Posted by Allen Schick
This note compares two strategies for modernizing public sector management (PSM) in countries that have large technical deficits in policymaking, allocating public resources, delivering public services, and monitoring results. One strategy, often favored by development specialists, is to attempt to rapidly modernize public management by introducing the advanced practices of highly-developed countries. The argument for this "leapfrogging" strategy rests on the expectation that low-income countries can avoid the trial and error process that advanced countries have experienced and accelerate straight to adopting best practices.
The counter argument is that countries which lack basic managerial capacity cannot make effective use of best practices. It behooves them, therefore, to forego, state-of-the art reforms and concentrate instead on capacity-building measures, such as developing basic accounting and budgeting systems. Rather than retard development, a "basics first" strategy prepares the ground for more sophisticated PSM systems. For example, it will likely be premature to introduce the accrual basis in a county that lacks reliable cash-based financial reports, or to extend the time horizon of budgeting to the medium-term in a country that has unstable annual budgets.
While the discussion in this note pertains to PSM innovations, it is relevant to a broad swath of governmental reforms. This writer has observed efforts to introduce avant garde education reforms in communities that lack schools or textbooks, where teachers are indifferent or ill-trained, and student attendance is irregular. When one exciting reform fails, development experts or donors promote the next great hope, often with the promise of fresh money, but again not aligned with the reality of conditions.
One of the virtues of the Millennium Development Goals (MDG) movement launched more than a decade ago, and a factor in its widespread success, is that it implies a basics first strategy. The MDGs do not themselves recommend a particular approach, but in targeting specific goals they emphasize that getting results is far more important than showcasing best practice.
The effectiveness of MDGs indicates that countries can make enormous progress by doing basic things, such as vaccinating children and bringing safe drinking water to communities. PSM reforms have the same characteristic: doing the basic things first is the surest way to accelerate development, even if this means eschewing best practices.
The next section makes the case for best practice, and explains why it has been so popular both in the development community and among low-income countries. Then I present the counter argument, and suggests an appropriate sequence for PSM reforms.
Why Everyone Loves Best Practice
When they assess public management in low-income countries, development specialists often encounter multiple PSM deficits that must be remedied in order for the government to effectively improve the wellbeing of citizens. The issues may include unrealistic plans that ignore financial and other constraints and are, in turn, ignored by policymakers; unstable budgets that are ignored or remade during the fiscal year, and actual expenditures that vary significantly from authorized amounts; low-quality public services that are provided, if at all, by poorly-trained or uncaring government employees who are hired because of political connections; large information gaps that prevent government from gauging the needs of citizens or the impacts of public programs; incomplete and inaccurate financial reports that invite corruption and misuse of public funds; and a truncated time horizon that sometimes extends as little as one month ahead.
To remedy these and other profound shortcomings, donors and field workers frequently advise governments that they can accelerate development by adopting the best practices applied in the most advanced countries. The roster of best practices includes reporting public finances on the accrual basis, introducing elements of performance-based budgeting, extending the budget's time frame to the medium-term, investing in program and impact evaluation, and installing an integrated financial information system.
The rationale for introducing these innovations in countries with large PSM deficits rests on the fact that best practices in advanced economies have evolved over an extended period, usually more than a century, during which countries innovated through trial and error by introducing new techniques, adjusting or discarding them in the light of experience, and finally settling on processes that have come to be regarded as superior to previous practices. Through learning and imitation, other countries have imported practices found to work well elsewhere, so that over time what was once avant garde came to be accepted as best practice. In this way, upwards of 80 countries have introduced a version of medium-term frameworks, and more than 100 claim to have a performance-based budget system.
