ATTACHMENT A: SOME COMMENT ON THE PUBLIC SECTOR AND ON REFORM

Some published comments on Queensland's public sector are outlined below.

`Consultants ... (said) there were shortcomings in how public servants administered consultancies, their knowledge of what they were administering and the records they kept. ... Mr Peter Forster ... said redundancy schemes had rid the Government of its best and most confident staff' (Fagan D., 'Brain Drain led to Consultancy Blow-out', Australian, 30/11/93, p4).

`Undoubtedly everyone has heard of, if not seen the Mexican wave. Nowadays in Queensland we have the Mexican shrug. It is no longer a matter of putting things off until tomorrow. Anything complicated or requiring a decision is simply put off. Our 'Mexicans' shrug their shoulders and hope all problems will disappear' (Anon, Public Sector Voice, Nov 1993).

`... the main complaint is the perceived bumbling decision making processes of the state government, which results in costly compromises, very slow decisions, or a lack of decisions. This is seen to be fed by the bureaucracy which is not regarded as being of the same calibre as the public servants who held sway during the National Party years' (Coombes P., `A House on Easy Street', ABM, Sept 1994).

An academic study suggested that `whistleblowers' trying to expose problems were being attacked and harassed (King M., `Whistleblowers accuse Goss Public Service', Australian 31/3/94).

`A former senior Goss Government bureaucrat .. slammed the politicisation of the State's Public service and claimed some of its efficiency reforms were farcical'. (Emerson S., `Former Bureaucrat Slams Goss Reforms', Australian, 22/3/95, quoting Roger Scott ex Director General of Education).

Published comments concerning the `reform' process are outlined below.

Reform was conducted without benefit of: any vision of what the public service should be; any guiding philosophy behind the reform process; any blueprint for reform other than 1989 Labor policy; or any strategy for the process of reform. No data was made publicly available as reviews were secret. Anecdotes suggest widespread concern with: lack of philosophy and methodology for reviews; young or inexperienced staff in review teams; and PSMC's propensity to lose senior staff. There was considerable concern about; politicisation; 'mexicans'; staff members who never made it to the short list for their own jobs, because of perception of inability to adapt to the new ethos or perceived disloyalty; downgrading of professionalism; loss of institutional memory; heartless process without concern for people; and loss of CEO autonomy. Outcomes include policy fragmentation in respect of economic issues; and the most complex machinery of government in the Westminster world (some key points from Wiltshire K., 'Reform of the Bureaucracy: An Assessment' Ch 21 in Hede A., Prasser S., Nylan M. Keeping them Honest: Democratic Reform in Queensland, University of Qld Press, 1992).

`The Government had failed to establish goals for departmental reforms, and the regionalisation program had simply created a middle layer of bureaucrats at the expense of services' (quoting SPSFQ officials in McKinnon M., `Women's Touch in Union Marriage', Sunday Mail, 30/1/94)

'The experience, knowledge, talent and indeed the very consciousness of officers has been brushed aside as unimportant in new wave management's lemming like rush to change everything and anything to enhance self promotion' (Anon, Public Sector Voice, Nov 1993, p12).

Prior to 1989, Queensland had none of the traditional signs of widespread corruption, and productivity was high. The administration was a closed shop rather than subjected to political manipulation. Reform may have been less about correcting problems, than about putting in a political `fix' (Prasser S., `The Need for Reform in Queensland - So What was the Problem?', in Hede A., Prasser S., and Nylan N. Keeping Them Honest: Democratic Reform in Queensland, University of Queensland Press, 1992).

Anecdotes Concerning Public Sector (which have not been verified because of lack of resources, but which are typical of those circulating)

An internal observer described policy development in a major department as follows:

• there are unstated assumptions that the types of programs offered (similar to typical international practice) are intrinsically `good'. These assumptions are never analysed.

• policy is derived on the basis of assumptions without concern for implementation, or whether new initiatives can be integrated with existing activities.

• the department's policy group, which has no practical basis, produces new policies periodically (apparently) so as to be seen to be busy. The result is ad-hoc. There are no performance criteria for effective policy.

• each business unit in the department has slightly different products which are sometimes offered to the same clients. Uncertainty about what to do often results in nothing being done.

• whether policies are accepted depends on the `political' skills of their proponents in mobilising support, rather than on the merit of the policies.

• failure to discuses proposals with end users results, at times, in delivery of inappropriate services.

There is now a constant oscillation between de-centralising policy (to make it responsive) and re-centralising it (because of concern about the outcomes of decentralisation). As a result there is no scope for a long term approach.

Cabinet submissions must be in a specific form which makes it very difficult for departments to communicate what they really mean. Procedures for approval of submissions are so complex that staff do not bother, and give priority to work which does not require Cabinet approval.

All middle managers in one major department are seen as incapable of performing their jobs, or of being trained to do so.

Staff recruitment has been biased towards cloning a particular style of individual. The bias is towards those with a 1970s confrontationist industrial relations approach. They are incapable of networking or integrating different viewpoints. A key central agency consists of numerous separate offices constantly feuding with one another.

