PUBLIC SECTOR REFORM IN SWEDEN: COMPETITION OR PARTICIPATION?

0 The Political Quarterly Publishing Co. Ltd. l Y Y 4 . Published by Blackwell Publishers, I 0 8 Cowley Road. Oxford OX4 1 JF, UK and ?3X Main Street, Cambridge, MA 02 142, USA.

PUBLIC SECTOR REFORM IN SWEDEN: COMPETITION OR PARTICIPATION? BRIAN BURKITT and PHILIP WHYMAN* ‘The most important part of excellence which any government can possess, is to promote the virtue and intelligence of the people themselves.’ [J. S. Mill, Considerationson Representative Government,first edition, Pinter, Son and Bourn, 1861.1

THROUGHOUT the western world, public sector reform has gained momentum during the last decade and seems destined to remain one of the dominant features of political and economic debate in the 1990s. In Britain, it took the form of the Conservative pledge to ‘roll back’ the state by privatisation and compulsory competitive tendering. It offered the vision of individual empowerment through market forces to be protected by Citizen’s Charter consumerism. The momentum for reform is felt even in Sweden, the country with probably the most developed public services in the western world. Hence the 1991 election victory by a coalition of four bourgeois parties, building upon the ideological campaigning of the Swedish Employers’ Confederation,’ promises privatisation and tax cuts, coupled to a reform of public sector provision through market forces. This ideological offensive provoked both British and Swedish labour movements to articulate new relationships between public sector producers and their customers. Proud of their achievement in constructing collectivewelfare agencies, parties of the left appear to suffer electoral disadvantage when merely defending the status quo, especially as increased demands on services become increasingly difficult to meet. Therefore they require a dynamic approach towards public sector provision, whilst retaining and strengthening the priority of democratic control over market forces. Whilst the debate within the British Labour circles remains at an early stage, the Swedish Social Democratic Party (SAF) has discussed reform for 20 years and completed successful experiments before losing office in * Dr Brian Burkitt is a senior lecturer in economics at the University of Bradford. He is author of seven books and over fifty articles in learned journals. Philip Whyman is currently a Swedish Institute research fellow in the Statsvetenskapliga institutionen of Stockholm University. He has written a number of articles in learned journals on Swedish political economy . P. Whyman and B. Burkitt, ‘Changing the Agenda: The Role of the Swedish Employers in Restructuring Pay Bargaining and the Labour Process’, Work, Employment and Society,

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1991. Since public sector development progressed further in Sweden than elsewhere and because the debate on its reform is advanced, we seek to draw on this experience to highlight elements which might provide solutions for other western nations with similar problems. The growth of the public sector in capitalist economies is largely a twentieth century phenomenon, which accelerated after the Second World War. In Sweden the expansion of the public sector as a proportion of GNP was especially rapid in the twenty years following 1960, when it grew from 31 per cent to 65 per cent in 1986. The OECD nations as a whole also witnessed a significant relative increase in the public sector’s size from 30 per cent of GNP in 1960 to slightly over 40 per cent in 1980. Approximately 20 per cent of OECD employees worked in the public sector in 1980, whilst the corresponding figure in Sweden was over onethird. However, although two-thirds of Swedish GNP passes through the public sector, more than half returns to the private sector in the form of pensions, educational grant funding, unemployment benefits, child care facilities, sickness benefits, etc. The increase in the size and scope of the Swedish public sector contributed towards greater social equality in Sweden. Moreover, the rise in public sector investment to a peak of 12.8 per cent of capital formation in 1971, and the rapid increase in public sector jobs as manufacturing employment declined during the 1970s and 1980s, both contributed to the achievement of the Swedish economy in maintaining full employment and stimulating the investment required to provide economic growth. However, the scale of the expansion in the Swedish public sector was so marked that it can be compared to earlier industrial revolutions in terms of its enhanced influence upon the performance of the economy and the creation of job opportunities.

Problems of rapid public service growth The rapid development of public services in Sweden highlighted a number of problems, which can be categorised as relating either to their demand or their supply.

The demand side On the demand side three developments placed increased pressure upon Swedish public services. They were: 1. Increased demands arise from an ageing population. Moreover, technological progress is providing high cost welfare facilities, while personal affluence accelerates claims for income-elastic forms of care.