International organizations, including World Bank and IMF, have actively promoted best practices not only in providing technical assistance, but also through the issuance of standards and diagnostic tools. Conversion to accrual accounting has been stimulated by the International Monetary Fund's rules for compiling government financial statistics; significantly, however, the IMF has not promoted use of the accrual basis in government budgets. Both the IMF’s Code of Good Practice on Fiscal Transparency, and the Public Expenditure and Financial Accountability (PEFA) framework, established by a consortium of donor countries and international organizations, are diagnostic instruments which have been used to prod countries to considerably improve budget and other related practices.
It is hard to quarrel with the notion that a country is likely to manage public finances better when it explicitly links resources to results, and that its fiscal position is more secure when it expressly considers downstream implications of current revenue and spending decisions. Recognizing future liabilities on the balance sheet and other financial statements provides a fuller, more accurate account of a country's finances than do statements that only record cash flows. Similarly, analyzing data to assess the effectiveness of government programs is preferable to ignoring evaluating findings.
Ignorance is not bliss in managing public responsibilities, nor is short-sighted disregard of destabilizing demands on future budgets. There is, in sum, good reason why best practice has earned its niche, and good reason why best practice is the gold standard that distinguishes soundly managed countries from those that are not as highly esteemed.
Why Basics Matter more than Best Practice
However, the sensible assumption that countries should vault to the top by virtue of their successful implementation of best practice begs a simple question. How did advanced countries manage to develop when they had cash accounts, budgeted only for the coming year , allocated money for the purchase of inputs, and knew nothing of the stellar practices that have earned them recent acclaim? This question can be asked of almost all advanced European countries, as well of the United States, and some Commonwealth countries. After all, it was during the heyday of line-item budgeting and of centralized control of public administrations that advanced countries achieved near universal literacy, added a decade or more to life expectancy, built modern transport networks, conquered most of the fatal contagious diseases, distributed safe drinking water to their people, and added greatly to material wellbeing.
This question, and the historical record that underlies it, pertain not only to the West, but also to some of the most advanced countries in Asia. In fact, Korea controlled public expenditure through 6,000 budget items during its spectacular rise from an under-developed country to one of the most developed. And how did Singapore squeeze so much progress in its first two decades after gaining independence despite having old fashioned administrative processes and input-focused budgets?
These unsettling questions can be restated in contemporary terms: how did advanced countries manage to produce sterling results when they lacked results-based budgets and management? How did they perform before they had performance budgets and how did they create robust futures when budget planning muddled through one year at a time?
In my view, there are two sets of answers to the questions, both of which bear on selection of the appropriate PSM strategy for development. One is that government can pay attention to results even when it lacks a formal performance-type budget; the other is that the input-based controls maintained by a country during its development years prepares the ground for modernized PSM processes.
What matters most in promoting development is that a country values results, and therefore uses inputs to purchase a better future for its people. It recruits teachers who are properly trained and cares that students are learning useful curriculums, has nurses who are meticulous on hygiene and check whether patients are taking prescribed medicines, engineers who endeavor to construct safe roads, social workers who protect people vulnerable to domestic violence or malnutrition, etc.. Results are more likely to be achieved when they are embedded in norms than when they are mechanized in procedures. This might be one of the reasons that service delivery in advanced countries has gone down in quality in the perception of many of its citizens, while not according to the performance indicators so avidly produced by our bureaucracies. To the extent MDGs in developing countries have been successful, it is as much because the values they express are widely shared as because they have been set in numerical targets.
The norms do more than articulate a developing country's yearning for a better future; they also inbreed the importance of complying with rules, for example, the rules that require expenditures to be properly documented and budgeted funds to be spent only as authorized in law. Although they may be inefficient and constrain managerial discretion, control and compliance systems formalize the administrative work of government. This is a transformative accomplishment in many low-income countries that have informal labor markets and informal social and commercial relations. It is an essential step in the transition from control-centered public administration which confines managerial discretion to modern PSM which empowers managers to perform.
Informality is a mixed blessing in low-income countries, for (as DeSoto demonstrated more than two decades ago in his study of Peru), it both promotes and retards development. Informality, however, is not confined to the market sector; it penetrates public administration and opens the door to conflicts of interest and petty corruption, low-paid and low-skilled public employees, deviations between authorized and actual expenditures, and other pathologies.
