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May 09, 2011

Transparency Versus Effectiveness in Public Financial Management

Posted by Sailendra Pattanayak

In recent years, there has been a resurgence of initiatives to promote transparency in fiscal policy decision making and implementation. Openness and clarity about the government’s policy intentions, policy formulation and implementation have been recognized as key elements of good governance. Comprehensive disclosure in a timely and systematic manner of all relevant information on management of public resources—their collection and use through a country’s public financial management (PFM) system to pursue policy goals—are seen as key to ensuring accountability.

Alongside transparency, the effectiveness of PFM systems and processes, including budget management methodologies and tools, is also important to manage public finances in a cost-effective manner. Budget reforms such as MTEF, program/performance budgeting, activity-based budgeting, cost accounting, etc. are primarily motivated to enhance the efficiency and effectiveness of allocating and managing public resources.

In this debate about transparency and effectiveness in PFM, a number of questions are usually raised:

  • Are there specific diagnostic frameworks/tools to assess transparency and/or effectiveness of PFM?Over the years, several frameworks have been developed to assess transparency of fiscal policy decision making and the associated PFM systems and processes. These include: (i) the IMF Code and Manual on Fiscal Transparency, including the  supplementary Guide on Resource Revenue Transparency; (ii) the Open Budget Initiative launched by the International Budget Partnership (IBP), which assigns a country score—called open budget index—based on the information made available to the public throughout the budget process; (iii) the OECD Best Practices for Budget Transparency; and (iv) the Extractive Industries Transparency Initiative (EITI) to promote greater transparency of natural resource revenues. Certain diagnostic frameworks, such as the PEFA, focus primarily on the extent to which PFM systems and procedures deliver efficient and effective outcomes in the six identified PFM areas.  
  • Are the goals of transparency and effectiveness mutually exclusive or are they two sides of the same coin? Although it may not be possible to assess both transparency and effectiveness of PFM by using a single overarching diagnostic framework (discussed above), these two goals are not necessarily mutually exclusive and are in fact complementary to each other. Providing the public with comprehensive and timely information on the government's budget and financial activities and opportunities to participate in decision making can strengthen oversight, improve policy choices, and enhance the efficiency and sustainability of policy implementation. However, experience also suggests that focusing solely on public availability of information may not necessarily enhance the quality of such information and the efficiency/effectiveness of PFM institutional framework unless the underlying weaknesses are adequately addressed. One could also argue that—depending on the political economy context of a particular country—too much emphasis on preparation of detailed reports at each and every stage of the budget cycle for informing and soliciting the views of the public could slow down the decision making (thus undermining the overall effectiveness of the PFM framework).
  • If a country is lacking both, should a choice be made to pursue one goal (either transparency or effectiveness of PFM) before the other? There is no clear answer to this question. The answer perhaps depends on the overall priorities set by the country itself. If transparency and accountability issues are an overriding priority for a country, they should be the focus of reforms to start with as part of a broader agenda of PFM reforms. Experience also suggests that enhanced transparency leads to better acceptability and sustainability of implementation of difficult PFM reforms that are advocated for augmenting the efficiency and effectiveness of public resources management. However, due to their complementary nature, a country cannot go far with one of these two goals unless it addresses the other. For example, unless the weaknesses in the underlying accounting and reporting systems are addressed to produce data of adequate quality and accuracy, the reports shared with the public as part of a transparent PFM system may not have much value.
  • Are there some preconditions to be met if one or both of these goals are to be successfully achieved? This is more of a sequencing issue which applies to both goals. The sequencing issues need to be addressed not just in technical terms, but should also take account of the political economy context and associated risks. It might be necessary to address some of these issues and risks upfront to avoid reforms failure due to their premature implementation. For example, a key prerequisite is political ownership of reforms in the absence of which a lot of resources may be wasted (e.g., in designing strategies and action plans and setting up organizational structures to manage reforms for strengthening transparency and/or effectiveness of the PFM system) without much result.    

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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