Walsh 1995, 12). Hierarchy is a perfect institution for maintaining political control over bureaucracy, for securing bureaucratic responsiveness and accountability vis--vis the political principal, and for making decisions that are transparent and predictable vis--vis the citizens. In this ideal world of perfect parliamentary governance (Olsen 1978, 22ff), politicians have unlimited powerthrough the budget and the authority to issue general rules and concrete ordersto command bureaucrats and public service producers. The distribution of power embedded in hierarchical governance fully suits democratic ideology. In the real world, political principals confront a number of serious problems. Viewed through the glasses of economic organization theory, the basic question is how the principal can assure that the agent will do his job efficiently and in accordance with politically set rules (Moe 1984, 756ff). The principal always confronts the risk of agent shirking. Rational, maximizing agents may exploit the free zones of control to do their jobs in other ways than demanded by the principals (Moe 1984; 1989; Williamson 1985; North 1990, 32). Even without other institutional constraints, political principals would confront serious control problems vis--vis public sector agents in a pure, hierarchical structure of governance.

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Organization theory on the principalagent relation assumes that the principal wants the agent to do a job as efficiently as possible (Moe 1984; Williamson 1975), i.e., at the lowest possible costs given a defined quality. That may be a fruitful analytical point of departure in some cases. If related to public sector governance, the preferences of the political principal may be much more complex. Politicians want to be reelected, to be visible, to increase personal status and power, to realize their party program, to have peace and order, etc. All of these preferences may be in accordance with the wish to provide citizens with the best and cheapest public services. However, they may also contradict the pursuit of economic efficiency. Although it is impossible to summarize the preferences of politicians in one single set of well-ordered preferences, it may be analytically useful to assume that politicians maximize control and authority (J. Christensen 1996; Nrgaard 1997). These preferences can be satisfied not only through the institution of formal hierarchy but also through the institution of informal hierarchy. Traditional hierarchical governance implies a top-down chain of command. The institution of informal hierarchy to some extent reverses the institution of formal hierarchy. In traditional public sector governance, service-producing organizations are hierarchically integrated with the political and administrative levels. This gives individuals and groups that represent public service producers easy access to politicians and bureaucrats in order to create, maintain, or increase distributive advantages or to avoid deterioration of existing arrangements. The lack of separation between demander and provider makes the provider the holder of possibilities of political and administrative intervention that are not available or at least significantly less available in a contractual mode of governance. At the same time, informal hierarchy gives politicians the opportunity to intervene in large and small matters as part of their strategy to maximize control and authority. The institution of informal hierarchy thus transforms hierarchical relations into governance relations based on power, bargaining relations, and coalition building between public service providers and politicians. Even if politicians were only constrained by the institutions of formal and informal hierarchy they would have a big job to do. The governance of public service production is further complicated by two additional and related institutions. One is the institution of formal corporatism. Formal corporatism adds unions and union representatives to the set of actors occupied with public sector governance. The core role played by unions within the institution of formal corporatism is collective bargaining which produces authoritative decisions that are highly relevant for public sector governance (Chubb and Moe 1990; J.G. Christensen 1994). For example, collective agreements regulate working hours, wages, the rights and duties of employers and employees and the procedures of conflict settlement.

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Closely related to formal corporatism is informal corporatism which structures the involvement of unions and union representatives in strategic as well as day-to-day matters. Typically, informal corporatism prescribes managers to involve union representatives, also when it is not formally required (J.G. Christensen 1994). Seen from the standpoint of politicians and bureaucrats, managers may involve themselves in very strong coalitions with public sector employees in the pursuit of distributive advantages. Contrary to Dunleavys bureau shaping theory (1991, 174), in which rational managers only face weak constraints from within the delivering bureau, strong informal corporatist institutions may put very strong constraints on bureau leaders and thus subsequently on politicians and bureaucrats. Since the competitiveness of the individual production units is never tested in a competitive environment, unions and employees may develop a very strong grip on management. The institution of informal corporatism is related to the institution of informal hierarchy. Informal contacts with politicians, parties, and bureaucrats enable unions and public sector employees to build coalitions with important political-bureaucratic actors. By definition, the introduction of markets into public sector governance breaks the institution of hierarchical governance. Hierarchy is replaced by contract (Williamson 1975; 1985; Walsh 1995). In collectively financed service provision, the political principal still has to define the services demanded in terms of kind, quantity, and quality. However, when the contract has been entered, the only political administrative task remaining is surveillance and control of contracts. As long as the delivering agent sticks to the contract, hierarchical powers cannot intervene in operational matters. A major benefit seen from the viewpoint of the political principal is that contractual governance, when true competition is present, reduces the problem of slack. Additionally, the political level is relieved of a number of operational questions to be politicized. As a consequence, the institution of informal hierarchy is also significantly weakened in contractual arrangements. Seen from the viewpoint of the delivering organization, contractual governance has significant impacts on formal and informal corporatism. If monopoly is part of the strength of unions and employees through formal and informal corporatist institutions in traditional public sector organizations, the exposure to competitive pressures will reduce, but not abolish, the strength of unions and employees. Particularly, it will be much more difficult to accumulate slack in the same way as organizations in non-competitive environments. As competitive pressures are supposed to strengthen management of the delivering institution, informal corporatism as a means of enhancing the interests of unions and employees is also weakened. In sum, the institutions of traditional public sector governance make the suppliers of public services very powerful. The monopoly position (Le Grand 1987; Kristensen 1987b) of the supplier and the integration of demander and supplier (Walsh 1995; Savas 1982) through formal and