In the same agency, positions appear to have been allocated on the basis of factional deals in return for past support.

The public believes that it can not now easily make direct contact with Government or with the public service.

A well qualified senior official appears to be `nuts', and no one knows what to do.

One senior official is clearly incapable of performing their job. Whenever anything is said by subordinates, those who do so are reported for `diminished work performance' (which threatens the subordinate's career).

50% of the human resource management staff in a major department are on stress leave, through being expected to deal with unmanageable problems.

There is massive uncertainty about Government in the community. People want Government to say what it is doing. It can not do so, because it does not know, or have the capacity to know.

(Discussion Paper by present author, May 1990)

The Evolving Role of Government: Increased complexity led to pressure for changes in public administration in the 1970s. This was compounded in the 1980s by the need for increased economic effectiveness, and concern about government's impact on this. However government's economic impact was often seen merely in terms of its role as a provider of goods and services, and the profound implications of East Asian economic success were not well recognised. Resolving Australia's economic challenges requires change primarily within the community itself towards more effective productive capability (needing leadership perhaps by government, rather than just more efficient government services).

Context for Change in Queensland: Government policies envisage the need for public sector reform (eg because of Fitzgerald Commission conclusions), and that such reform (to improve efficiency, simplify regulation, and catalyse needed change) would be government's best economic contribution. However the economic challenge is very great because of Queensland's low level of economic development, the lack of general understanding of the nature of a developed economy, and the lack of required cultural awareness to achieve a productive interface with successful economies in East Asia.

Change Strategies Elsewhere: Reform is universally agreed to be difficult and to frequently experience failure in implementation. Wilenski's theory, that the problem is to overcome bureaucratic resistance to change, has been widely put into practice. However difficulties have emerged elsewhere as a result of such approaches.

Assessment of Experience: The assumption that the public sector is the problem rather than the means to achieve a solution to broader problems within society has led to politicisation and managerialism which has reduced scope for overall (ie society wide) solutions emerging. Change should not be separated from ongoing operations. Such separation would make it impossible to take operational requirements into account; create organisations incapable of ongoing change; and reduce staff commitment.

Past Change in Queensland: Despite the absence of major reviews, reasonably effective means for managing change had existed in the 1970s (eg through the Coordinator General's role in arranging coordinated responses to strategic issues). These declined in effectiveness in the 1980s as the Coordinator General's role was changed to ensuring support for major investors. Increasing weaknesses in the public sector and social / economic problems in the late 1980s then resulted in more heavy handed politically driven change, which compounded the problem. There is massive energy for credible change in the public sector [ie in 1989], but also a risk of desertions if effective methods are not used soon.

PSMC Approach: PSMC says it intends to conduct reviews over two years in co-operation with agencies.

An Effective Process: Useful steps would include: allowing grass roots support for reviews to emerge; introducing new information to reviews to provide a sense of direction; focus on functions of agencies, not on their structure and capabilities; and demand real performance.

A number of practical issues were also discussed.

(by Robert Murray and Kate White)

The authors studied the Cain Government's reforms in Victoria after 1982 to explain why these were followed by serious problems. Their analysis is based on a more conventional public service attitude than was dominant in the 1980s. The Fall of the House of Cain (available from Spectrum Publications, Melbourne) is well worth reading as indicating the long term consequences of a particular way of achieving popular and desirable reforms.

There are parallels with Queensland's 1990s methods for Public Sector change. There was the same: managerial emphasis on government being a business; ill informed belief that the existing system was heavily politicised; and ignoring of prior reforms. The result in both cases was a decline in the substantive understanding by senior administrators about areas they were supposed to administer, and thus an emphasis on 'paper shuffling'. Furthermore, the emphasis on compliance with, rather than counterbalance of, political policies turned the senior public service from the conscience of politicians into their unthinking accomplices. In Victoria those methods led to major problems.

Queensland will not suffer in the 1990s the same financial consequences as Victoria did, because Queensland did not eliminate its 'beancounters' or divert its sinking funds to boost expenditure. But the initiative which was vital to improved economic performance was disabled. The most probable outcome in Queensland is that little will happen at all. Furthermore: dis-organisation similar to Victoria could occur in major functions such as transport, education and health; expensive 'white elephants' could be built; corporatised Government enterprises exposed to competition could suffer losses due to excessive or insufficient constraints, and a lack of skills; and corruption could prosper in the vacuum created by the displacement of competent experience from the public sector. (From present author's submission to MLAs, 8 may 1993)

The Cain Government emphasised 'big' policies, which eliminated smoothly working machinery. The Public Service was badly damaged in the name of reform, creating mistrust, division and politicisation. The Kennett government is using a similar approach.

