The Challenge of Reforming Budgetary Institutions in Developing Countries

Richard Allen was recently interviewed by the PFM Blog about his recent IMF Working Paper―”The Challenge of Reforming Budgetary Institutions in Developing Countries,” WP/09/96. The full text of Richard Allen's working paper is available by clicking on the following link: Download Wp0996[1]

Question:  What are the main conclusions of your analysis?

RA:  First, reforming public financial management is a frustratingly slow business. In developing countries, the progress of modernizing budgetary institutions needs to be measured in small steps. Major reforms such as introducing a new treasury system or a medium-term budget framework can take a decade or longer. Second, governments, donors and multilateral institutions―including the IMF, I would admit―almost always underestimate the difficulties and challenges, and overestimate the capacity of government to deliver reforms. They fail to learn from the lessons of the past.  Third, countries that are now advanced went through similar experiences when they were in the developing phase.  Some PFM reforms in these countries have taken up to two centuries to evolve from where many developing countries find themselves today, to where the developed countries are today.

Question:  Why is reform so difficult?

RA:  The donors will say “lack of political leadership”. In practice, this is a euphemism in developing countries for weak institutions, feeble ministries of finance, bureaucratic rigidities, and rent-seeking practices. These institutional constraints are hard to break.  In addition, donors often make reform more difficult by failing to understand the constraints, preaching inconsistent messages, pushing reforms that can accommodate their agendas, placing inexperienced or incompetent advisors in the field, and fighting among themselves for a slice of the technical assistance (TA) cake. They are reluctant to say “no” to ministers who ask for the “wrong” types of reform, such as MTEFs and performance budgeting, that are way beyond the capacity of most countries to implement, and contravene the principle of getting the basics right first―Allen Schick’s famous motto “look before you leapfrog”.  In some countries, in Africa, donors have become a major part of the problem, not part of the solution. There are several instances where, for example, World Bank teams and other donors have  pushed IFMIS and similar high-tech projects on countries as a way of disbursing loans, and with too little thought to the real needs of the country. In most developing countries, the proper incentives for rapid change―political, administrative, financial―do not exist.  Indeed, there are much more prevalent incentives against reform. Budgetary institutions are particularly difficult to reform because they are a primary source of rent seeking.

Question:  Are there no success stories?

RA:  Very few, if one makes an honest assessment. The countries that have made notable advances in the field―examples include China, Chile and South Africa, and a handful of countries in central and eastern Europe―have often done so for exceptional reasons such as regime change, a new constitution, a civil war, or economic and fiscal meltdown. Exceptionally strong leadership (Mauritius is a good example) can also help. But such conditions are hard to find outside post-conflict countries and a handful of others around the world. Even when some progress is made, it may not be sustained. In Africa, for example, once strong systems in former British colonies have become degraded or dysfunctional. In Europe, several countries affected by the global financial crisis have been shown to have weak and vulnerable budgetary institutions, contrary to the received wisdom prior to the crisis, and endorsed by  the European Commission.

Question:  Is there a consensus “model” for sequencing PFM reform, e.g., the World bank’s “platform approach”?

In my opinion, no, except perhaps in the theoretical sense. The complexities of the reform process are not amenable to modeling; nor are the enabling conditions, political and administrative, that are critical for success and vary so widely from country to country. The “platform approach”  has some intuitive appeal, but its practical value has still to be proven in Cambodia and the other countries where it is being applied. My concern about the approach is that it is over-determined, and too much driven by technical considerations and failure to address key institutional constraints. I don’t believe that it provides a viable model of reform. 

Question:  Can the PEFA approach help?

RA:  Yes, but PEFA is primarily a diagnostic tool, and its role should not be exaggerated. It does not answer the much more difficult question of how to sequence PFM reforms.  For example, a PEFA assessment may indicate that country X has 10 or 15 areas of PFM that are fundamentally weak, but how should a government decide which areas to start with?  Some recent research by Quist suggests an approach using PEFA assessments to form “activity chains” that identify the most important connections between various components of the PFM process. This is intellectually interesting but is not a solution because reform of institutions is not fundamentally a technical issue, as Douglass North―an author much quoted in my paper―has rightly emphasized. The World Bank recognized the importance of institutions ten years ago, but unfortunately has not applied this idea to much of its work on public financial management.

Question:  So is your paper entirely pessimistic on the prospects for reform?