In countries where informality is widespread in the management of public programs and agencies, introducing best practice is not the best strategy. Best practice in these situations should means building basic capacity to carry out public responsibilities in a prudent reliable manner by strengthening the basic institutions of public administration. It is safe to migrate to better practice only when basic capacities have been institutionalized in the ongoing work of government. Basic capacity is a practice found in all well-managed countries over an extended period,, in contrast to the better (or best) practice that is a recent innovation found only in relatively few countries.
By this standard, it is easy to distinguish between basic and best by considering particular elements or practices. Annual budgets are basic practices of all developed countries, medium-term frameworks that actually regulate future revenues and expenditures are the best practices of only a few countries. Cash -based budgeting is universal, accrual budgeting is practiced by barely a handful of countries. Itemized control of expenditures is the norm in most countries, budgeting for outputs has been attempted again in only a few, and budgeting for outcomes hardly at all.
The difference between basic and best is more than a matter of labels, but speaks to the preparedness of a country for advanced methods and processes. A country that does not have a reliable annual budget cannot master the technical demands and political will to produce and implement a reliable medium-term framework. To be specific, significant variances between authorized and actual expenditures indicate that the finance ministry lacks the will or capacity to review the actions of spending units, or that the budget tabled by government is merely a pretense and not a genuine plan of activities and expenditures. In this circumstance, not only is a medium-term framework useless, but it can damage the country's fiscal position by generating pressure for higher expenditures in future years.
Across the full spectrum of PSM processes, there is a logical progression from simple to complex systems, from rules that control managers to rules that give managers broad operating discretion, from informal arrangements based on interpersonal relations to formal arrangements based on prescribed processes. This sequence is as relevant to the management of human resources and information systems as to the management of financial resources. It makes little sense to offer performance bonuses to workers employed through political connections, or to invest in construction of an integrated financial management information system in a country where financial reports are tardy or incomplete, and where staff have not internalized the norm of accurately recording transactions.
Singapore and Korea, the two countries mentioned earlier as exemplifying development while operating old fashioned control and compliance administrative systems, significantly modernized PSM arrangements once they achieved basic capacity. Approximately two decades after gaining independence, Singapore launched a series of reforms that shifted the country from input-based budgets that restrict managerial freedom to block budgets that both empower managers and hold them accountable for use of public money and substantive results. A big part of Singapore's success story has been recruitment, training, and excellent remumeration of the civil service, and indoctrination of a civil service culture that stresses the absolute necessity for performance and propriety in carrying out public responsibilities.
Korea has taken a different path, though the sequence has been the same as in Singapore: basics first, then best practice. Rather than step by step modernization, Korea launched a "big bang" reform early in the new millennium that purged the budget of most line items, established top-down budget policy introduced a medium-term framework, and combined strategic policymaking and public finance in an enlarged ministry of financed.
Singapore and Korea are not isolated cases. To this writer's knowledge, just about all "best practice" countries earned their stripes by first establishing reliable control-based PSM systems before graduating to "new public management" and modern public financial management techniques. Chile in Latin America, Australia in the Pacific, Sweden and the Netherlands in Europe are prominent countries that were well-grounded in basic PSM before they adopted contemporary best practices.
Singapore and Korea provide yet another lesson that is reflected in the title of this note. It is not the case that building basic capacity first retards a country's development and condemns it to second class status. Basic capacity is the surest route to rapid development and best PSM practice. The old adage "haste makes waste" has been validated by the numerous failed initiatives that dot the development landscape, and the project portfolios of World Bank and IMF. Failure, however, is an excellent teacher, provided one is willing to abide its lessons, even when they clash with conventional wisdom. Through disciplined, step-by step reform, the development community has the opportunity to achieve numerous success stories in the decades ahead.
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.
