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August 11, 2010

A Stock-Take on African PFM

Posted by Matt Andrews

How strong has African PFM become? How do African public financial management (PFM) systems in place now facilitate effective public financial management? Where are the next challenges and how can they be met? A recent paper of mine addresses these questions, using PEFA analyses to identify central themes of the continent’s recent PFM story. The themes emerge from quantitative and qualitative data in 31 central government PEFAs completed prior to mid-2008 and tell a story in two parts: (i) across PFM processes, and (ii) across countries.

Themes Across PFM Process Areas

The data analysis suggests that: (i) African countries make budgets better than they execute these budgets; (ii) Practice lags behind the creation of processes and laws; and (iii) Processes work best when actors are concentrated, but poorly when they are de-concentrated.

The first theme relates the observation that budget preparation processes are comparatively stronger than budget execution and oversight processes across all African countries. In PFM jargon, this is commonly presented as ‘upstream processes are stronger than downstream processes’. I call this the downstream problem in African PFM.

The second theme is more nuanced, showing across all process areas that African PFM systems generally suffer from an implementation deficit—laws and processes may be in place but seldom affect actual behavior. The theme reflects a new institutional differentiation between de jure and de facto reform and is shown in the words of one recent diagnostic, “Legislation and procedures have been improved … [but] implementation has not yet been achieved.” I call it the de facto problem.

The third theme offers even more specificity, suggesting that processes are stronger when narrower, concentrated sets of actors are involved in implementation. Processes are weaker where they involve multiple players, especially outside of central PFM entities like the budget department or treasury. I call this the de-concentrated actor problem.

Themes Across Countries

Data shows substantial variation in PFM strength across countries as well. The variation is significant enough to suggest that different countries fall into different ‘PFM performance leagues’. Countries in the different leagues look very different to each other, facing different challenges.

Lower league countries have weak dimensions no matter how these are categorized: their challenges are in every area and it is difficult to see where to start. Countries one or two leagues higher are strengthening PFM dimensions that are in the upstream, de jure in nature, and centered on the engagement of concentrated actors. This seems to be the current challenge they are attempting to address. The highest league countries already have stronger upstream, de jure and concentrated PFM areas and are now challenged to strengthen other dimensions—downstream, de facto and de-concentrated.

Five factors are identified to explain why countries fall into different leagues: (i) Growing countries have stronger PFM; (ii) Stability delivers PFM progress; (iii) States with larger domestic, non-mineral income sources have stronger PFM; (iv) Longer periods of broad reform commitment fosters PFM progress; (v) Colonial heritage matters (maybe).

The paper notes that additional work is required to fully test the validity of these factors and explain them; they could all be reflective of more fundamental issues. The higher league, stronger PFM countries tend to have all or most of the ‘positive’ factors—high growth rates, stable politics, larger non-mineral domestic revenue sources, longer reform periods, and an Anglophone heritage. The lower league, weaker PFM, countries tend to have few or none of the factors—low growth, unstable politics, lower non-mineral domestic revenue sources, shorter reform periods, and a Francophone heritage.

The message is simply that country characteristics influence PFM strength. Some countries are substantially ahead of others in a general sense because they manifest the positive, enabling factors. They are in Africa’s top leagues, climbing rungs towards the top of the PFM performance ladder. Other countries find themselves struggling with contextual realities that undermine reform. Their PFM processes and outcomes are weak, and they are in the bottom leagues, struggling to get past the lower rungs of the PFM performance ladder. This raises a question for reformers: “Is context taken seriously in reform design, and how?”

Themes from Past Reforms, Thoughts for the Future

The paper argues that context is not well considered in reforms, and that there are strong similarities in reforms across the 31 countries. Reforms typically comprise sub-sets of the same  international reform ‘products’, emphasize the engagement of  central, concentrated entities like treasuries, budget departments and revenue and procurement agencies, and direct attention to changing laws and formal processes as the basis of change.

Given this discussion, and drawing from the new institutional theory about isomorphic change, the paper suggests that the existing reform approach may have successfully delivered strong laws and central agencies to date but is less well suited to looming challenges with other dimensions. It also ‘works’ in countries with favorable environments, but does not deliver stronger PFM in less welcoming contexts. To meet challenges of context-challenged countries, and weak downstream, de facto and de-concentrated process dimensions, future reform approaches need: (i) less focus on technicalities, more on ‘reform space’; (ii) less concentration and more reach and coverage, and (iii) less similarity, more context-appropriateness.

A critical focus of reform efforts should be on creating ‘reform space’ rather than pushing technical reforms. For reforms to be internalized, new ideas must be ‘accepted’, ‘authorized’ (by formal and infor¬mal mechanisms), and ‘enabled’. This requires provoking endogenous change processes instead of motivating and informing reform from the outside in. Ideas may come from outside, but they will only be implemented if ‘reform space’ exists to allow such.

PFM reform engagement should be extended beyond concentrated groups of actors at central government level. A dialogue-based approach with multiple stakeholders should replace prescriptive and externally-driven reform efforts as a means to garner reform commitment. Broad engagement stimulates support and demand for PFM reforms, enhancing ‘reform space’.

PFM reforms need to be more contextualized, shaped to fit the peculiar political, social and economic realities of a country. Contextual weaknesses—as in the factors noted above—should not be seen merely as ‘risks’ that may scuttle attempts at ‘best practice’ reform. Rather, they should be seen as crucial factors around which reforms are designed, that determine the scope, pace, and ambition of reform. Ultimately, many contexts are too difficult to simply import reforms, requiring an approach the allows learning by doing—through experimental design—as an approach to identify what reforms might work or fit.

The appearance of unorthodox reforms would be a possible sign of more appropriate design, especially in countries with challenging contexts. The paper concludes by asking what this would mean for countries and donor organizations that seem to have bought into orthodox one-best-way models of doing things. The PEFA diagnostic, relied upon for data in this study, is a loose manifestation of such a model. Key themes emerging from the study raise concerns about its general appropriateness, however, which the study alludes to: How relevant is the proposed model for Africa if countries adopt PEFA-endorsed rules but routinely fail to execute them? Is the model relevant if it is adopted by agents in concentrated discussions with donors, but not by those whose day-to-day lives are informed by local politics, economics and social convention?

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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