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informal hierarchy strongly reduce the chances that reforms that are not in accordance with the interests of suppliers will succeed. Even if politicians are not powerless (Miller and Moe 1983), formal hierarchical governance is easily undermined by the institutions of informal hierarchy and formal and informal corporatism. The power to command, monitor, and control is transformed into bargaining relations, and consequently the suppliers of public services have a firm grip on the ways and means of public service provision and thus also on how reforms are formulated and carried through. The introduction of market mechanisms, when successful, breaks with some of the core institutions of hierarchical governance. Since institutions somehow reflect the power of the actors who established them, significant institutional changes must depend on a relative change of power between powerful actors or on a changing outcome of institutions which no longer satisfy the interests of dominant actors (Knight 1992, 145, 183). The institutional approach outlined above can be applied at any level of government. In all Western countries government is to some extent divided between a central and a regional and/or local level. The institutions governing centrallocal relations are important for the chances of success when central government imposes reforms at the local and regional levels. If local and regional self-governance is strong, for instance as measured by the functions of local and regional government, and the discretion in performing these functions (Page 1991, 13), the potential of central government to impose specific reforms on local and regional governments is reduced. As a consequence, we must expect to find greater variation in the structure of public sector organizations between different local governments. If local and regional self-governance is weak, the chance of success of centrally set reforms increases. Nevertheless, the institutions that operate at the micro-level may be significantly more important in predicting the success of reforms compared to macro-level institutions.
PROBLEMS OF PUBLIC SECTOR MANAGEMENT

In general, the history of Danish public expenditure growth is not different from that of other Northern European countries, except that the Danes seem to be extreme. As late as 1960, the Danish public sector, measured by public expenditure as a percentage of GDP, was well below the average of the OECD countries, but growth was tremendous in the following two decades. From a position below average in 1960 (24.8% of GDP), public expenditure in Denmark, Holland, and Sweden began to depart from that of the rest of the OECD by the mid-1970s. By 1980 (Denmark: 56.9% of GDP), the three countries had established public expenditure levels significantly above the OECD average (Andersen and Christiansen 1991, 28). Ten years later, these differences remain, although some of the other Northern European countries are catching up with the three leaders.

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It is no wonder that by the end of the 1970s, the size of public expenditure and the tax burden was subject to serious political concern and reform in all Western countries (Aucoin 1991; Hood 1991a). In Denmark, the concern for public spending and the tax burden grew as the pressure on Danish public spending became immense during the second half of the 1970s. From 1979 through 1982, public budgets more or less went out of control, along with severe structural problems related to the balance of payments, unemployment, and inflation. In 1982, the public deficit was close to 10% of GDP. In other words, the stage was set for the ConservativeLiberal cabinet coming to power in 1982. The reduction of expenses and taxes alongside with a modernization of the public sector were among the major goals of the new cabinet. The following briefly reviews reform measures and their effects on three problems of public sector governance: the management of the overall level of public spending, the management of budgetary allocations, and the management of efficiency in public service production. A major state budgeting reform was carried through in 1984. The reform was in line with the development of Danish state budgeting since the 1960s, based on budgetary frameworks, but the means to control overall spending were tougher. Frameworks were introduced to cover all public expendituresearlier they had only covered operational expenditures and investments. Total state expenditures were to be kept within a limit set by the 1984 level, so that future spending could not exceed the 1984 level in fixed DKK, except for expenditures caused by the economic cycle. Each minister was to keep net spending within centrally set limits (Christensen 1992). Local government was to operate under the same overall restrictions, supported by annual agreements between the state and the National Association of Local Authorities and the Association of Counties. However, with two thirds of all consumption expenditure spent by local and regional governments, coordination of overall spending is an important part of central-local relations. Looking at the overall composition of public expenditures in Table 1, it is surprising that consumption expenditures were kept at an almost zero growth level from 1986 through 1992. That is in itself an impressive result, keeping in mind that public choice theories of public expenditures emphasize the strong supply-side pressure connected with consumption expenditures (Kristensen 1980). The problems of managing total public spending in the 1980s were clearly connected with transfers and with interests paid on mainly state debt. The reform was successful with respect to reducing the growth rate of public expenditures compared to the growth rate in the previous decade. However, as shown in Table 1, public expenditures began to grow rapidly after 1986. The reason was partly the long economic recession from 1987 and onwards and partly that the weak ConservativeLiberal cabinets could not withstand the pressure from the opposition. The budgetary system was simply not strong enough to keep down demands on