Background: Labour had been elected in 1982 after 27 years in opposition. Cain handled Parliament and the media well, and engaged support for reform. Parliamentary systems were weak in Victoria resulting in a strong public service and many strong semi Government bodies. The reform agenda in 1982 was to improve efficiency. Political interference was traditionally seen as a bad thing, and the system of Commissions minimised its effect. The Victorian Public Service had a strict 'Westminster' character. Pressures in the 1970s indicated the need for changes which were built into the Labor programs. In opposition Labor produced blueprints for radical change. These were up to date policy ideas, but were seen as 'holy writ'. These ideas included a rejection of the role of bureaucracy, belief in modern management, and cynicism about public service manipulation based on 'Yes Minister'.

A former Minister argued that public service manipulation (as in 'Yes Minister') often stopped new Ministers making fools of themselves. Victoria's public service had a tradition of neutral, if stodgy, service. External appointments increased after 1974, and accelerated under the Cain Government which changed the character of the public service.

Public Service Reform: Labor's 1982 reform agenda was based on the ideas of Whitlam and Wilenski. It sought a reform oriented bureaucracy, which would be: efficient, accountable and equitable; co-ordinated in line with Government policy; subject to efficiency audit and effectiveness review. A common employment framework was envisaged to increase staff mobility. Power was to be devolved. Co-ordination would reside in the Premier's Department; the budget process would be reformed; departmental autonomy for staffing would increase; FOI would be introduced and an Administrative Appeals Tribunal. Because of Labor's long period out of office, the Public Service was not trusted. The belief had grown that it was politicised. There was no recognition in the reform agenda of past efforts.

Once in power, the Premier's Department was changed to support Cabinet, by lifting it's policy / co-ordinating role. Large politically aware Ministerial advisory units were established. Treasury became an Office of Management and Budget. Statutory authorities were brought under closer ministerial control to ensure: responsiveness; co-ordination; better policies; co-ordination of borrowing and investment; and to gain access to their funds.

Many outsiders were introduced to senior levels in the public service. Existing staff left in droves. Those who stayed watched some new department heads create turmoil. Some new staff were appointed for academic or management qualifications, others for their assumed loyalty. The distinction between ministerial advisers and departmental advisers was blurred. Management was unstable, as new ministers made large changes at senior level.

The view was that government could be run like a business (managerialism). Management skills were seen to be interchangeable rather than requiring specialised knowledge. New recruits had management and economics training. An elite 'Senior Executive Service' was created on terms similar to the private sector. Managerialism devalued professionals and career public servants. The latter had greater knowledge of (say) health, agriculture or education - but were told they knew nothing about managing. The outcome was that the public service became an end in itself rather than concerned with real outcomes. Junior staff were promoted beyond expectation, through political connections. This led to poor morale. Politicisation meant that senior management ceased to be a 'brake' on expansionist ministers. Whilst building up a team of 'super managers' in the public service, the Government cut resources at the coal face.

Finance: The Cain government indicated that it would not take notice of the 'bean counters', but would create an Office of Management and Budget' out of Treasury. This was done in 1983 under Sheehan (from IAESR) whose approach was Keynesian (ie belief in Government 'pump priming'). Other changes included: use of Government resources to create employment; funding this by abolishing the sinking funds used to retire Government debt; and establishing a State Development Program. The spending stimulus (welfare housing) was not removed when recovery strengthened. Victoria's debts, which fell in the 1970s, grew rapidly in the 1980s. The emphasis was on expansion. It was 'unfriendly' to suggest that anything might go wrong. Many reforms were constructive, but led to debts which now require tax increases. The Department of Manufacturing and Industrial Development concentrated on expansion without any thought about defences if things went wrong. Despite this Victoria's growth during the 1980s was below the national average. Other factors made more difference.

The VEDC was intended to stimulate innovative companies with good growth prospects. After 1982, the VEDC grew quickly. Rapidly growing institutions attracted bad debts faster because institutions hold clients with good debts service records. This problem was recognised by experienced VEDC staff, but decisions came from the Board or Ministers who did not. The VEDC was praised for the quantity of its lending, with no concern for its quality. After 1984, its role was expanded to fit Government policy. The Board ceased to be businessmen but became Labor appointees. Lending was to sectors targeted as having good prospects. Extraordinary practices occurred - which took years to detect, and were then denied for political reasons. An inquiry identified losses of over $100m, poor management practices and flawed relationships between the VEDC and Government.

The State Bank of Victoria failed because of the climate of rapid change; and the pre-occupation with 'Labor' policy. There was reduced capacity to cope with adverse events. The problem was its merchant banking arm. Initially a share in Tricontinental had been acquired for $1m to get experience in Merchant Banking. Deregulation eliminated its protected niche market (the short term money market). Other investors sold their shares. It could only survive by adventurous financing practices, for which it lacked the skills, and was left with $2bn losses after markets collapsed. It had borrowed money with implied Government guarantee, so the Government carried the loss.

The Pyramid Building Society was the largest in Victoria. It used aggressive practices (ie higher interest rates etc) but was not really exposed. But rumours circulated of a liquidity problem causing a run on the society. Normal practice was to support the society. Given the shock over the Tricontinental losses, this proved impossible. When the statutory liquidity limit was reached, the Society was wound up, with losses from selling into a weak market.

