Posted by Carlos Santiso, Sector Manager, Governance (AfDB)
In a relatively recent article (“Banking on Accountability? Strengthening Budget Oversight and Public Sector Auditing in Emerging Economies” Public Budgeting and Finance, 26(2), pp.66-100, 2006), Carlos Santiso reviews multilateral development banks’ support to parliaments and external audit agencies in Latin America. The analysis reveals a learning curve in multilateral assistance to budget oversight institutions, including in the choice of strategies and the combination of instruments. It underscores the importance of the underlying political economy context for strengthening checks and balances in the management of public finances.
MDBs have traditionally centered their attention on the modernization of financial management within the executive and the bureaucracy (finance ministries, central budget offices, central banks, and tax authorities). They nevertheless realize the limitations of an exclusive focus on the executive and the need to balance executive discretion with external accountability and, as a consequence, are increasingly supporting the infrastructure of accountability within the state - those institutions outside the executive branch of government and tasked with scrutinizing government and overseeing the budget.
Strengthening parliaments Lending to parliaments has traditionally been a contentious area of engagement for the MDBs because of its political ramifications. The WB does not directly assist parliaments through targeted investment lending and its analytical and diagnostic work in this area is limited. Only the WBI, through a small parliamentary program, provides technical assistance and training. By contrast, since 2003, the Inter-American Development Bank (IDB) has included parliamentary strengthening as an area of support. In Latin America, between 1994 and 2006, the IDB approved 13 investment loans to strengthen the representative, legislative, and oversight functions of parliaments, totaling US$100 million. A salient feature of these loans is their increasing focus on the role of parliaments in the budget process.
It is possible to distinguish two main types of interventions:
- A first set of initiatives aims to strengthen the internal structures, rules, and procedures shaping the legislative process, with a marked emphasis on those parliamentary committees involved in the budget process, either at the approval (budget committees) or the oversight stages (public accounts committees), as in Guyana.
- A second set of initiatives is designed to enhance the capacities of parliaments for independent budget analysis and budget research capacities.
Strengthening external audit agencies. Lending to external audit agencies has been less contentious. Between 1993 and 2006, the WB and the IDB have designed 15 investment loans wholly or partially intended to strengthen external audit agencies. These operations represent an investment of almost US$115 million. They include 11 investment loans by the IDB and four by the WB. The MDBs also support external audit systems as part of their policy dialogue with borrowing countries and through the conditionality attached to their policy-based loans. The WB also provides technical assistance through small grants, at times supporting larger policy-based loans or preparing the ground for investment loans. According to one estimate, in 2003, more than 30 such grants, with a value of US$10 million, were made to strengthen public financial accountability, as in Mexico in 2000 and Argentina in 2003.
There are important differences between the approach of the WB and the IDB. The WB tends to confine itself to advisory and analytical work, and small technical assistance operations, while the IDB privileges single-purpose investment loans. Moreover, as in Ecuador, Haiti, Honduras, and Bolivia, the WB tends to integrate its support to external auditing into larger operations designed to improve public financial management.
Key lessons
Choice of strategy. A first lesson concerns the choice of the most effective strategy for strengthening legislative budget oversight and external auditing. There are two main approaches, reflecting different strategies and aims:
- Focused approaches, such as those adopted by the IDB, entail designing stand-alone investment loans specifically and often exclusively intended to strengthen national parliaments or external audit agencies. IDB support to the budgetary functions of parliaments is therefore part of its broader support to the strengthening of parliaments. The focus is on parliaments as institutions and the assumption is that parliaments’ budgetary powers can only be addressed through a comprehensive approach to parliamentary strengthening and executive-legislative relations.
- Integrated approaches, such as those privileged by the WB, incorporate support to external audit agencies into broader interventions aimed at strengthening financial management systems. The focus here is on strengthening the system of public financial accountability, rather than external audit institutions in isolation. In fact, the WB often integrates support to external audit agencies in its policy-based operations. Between 1997 and 2002, WB policy-based loans included about 90 conditions related to external auditing in 38 countries.
Both strategies have their advantages and disadvantages.
- Focused investment loans tend to be more self-contained and targeted focusing on individual organizations, but often failing to generate the systemic impact they could have on the system of accountability.
- Integrated investment loans allow for greater consistency and coherence in the strengthening of financial management systems, but tend to focus on the technical aspects rather than the broader political economy context which make systems function or not.
Combining instruments. A second lesson concerns the choice and combination of instruments. MDBs assist developing countries in the reform of their financial management systems in several ways, through analytical work, advisory services, policy-based lending, technical assistance, and investment lending. Some instruments are more effective at reforming budget oversight institutions, while others are more effective at strengthening them.
- Investment lending and technical assistance are likely to be more effective when they add capacity to an already capable institution.
- In contrast, the conditionality attached to larger policy-based loans is likely to be more effective at reforming institutions whose performance is judged as lacking or inadequate.
Analytical work, advisory services, and policy dialogue can serve both purposes. Additionally, there exists scope for enhancing the synergies between available instruments, adopting sequenced approaches to, first, the reform of fiscal institutions and, then, their strengthening.
Political economy. A third lesson relates to the defining challenge of not only in understanding how budget oversight institutions can be strengthened, but also the conditions under which they can be reformed. It is important to understand that contributing financial resources does not change institutions per se. The literature on the political economy of public financial accountability tells us that the effectiveness of external control mechanisms and legislative budget oversight is hampered by the dysfunctional relations between the individual components of the systems of fiscal control, the weak links in the chain of financial accountability.
Strengthening technical capacity per se does not necessarily or automatically improve the effectiveness of parliaments and external audit agencies, nor has it prevented them from being captured. Reform efforts fail not only because they are incomplete, but because they are often designed to solve technical shortcomings when problems lie in institutional arrangements and incentives structures. Consequently, the key question for the MDBs is whether endowing budget oversight institutions with more technical capacity can strengthen them, or whether increased independence would lead these institutions to create and utilize technical capacity more effectively. Should institutional capacity be built first or should it emerge as a result of the emergence of the right political incentives?
Explaining the unexpected. Ultimately, power and politics matter. The MDBs increasingly acknowledge the centrality of political economy factors in initiating, pursuing, and sustaining institutional reform and, as a consequence, determining the effectiveness s of the aid they provide. The added difficulty for MDBs is that multilateral loans are subscribed to by borrowing governments, which might be reluctant to strengthen those institutions tasked precisely to control them. The very fact that borrowing governments agree to such loans, even reluctantly, is, in itself, a considerable achievement. Why do governments accept strengthening those very institutions tasked with overseeing and restraining them?
This partly reflects the increasing recognition by governments of the importance of having more reliable and capable oversight institutions to interact with in a responsible manner. It also reflects the recognition of the importance of checks and balances more generally by political parties that now, more than before, alternate in government. For the MDBs, a key challenge in the near future will be to ascertain the impact and results of their support to budget oversight institutions.
Other posts by Carlos Santiso:
Eyes wide shut? Understanding the politics of government auditing
African Development Governance Strategy - AfDB Request for Comments
Understanding the Politics of the Budget: What Drives Change in the Budget Process?
