Crafting Public Service Reward in a Cash-Strapped Economy

Nov 30 , 2024.

In the corridors of government offices worldwide, the question of how much to pay members of the public service is no longer a dry fiscal matter. It has become a defining test of leadership, fiscal discipline, and the ability to retain talent while avoiding the pitfalls of inefficiency and inequality. For policymakers, the question is no longer whether reform is necessary. It is how to craft it without igniting political and economic upheaval.

The federal government has taken a step to rejuvenate its civil service, an army of nearly two million, announcing a wage increase for public servants. Targeting primarily the lowest-paid workers, policymakers could consider that their move uplifts morale, reduces poverty among public sector employees, and enhances the quality of public service delivery. While the decision to sign a 97 billion Br check addresses the chronic issue of substandard wages that have long plagued the country’s bureaucracy, it also raises questions about balanced public finance and the risk of inflationary pressures.

Civil servants have endured low pay for decades, leading to high turnover and diminishing motivation. As the World Bank study notes, many live below the extreme poverty line, a situation exacerbated by the recent cost-of-living crisis. Low salaries have eroded morale, efficiency, and effectiveness in public service delivery.

The consequences of these systemic issues are far-reaching.

Public confidence in the civil service is waning. A survey conducted a couple of years ago revealed that 60.3pc would not recommend a career in the civil service to their children. The Global Integrity–African Integrity Indicators rate Ethiopians' trust in the civil service as "somewhat weak." Corruption, fueled by low salaries and a lack of accountability, has deepened public scepticism. Transparency International consistently ranks Ethiopia poorly on its Corruption Perceptions Index.

The wage hike, therefore, should be seen as a long overdue but necessary corrective measure. Its implications should be profound, although several still feel that it is too late and too little to impact their lives.

Nonetheless, proponents would prefer to see the glass half full. It is better than none to ease the burden of low pay, leading to a demoralised, underperforming workforce. They believe it can help address poverty, improve living conditions, and attract a more competent cadre of professionals. Some suggest it might even reduce corruption, as higher wages could lower the temptation for illicit income, a notion supported by World Bank studies.

Yet concerns about sustainability and potential inflationary effects persist. Sceptics argue the fiscal strain on the public coffer and the risk that unsustainable expectations could lead to market speculation and unintended private-sector wage hikes. While the raise should be welcome, they contend that it does not address other critical factors for an effective civil service, such as leadership quality, working conditions, and training opportunities.

Ethiopia's situation is not unique, though.

According to the International Monetary Fund (IMF), public sector compensation accounts for 26pc of global government spending. However, Ethiopia's private-to-public sector pay premium is so high that the government finds it difficult to retain skilled personnel.

The IMF warns of the dangers of pay compression, where the difference between the highest and lowest salaries in public service is so narrow that highly skilled professionals flee to private employers. In Ghana, for example, more than 60 different allowance schemes have left employees confused and demotivated, while Kenya's complicated 247 bonus systems consumed nearly half of its public wage bill in 2019.

Performance-related pay is often touted as a solution, but the IMF notes that it has delivered mixed results, with few governments achieving the intended productivity gains. Attempts to incentivise performance in corruption-prone sectors, such as tax collection, have occasionally backfired, spurring bribery instead of efficiency. Close to 69.6pc of technical civil servants surveyed in Ethiopia feel that performance evaluations do not impact their pay.

Practical interventions like housing support and discounts on essentials should not be overlooked. In The Gambia, civil servant wages were so low that employees struggled to afford food. Meaningful adjustments were not made until 2022. Pakistan offers a cautionary tale.

Civil servants there are "cash poor, perk rich," enjoying a bounty of in-kind benefits yet lamenting stagnant wages. A report by the Pakistan Institute of Development Economics reveals how non-monetary rewards like housing, cars, and job security often overshadow cash salaries, distorting incentives. Senior civil servants cost the government more than their declared benefits. While lucrative, they undermine performance-driven motivation. Public sector inefficiency in Pakistan has long been attributed to this perks-driven system.

Arbitrarily awarded allowances have fragmented the structure, breeding resentment among lower-grade workers. While a senior officer may enjoy nearly 24 times the compensation of their lowest-grade counterpart when all perks are included, those in lower grades are left demoralised by compressed pay scales and limited career progression.

Countries like Singapore and South Korea provide templates for reform. Singapore's public sector wages are much more decompressed than Pakistan’s, directly linked to performance metrics. South Korea adopted a streamlined grade system that values merit and specialisation, emphasising transparent compensation structures and focusing on skills development.

As the IMF findings show, base salaries should dominate compensation, with non-salary allowances remaining transparent and targeted. Policymakers should avoid blanket inflation-indexation, which can fuel wage drift and distort fiscal space. Reforms in France streamlined bonuses and allowances into a simpler structure, ensuring greater equity and transparency.

Policymakers in Ethiopia could heed these examples. They should acknowledge that salary increases alone cannot solve the civil service misgivings. Financial and non-financial incentives should work hand in hand, addressing systemic issues to create a motivated, efficient, and effective public service. They could craft a thorough long-term plan to ensure the sustainability of wage increases while implementing comprehensive reforms.

By implementing such reforms that tackle critical aspects, policymakers can inspire a new era of public sector excellence, one driven by purpose rather than wages and perks.

The wage increase could be a step in the right direction but should be part of a broader strategy that includes merit-based recruitment, promotion, and management. Meritocracy should replace patronage, the latter a trend that has become more pervasive lately. Establishing clear and transparent criteria for promotions and appointments could restore faith in the public sector. Depoliticising the civil service should also be crucial; civil servants should serve the public interest, not the political agendas of the day.

Investing in professional development can empower civil servants. Continuous training and education opportunities enhance skills and promote openness within the public sector.

Gender representation presents additional disparity. Despite efforts to promote equality, women remain underrepresented in decision-making positions, holding only 28pc of professional roles within the federal government. Encouraging an inclusive environment that genuinely reflects Ethiopia's society could mean not only enacting policies but also ensuring that they translate into tangible outcomes.

A well-compensated and fairly motivated civil service is critical for delivering the public goods that underpin economic development and social stability. For citizens, the price of getting these choices wrong could be steep. For civil servants, the right balance in pay is about the future of public service itself. Ultimately, compensation reform requires political courage. As the saying goes, the measure of any country lies not in the perks it provides its bureaucrats, but in the impact those bureaucrats have on the public they serve.

PUBLISHED ON Nov 30,2024 [ VOL 25 , NO 1283]

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