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Table 1 EXPENDITURE OF GENERAL GOVERNMENT1 IN DENMARK 19801992, INDEX IN FIXED PRICES (1980 = 100), PERCENT OF GDP AT FACTOR PRICES AND BILLION DKK IN CURRENT PRICES 1980 Consumption expenditure Transfers, excl. interest Interest Total Billion DKK in current prices Total as percent of GDP at factor prices Consumption in percent of total expenditure 100 100 100 100 195.4 1982 106 109 153 111 267.0 1984 105 112 262 120 326.3 1986 109 113 262 122 356.1 1988 112 127 239 128 414.9 1990 110 134 229 129 454.0 1992 112 147 219 135 500.9 1994 116 1702 239 148 567.4 71.32

61.8

67.2

68.4

64.4

68.1

65.8

66.7

51

49

44

44

45

44

43

42

1. Excluding capital outlays. 2. In 1994, almost all non-taxable income transfers to households were made taxable. Transfers were increased in order to have a neutral effect on the net income of the receiver. The net effect on public transfers was a DKK 19 billion increase. Without this increase, total public expenditures as percent of GDP at factor prices would have been only 68.0. Source: Statistisk Tirsoversigt, 1990, Statistiske Efterretninger. Nationalregnskab, offentlige finanser og betalingsbalance, 1994, 1; 1995, 22.

expenditure (Christensen 1992; Christiansen 1990). Despite a heavy political interest in keeping total expenditure and the tax burden down, public expenditure grew by one-third in fixed prices during the 1980s. Between 1984 and 1992, the years in which the cabinets stuck to the principle of zero growth, total spending went up by 14% in real terms. If management of total public expenditures was a relative success, it proved more difficult to pursue budgetary reallocations. The problem is basically the degree of immobilism in the budget and in the budgeting process (Caiden 1990). Politicians face a number of institutional constraints when they choose between different purposes or providers. Public sector organizations, and to a large extent also their customers, have strong incentives to abate any reduction of their budget. In the bilateral monopoly situation of traditional public sector governance, they also have good chances of success. The Danish welfare state is, like the Swedish, characterized by a very high level of public consumption. In 1993, consumption made up 33.6% of GDP at factor prices in Denmark, or 43% of all public expenditures, and 31.2% in Sweden. The level is significantly lower in other Northern

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European countries: consumption expenditures in Norway are 24.1%; Germany 20.5%; France 22.6%; and Great Britain 26.0% (OECD 1996).3 The Danish and Swedish deviation mainly stems from high levels of social services and education. On top of a comparatively high level of consumption expenditures, Denmark and Sweden tend to have a higher degree of self-sufficiency (OECD 1993), i.e. public services are produced with a relatively low level of acquisitions from the private sector. Two examples illustrate the problems of budgetary reallocations even when changes in demand are relatively clear. The number of children in public schools in Denmark fell from 722,500 in 1980 to 566,100 in 1990, a drop of 22%. During the same period, the number of students in higher education organizations increased by 20%. However, the relative distribution of expenditure in the education sector only changed incrementally. During most of the 1980s, productivity in primary schools dropped significantly. Despite an improvement in the ability of local authorities to adjust resources to the number of pupils during the late 1980s, adjustments of resources were significantly less than proportional to the drop in the number of school children (Andersen and Christiansen 1991, 123ff.). Another example is psychiatric hospitals. From 1976 through 1990, the number of beds in psychiatric hospitals was reduced by 40%. A similar trend is found in many other OECD countries, based on the idea that some psychiatric patients might better be treated outside the hospitals. The reduction in the number of beds was followed by growth in a number of other services and treatment facilities. The budgetary precondition was that the change in psychiatric services should be kept within the limits set by the original budgets; no extra resources could be allocated to the psychiatric system. Things did not turn out that way. Money did not follow changing priorities. Contrary to popular belief, resources in the psychiatric hospitals grew by 7% in fixed prices from 1976 through 1990. In the same period, total resources for psychiatric treatment grew by 46% in fixed prices (Andersen and Christiansen 1991, 120). Attempts to change the order of priorities are met by strong opposition from those who are negatively affected by such changes. Due to the asymmetrical distribution of incentives in those situations, the chance of success in the pursuit of a cutters strategy is low except for situations with high fiscal scarcity. The explanatory power of the asymmetrical distribution of inducements and power in the budgetary process is particularly prominent in the case of proposals for budget reductions (Christiansen 1990). In sum, with the possible exception of serious budgetary constraints, Danish public expenditures are generally relatively immune to changes from the demand side. Problems are even bigger when it comes to affecting the internal production process in terms of quality and efficiency of traditional public sector production. Efforts aimed at affecting the efficiency of collectively financed and hierarchically controlled service production are constrained by the very core institutional characteristics of exactly that type of

