Budget Support and Poverty Reduction in South Asia

1. Budget Support and Poverty Reduction in South Asia Shanta Devarajan Shekhar Shah Forthcoming in Budget Support as More Effective Aid: Recent Experiences and Emerging Lessons World Bank, April 2006

2. Main messages • South Asia needs second-generation reforms, but these are deeply contested • Governance problems persist, politics is clientelist, reform capacity varies greatly • If funding is to be provided, budget support improves chances of policy & institutional change in both strong and weak settings • Budget support faces new challenges as ground realities change in South Asia

3. Impressive growth

4. On track for income poverty reduction

5. But a long way to go on health and gender parity

6. Governance problems persist • Corruption (Bangladesh) • Conflict (Afghanistan, Nepal, Sri Lanka) • Lagging states (Bihar, Sindh, Two “Indias”) • Delivery of basic services (India, Pakistan)

7. Needed: second-generation reforms • Restructuring state-owned enterprises • Reducing untargeted subsidies • Privatizing banks • Improving public expenditure management • Implementing sector reforms • Decentralizing to increase accountability

8. Characteristics of South Asia • Very strong reform settings (Punjab, South India) and weak reform settings (Bihar, Baluchistan, Bangladesh, Nepal) co-exist • Policies and programs are highly contested in open, democratic settings • Politics more clientelist than programmatic, so reformers often lose elections

9. Success in both high and low-capacity settings requires • Decisions for which policymakers can be held accountable • Client ownership to sustain progress • Deep local knowledge • Political choices on timing and sequencing of contested, long-haul reforms • Focus on outcomes, not on inputs

10. Budget support for second-generation reforms • Focusing on budgets that matter • State-level, medium-term reform framework (Andhra Pradesh, Karnataka, NWFP, Punjab) • Improve state finances (India)

11. Fiscal deficits of Indian states

12. Budget support for second-generation reforms • Focusing on budgets that matter • Exercising flexibility in implementation • In timing (Karnataka, AP, Pakistan PRSC) • In addressing binding constraint to growth (Bangladesh governance) • In aligning reforms with political realities

13. Budget support for second-generation reforms • Focus on budgets that matter • Exercising flexibility in implementation • Promoting ownership • Support PRSPs or equivalent (AP Vision 2020, Regaining Sri Lanka) • Dialogue and analysis create climate for reform (knowledge partnership Tamil Nadu)

14. Budget support to strengthen public sector management • Reveals capacity gaps (budget reform in Bangladesh) • Maintains dialogue, joint search for solutions to problems (Bangladesh DSCs) • Supports sector reforms (Punjab, AP, Nepal)

15. Budget support to scale up human development • Keeps policymakers’ attention on human development (Punjab education) • Promotes innovation in service delivery and supports devolution (also Bangladesh) • Supply-side (textbooks, school councils) • Demand-side (stipends for girls)

16. 19.9% 12.7 % Average increase1.5% per annum Primary school enrollmentPunjab, Pakistan, 1994-2005

17. Budget support to scale up human development • Keeps policymakers’ attention on human development (Punjab education) • Promotes innovations in service delivery (Punjab, Bangladesh ESDSC1&2) • Cross-fertilizes learning (India primary education and HIV/AIDS, Nepal education and health)

18. Challenges in South Asia • Decentralization • Third-, fourth- and fifth-tier governments • Governance • Dealing with crises (Nepal, Sri Lanka) • Donor perceptions, “writing a blank check”, “money down a rat-hole”