RA:  No, not entirely......, but donors and governments need to lower their expectations substantially. In some cases, small steps such as revising the budget calendar, or presenting the budget more simply and transparently can be much more useful than grandiose schemes that prove totally impractical. Even developed countries normally tackle only one major reform a time, compared with the dozens of items typically found in a platform approach document. Unfortunately, such scaled-down approaches to PFM reform are not very appealing to some governments and donors. In my paper, I set out several basic principles (but not a “model”) for successful reform. In a nutshell, these are as follows: start by recognizing the extremely long gestation periods for reforming budgetary institutions; take a few small steps at a time; focus on getting the basics right; don’t take developed countries as the paradigm; empower finance ministries; and don’t forget that PFM is only one small aspect of reforming the public sector which also needs to encompass fundamental changes in the judicial system, civil service management and incentives, strengthening the core policy making functions (cabinet, etc.), organizational restructuring, and so on. So take a holistic view of the reform process, as was done in New Zealand, the U.K. and other public service reform pioneers of the 1980s and 1990s.

Question: To what extent are your views shared amongst fellow TA providers, and what should your analysis mean for the activities of donors and multilateral institutions in the PFM field?

RA:  Insufficiently at this stage. Many TA providers have a vested interest in maintaining existing approaches and instruments. Developing countries should not be regarded as a laboratory or playground for the donors. Fresh thinking is required but there is not much incentive for change since TA providers are not sufficiently held to account for the imperfections of the models they use, and the advice they offer. Emphasis should be given to (i) conducting more critical evaluations of TA work in this field, and giving feedback to providers and governments that “bites”, and may affect the careers of the advisors concerned; (ii) upgrading the quality of PFM advisors in the field, who ideally should have more practical experience of government than is generally the case; and (iii) making use of an “honest broker” such as the IMF to provide genuinely impartial advice on PFM reform strategy and its implementation that is disengaged from donors’ lending strategies.
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Thank you very much for this interview. 

Comments

[Mauro Napodano]

Dear Richard,

as 'fellow TA provider' (I have provided MTEF advisory in Egypt, Albania, Mongolia recently) I couldn't agree more with the points you expressed in the interview.

Supporitng PFM reform is in my view a strategy management consultancy, first of all, but unfortunately it seems that other PFM advisors see it more as a technique (hence the lack of feedback 'bites').

One point were I have a slightly different view from yours, is on approaching the recipients. Telling recipients, especially local politicians, that PFM reform is a ten-year reform risks to discourage them to embark in it and for sure reinforces the existing vested interests.

More than scaling down expectations I would (and I do it in my consultancies) present the PFM reform as a package of sequenced initiatives each with its own rewards and successes ('quick wins' as the poiticians may like to say). Donors and Governments need Champion(s) of the reform who themselves need to be rewarded along the process.
Standing ready to open a debate on this, I send you my
best regards,
mauro
mauronapodano@tin.it

[Doug Hadden]

PFM starts with budgets. Any critical work that describes risks to budget reform is critical. We too often adopt a model without recognizing the dependent factors. This paper points out many of those risk factors that prevent ongoing budget reform. (And, this is not just a problem in emerging countries as we learned at the May ICGFM conference from Kevin Page, the Budget Officer for the Parliament of Canada http://icgfm.blogspot.com/2009/05/government-budgeting-in-uncertain-times.html).

The political position of the government budget office differs among countries. Perhaps this dimension is worthy of further study. For example, the independence of the budget office from politics or other ministries, the system of government (i.e. Westminster system vs. others), the extent of 'off-budget' activity, and the extent to budget influence by the executive vs. legislature may help countries to determine the budget reform path.

[Ricardo Silva-Morales]

Dear Sir;
Your comments however good and up to some point realistic are certainly unhelpful. You don't offer any alternative or any new path to follow and simply criticizing is something that even a college student is nowadays able to do. Concerns me more that you suggest the IMF as an impartial mediator or "honest broker"; that could be maybe in planet Mars but not in this planet, and has no ground in the recent experience of most developing countries.

A second idea I see absent in your analysis is that all this efforts to fix the public sector by introducing efficiencies in the management of public funds has some rationale, but even if the public sector is doing a good job that does not necessarily brings by it self economic and social development to anywhere, the most we could say is that it won't be interfering too much with it. In addition I really think there is not yet a model for institutional development that can be applied universally and perhaps it is because diversity in the humanity produces diverse Estate organizations with its own institutions.

Contrary to your underlying premise that some colonial PFMs were suited and perhaps better for some countries allow me the freedom to awake you to the reality that in most cases is the inability to break with these colonial PFM systems the reason for tardiness in developing new a more economic development friendly PFM approaches in post colonial countries and in most post-anything countries. I find your nostalgia for the colonial era irritating and misinformed. You sound like a UN official talking about failed Estates and excluding from the concept USA and UK and other reputed well developed countries which are in fact major failed Estates as proven by their incapacity to operate in the on going financial crisis. As again for the role of the IMF: How many of the countries the EU gave mandate to the IMF to "help" to solve the hurdles of the international financial crisis are now better off than before and how many thanks the IMF internvention? perhaps none. Perhaps there are also Failed Inernational Institutions undeserving the reputation and the resources they enjoy nowadays.