2. The changing composition of demand, accompanying the post-Fordist flexible mode of production (e.g. a greater proportion of jobs are part276 8 The Political Quarterly Publishing Co. Ltd. 1994.

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time), encouraged differential preferences to be reflected in consumption. The traditional, uniform nature of public sector provision became increasingly unpopular as more diverse requirements were expected to be met by it. 3. The rise of neo-liberal market economics in the late 1970s and 1980s led to the widespread adoption of deflationary policies. These restricted the rate of international economic growth, thereby adversely affecting economies like Sweden which rely to a large extent upon exports to fund domestic living standards and public spending programmes.

With lower economic growth, Sweden found it harder to meet the increased pressures on the public services by simply devoting more resources to them. Moreover, the growth of the Swedish public sector depended upon universal provision in order to retain middle class support, which in turn imposed the need to improve the quality and quantity of services. This required maximisation of the tax base, but with one third of all employees in the public sector, expansion is constrained by reluctance to pay higher taxes. For continued growth, the government came to rely upon wage moderation amongst its employees, so that the public sector experienced the most serious industrial relations conflicts during the 1980s.

The supply side On the supply side, a number of actors also provided an increased focus upon the need for reform of public sector provision. These included: 1. Continued rationing by queue implies that government not only meets a minimum of peoples’ needs but also sets an effective ceiling to them. To circumvent such limitation requires adding personal, to national state, resources, thereby undermining the communitarian ethic of the public service system.

2. The administration of public service provision imposes costs upon the consumer which compare unfavourably with those of other sectors. These include inconvenient appointments, long waiting lists, difficulty in obtaining information, poorly coordinated services and inconvenient locations for provisions. The interests of the producers, who enjoy a more concentrated position of power, frequently receive a higher priority than consumers’ needs. Thus, von Otter2 maintained that ‘politicians and public sector unions can be more self-serving than their private sector counterparts’. The danger of unresponsive supply grows as the size of the public sector increases.

* C. von Otter and R. Saltman, ‘Voice, Choice and the Question of Civil Democracy in the Swedish Welfare State’, Centre for Working Life Paper No. E27, Stockholm, 1988. 277 0 The Political Quarterly Publishing C o . Ltd. 1994.

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3. Bureaucracy may not only be self-seekingbut its growth can develop a momentum of its own. Schumpeter argued in 1942 that a political sector comprised of politicians and administrators develops under capitalist democracy. Its interests lie in expanding the size and scope of the activities undertaken by the state. 4. It was estimated at the 1985 Swedish election that 54 per cent of voters depended on the state for their incomes, either through employment or through welfare benefits. They constitute a sizeable vested interest, potentially opposed to public sector reform.

An overview Therefore collective welfare became subject to increased demands for more heterogeneous services and improved quality of deiivery. With few additional resources available for expansion, any greater consumer satisfaction depends upon increased efficiency and a reorganisation of provision. Saltman and von Otter3 argued that these combined developments ‘reflect an inability of the present “frozen” Swedish delivery system to respond to current patient demands’. Moreover, when examining healthcare, they claimed that while many service professionals might ‘dismiss patient-generated demands for service differentiation as frivolous-indeed, perhaps because of that tendency-many Swedes are coming to look more critically at what they perceive as an unnecessarily rigid and unresponsive health sector’. One cause of this is the lack of any public equivalent to private sector bankruptcy. In the private sector, when a firm fails to make profits, it goes out of business or is taken over, yet if a public provider fails to satisfy consumers, no effective mechanism exists to rectify this deficiency. This lack of an ‘output’ criterion within public sector provision requires some form of corrective to provide a more efficient allocation of resources and to stimulate the suppliers’ incentive to respond flexibly to the needs of their users. This paper examines a variety of proposals to create such a mechanism, which have been widely debated in Sweden during the last decade.

Why not privatisation? A detailed analysis of privatisation lies beyond the scope of the present discussion, but a brief description of the unique, positive features of public service provision is necessary, before discussing its reform, in order to decide what should be preserved. First, the liberal market-based model has not proved successful in the R. Saltman and C. von Otter, ‘Re-vitalisingPublic Health Care Systems: a Proposal for Public Competition in Sweden’,Health Policy, 7, 1987, pp. 21-40.