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production. Hierarchically organized service production is never tested by market conditions. The lack of possibilities to test efficiency increases the problem of information asymmetry involved in any principal-agent relation. As well, the institutions of informal hierarchy and informal corporatism increase the possibilities of effectively combating or at least reducing the effects of efficiency enhancing reforms. The major approach to reforms at the level of the individual organization in Denmark has been the introduction of devolving budgets (Christensen 1992; Christiansen 1996). At the state level, the reform was carried through in the years following the 1984 budgetary reform. Municipalities and counties in practice introduced the same overall type of budgetary system, although they are not constrained by state regulations in their choice of governance system vis--vis the individual production unit. Devolution of budgets increases the degrees of freedom at the managerial level. Budgets are less detailed, and managers in most cases have the option to transfer items within the budget and to transfer surpluses and deficits to the next budget year. In some sectors, other measures were added to the devolution of budgets. In higher education, appropriations have gradually become closely related to the number of students who complete a year of studyin some areas also with a free choice of enrollment in order to approach a quasi-market mode of governance (Bartlett 1993). In nurseries, kindergartens, and primary and secondary schools, the devolution of budgets has been followed by the introduction of boards for each unit of production, in most cases with a majority of users (parents) and with varying competences. Even if it is a reasonable idea that money is spent more efficiently by actors who are professionally involved in service production than by distant politicians and bureaucrats, devolution of budgets has had no or only modest effects in terms of significantly affecting efficiency. The introduction of devolved budgets does not present any strong inducements to produce cheaper or better. Budgetary frames are most often based on existing appropriations, so that productivity basically remains the same as before the introduction of devolving budgets. Budgetary frames are further weakened by the possibilities of getting further appropriations, by keeping the budget but lowering output, etc. (Christensen 1992). The devolution of budgets does have major advantages: when managed with firmness, budgetary frames reduce uncertainty at the political level with respect to unpleasant budgetary developments in the finance year. When frames are further related to output, the problem of adapting the budget to lower levels of output is eased if service producers are not successful in bargaining for further appropriations. It has consistently been part of the rhetoric that devolution of budgets should be followed by specific targets. Governance through targets and frames was the catchword for many years (Ministry of Finance 1983; 1993). The idea of setting goals which could be seen as a quid pro quo deal in exchange for increased degrees of freedom has proved extremely

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vulnerable as a measure of affecting the quality and quantity of production. Many or most public organizations have many and vague goals (Walsh 1995) which can only rarely be the basis of constructing and using prescriptive targets (Christiansen 1996). Although productivity in public service provision has changed during the last 15 years, there is no overall indication that productivity has increased. In 1993 the National Audit Department evaluated the Modernization Program mentioned above. As regards economic management, the conclusion was that the program itself did not promote changes in economic management. In 1988-89, an annual 2.5% reduction in state budgets from 1988/1989 and onwards was implemented (Rigsrevisionen 1993). In sum, major Danish public sector reforms have stayed within the traditional governance structure of hierarchy. Reforms have primarily focused on low-powered incentives (Williamson 1985, 131). Some but not many results have been reached in terms of managing overall spending, but in terms of allocation of resources and in terms of efficiency, results have been modest.
USING THE MARKET IN MANAGING THE PUBLIC SECTOR

If traditional hierarchical reforms primarily imply low-powered incentives, market governance reforms rely on high-powered incentives (Williamson 1985, 131). According to the reform literature of the last decade or more, the major advantage of the market is its effects on allocatory and X-efficiency through the introduction of competitive pressures on monopoly producers (Walsh 1995; Kettl 1993; Chubb and Moe 1990). Competition squeezes slack out of slacky organizations. Markets or semi-markets may be introduced on the demand side through the free choice of consumers, or on the supply-side through the introduction of competition, or in a combination of the two. Here, we restrict the object to competition on the supply side. The focus on supply side competition has at least one important advantage: privatization of the producers role does not affect distributive considerations related to the consumers (since services are still tax financed) or community considerations, as might be the case following a voucher system (Hirschman 1970, 101; Bartlett 1993). In some cases, hierarchical governance is more efficient than a contractual arrangement due to high transaction costs of contracts. In the case of services produced with a low frequency of transactions and with a high degree of specificity, Williamson (1975; 1985) expects the rational principal to prefer a hierarchical arrangement. Another problem is that when the goods demanded are suited for a contractual arrangement, imperfect competition can be a serious impediment to realizing the benefits of contracts (Kettl 1993). As shown by Milne (1993), it takes time for markets to

