Public Sector Downsizing: An Introduction

Authorities throughout the developing world are turning to downsizing in an effort to reduce budget deficits and address the inefficiencies engendered by state-led development strategies. Because large-scale involuntary dismissals are often politically difficult, a voluntary approach to reductions in public sector employment is increasingly popular among developing-country governments, multilateral organizations, and donor countries. This article (and, more generally, the research project on Public Sector Retrenchment) attempts to sketch a protocol for public sector downsizing that takes into account the costs and benefits for the workers and the economy. After reviewing the international experience with downsizing, the article addresses five questions: how to identify the redundant workers, how to predict their losses from separation, how to design compensation and assistance packages, how to assess the financial and economic returns to downsizing, and how to deal with downsizing in one-company towns. Based on the answers to these questions, a decision tree is proposed.