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countries where it was tried; indeed the study by Rodwin4suggested that such mechanisms are rarely able to control the system’s expenditure or its development. Secondly, needs-based demographic planning, in terms of defined standards for the design of future provision, made an important contribution to the overall health of the Swedish people, particularly of vulnerable groups like children, the elderly and the chronically ill. It would be a retrograde step if the imposition of a market mechanism and private producers undermined such planning. Thirdly, it is contradictory to give public goals to private firms, since private firms seek to maximise profit as in other sectors; otherwise they would fail to attract sufficient capital to enable their continued operation. They must earn a return on their capital that satisfies stockholders and protects them against takeovers. Moreover, the closure or expansion of particular services depends upon profitability, so that their quality might deteriorate if cost reductions were to predominate over use value considerations. Public services can promote values other than those which dominate in the rest of capitalist society. Fourthly, the growth required by private firms involves a determination to acquire market share and possibly a dominant position within the market. Furthermore, previous experience has demonstrated that profitmaking institutions tend to form lobbying alliances with powerful client groups to manipulate provision. Fifthly, the market mechanism often fails to operate optimally. These market failures include the emergence of monopoly, the inability to provide sufficient provision of public goods when relying upon non-tax funding, the failure to conserve ‘free’ goods like fish or water, and the neglect of external costs and benefits. Therefore free markets are unlikely to provide the socially optimal provision. Finally, private markets might suffer from similar flaws as the present system, serving internal interests before those of the client-consumers. Lange summarised the basic problem: To retain private property and private enterprise and to force them to do things different from those required by the pursuit of maximum profit would involve a terrible amount of regimentation of investment and enterpri~e.~

These difficulties in monitoring service providers render the privatisation of collective welfare undesirable. Among those rejecting rationing by the cash nexus, many groups in Sweden concluded that it was not enough simply to defend the present system and wait for improved economic circumstances that would allow resumed public sector growth. Their responses can be analysed as three distinct, although overlapping,approaches to welfare reform. V. Rodwin, The Health Planning Predicament, University of California Press, 1984. 0.Lange, ‘On the Economic Theory of Socialism’,re-printed in Lange and Taylor (eds), On the Economic Theory ofSociulisrn, McGraw Hill, New York, 1964.

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(0 Participatory democracy Traditional labour movement strategies emphasised the transformation of political, social and economic life. However, they usually baulked at the fundamental changes in power that would increase the direct influence of the individual consumer of social services.Von Otter and Saltman6wrote that: The dilemma of civil democracy within the Swedish welfare state reflects the fact that one has been empowered as a citizen in political life, and as a recipient of entitlements in social life; one is at least struggling to be empowered as a worker in economic life and as a consumer of private sector commodities; yet one remains all but powerless as a community resident with regard to publicly provided human services.

Emerging from the Swedish movement for direct popular democracy (Folkr~relsedemokruti) in the early 1970s, the social democratic youth movement (SSU) advocated resolving this dilemma by making the public sector more responsive to the citizens it was intended to serve. They proposed introducing co-operative self-managed forms of service provision, replacing local administration with popular organisations incorporating the community into the services’ decision-making process. This approach identified decentralisation of service provision as a necessary prerequisite to make the public sector more responsive to its customers’ wishes. Additionally, direct participation in organising collective welfare need not weaken professional expertise, but might prevent it from perpetuating existing social inequalities and class differences by reducing the gap between providers and passive recipients. The advantage of this approach was its foundation upon successful existing Swedish housing and retail cooperatives, whilst drawing theoretical power from the writings of Wigforss and the concept of Guild Socialism developed by Cole.’ The SSU’s challenge to the organisation of collective welfare was not an isolated development, but reflected industrial democracy debates taking place at the time. In the early 1970s the Swedish labour movement advocated moving beyond political and social, to the creation of greater economic, democracy. The latter would be achieved primarily through establishing Employee Investment Funds (EIFs) which socialise a proportion of new investment in the form of share issues controlled by employees as a collectivity, at both local and national levels. These would provide employees of private firms with an increasing influence which public sector employees would not enjoy. They do not obtain the same opportunity for self-government that, at least in theory, EIFs secure in the private sector over the long run. Advocates of greater worker participation suggested self-managed co-operative structures of

‘ von Otter and Saltman, op. cit., p. 9. ’ G. D. H. Cole, Self-Government in Industry, Bell, 1919. 280 0 T h e Political Quarterly Publishing Co. Ltd. 1994.