Transport: Rail usage had grown until the 1950s, and then began to decline. Attempts to cut services were difficult. With inflation in the 1970s costs soared. In 1982, the system was in need of repair. Labor favoured a 'new deal' by new funding to increase usage. New organisations were created. Existing staff left (for early retirement or because of upheaval). Many outsiders were appointed. The objectives were to: reduce staff; better integrate services;2 bring in commercially oriented staff. Many staff had no transport experience, but only knowledge of transport theory. The organisation went straight from tradition bound routine into chaos. Capital spending escalated. Usage grew (a trend established before reforms). Deficits rose above $1bn. Service quality fell. Staff morale was poor.

Health: A constant program of big reforms were undertaken. These included regionalisation, and de-institutionalisation. The overall process became extremely confused at senior management levels, with extensive paper work. Resources went into an administrative elite, leaving no more for services. This was due again to activities of management specialists, who were unfamiliar with health and welfare. Paperwork was far preferred to action.

Education: The Victorian Certificate of Education created unbearable pressures on Year 11 and 12 students. The volume of work and stress was very high. VCE had originated to promote equality of access. It was turned into redesigned standard curriculum by group of experts using state of art thinking. It was accepted politically, and was immediately seen as a practical disaster. The volume of work very high, and the competencies of persons undertaking it were seen as suspect. The rules were changed, but did not fix the problem.

After Cain: When Cain ceased to be Premier in 1990, Labor leadership went to the socialist left who were still in favour of heavy government spending.

Overview: Cain had: delegated Treasury to a young inexperienced Minister; and allowed Ministers to replace senior administrators with inexperienced University staff. The Cain Government was unlike no other in following theories, supported by party factions, with growing gaps to the public service. The nature of what was happening was only slowly recognised by the public, because of centralised media liaison. Critics were answered in terms of Government's electoral 'mandate' without any critical scrutiny.

Source: Reproduced from Craig J., Transforming the Tortoise: A Breakthrough to Improve Australia's Place in the Economic Race?, Prosperity Press, PO Box 74 Nundah, 1993

Government is not like business. In a business, the Board of Directors want staff to be responsive to the desires of their customers, because that is the way a firm makes its profits.

In government, by contrast, the Board of Directors (eg Cabinet), usually want staff to be responsive to ministers ie to the desires of interest groups which have been convincing through the political process. This is often not the same as the needs of individual 'customers'. Thus the bureaucracy must force the public (their 'customers') to do things which the latter do not want to do, or supply them with things they do not want, and is therefore 'bureaucratic'. In the process, the bureaucracy learns something of what is required in the community, and that interest group desires may be inappropriate in particular situations. Further, the bureaucracy can study best practices elsewhere. When such conclusions are pointed out to the 'Board of Directors', bureaucrats are again seen to be 'bureaucratic' by challenging political control over policy.

The inconsistency of pressures to respond to interest groups and to 'reality' (ie particular cases, and current ideas) can produce institutions which are unable to respond usefully to anything at all. Consider the following hypothetical case study:

A group of industry representatives say to a government: 'We need assistance, which is not provided by the market. But the bureaucrats are not responsive. We have thought about it, and we need ABC'.

The government puts a commitment to provide assistance with ABC into its economic policy and says to the bureaucracy: 'There are going to be some changes around here. You have been inefficient and unresponsive. The public service is going to be restructured. You are going to provide ABC'. The bureaucracy is re-organised to provide ABC efficiently. One or two years later the changes have been bedded down, and the bureaucracy is ready to do its job properly. For some time there is a growing appreciation of the assistance with ABC which is being provided. The demand exceeds available funds for ABC and the bureaucracy has to decide which of its clients are most worthy to receive assistance. Eventually there are complaints about unfair competition from firms who believe that there should be a way to provide ABC commercially.

One day a client approaches the bureaucracy and says 'G'day, I need some help which the market can not supply. I need PQR'. A junior bureaucrat says 'Sorry we don't have any - are you sure you wouldn't like ABC? '. Eventually the junior bureaucrat tells management that some clients want PQR, not ABC. Managers take note but can not do much. Legislation and organisation structures were all designed for ABC, this is what the government is politically committed to and ABC consumes all available resources. Nothing is said to the government because the bureaucracy's job is just to implement policy.

Bureaucrats who will comply with what they are told without question are in charge, and they keep on providing ABC. But criticism of the bureaucracy grows, because it is competing with the private sector for ABC, and not doing anything about the obvious market failure for PQR. Senior bureaucrats are seen to be obstructive. There are few thinkers in the bureaucracy and they are in junior positions because the job of the bureaucracy is just to follow orders. But eventually someone says 'This is not as simple as it was supposed to be. The real problem isn't just to provide ABC or PQR efficiently. Whenever our clients are asked what they want they just tell us about their immediate needs which the market is not providing. But the private sector can work out how to provide these when they know there is enough demand, and also things change. Much different arrangements within the community as a whole are needed. They even discover studies buried in the academic literature which show the government assistance with ABC doesn't actually help anyone very much anyway.