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develop in response to increased public sector outsourcing. Exploitation of market forces presupposes that market forces are actually at work. Contracts are not free. Contractual arrangements imply ex ante costs of drafting, negotiating, and safeguarding as well as ex post costs related to things that went wrong in the contractual relationship (Williamson 1985, 2022). Another problem is that contractual institutions may have unintended effects. In the real world, some actors, the losers will build in impediments to the smooth functioning of market governance (Moe 1989). Thus, the traditional skepticism towards promises of reorganization should also be alert in relation to the use of market solutions (Meier 1980; March and Olsen 1984). Even with all these reservations, there is hardly any doubt that a wellplanned and intelligent use of different types of market mechanisms might contribute to a more correct price/quality ratio and to easing the political level from some of the constraints following the tight relations between the political and the operational levels in the traditional public sector model. Put bluntly, the use of market mechanisms will potentially increase the power of the political level vis--vis the producers. Experience shows that in general, but not always, significant cost reductions will follow the introduction of contractual relations (Stein 1990; Walsh 1995, 222; Domberger and Hall 1996; Ministry of Finance 1991a). Most of the empirical evidence concerns relatively simple services for which markets are well established. Even in the case of social services, such as elder care, Swedish experiences show significant cost reductions coupled with a marked increase in quality (Bengtsson and Rnnow 1996). Private producers have been used in the provision of welfare services for many years: a little more than 10% of all Danish school children at the primary level attend private schools.4 The primary level of the health system general as well as specialized practitionersis private, but almost 100% is publicly financed, whereas the secondary level is almost exclusively public. In social services, a number of specialized organizations are private, working under a contract with municipalities or counties such as fire and ambulance services, construction works, a number of cultural organizations and, of course, a number of supporting services such as cleaning, building maintenance, and computer services. In many cases private producers are not exposed to competitive pressures. In the case of private providers in education, health, social services, and fire and ambulance services, price, quality, and quantities are set by negotiations. The reason for choosing private producers is found in specific historical circumstances and the path dependence of institutions rather than in the wish to comply with the prescription of competition. For instance, fire protection and water purifying plants are both technical tasks with a marked political attention (at least when things go wrong). The first service is, in the Danish case, mainly run by one private firm, the second almost exclusively by the municipalities. The explanation of the

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different ways of organizing the two tasks might be that they were started at different times when different institutional forces were at work: fire protection in a period with a small public sector, and water purifying plants in a period with an immense public sector growth. In the case of technical services, cleaning, building maintenance, and construction, there is some tradition of contracting out. Increased use of market mechanisms was part of the program of ConservativeLiberal cabinets from 1982 until 1993, although with varying degrees of clearness and firmness. Perhaps because the general ideas were vague and hard to oppose, the Modernization Plan of 1983 received sympathetic attention with regard to the general idea of modernization, but the parts on privatization and outsourcing were met with hard attacks from the opposition.5 The idea of market orientation was revitalized again by the end of the 1980s (Ministry of Finance 1991a). At the same time, the level of politicization in using the market in the management of public services had seemingly decreased. The principle of best and cheapest was endorsed by the National Association of Local Authorities. Even the opposition in Parliament approved the strategy in principle. The new majority cabinet that came to power in 1993, led by the Social Democrats, adopted the strategies of the previous cabinet, at least in rhetoric (Ministry of Finance 1993), although less emphasized and, seemingly, not seriously pursued. Using the market to supply collectively financed services is nevertheless highly controversial. The empirical evidence on the use of private suppliers under competitive forces is not optimal. The best clue is given in Table 2 which covers public sector acquisitions of services and construction irrespective of the institutional arrangement. Table 2 thus includes non-competitive procurement. Despite these deficiencies, there are good reasons to assume that the development over time is fully comparable. Despite the widely accepted rhetoric on the use of the market, outsourcing, etc., nothing has actually happened since the mid-1980s. The acquisition of private deliveries by municipalities and counties fell slightly from the mid-1980s and rose again to the level of that of a decade ago (fully comparable data for the whole period is not available for state expenditure). In construction, private procurement has been high for the whole period with some increase late in the period. A special survey on cleaning shows that even in this simple service for which market competition is high, the use of private firms has not increased in the last 20 years (Offentlig & Privat 1995). A recent survey on new cases of public sector outsourcing shows that from January 1994 through June 1996, only 39 cases were found in all 275 municipalities and 14 counties. The total value of these contracts was DKK 300 million or 0.15% of total operating costs of municipalities and counties (PLS-Consult 1997). With regard to acquisitions from state organizations, it is not possible to compare the development before and after 1990. Some increase in private sector acquisitions may have occurred.

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Table 2 ACQUISITIONS OF SERVICES AND CONSTRUCTION FROM THE PRIVATE SECTOR AS A PERCENTAGE OF PUBLIC SECTOR OPERATING COSTS AND CONSTRUCTION COSTS, 19851990 1985 Services State Counties Municipalities Total public sector Construction State Counties Municipalities Total public sector 1988 1990 1992 1994 1995

11.0 7.2 11.1 10.3

percent of operating costs 11.9 12.4 15.71 16.91 5.9 6.5 6.6 7.3 9.6 9.3 9.7 10.7 9.5 9.6 11.51 12.71 percent of operating costs 94.7 96.6 n.a. n.a. 66.7 75.4 76.7 78.6 75.2 76.8 76.8 77.0 79.6 83.8 n.a. n.a.

n.a. 7.2 10.9 n.a.

96.2 72.2 75.3 83.9

n.a. 76.8 79.4 n.a.