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public service provision partly to redress this imbalance. To quote Cole, industrial self-government enables the ‘greatest possible opportunity for individual and collective self-expression to all its members’. This cooperative approach gained sufficient acceptance within the labour movement that it was adopted in 1988 by a government commission examining these questions.8 However, while criticism of the inflexible, centralised organisation of public services were largely accepted by the leadership of the labour movement, the full programme of cooperatives was not.

(ii) Public competition Concentrating primarily on health care, Saltman and von Otter9 constructed a market-based strategy to ‘un-freeze’ service provision and hence ‘develop a health system which has simultaneously high standards of patient service, economic efficiency and social responsibility’. Their approach distinguished between the requirements of the internal organisation where ‘participatory management techniques’ were proposed, and the external organisation where a model for public competition was developed. Within the internal organisation of service provision, von Otter’” argued that low employee motivation and dissatisfaction with leadership results from the inability of detailed rules to define satisfactorily all the situations workers face when meeting clients.The workers, therefore, must possess a ‘fundamental role’ in defining their function, while management should concentrate on communicating a corporate culture, on delegating responsibility and on monitoring performance. Operational tasks become decentralised while work roles should be reorganised to ‘stimulate collective support’. The sharing of information and responsibility through participation in decision-making contains many similarities to the policies advocated by the SSU. Cameron’ noted that, if employee participation is to become effective, it requires both the involvement of individual employees and more formal collective discussions between management and unions. The latter produce the agreements on which the participation structure is based. He believed that such a collective framework is a pre-requisite for successful implementation since it provides ‘the umbrella and support’ required to ensure the backing of employees, unions and employers. Managers with a

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SOU, Firkommun Forsoket-en rapport om forsoksverksamheten med okad kommunal sjalvstyrelse, Allrntinna Forlaget, 1988, No. 26. ’ Saltman and von Otter, op. cit., p. 21. I ” C. von Otter, ‘Responsiveness in Public Service Organisations:the Case for Public Competition and Participative Management’, paper given at the OECDAULA Workshop Urban Services and Consumer Needs, Amsterdam, 22-25 April 1988. ’ J . Cameron, ‘The Implementation of Employee Participationin ScandinavianPublic Sector Bureaucracies’, a study undertaken for a New South Wales Public Service Board Fellowship in Management, Centerfor Working Life, Stockholm, 1986.

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commitment to change which allow the learning process to take place, well organised unions with a positive attitude to information sharing and the necessary education of their members to enable their constructive involvement, are both preconditions that von OtterI2identified as crucial to the success of such reorganisation. Employee participation can become ‘an offensive tactic to overcome self-seeking or restrictive practices in the work organisation’and thus increase ‘flexibilityand responsiveness’. It can also be an opportunity for the personal and professional development of the workforce. Its overall outcome can thus reduce the rigidity of the public services at the point of delivery to users. While the internal introduction of participation may contribute towards increased flexibility of provision, it still depends upon its external relations for ‘feedback and contr01.l~This external system must therefore impose ‘dynamic boundary conditions’ such that decentralisation and workplace participation become truly effective, and provide the incentives necessary for local managers and employees to ‘identify their interests more closely with their clients’ interests’. The framework considered to have the greatest potential to meet these goals, whilst retaining the public sector’s democratic control and service orientation, is termed ‘public competition’. Unlike the SSU strategy to encourage greater democratic participation by recipients in the community, this second approach relies upon an essentially market mechanism as the most efficient method to co-ordinate decentralised economic decision-making. However, the market mechanism operates within the public sector, whilst competition between units takes place not for cash, but for market share. Put simply, all users of the public services choose which provider they wish to meet their need, so that no provider possesses a guaranteed monopoly within the local market. The aim of such a framework is to empower service users whilst simultaneously securing a more efficient allocation of resources, by stimulating the incentive for providers to identify with the demands of users. Suppliers are forced to compete for their public market share, since their budget levels to some extent reflect the number of users of a particular unit’s services. In this way clients exercise choice over where they receive the service. Unlike the recent British NHS reforms, the users themselves decide on the placement of their demand and possess a veto on any unit they choose not to frequent. This is very different from the NHS changes, where the area management has been empowered to decide who should be sent where purely on a cost basis, with the users exerting no effective decision-making. Adapting Hirschman’s termin~logy,’~ the public competition model can be described as lateral re-entry: exit from existing provision is I2 l3 l4

von Otter, op. cit., p. 12. Ibid., p. 21. A. Hirscham, Exit, Voice and Loyalty, Harvard University Press, 1970.