But there is no way to do anything. The alternatives proposed seem more complex, and do not allow government to decide everything, or announce initiatives. Besides, the government's advisers have seen 'Yes Minister', and know that bureaucrats are not to be trusted. It is Government that makes policy. Bureaucrats just carry it out. The compliant bureaucrats who are still providing ABC which is widely seen to be irrelevant because the real market failure is PQR start playing political games to justify what they are doing. This confirms everyone's worst suspicions about the bureaucracy. Things start to go badly wrong in the administration, and the government grows less popular.

A group of industry representatives say to the opposition: 'We need assistance which is just not available through the market. The government is not responsive. We have thought about it, and we need PQR'.

A few years later there is an election, and a new government is returned, with an economic policy to provide assistance with PQR. The government says to the bureaucracy 'There are going to be some changes around here. You have been inefficient and unresponsive. The organisation is going to be restructured, and have big changes in management. You will, of course, be fully consulted. What you are going to do is provide PQR, and anyone who objects will be sacked'. By this time, methods for overcoming bureaucratic resistance to change have become far more subtle and sophisticated. The bureaucracy is restructured to provide PQR efficiently. Those who even whisper that there is something wrong somewhere, are sacked. The organisation is staffed by bureaucrats who will do what they are told without question, ie those who used to provide ABC. A useful new innovation called 'management mobility' is introduced to make sure that senior bureaucrats are never in any one place long enough to gain knowledge or experience, or point out what happened before.

Some years later all the changes have been bedded down, and the bureaucracy is finally set to do its job properly. However there is not enough PQR to supply everyone who wants it, and criticism about unfair competition grows from firms who believe there might be enough demand to provide PQR commercially. Then one day a client approaches the bureaucracy and says 'G'day, I need some help. I need XYZ........'.

Whilst this is an over-simplification and public officials can seem inefficient or self interested for many reasons, there is an inevitable tension between messages given to the public sector by politics which usually only accepts ideas when they are widely known or valued by influential interest groups, and by the world of real day to day contacts and leading edge ideas. The more rapidly the situation changes, or the more complex it becomes, the greater this discrepancy must become.

The consequences are not trivial. Senior level staffing on the basis of political compliance can hold up serious consideration of alternatives to irrelevant programs for decades. It was just such dynamics which kept Queensland's industrial estates program going for 25 years at a cost of many tens of millions of dollars. The emphasis on compliant provision of public goods and services meant that no one in the bureaucracy seemed to see, as others did after 15 years (eg Berryman J., `Survey of Business on Queensland's Industrial Estates', Planner, V21, N2 June 1981) that industrial estates did not really influence the location decisions of manufacturers. Such problems are the results of the dynamics of complex political / administrative / economic systems, not of incompetence.

The outcome can be even less 'intelligent' if:

• an interest group benefits from a program of no real use to the community as a whole, eg regulations preventing competition. Their influence can prevent alternatives even being considered;

• senior management is politicised even if only passively, ie by not providing a counterbalance to political policy proposals. If there is no desire to consider anything but current political desires, incomprehension of emerging real requirements, and fear about mentioning them then penetrates well down into the bureaucracy.

Asian societies resolve this by rejecting interest group politics and accepting a strong elite bureaucracy. The USA solves the conflict by a 'free market' ideology, and tolerating a politicised and useless bureaucracy. Australia has tightened political control, whilst expecting the bureaucracy to provide efficient services to its 'customers', and give useful policy advice. This is not feasible, and massive stress in the bureaucracy is the only real outcome. Many know something is wrong, but they are being blamed, not heard. The community continues to elect politicians who promise to bring the bureaucracy under control, though a loosening of political control over administration would probably be more constructive (Ickis J. etal, (eds) Beyond Bureaucracy: Strategic Management of Social Development, Kumarian Press, 1986).

A competent public service can be easy for others to deal with. Queensland had such a reputation as a result of strategic management of public sector change by the Coordinator General in the 1970s which created a sense of purpose and cooperation. The quality of administration worsened during the 1980s when this role was replaced by one designed to ensure support for major investors, and no alternative mechanisms for integrated administrative development were created.

Secondly, inputs to public policy from political sources reflect sectional views). A competent public service (which responds to `reality', rather than merely complying with political wishes), can ensure that public policy considers more balanced views by pro-actively identifying alternatives and policy options. `Politicisation' (eg by insisting on unquestioning compliance) eliminates such balance, and also increases the power of the public service relative to ministers (because the latter are only presented with one point of view and thus have no choices to make).