1. Cannot be compared with the previous period due to changes in statistical accounting. Sources: Ministry of Finance 1991b; Ministry of Finance and Ministry of the Interior 1995; Statistiske efterretninger 1993, 11; 1995, 13; 1996, 13.

In sum, the level of competition in the provision of public services is low, and nothingor very littlehas happened over the last decade, when competition became part of the official reform ideology. The finding of lack of competition in the Danish public sector corresponds to other findings on Denmark (Schwartz 1994).
THE POLITICS OF USING THE MARKET

Managerial questions of public organization have seldom been high politics in Denmark. The devolution of budgets pursued during the last 10-12 years was never widely discussed. However, the introduction of market mechanisms is typically controversial and highly politicized. Non-hierarchical means of governance fundamentally challenge the institutions of hierarchical governance. Since we expect institutions in one way or another to reflect the powers of the actors who established them, we have to look carefully at how the interests of powerful actors are affected through non-hierarchical structures of governance. The interests affected are roughly outlined in Table 3. The supply-side market models suggest a potential conflict between public producers and the taxpayers,6 whereas demand-side models, included for the sake of completeness, expose potential conflicts between users and taxpayers on one side and producers on the other. As producers have strong vested

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Table 3 BENEFITS/WINNERS AND COSTS/LOSERS BY TYPE OF MARKET MECHANISM Organizational model Benefits/Winners Costs/Losers More competition between producers/present producers

Supply-side market: Out- More efficient producsourcing and internal ers/taxpayers contracts

Strengthening of manage- Reduced political influment at operational ence to trade unions/trade level/management unions Increased markets for pri- Fewer public sector vate firms/private firms employees/present employees Reduced political overload/politicians Demand-side market: Free choice, vouchers More influence to users/ users Quality exposed/users Less operational influence to politicians/politicians Less influence to politicians/politicians Increased competition between producers/producers up till now

Source: Elaborated from Kristensen (1987a)

interests in existing structures, they will combat the introduction of contractual governance. Due to the asymmetrical nature of public spending decisions, producers have strong incentives and often strong positions to be successful when core interests are challenged. The strategy of opposition is often a combination of denying that a productivity problem exists, involvement of the press, parties, and politicians in campaigns against the proposed measure, and, as a possible last resort strategy, strikes. Just to take one example: a proposed outsourcing of part of the cleaning service at the National Hospital in Copenhagen7 (Rigshospitalet) became a national issue. In 1990, two small contracts were outsourced. When it became clear that the management would give the contract to a private firm, a three-week strike, including the cleaning personnel as well as other groups at the hospital, broke out. At one point, 900 persons were involved in the strike. In 1992, a large assignment was contracted out. That contract was also lost by the in-house producers. A strike was started but quickly abandoned and transformed into other actions, of which a dramatic increase in sick days was the most visible. According to P. Christensen (1994), the powerful, but in the end fruitless, opposition to the contracts was due to heavy support from other groups at the hospital who were afraid that more tasks would be outsourced. It should be added that at other hospitals, cleaning had been contracted out for decades. These

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examples show that outsourcing is controversial, but can be pursued successfully in some cases. Such cases, however, also signal to politicians that one of their preferences may be violated through outsourcing; the political preference for peace and order is challenged when contractual governance is introduced. The literature on the politics of privatization of the producers role traditionally emphasizes the potential costs for the direct producers (Kristensen 1980). Table 3 points to two more core actors that are affected by shifts in governance structures. Trade unions are negatively affected by contractual arrangements. Competitive pressures increase managerial power. Increased hierarchical power at the delivery level will most often be at the expense of trade union power. The institution of informal corporatism is threatened in contractual governance. Formal corporatism is not challenged to the same degree. Even more negatively affected by contractual governance is the possibility of unions of pursuing distributive advantages through the institution of informal hierarchy. In a contractual arrangement it is much more difficult to make informal contacts with political and administrative actors in a legitimate way. To the extent that informal hierarchy has been part of a strategy for unions to protect their interests, this strategy is severely constrained by contractual governance. Danish public sector unions are very strong. Although there is some uncertainty about the number, it can be assumed that around 90% of all public sector employees are members of a union (Due et al. 1994). The relations between unions and public sector employers are characterized by a high degree of formalization and institutionalization. Union representatives have a strong formal and informal position at the level of the individual producing organization. The preference for consensual decision-making is part of the strength of public sector unions in the governance of the public sector. In the traditional integrated model, formal as well as informal corporatism is very strong. On top of protecting the interests of their members, trade unions have their own institutional interests to pursue. Control and authority maximizing union leaders have a lot to lose from having more or less cut off the institution of informal corporatism. The second group of actors that are affected strongly by the shift from hierarchical to contractual governance is the politicians. Table 3 shows politicians as both winners and losers. As argued above, politicians have a plurality of preferences. All things being equal, they must be presumed to prefer service deliverance at the lowest possible costs, which means that they act as principals in economic organization theory. Maximizing this preference would make them prefer contractual governance if contracts could be argued to minimize the sum of production and transaction costs. Competitive contracting would help politicians overcome part of the control problem inherited in hierarchical governance, and it would reduce the potential overload at the political level following hierarchical organization of service production. Separating the political and the operational