Lastly, my humble personal experience shows me you are right in your apreciation on the vested interest of most consulting companies appointing "unexperienced experts" to solve complex problems in the PFM reforms. Most of the time they have a deal with the software producer or simply want to maximize profit by cuting the consulting cost. But I am also affraid and in dear doubt of the delivery capacity of sacred momies that have lived their profesional lifes in national bureaucracies, they really know the politics of the budget, but do you really think they can change someting after 15 or 20 years of training in the culture of don't do, don't change that rules the civil service in the most developed countries?

With all due respect:
Ricardo Silva-Morales
Public Finance Analyst

[Richard Allen]

As the author of the paper and blog post, perhaps I could comment on some of the interesting comments made by Messrs. Napodano, Hadden, and Silva-Morales.

First, I welcome the fact that my post was controversial and has elicited some lively debate. That is precisely what is needed. No one, including of course myself, has a monopoly of wisdom in this field, but what is clear is that we need to move on and develop better approaches than are available at present. It is also clear to me that, in many countries, donors and the advisors they employ are giving finance ministers advice that is often misleading and impractical on the options for reforming budgetary instititutions, and that false and unrealistic expectations have been created on both sides. Adjusting expectations downwards is not easy to do since both governments and donors have a vested interest in keeping them high, and there is very weak accountability for results, on either side.

On a minor point, I would make a plea for using simple language rather than jargon. Phrases such as a "package of sequenced initiatives, each with its own rewards and successes" run nicely off the tongue, and can be read in many consultants' reports, but what do they really mean in practice?

Second, I don't accept Mr. Silva-Morales' charge that I have not offered any alternative or any new path. The approach I suggest is certainly different from, and a substantially scaled-down version of, existing approaches based on platforms, etc., but an approach - or perhaps a framework of principles would be a better description - it certainly is. Its main characteristics are a focus on basic elements of PFM (and I agree that more work is needed to define the precise meaning of "basic" in this context), and a pragmatic and incremental approach to reform that, in my view, fit much better with the reality of institutions (and incentives) in low-income countries.

Third, leaving aside the issue of the IMF, the "honest broker" idea is important since there can be a conflict of interest if a donor agency is both lending to a country and supporting it with technical assistance and other advisory services. This can be compared with the bad old days in which an audit firm both audited a client company's books and providing it with consulting services, a practice that was prohibited some years ago.

Finally, I'm not nostalgic for the old colonial days. My paper simply reports the fact that in many such low-income countries, whether from the Anglophone and Francophone tradition, the basic elements of a strong PFM system used to exist but have subequently degraded or been replaced by inferior practices. The point is that budgetary institutions in LICs can get worse, and frequently do, and that we need to find an explanation for this phenomenon (which is not confined to former colonial countries) and methods to deal with its consequences.

Richard Allen

[Mauro Napodano]

A reply to Richard's comment that is more a suggestion. I agree jargon should be dropped. At the same time it would be useful for this blog to have a separate discussion forum where practical experiences can be exchanged and debated among practitioners on PFM thematic issues, a need that cannot be addressed by simply posting comments where brevity is a necessity and the message may get jammed.

Mauro

[Sanjay Vani]

Thanks for undertaking to write a provocative article and present a view that does not accept some "facts" at the face value! I take this opportunity to share my view (and likewise hope it adds to the debate).

After several years of PFM work in different parts of the world, I am getting more and more convinced that for any major PFM reform to succeed, it needs, among other things, a solid accounting and reporting system. If the MoF cannot accurately tell how much money has been spent and for what purposes, no other PFM reform has any chance of success. Imagine undertaking an MTEF exercise or performance budgeting or major overhaul of the tax administration without proper accounting and reporting systems - failure is not difficult to predict. It does not matter whether it is accrual or cash-based. MoF should be able to account and report in a timely and reliable manner how resources were raised and how they were spent, it is a necessary condition for any further PFM reform. Strengthening accounting and reporting in a country is a first step in the sequence of PFM reforms in any country. In most countries, reforms in the area of accounting are relatively easy to usher in as they do not require “political will” in contrast with, say, procurement reforms.

[education india]

hi your comments are good.After several years of work in different parts of the world, I am getting more and more convinced that for any major reform to succeed.Finally, I'm not nostalgic for the old colonial days.
My paper simply reports the fact that in many such low-income countries, whether from the Anglophone and Francophone tradition, the basic elements of a strong PFM system used to exist but have subequently degraded or been replaced by inferior practices.