A major effect of politicisation is that government actions are dominated by a narrow range of perspectives. Australia's electoral processes allow representatives of interest groups reflecting say 25% of the community to form government (A party could gain about 50% of the vote, and then select a government reflecting 50% of that party). Without a counterbalance in the form of an independent public service, public administration can be based on only one side of the story. Thus government may be unable to detect critical emerging issues which are seen by everyone but its supporters (ie it learns slowly). Examples of this in Australia are increasing. Furthermore the quality of public service will deteriorate because of lack of worthwhile careers. (Paraphrase from `Politicisation of the Public Service: Some Objections', discussion paper by the author, July 1990 submitted to Premier's Department corporate planning workshop which the author for some reason was not invited to attend).

Thirdly, political compliance reduced the credibility of political leaders and of the democratic process, because it erodes the competence required to implement policy successfully (eg by removing skills, organisational memory, networks). Thus what the politician promise is less likely to actually happen (except on paper).

Fourthly, corrupt behaviour is more likely when officials are disinclined to point out defects in political decisions and outcomes (Davis B., `Public Service Culture May Foster Fraudsters', Australian, 24/7/95).

Finally, the absence of political accountability in successful economies in East Asia has implications which should be considered. Such government's are dominated by bureaucratic elites (and true democracy is rejected). The very rapid economic development achieved by Japan (and others) is probably a consequence of such government styles, for reasons suggested in Attachment G). This can only be effective because of a different epistemology (philosophy of knowledge) in such societies.

Briefly: The debate about political responsiveness in Australia has been seen to be about the distribution of power (Tingle L. `The Politics of Policy', Australian, 1/8/95). However this reflects a Western view which equates power with decision making. This is not the usual assumption in East Asia (See Pye J., Asian Power and Politics: Cultural Dimensions of Authority, 1985). Rather power is equated with having subordinates who make one's decisions. Influence is exerted by having access to a great deal of information in order to influence the thinking (and thus free decisions) of others. Such issues are relevant to Australia, because of Australia's economic difficulties, the need to interface with East Asian societies, and the direct impact which such methods have here.

Australia is in the `front lines' of a context between civilisations which have different approaches to the discovery and use of knowledge. Even in Western societies there are differences such as between empiricism (which emphasises gaining knowledge from the material world) and rationalism (which stresses reason). Anglo-Saxon societies value empiricism more, whilst Continental European cultures tend more towards rationalism. However differences with East Asian societies (eg Japan) are much greater, as they use epistemologies which deny the existence of truth. Where Western societies succeeded economically on the basis of reason and science (technological innovation), Japan succeeded on the basis of arational organisational innovation (eg through methods such as `bottom up' decision making). Such methods are not applicable to all problems, or always successful, but they are fundamentally different. These issues have been considered in detail in Transforming the Tortoise: A breakthrough to Improve Australia's Place in the Economic Race? (Prosperity Press, PO Box 74, Nundah, 1993).

Without support from an effective (and well informed) bureaucracy, Queensland's democratic process will even more susceptible to manipulation than that in countries such as Japan (especially given the limited understanding of current public policy and economic strategy issues which is independently available to Queensland's branch office / small business community).

Sun Tzu's The Art of War, is typical of strategy in East Asia. It emphasises deception of the less informed by encouraging them to take actions which weaken their position in the long term.

The main economic problem with public sector commercialisation is that it is not a significant or effective method for dealing with Australia's economic challenges.

In particular, the public sector is only 30% of Australia's economy. Greater scope for gain lies outside the public sector (eg by creating a well developed economy as suggested in Attachment G).

Furthermore, real commercialisation is intrinsically impossible in government due to public accountability. Government is not like a business. In a business, the `board' wants employees to be responsive to customers, because this is how profits are made. In government, the `board' wants employees to be responsive to ministers (ie to the desires of influential interest groups).

This is appropriate for many services which involve public or social goods with high social or economic value relative to their costs, for which no effective market mechanisms may exist.

The `public service' model was an attempt to ensure reasonable productivity, whilst being politically (rather than primarily customer) responsive. There are limits to gains from common commercialisation measures. In particular:

• contracting out replaces the problem of efficient production without commercial incentives with the equally difficult problem of contract management in a political environment.

• privatisation originated in Europe as a way to deal with large losses by nationalised industries. There were virtually none of these in Australia.

Furthermore where market mechanisms are feasible, productivity improvement by the use of commercial methods is limited. Commercialisation has been sought to increase public sector efficiency. However efficiency is not the major source of potential productivity gains. Productivity refers to the value added (wages, return on capital, nett taxes) relative to resources used. The productivity of an enterprise depends not only on its efficiency (ie output / input ratio), but also on its quality (providing what customers value) and flexibility (responding to changes in customer's demands). According to Australian Productivity Council data only a fraction (say 20%) of productivity gain comes from greater efficiency. Thus the main sources of productivity improvement are denied to government agencies because it is unrealistic to assume that they will not remain primarily politically, rather than customer, responsive.

