The Challenge of Reforming Budgetary Institutions in Developing Countries

1. The Challenge of Reforming Budgetary Institutions in Developing Countries Richard Allen Fiscal Affairs Department Presentation to AFR, October 22, 2009

2. Why strong budgetary institutions are important … • Enhance efficiency of public spending • Promote transparency and enhance governance • Allocate budgetary resources to priority economic and social areas • Exit from current crisis: unwinding stimulus measures, restraining deficits, and reducing debt Public sector resource management and accountability is by far the most widely featured category in LIC program conditionality

3. Sound budgetary institutions support sustainable and credible fiscal/expenditure policies by … • Robust macroeconomic and fiscal forecasting that helps eliminate “optimism bias” in budget planning • Effective medium-term fiscal/budget frameworks linking short-term objectives with medium-term resource availability • Comprehensive legislative oversight • Credible fiscal reporting and timely information on fiscal risks

4. And facilitate the work of AFR country teams by … • Providing reliable fiscal data, improved coverage , and capacity to understand where fiscal problems may arise • Allowing authorities and country teams to analyze better the causes of fiscal problems and explore policy options

5. Substantial evidence that budgetary institutions in LICs are very weak • Following two slides illustrate data from an ongoing study by SPR/FAD/AFR on budget institutions and fiscal performance in low-income countries • This study has attempted to construct an index for measuring the quality of budget institutions (47 LICs and 28 emerging market countries) • The data come from PEFA assessments, fiscal ROSCs, OECD, FAD and other sources

6. * Score for each criterion ranges from 0 (lowest) to 2 (highest).

7. * Score for each criterion ranges from 0 (lowest) to 2 (highest).

8. And little evidence that budget institutions are getting stronger • HIPC (2000-2004) and PEFA data (since 2005) not conclusive • Some relative success stories, e.g., Botswana, Liberia, Mozambique, Namibia, but these are few, and will progress be maintained as donor support is withdrawn? • Also progress in some of the shining stars of the 1990s, e.g., Ghana, Tanzania, Uganda has flattened out or reversed

9. Some technical areas of the budget system (e.g., classification, accounting) may be easier to reform than others (e.g., budget allocations, TSA) directly affected by rent-seeking and patronage • Evidence from FAD TA suggests that revenue administration is often easier to upgrade than expenditure side of the budget

10. Historical evidence confirms that reforming budgetary institutions is a very slow process ….

11. Selected Dates in the Development of Budget Systems:France, the United Kingdom, and the United States* * Measures that established the basic framework of accounting and budgeting are shown above the line; items shown below the line are subsequent (“new wave”) reforms.

12. Other evidence of slow progress is quoted in my Working Paper, e.g., World Bank Economic Development Reports from 1950s and 1960s identify similar problem areas of PFM compared to recent FAD TA reports and World Bank diagnostic assessments

13. Why is reform so difficult? • Political economy factors are dominant – see North (1991) and North, Wallis and Weingast (2006). • Incentives for change are weak • Most AFR countries are at a similar position in developing their budgetary institutions as now advanced counties 150-200 years ago.

14. In addition, there are technical reasons why the budget is especially difficult to reform …. • The budget is a prime source of rent-seeking and political patronage • Ministries of finance are typically quite weak in most low-income countries • Ministries of planning often have more weight than MoF • Central banks often responsible for macrofiscal functions • The annual budget competes with the national plan and the PRSP as the primary policy statement of government • Lots of off-budget accounts and funds • Responsibilities for preparing and implementing capital investment and recurrent budgets are often divided (“dual budgeting”) • Donor aid is frequently off-budget, and poorly coordinated

15. Donors and the international community are often part of the problem rather than part of the solution …. • Conflicted incentives - loan driven culture that oversells the possibility of rapid reform • Failure to learn from lessons of the past • Territorialism – competition between donors to divide up the TA cake • Weak evaluation and follow-up on implementation of TA recommendations • Recipient governments often play one donor off against the other in order to gain access to generous loan finance with few strings attached • Paris Declaration (2005) and Accra Agenda for Action push countries (and donors) to use country PFM systems before they are ready

16. And medium-term PFM reform plans are not well suited to the needs of recipient countries… • Far too complex, too many measures – e.g., “platform approach” in Uganda and Kenya • Over-mechanistic approach, with too much weight placed on PEFA scores • Unrealistically short time frame for implementation • Insufficient focus on political economy factors • Little attention to building local capacity (as opposed to filing key line positions with expensive international consultants)

17. A better approach might include the following elements: • Focus on the ultimate goals of budget reform • Avoid complex designs (however seemingly intelligent) – adaptation and evolution are the key concepts • Avoid importing solutions from advanced countries that don’t fit LICs • Choosing rather than sequencing is the right approach But, for each individual reform sequencing IS important • Focus on Schick’s half-forgotten notion of “getting the basics right” (1998) • Don’t let donors (and high paid consultants) run the show, they should be servants not masters • Follow-up by monitoring and evaluating outcomes, and hold officials to account for success/failure of reform initiatives

18. Getting the Basics Right (Illustrative)

19. But note that … • None of these basic elements should be as sophisticated as in a developed country • Sequencing the basics is actually quite complex, and will need many years to complete – “X” in the diagram could be 10, 20 or more years. • Some reforms, e.g., MTEF, TSA, external audit, may never be fully completed for political economy reasons • Enabling reforms need to take place in parallel, e.g, civil service, consolidating planning and finance functions, rule of law, strengthening local capacity

20. And what should (generally) NOT be included in a reform action plan for an LIC … • MTEF (MTFF however IS among the basics) – existing MTEFs in AFR countries have not been successful • Fiscal rules/FRL without MTFF • Accrual accounting and accrual budgeting • Performance-related or program budgets, except in rudimentary form, e.g., tracking PRSP spending • State-of-the-art fiscal risk analysis (but record guarantees, main contingent liabilities, etc.) • Fiscal decentralization (unless supported by strong central oversight and control)

21. Thank you!