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level would enable cognitively limited politicians to devote more interest to overall policy questions. However, as argued above, politicians are also assumed to maximize control and authority. Control and authority maximizers may not prefer contractual governance since it denies them some possibilities of intervention through formal as well as informal hierarchy. Furthermore, to the extent that the pursuit of contractual governance implies an increased level of conflict, the balance is tipped in favor of hierarchical governance. Altogether, the preference for control and authority and for peace and order seems to outweigh the preference for cost minimization. On several occasions politicians, independent of party affiliation, seemed to prefer hierarchical organization to contract relations. Politicians prefer to include the many nitty-gritty questions of operational matters in their job. Add to this the political costs of transforming management from hierarchy to contracts. A survey on outsourcing in which city directors were asked what kind of barriers they had experienced in using contracts supports the strong emphasis put on the maximization of control and authority. Of 17 barriers, the one most often mentioned (by 45%) was that the city council had decided the task in question should be produced by its own employees (PLSConsult 1992). The politics of using the market under the provision of collectively financed services is characterized by producer groups with strong incentives to combat the use of the market; politicians whose preferences toward the use of outsourcing are ambiguous but altogether in favor of hierarchical governance and users and taxpayers with only indirect influence. This constellation of interests, powers, and conflicts is not in principle different in Denmark and other countries with a large public sector, but, as mentioned in the introductory section, the introduction of market mechanisms seems to be less successful in Denmark compared with a number of otherwise similar countries. Against this background, it is of interest to pick up more systematic explanations of success or failure in the Danish case.
EXPLAINING THE LACK OF SUCCESS IN USING THE MARKET

The model outlined above stresses the importance of institutions at the micro level: the success of reforms depend mainly on the institutions management, formal and informal hierarchy and formal and informal corporatism, which allocates positions of power to different actors at the delivery level of the public sector. This does not mean that other types of variables are unimportant in explaining the outcome of public sector reforms. In order to validate the importance of institutions at the microlevel, the following discusses some of the possible macro-explanations for the lack of success in increasing the use of contractual arrangements in public sector governance. One important macro-explanation may be the strength and preferences of the government. Metcalfe (1993) points to the parliamentary

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strength of the Conservative Party as one precondition for the success of British cabinets in the pursuit of reforms during the Thatcher period. For the last two decades, Danish cabinets have generally been weak and without a stable majority in Parliament. They have been based on the consent of the small center parties, so engaging in controversial reforms was dangerous for the life of the successive cabinets. The Social Democratic Party has always been hesitant toward or directly against the use of outsourcing and other tough reform measures. The resistance is even more pronounced by parties to the left of the Social Democratic Party. The parties in favor of outsourcing have traditionally been the Liberal and Conservative parties. However, as shown in Table 2, the effects of the LiberalConservative coalition governments from 1982 through 1993 on the level of acquisitions from the private sector are barely recognizable at the state level. However, in the Danish public sector the strength of the cabinet is of relatively modest importance in terms of affecting public sector organization. As mentioned, about two-thirds of public consumption is produced at regional and local levels. In most areas, state regulation of service supplies does not interfere with the organization of service production, at least not when it comes to the question of public versus private producers or competition between public producers. Any attempt to regulate, for instance, the use of contracts with private firms at the local level would have challenged the important but vaguely formulated principle of local self-governance, and it would have increased the level of conflict in Parliament. This leaves us with the lions share of public services outside of the reach of the central level in terms of basic organization. With 275 municipalities and 14 counties, one would guess that the Danish public sector reveals a great variation in terms of organization. That is not so. Similarities in terms of the organization of service production across the boundaries of counties and municipalities are more striking than differences, although differences have increased during the last decade. In the majority of cases, traditional hierarchically organized public service production is the way of organizing service delivery. Two variables might influence the use of contracts. To what extent is the propensity to enter contractual governance explained by the preferences of the governing party? Christensen and Pallesen (1997) show that it cannot be sustained and there are systematic differences between the level of private sector acquisitions among municipalities governed by the Social Democratic Party and municipalities governed by the Liberal Party. This is in accordance with the general observation of Danish local and regional politics as not being dominated much by party politics. May the economic constraints on the relevant authority affect the propensity to pursue reforms involving contracting out? Mouritzen (1991) shows that in Danish local governments, power is shifted in favor of the political level as opposed to the delivering level when the level of fiscal