Reported increases in Government revenue from corporatisation are not necessarily the result of increased productivity. They could also result from asset stripping, or monopoly profits. Furthermore corporatisation (eg under the Queensland model) contains flaws, in that GOEs are subject to accountability constraints which would make it impossible for them succeed commercially in the competitive environment, envisaged by the National Competition Policy (See supporting document, The Paper Government: A Review of Queensland's 1994 State Budget, Section 9). Competition policy will increase the incentive of GOEs to be productive but not ensure that they have the capability to do so. The main scope to increase GOE performance probably is to eliminate the detailed and prescriptive regulation with which Australian GOEs have been controlled to maximise political accountability (See The Paper Government, Section 9.5). However effective operations require not only internal productivity, but also a developed economic environment to provide appropriate support. In Queensland, at least, this does not really exist, and is not being created.

Thus it is likely that only limited economic gains are possible from asking governments to pretend to be `commercial'.

Australia's economic thinking over the past decade has been characterised by a market oriented approach (which did not favour direct government economic intervention). This emerged because:

• Market mechanisms were seen as the best way to achieve structural adjustment because centrally planned changes can never accurately determine market demands, and democratic politics inhibits change to protect interest groups. Mass production had been the main source of wealth for affluent countries until the 1970s when the productivity of such activities was eroded by a challenge from low wage countries. Thus major changes were required in all OECD countries, towards knowledge / innovation as the basis for high incomes (ie to a post industrial economy). Australia had an even greater adjustment challenge in shifting from its unprocessed commodity emphasis (which were slow growing sectors, facing declining terms of trade).

• the fiscal impact of politics was seen as a problem. Economic growth in many OECD countries slowed dramatically after the mid 1970s, but government spending initially grew unabated (suggesting that their political systems were insensitive to economic constraints).

Such concerns have some basis, and demonstrate why governments can have difficulty correcting market failures. However, market failures are none-the-less real.

Research since the 1980s shows that classical economics' assumptions about markets are inadequate. Market failures are real, eg: price adjustment (even small changes) can be socially costly; wages and prices do not go up together; competition is imperfect; there can be coordination failures in markets; labour markets fail; there is asymmetry between borrowers and lenders in financial markets in access to information; and through effects of goods mark-ups. Market rigidities are real. (Mankin N. and Romer D., The New Keynesian Economics, MIT Press 1991)

One further problem is that a `free' market enables growth within the existing productive capabilities of an economy. But it does not rapidly increase those capabilities (ie develop the technological capabilities of economic agents, and the effectiveness of economic processes such as innovation). Australia's economy shows symptoms of slow economic development ie growth in low value added sectors (eg tourism) leading to declining relative incomes, and productivity increase which are not fast enough to provide the competitiveness to overcome current account problems.

Despite market oriented changes and the application of up-to-date theories of macro-economic management, Australia's fundamental economic problems have not been resolved. A Better Way of Sustaining Growth (enclosed as supporting document) highlights plausible theories which were tried and found to fail over the past decade (see Sections 8 and 9).

Leadership in the development of practical economic capabilities is required (in addition to the development of enterprises) if productivity growth is to be maximised. This requirement is considered in a macro-economic context in A Better Way of Sustaining Growth.

Briefly: Both enterprise and economic development are needed to achieve sufficient productivity increase to overcome current account constraints on fast growth (as imports are increased by growth, but not necessarily matched by exports unless competitiveness grows rapidly - which requires productivity improvement if real incomes are to be maintained). Economic development involves directly increasing the ability of business and communities to initiate and support high productivity enterprises and industries, by altering the efficiency, quality and flexibility of the economic system as a whole. There is (probably) a means to manage economic development, via strategic management led by apolitical organisations (given appropriate protocols). The effect is to speed up the rate of development (re-organisation) by the economic system as a whole. This changes `causal' relationships within the economy. This approach might involve: treating major investments as a stimulus for initiative in real social / economic systems (rather than as just a design and analysis exercise); or systematic attention to the effectiveness of economic mechanisms, needs for which will appear as market gaps, for which indicative business plans could be prepared. Direct economic development can reduce the `chicken and egg' problem which constrains economic development and potentially double the rate of productivity gain by an economy, and alter its areas of competitive advantage.

Capabilities to accelerate such development (rather than encourage growth in existing low value added areas of comparative advantage) have been the basis for the very rapid economic progress and competitive strength which has been created in Japan (and is rapidly emerging elsewhere in East Asia) (though this is contrary to the assumptions of conventional economics for reasons explored in attachments to the author's letter of 8 May 1993 to MLAs). Such capabilities set a new standard for societies which wish to be affluent (if they prove sustainable, which is not yet proven).

Unfortunately economic development is intrinsically impossible for representative political organisations. Firstly, the interest groups to which politics responds, bias any outcomes towards wealth redistribution rather than wealth creation. Secondly, economic development requires accelerating the rate at which the economy as a whole `learns' to re-arrange itself to suit emerging opportunities and threats. Representative politics reflects what is widely known and accepted (and thus tends to slow the rate of economically relevant learning).

