The first wave of public-sector reform was the new public management (NPM). It was inspired by ideas associated with neoliberalism and public choice theory. At first, NPM spread in developed, Anglo-Saxon states. Later it spread through much of Europe—though France, Germany, and Spain are often seen as remaining largely untouched by it—and to developing and transitional states. In developed countries the impetus for NPM came from fiscal crises. Talk of the overloaded state grew as oil crises cut state revenues and the expansion of welfare services saw state expenditure increase as a proportion of gross national product. The result was a quest to cut costs. NPM was one proposed solution. In developing and transitional states, the impetus for NPM lay more in external pressures, notably those associated with structural-adjustment programs.

NPM has two main strands: marketization and corporate management. The most extreme form of marketization is privatization. Privatization is the transfer of assets from the state to the private sector. Some states sold various nationalized industries by floating them on the stock exchange. Other state-owned enterprises were sold to their employees through, say, management buyouts. Yet others were sold to individual companies or consortiums. Industries subject to dramatic privatizations included telecommunications, railways, electricity, water, and waste services. Smaller privatizations involved hotels, parking facilities, and convention centres, all of which were as likely to have been sold by local governments as by central states.

Other forms of marketization remain far more common than privatization. These other measures typically introduce incentive structures into public-service provision by means of contracting out, quasi-markets, and consumer choice. Marketization aims to make public services not only more efficient but also more accountable to consumers, who are given greater choice of service provider. Prominent examples of marketization include contracting out, internal markets, management contracts, and market testing. Contracting out (also known as outsourcing) involves the state’s contracting with a private organization, on a competitive basis, to provide a service. The private organization can be for-profit or nonprofit; sometimes it is a company hastily formed by those who previously provided the service as public-sector employees. Internal markets arise when departments are able to purchase support services from several in-house providers or outside suppliers that in turn operate as independent business units in competition with one another. Management contracts involve handing over the operation of a facility—such as an airport or a convention centre— to a private company in accord with specific contractual arrangements. Market testing (also known as managed competition) occurs when the arrangements governing the provision of a service are decided by means of bidding in comparison with private-sector competitors.

Typically, marketization transfers the delivery of services to autonomous or semiautonomous agencies. Proponents of NPM offer various arguments in favour of such agencies. They argue that service providers are then able to concentrate on the efficient delivery of quality services without having to evaluate alternative policies. They argue that policy makers can be more focused and adventurous if they do not have to worry about the existing service providers. And they argue that when the state has a hands-off relationship with a service provider, it has more opportunities to introduce performance incentives.

Corporate management reform involves introducing just such performance incentives. In general, it means applying to the public sector ideas and techniques from private-sector management. The main ideas and techniques involved are management by results, performance measures, value for money, and closeness to the customer—all of which are tied to various budgetary reforms. Although these ideas and techniques are all attempts to promote effective management in the public sector, there is no real agreement on what constitutes effective management. To the contrary, the innocent observer discovers a bewildering number of concepts, each with its own acronym. For example, management by objectives (MBO) emphasizes clearly defined objectives for individual managers, whereas management by results (MBR) emphasizes the use of past results as indicators of future ones, and total quality management (TQM) emphasizes awareness of quality in all organizational processes. Performance measures are concrete attempts to assure effective management by auditing inputs and outputs and relating them to financial budgets. Such measures vary widely because there is disagreement about the goals of performance as well as how to measure results properly. Nonetheless, value for money is promoted mainly through performance measures to influence budgetary decisions.

The success of NPM has been unclear and remains a source of considerable debate. Few people believe that it proved to be the panacea it was supposed to be. Studies suggest that it generated at best about a 3 percent annual saving on running costs, which is modest, especially considering that running costs are typically a relatively small component of total program costs. Even neoliberals often acknowledge that most savings came from privatization, not reforms in public-sector organizations. The success of NPM appears to vary considerably with contextual factors. For example, the reforms were often counterproductive in developing and transitional states because these states lacked the stable framework associated with elder public disciplines such as credible policy, predictable resources, and a public-service ethic. It is interesting that, in this respect, NPM appears to require the existence of aspects of just that kind of public-service bureaucracy that it was meant to supplant.