Book Review: The International Handbook of Public Financial Management[1]

Postedby Philip Joyce and Juan Pablo Martinez Guzman[2]

Overthe last two decades, public financial management (PFM) has been at the core ofmany government reforms around the world. As a subject with many moving parts, the field has become distinctivelybroad and diverse, with a great array of topics that are strongly linked witheach other. For that reason, creating a comprehensive book that covers most, ifnot all, of the PFM related topics, is a daunting (some might say impossible)task. Richard Allen, Richard Hemming and Barry Potter, three former staffmembers of the Fiscal Affairs Department of the IMF, however, have managed toaccomplish such an objective with the publication of the new International Handbook of Public FinancialManagement.  The book’s length (morethan 900 pages) is itself a testament to the breadth of the field.

Inaddition to the broad range of topics that make this book almost inarguably themost comprehensive PFM publication to date, it is important to describe two overarchingcharacteristics that make it unique. First, it provides an extraordinarycombination of academic knowledge and empirical evidence. Thus, every topiccovered is analyzed both through the lens of how ideal PFM systems should be designed and how they are to be implemented given specific country scenarios. Eachchapter of the book combines evidence from developed and developing countries;emphasizing institutional arrangements, political economy constraints, and theinterrelations between systems. This makes this book an excellent guide forpolicymakers, practitioners, and academics. Second, this book benefits from theviews of the different authors, many of whom are the leading experts on thetopics covered by the many chapters. Readers will benefit greatly not just fromlearning about the topics, but by learning about them from these world-reckonedexperts.

The38 chapters in the book are grouped into six parts that provide the readerswith a logical understanding of the interrelations between PFM topics. Thisstructure provides a comprehensive, accurate, and logically ordered descriptionof PFM.

Asstrong institutions are the cornerstone for any PFM reform, the book starts byanalyzing the different conceptual, institutional, and legal frameworks thatcharacterize PFM. The analysis not only includes formal and informal rules(such as debt and deficit limitations), and  relations between different actors (such asexecutive and legislative bodies).  Thesection also treads onto less traveled ground by describing how micro andmacroeconomic decisions affect each other. For example, strong central finance agencies, solid legal budgetframeworks, and consensus fiscal rules are important not only because theyassist with the smooth operation of budget allocation processes, but becausethey contribute to macro-level fiscal sustainability.  The book also analyzes these fiscalinstitutions from the vastly different environments of developed and developingcountries.

Thesecond part of the book focuses on resource allocation regimes.  Although Performance Budgeting and Medium TermExpenditure Frameworks (MTEF) have now been widely perceived as strong tools toimprove the effectiveness of resource allocation, those topics are not usuallyconsidered as the core of PFM, and are often mistakenly treated as isolatedreforms. The book takes a definite stand in this regard, providing empiricalanalysis of the relationship between the implementation of these tools andeffective resource allocation. The book also provides additional value byproviding specific recommendations on the implementation of some of the mostbasic technical tools (such as budget classification) that promote moreefficient resource allocation.

Thethird part moves logically from resource allocation to the important but oftenoverlooked topic of budget execution. The book points towards three main areas crucialto proper execution of the budget: cash management, procurement, and payrollsystems. As with other topics covered in the book, this section reviews itssubjects from a political economy perspective, and differentiates reformsbetween those that are likely to be successful in some countries but may notwork in others.  This section closes witha discussion of the management of extrabudgetary funds and the maintenance ofinternal control mechanisms; the failure to adequately address each of thesecan result in a lack of transparency, promote corruption in budget executionand hamper the achievement of planned objectives.

Thebook is notable for its attention to both the expenditure and revenue sides ofPFM.  While much of the literaturefocuses much of its attention on spending, no comprehensive review should leaveaside the analysis of how to gather those resources in the first place. Thus,the fourth part of the book covers issues as broad as the normative andtechnical conditions for the design and the implementation of specific taxsystems; and  as specific as how tohandle revenues from natural resources, customs offices, and foreign aid.

Thefifth part of the book describes, at some length, the management by governmentsof assets and liabilities. This section includes varied topics such as: how tomitigate the financial effects of natural disasters, how to manage public pensionfinancing, how to correctly account and plan for investment projects, how toadminister sovereign wealth funds properly, and how to strengthen and managenon-financial State-owned Enterprises.

Thelast section of the book closes the PFM cycle with a discussion of audit andcontrol mechanisms, not only as means to ensure legal and moral accountability,but as a feedback mechanism to inform future allocation of resources. For thesemechanisms, the authors draw on specific characteristics needed for them to besuccessful in different types of countries. Also and closely linked to controlmechanisms, the book correctly identifies accounting and reporting systems askey elements to promote transparency and accountability.

Ifthe book has a weakness, it is that its sheer length may prove daunting to somewho may desire a more streamlined introduction, and that it does not focusexplicitly on more innovative reform ideas. Those interested in a shorter treatment focused specifically on the cuttingedge reforms in PFM could look to the recent book published by the IMF FiscalAffairs Department.[3]  At a minimum, the two books could serve ascompanion volumes for those interested in the current state of fiscalinstitutions around the world.

Insum, we believe that The InternationalHandbook of Public Financial Management is a must-have resource for manyvaried audiences. From a practitioner perspective, both developmentprofessionals and government officials (particularly, but not limited to, inthe Ministry of Finance) will find a wealth of ideas and good practicesdescribed in the pages of this volume. Moreover, faculty teaching courses in financial management, who wish tolook at traditional PFM issues from an international perspective, will find nobetter resource than this book.  Giventhat pace of PFM reform is notoriously slow, this book should serve as a usefulresource for years, or perhaps decades, to come.  The editors and authors have thus done a greatservice to the field.

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