Click for diagram

Economic development is beyond politically responsive organisations. The figure represents ideas and practices which are well accepted near the centre, and newly emerging near the periphery. Practitioners normally operate within an area where there is a better than 50% chance that an idea / practice is accepted. However changes (to markets, technologies) allow innovators to succeed by trial and error in a direction which corresponds to those changes (which is the basis of economic change in a `free' market). Over a period of time, the `boundary of practice' moves. Change can be accelerated (ie the economy can be developed faster) by identifying a `vision' (of attractive new options) and `guidance' of groups of practitioners in considering early action to address it. This appears to be the method through which Japan's industry policy was conducted by its Ministry of International Trade and Industry (and its predecessors over the past century). However, in this figure, there is no overlap between what is accepted by the majority of practitioners (ie politically acceptable) and a valuable new option. It is probable that East Asian development states reject truly democratic politics, because this would prevent the state catalysing rapid economic development.

None-the-less the economic challenge exists, and is not resolved just because there is no obvious way for Australia to deal with it. A case can be made that Australia's traditional political system may be unsustainable because it is structurally incompatible with current economic requirements.

An Hypothesis? Modern democratic politics emerged in Europe after the industrial revolution (as a reaction to the French Revolution). For most of the period since, increasing wealth creation depended on capital intensive production (ie mechanisation in the 19th century and mass production since the 1920s). Democratic politics and the unions were methods some societies created to redistribute that wealth from the owners of capital. However, since the 1970s, factors such as better transport, the mobility of capital and competition in mass production from low wage countries have reduced the ability of mass production to create the value on which more affluent societies had depended for their wealth. Since the 1970s, knowledge, teamwork, the ability of enterprises to sustain innovation, and the mutual support amongst elements of a well developed economy have become more important than capital alone in creating value. The involvement of democratic politics in economic change and external unions in enterprise change slows innovation, and thus impedes creation of the wealth which they exist to redistribute. Their continuance is thus at risk.

However apolitical mechanisms might be able to deal with this challenge, and so protect Australia's political tradition (see Transforming the Tortoise: A Breakthrough to Improve Australia's Place in the Economic Race, 1993).

The following are provisional suggestions, based on general considerations not recent close study.

• Structural changes should not be seen as primary solutions to administrative problems (eg restructuring, or eliminating particular organisations or people). Rather emphasis should be placed on what is done, how it is done, and why. [Structural changes can come later if still needed. It takes 15-20 years to acquire the local knowledge and networks to successfully fulfil a senior administrative role. Recruiting externally may bring in new knowledge and skills, but not necessarily produce effective performance. Even limited experience may be better than none].

• Regard the public service (rather than political advisers) as the main source of support for ministers. [Even though there are weaknesses in the public service, it will try to take a more balanced, practical and longer term view than advisers. A systematic rather than political approach could take the heat out of many contentious issues. Performance is better than public relations for government's image. Excluding the public service de-skills it].

• Get people with solid experience into agencies (or as mentors to agencies), and ensure that their opinions are sought. [People who have `seen it all before' will have a fair understanding of how to deal with even completely new priorities effectively]. Sideline people with primarily academic backgrounds from serious decision making. [They typically have little practical sense, though their ideas can be valuable].

• Value agencies more in terms of whether the real world system which they deal with works, and less for their own outputs. Similarly value senior administrators for the effectiveness of their departments not for their political contributions. And value central government agencies for effectiveness of the public sector as a whole. [This would get the focus onto reality and off politicking].

• Use policy staff in each agency to stimulate practical operators to produce integrated responses to policy issues, rather than to write policy themselves. Strategic policy (to help set overall directions) is also required, but must be considered by operators before acceptance [This would reduce paper war, and produce useful policy staff in time. Progress is impossible if policy and practice are divorced].

• Change Cabinet submission process, to allow departments to say what they mean, not just fill in the blanks in forms designed by Cabinet Office.

• There should be little need for more recurrent spending (given large increases in recent years). The problem is that outcomes have not matched those increases. Any expectations of further funding should be considered systematically in the budget process, not outside the budget.

• Get a long term forecast of revenue / expenditure balance. [A blow out seems probable].

• Expect Financial Management System to identify why programs are undertaken and how they affect real world systems (rather than just considering what is done).

• Get independent analysis of financial risk, accountability and economic implications of Treasury financial businesses. [These have distorted approach to economy and administration. Analyst should be out-of-state as some local businesses are dependent].

• Get independent (ie out-of-state) assessment of effectiveness of commercialisation efforts.

• Emphasise realistic development of the productive capabilities of community. Ensure that data is assembled on effectiveness and productivity of commerce and industry (ie need more than data on growth which is traditionally emphasised). [Low value added in tourist sector, implies need for real economic development in regional areas].

• Decentralise government procurement. [There is an odour of corruption in some areas, which would be less feasible and tempting if purchasing was de-centralised].

• Transfer responsibility for human resource management to line managers [Separation means that HRM is managed without any real goal or purpose].

• Emphasise internal training and recruitment [Experience and networks are keys to effectiveness]