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possible, but only for re-entry into the public service network at a different unity of supply. Thus, whilst retaining the public service ethos where delivery is determined by use value rather than exchange value, the public competition approach hopes to provide incentives for an efficient allocation of resources, which enables the participatory internal organisation to succeed.

Decentralisation-a successful experiment ? Chastened by their six years out of office between 1976 and 1982, and responding to both the changing public debate and to post-Fordist international influences, the S A P developed a decentralisation programme of their own. It accepted some criticism of the inflexible, remote nature of public service provision and therefore proposed to make them more open to inspection, influence and participation by citizens. Whilst incorporating the concept of greater decentralisation proposed by the SSU and public competition advocates, its programme was also influenced by the ideas of the Swedish Centre Party. Additionally, it was designed to preserve the organisation continuity of provision whilst trying to increase the democratic input into service bureaucracy. The S A P ,the traditional advocate of strong government, tried to adapt to what the Secretariat for Futures Studies called the ‘paradoxes of the new age’; namely the simultaneous trends towards internationalisation and decentralisation, under the guiding principle of subsidiarity, which requires that decision-making should be located at the lowest efficient level for all public activity. Consequently the central government’s legislative control over local services was relaxed to allow them to adopt their own priorities on the basis of a re-invigorated community participation. Rather than removing provision from the public sector, this proposal attempts to tap the power of what Hirschman called ‘voice’ to reform services from within. ‘Loyalty’to the concept of public provision effectively prevents the alternative avenue of ‘exit’ from being utilised in the form of private provision. Decentralisation was allowed to proceed further in a selected number of ‘free city’ experiments throughout the 1980s. One of the chosen municipalities was the Orebro Kommun, which claimed that their attempts to expand both local democracy and efficiency, through restructuring service provision, generated a better quality and increased volume of services at almost the same cost, equivalent to approximately 10 per cent savings over six to seven years. Another example was the reorganisation of the Swedish student loan department (CSN). Here administration costs were reduced by 27 per cent in five years and productivity (measured in terms of the cost of processing per case) rose by 35 per cent over four years.15These achievements were largely due to a change in organisation Is

von Otter, op. cit., p. 20.

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culture and increased employee participation in decision-making processes through decentralising responsibility, staff rotation and project work. Due to these largely beneficial outcomes, all municipalities were allowed to participate in such experiments. (The Chief Administrative Director of the Orebro Kommun, Jan Lindberg, undertook research to measure the levels of public participation in Orebro Kommun in 1983, 1986,1989 and 1991. He found that while local people knew of and welcomed the changes in local boards and the opportunity to influence their democratic representatives, they also showed little intention to make use of their new opportunities.) Indeed, at the start of 1992 a new law was passed allowing every local authority to make the changes permanent. Thus the experiment was pronounced a success and its methods became accepted practice. Municipalities now enjoy the untrammelled opportunity to design their own organisation and service provision mechanisms.

Conclusion The winds of free market and neo-liberal ideology blew through Sweden as they did throughout the western world. They placed the reorganisation of the public sector high upon the political agenda. For those who reject privatisation as a solution to the rigidities of collective provision, alternative reforms are required. These must deliver greater efficiency in resource allocation and increased attentiveness to consumer requirements, without the effects exerted by private provision upon equity, accessibility and public planning. In Sweden this challenge led the labour movement to propose the three distinct, albeit overlapping, approaches to reform summarised in this paper. Common to all is the encouragement of greater employee participation in organising provision and the empowerment of the community to exercise greater influence over the services they receive, either through extended democratisation or through a market-based solution within the public sector. With the demographic pressures on service provision set to intensify during the coming decade, the Swedish labour movement have demonstrated the importance they place upon developing an effective strategy to meet these demands. Throughout Europe, democratic socialist parties need to be similarly creative in defence of the public sector they helped to build.

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