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stress increases. In order to cope with economic scarcity, it would be an economically feasible strategy to include contracting out among the set of measures considered by the municipal councils. The transforming mechanism would be that the governing majority in local and regional governments is punished by the voters in case of a bad or worsened municipal economy. However, there are many possible political responses to economic scarcity, including general and specific budgetary cuts. In a situation already characterized by stress and potential conflicts, politicians may have very good reasons not to increase the level of conflict by proposing controversial reforms. When, for one reason or another, politicians prefer to engage in outsourcing previously in-house produced services, they will do it in periods of economic prosperity in order to keep the level of conflict at a manageable level. These arguments leave us with two conflicting hypotheses. The fiscal stress thesis is based on the propensity to pursue an economic logic when put under fiscal stress. The prosperity thesis is based on the political logic that if controversial reforms should be pursued successfully, economic prosperity is a more feasible economic environment. There is no clear empirical evidence in favor of one of the hypotheses, but there are some indications. From 1987 through 1993, Danish local and regional governments at the aggregate level experienced quite strong fiscal pressures due to relatively tight economic regulation from the state (Blom-Hansen 1996) in combination with a long economic recession that squeezed the tax base of municipalities and counties. However, as seen from Table 2, at the aggregate level, economic stress had no impact on the propensity to engage in increased outsourcing. A Norwegian study shows that in the period 1992 through 1995, municipalities with good finances were significantly more willing to engage in contracting out compared to municipalities operating under fiscal stress (Hagen and Srensen 1998). It appears that it is easier to cope with the high political transaction costs associated with the introduction of non-hierarchical reforms in a period of prosperity compared to one of economic recession. The inability to explain the use of contractual regimes of governance supports the claim that the institutions of formal and informal hierarchy and formal and informal corporatism are in fact core institutions in explaining the course taken in and the effects of public sector reforms. On a number of points, the insiders of these institutionspoliticians, bureaucrats, service producers, and organized interestshave different preferences. However, it appears that an equilibrium is reached through traditional hierarchical governance, and it seems to be very stable. With the very strong corporatist institutions, formal and informal, of the Danish public sector, the political costs involved in path-breaking reform seem large. Not only in relation to market reform, but in general, it can be argued that the Danish, and with that, other Scandinavian, models are not conducive to changes and reforms (Christiansen 1995). Strong corporatist arrangements and a political culture that emphasizes negotiations and

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consensus leave market arrangements outside of what organizations, bureaucrats, and political leaders can agree on within the existing institutional arrangements.
CONCLUSION

The Danes should have learned at least one thing during the last decade: comprehensive reform of the public sector is a dubious affair. The talk about reforms has left the public with the impression that major reforms have been carried through, and of course some things have changed. However, within collectively financed public services, reforms have been kept within the traditional hierarchical organization of the Danish public sector. This means that the Danes are left with some of the problems that existed before reforms took off in the early 1980s. The major reform type, devolution of budgets, has increased the degrees of freedom at the production level, but has not made it easier to hold producers responsible for the output (Christiansen 1996). As a consequence, the possibilities of politicians to monitor and control efficiency at the level of service-delivering organizations have not increased. Contractual governance is a means to increase the efficiency of public service production, to have defined specifically the type, amount, and quality of services to be produced, and to be able to monitor and sanction possible contractual violations. Contractual governance is far from the optimal solution to all problems of public sector governance, but it nevertheless appears to have its strength when it is possible to define the service demanded and when there is a market for the relevant service. The lack of success in introducing contractual governance is not, or only to a limited extent, explained by institutional structures at the macro- level. The political preferences of cabinets and municipal and county councils appeared to make no significant difference in the propensity to outsource service tasks. It was argued that the most relevant institutional explanation should be found at the micro-level. There are hardly reasons to believe that the formal and informal institutions of hierarchy are very different in Denmark from many other Western countries in terms of the preferences and preferred strategies of politicians and top civil servants. However, the corporatist institutions at the micro-level are very strong in the Danish case. Very strong interests are imbedded in existing institutions. Since these institutions somehow reflect the power position of different actors, the outcome of institutional reform is to a large extent explained by the way reform proposals affect the costs and benefits of the dominating actors. As a consequence, solutions to problems of public sector governance as a consequence are almost exclusively found within the range of alternatives accepted by all the dominant actors.

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Notes
1. 2. 3. 4. 5. 6. Major reforms have been carried through in these areas mainly through the establishment of state-owned enterprises. Inspired by Christensen (1994) who does not distinguish between formal and informal hierarchy. One should be aware that direct comparisons between the levels of public consumption in different countries are biased by problems of comparison (see Andersen and Christiansen, 1991, 41ff.). It should be noted that private schools in Denmark are subsidized for 85% of their operating costs. For documentation of the privatization policy in the beginning of the 1980s, see Kristensen, 1988. The conflict between producers and taxpayers might not always be there. Stein (1990) shows that cost reduction is more a result of better management, changes in the working process, and new technologies than of reduced wages. If people are interested in working in more well-managed organizations, the individual might prefer a private to a public one. But that is hardly what people are thinking when they confront a demand for privatization. Danish hospitals are generally owned and operated by the counties, except for the Rigshospitalet (National Hospital) and other hospitals in the Copenhagen area which are run by a special authority composed of state as well as municipal representatives.

7.

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