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November 23, 2011

The Political Economy of Budget Reforms in Aid-Dependent Countries: Domestic and External Factors Shaping Success

Posted by Paolo de Renzio, Senior Research Fellow, International Budget Partnership and Research Associate, Global Economic Governance Programme, University of Oxford

The quality of governance and institutions is increasingly seen as a fundamental factor in shaping the development prospects of poor countries. As a consequence, donor agencies have increasingly allocated resources to providing support for improving governance standards in such countries. Their interventions are based on the assumption that, through a combination of financial and technical assistance, they can provide better incentives for reform and affect the quality of institutions in positive ways. Despite this existing consensus, research on how institutions develop and change over time is still incipient, especially in developing countries. Research on how donors’ influence affects governance trajectories and processes of institutional change in aid-dependent countries is even more scarce.

A paper recently published by the Global Economic Governance Programme at the University of Oxford investigates the domestic and external factors affecting the outcomes of reforms aimed at improving the quality of government budget institutions across a group of 16 aid-dependent countries. Government budgets are a key area of government action, through which policy objectives are chosen and acted upon, and the necessary resources are collected, allocated and spent. They have also become a crucial area being promoted by donors, backed by an increase in funding for technical assistance from US$ 170 million in 1997 to US$ 1.6 billion in 2007), covering a range of initiatives aimed at strengthening the rules and procedures which underpin budget processes. How has such external assistance worked? Were donors able to ‘buy’ better governance? What other factors shaped the outcomes of budget reforms? These are the key questions that the paper seeks to answer.

The first phase of the analysis focuses on broad cross-country comparisons, using bivariate correlations and descriptive statistics in order to look for significant patterns related to changes in the quality of budget institutions across the whole sample of 16 aid-dependent countries. This analysis is based on a new dataset drawn from HIPC and PEFA assessments, tracking changes in the quality of budget institutions over the period 2001 to 2007, and on a number of economic, political and aid-related variables for which cross-country indicators exist. Two results stand out. The first one is that economic and political stability seem to be preconditions for successful budget reforms. Only countries with a minimum level of stability managed to achieve improvements in the quality of their budget institutions. The second one is the lack of any clear correlation between reform success and donor effort in support of such reforms. Higher levels of donor effort were associated with reform success only in some countries, calling for further investigation into some of the other factors that might interact with donor effort in bringing about improvements in the quality of budget institutions.

The second phase of the analysis is based on in-depth case studies of budget reforms, looking at both overall reform trajectories and three specific budget reform areas, namely (a) changes in budget classification systems, (b) the adoption of medium term expenditure frameworks, and (c) the introduction of IT-based Integrated Financial Management Information Systems (IFMIS). Mozambique and Burkina Faso were selected as relevant case study countries. In the former, budget reforms achieved limited results despite high levels of donor effort, while in the latter budget reforms were successful even with more limited donor assistance.

The results show that among domestic factors, a minimum degree of government leadership and commitment to reforms is the most important factor shaping budget reform outcomes. In turn, higher levels of leadership and commitment are shaped by past reform experiences and historical legacies in the relationship between governments and donors, by levels of technical capacity and by the degree of politicization of the bureaucracy. The degree of centralization of budget institutions, or more specifically the relative power of the Ministry of Finance vis-à-vis sector ministries, is another crucial factor for budget reform success. In other words, the finance ministry needs to have the capacity and powers to convince, coerce or cajole sector ministries into complying with budget reforms.

Among external factors, the level of technical assistance and the use of so-called programme aid modalities were less important for budget reform outcomes than the overall fragmentation of aid flows and the ways in which technical assistance is delivered. Lack of transparency and coordination, a multiplicity of implementation and reporting mechanisms, and high levels of volatility and unpredictability can all have a negative impact on different aspects of the quality of budget institutions. Fragmentation on the donor side can generate fragmentation in government systems as well, as sector ministries which have direct access to donor funding are able to bypass normal budget procedures.

Donors’ hopes of ‘buying’ better budget governance, therefore, are more likely to be enhanced not by additional technical assistance or general budget support, but by better behaviour, reducing the perverse incentives induced by aid fragmentation and increasing coordination in the delivery of technical assistance. Both of these factors, however, might only work in countries that are somewhat stable, and that enjoy a minimum level of government leadership and commitment.

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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Comments

Donors have issues more with the budget execution than the budgeting now. In spite of Paris Declaration and Accra Action Agenda, many of the donor funded projects are being executed, as extra budgetary mechanism; in foreign aid (grants)-receiving countries. The procurement procedures, transparency and efficient projects management being the issues!

It may be for these reasons that in cases through the national budget funding, (donors have to ensure that things go right and as desired) TA is considered a prerequisite. But the points made in the post are well taken!

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