Caracas Chronicles

A few years ago, a group of experts identified the types of policies that most countries with high growth experiences had implemented, as well as the ones they avoid. Their results, published in “The Growth Report,” are as close to an approachable recipe book on growth as you’re going to find.

This is the eighth part in a series on what Venezuela can learn from that exercise. In Part II, I tackled the importance of inserting Venezuela into the global economy. In Part III, Quico discussed getting the macroeconomic fundamentals right. In Part IV, we looked at why you need a financial system that fosters savings and investment. In Part V, I discussed the importance of letting the market tell you what you’re good at. In Part VI, I made the plea for political parties to find some sort of consensus as a pre-condition for any strategy to work. In part VII, we started discussing the things we need to stop doing, beginning with subsidies for energy.

In this part, I tackle the idea that government jobs are real jobs.

One of the best books I read last year was “Poor Economics,” by the economists Abhijit Banerjee and Esther Duflo.

In one of the best chapters, the authors tear apart the notion that “informal jobs” in developing countries are a sign of “entrepreneurship.” Many times, the authors say, people in informal jobs are doing them because they have no other choice. Ideally, most poor people in informal jobs would rather have a stable job … with the government.

The idea of a government job as the golden ring of job-seekers is firmly entrenched in our societies. While private sector jobs are frequently subjected to evaluations based on productivity, public sector jobs are viewed as stable – a ticket to a nice, tranquil job, an easy life, and an early pension.

It’s too bad people feel that way, because the more governments use the public sector as a source of employment, the less growth you have in the economy.

The data bears this out, and so do the anecdotes. Here is The Economist from a few years ago, talking about Brazil’s public pensions system:

TO SEE WHY Brazil urgently needs to reform its pension system, picture a 73-year-old retired public prosecutor. He is living very comfortably on a generous government pension—around 20,000 reais a month, more than ten times the average wage. With three children from a previous marriage and one from an affair, he is now married to a beautiful 30-year-old with whom he has a fifth child. Life is sweet. After 12 more happy years he dies. Naturally his widow is distraught, but her financial future is assured. For the rest of her life she draws almost his full pension, increased annually by at least the rate of inflation. When she dies 38 years later, aged 80, that pension has been paying out for more than half a century—much longer than her husband had worked to earn it.

The ages at death in this story are based on current life expectancy in Brazil for a 73-year-old man and a 30-year-old woman. The other details, including the current ages and the value of the pension, are those of a high-profile politician and his wife. Brazil has many other couples like them, though pensions outside the public sector are usually much lower. Survivor benefits give such a boost to the appeal of an elderly romantic partner that Brazilians talk about “the Viagra effect”.

In effect, the early retirement age (55) of Brazilian civil service workers has sharp negative effects on growth.

This fact hasn’t stopped Latin American governments from using the public sector as a way of hiding a dismal job market. For example, here in Chile unemployment is not yet shockingly high thanks to the growth in public sector employment.

In Argentina, the problem became so severe under former President Cristina Kirchner that do-nothing public employees got a name: ñoquis. Current President Mauricio Macri is taking a big gamble in trying to fix the problem. He has even pointed out that 1.5 million public servants should not be employed by the government.

Good luck dealing with that.

The problem with public sector jobs is that it is so damn hard to get rid of them. Firing people can be so expensive in our countries, that frequently governments have to “buy them out” in order to get rid of unwanted payroll by settling into some form of expensive compensation scheme.

These kinds of settlements became famous in Venezuela during the 90s. After many companies with thousands of unneeded employees were privatized, the incoming owners were forced to deal with bulging payrolls. They decided to save themselves a great number of fights in the courts, an doffered them “cajitas felices,” or Happy Meals. Many of them took it, but at an enormous cost to society – because the new owners quickly passed the cost of these schemes to consumers.

How many public sector employees do we have in Venezuela? Nobody knows. According to ODH, in January of 2015 the figure was 2.5 million people, or close to 18% of the working age population.

That is way too much. Consider that Japan has a little more than a million civil servants, out of a working age population of 77 million – the ratio is a puny 1.2%.

One of the most galling things about this problem is that few of our opposition leaders talk about it. Not once have we heard Henrique Capriles or Henry Ramos Allup talk about how the civil service needs to be trimmed down, let alone how they would go about doing this. It is simply assumed that we can continue supporting this bureaucracy indefinitely.

In fact, the only times they raise the issue of public sector employment, it is to decry that the federal government does not give them enough money for payroll. The state government of Miranda, for example, has 37 thousand employees. Capriles himself admits that 80% of his budget goes to pay salaries. The surreal aspect is that he talks about this … as if it had nothing to do with him!

Unless we put a stop to this insanity, we will not embark on a path to growth. We need to make clear that every non-essential public servant (in other words, practically every one of them) is draining resources that could be going toward better roads, improving education, or more reliable public services. Furthermore, keeping them in cushy public sector jobs is holding them back – taking away their incentives to improve and become more productive. This puts a serious damper on growth.

Money that goes into payroll is money that does not go into development projects. It is money that is taken out of Venezuelans’ pockets in order to pay political favors and keep a large amount of people blackmailed.

Ending this vicious cycle is going to take guts. It will require training programs so that civil servants can actually compete in the global economy on the basis of their skills. It will also require some temporary relief for those laid off while the government is restructured. It will be hard, but it has to be done.

Now, if only our politicians were convinced of this.