RA: PFM reforms can often get held up, or be obstructed by, political and institutional constraints. Should FAD incorporate more analysis of these issues into its technical advice? Some agencies, USAID, the World Bank, and DFID for example, have already developed useful diagnostic tools to assess political economy aspects of public administration, and how the results can be applied to TA work.
CR: The answer is yes, but I think the constraints are more than just political. The first essential step in any reform is for the authorities to be certain that there is a problem that needs to be fixed. The leaders of the reform need to be convinced, as well as members of the cabinet and other stakeholders. Political economy aspects of reform, including how to manage change, are critically important elements of any reform program. We at the IMF have to be aware of these political economy factors, and incorporate them into the design of our TA operations.
RA: What about the role and organization of ministries of finance in developing countries? In some sub-Saharan African countries, for example, the ministries of finance are not very strong or powerful organizations. They are also badly organized, and don’t have the right staffing and management capabilities. Is this an issue you think is important, and on which FAD needs to do more work?
CR: Yes, it’s extremely important. There’s an interesting contrast here between the Sub-Saharan African and Latin American experience. In Latin American, in general, you see stronger ministries of finance, with a clearer vision of their role in improving public finances. At the center of government, these ministries are seen as key players in many policy areas, which is often not the case in Africa. Many ministers of finance in Latin America are technocrats, whereas in Arica they are often politicians, with less understanding of public finance issues, which can undermine their authority. I also think that we tend to overwhelm countries with too many reform initiatives, not recognizing that senior finance officials have important day-to-day jobs to carry out, whether running a treasury department, a debt office, or a budget office. We cannot make a ministry stronger simply by telling them the hundred and one things they need to do to improve PFM systems over the medium term. They need to understand how reforms should be prioritized and sequenced, how institutional capabilities should be built, and how the processes of change should be organized and managed.
RA: Are there other important differences you perceive between PFM arrangements in Latin American countries and those in other regions of the world?
CR: Yes. As an example, let’s take one area we are working on right now, namely public investment management. We all recognize the importance of good infrastructure, and effective processes for allocating resources for investment, and spending resources well. In Latin America, there was a first wave of interventions in public investment management in the 1980s, that is now being replicated in other parts of the developing world. Norms and standard procedures for the appraisal and selection of investment projects, as well as other improvements in public budgeting, were developed early in Latin America. This partly explains the greater maturity of the PFM systems in the region, which I believe was facilitated by the presidential systems of governance, relatively strong public sectors, and greater capacity than you will find in the finance ministries of other regions.
RA: Achieving a satisfactory balance between the planning and budgeting functions is an issue in many developing countries. Drawing on your experience in Colombia, what do you think are the key challenges in achieving better coordination and integration of these functions?
CR: Colombia is a special case. It is recognized in Latin America as a country that has achieved good coordination between the planning and budgeting functions. The country’s closely-knit institutional framework encourages coordination, as does its strong Ministry of Finance and the National Planning Department. There is the Fiscal Council, for example, which includes the Minister of Finance, the Director of Planning, and senior staff from both of these organizations. And there is the Council for Economic and Social Policy which is headed by the President of Colombia, and whose technical secretariat is the National Planning Department. Any important decisions must be approved by this Council, which considers trade-offs among different policy goals, and their financial implications. These mechanisms are far from being perfect, but they work reasonably well.
RA: Are similar models used in other Latin American countries?
CR: Chile uses a similar model to Colombia, and is perhaps the best known case. But there is no uniform pattern. The institutional arrangements for planning and budgeting have mutated over time in Latin America. In some countries, the planning functions have been integrated with budgeting; in other countries, they have been removed. I wouldn’t say it is necessarily better to have a joint ministry of finance and planning, or two separate entities. The preferred solution will depend on the conditions that exist in any country.
RA: How can the World Bank and the IMF work better together on PFM issues?
CR: The most important thing to stress is that there is plenty of work for everybody. The challenges are enormous, in all regions of the world. And the business of PFM reform is a long-term business. Results are not achieved in three months or in six months, or even necessarily in six years. Reformers have to be persistent, know where they are going, and stay the course for the long term. So there is a space for both the Bank and FAD, and of course there is always space for better coordination. The Bank and FAD have models of providing TA that are somewhat different, but at the end we need to cooperate for the benefit of our mutual clients. In Mozambique, for example, FAD and the Bank worked together on preparing a public investment management assessment, and an action plan, which the Bank and other donor partners are now helping the authorities to implement.
CR: Given all your experience, I’d like to turn the tables and ask you a question. What do you believe should be the focal points for PFM work in FAD, and our agenda for the short term and the medium term?
RA: Well, above all I think we have to be responsive to our clients. Which I think we sometimes are, but sometimes are not. The PFM reform agenda remains a little too supply driven, and we should try and turn that around. A large number of new topics related to PFM have come on the agenda in the last couple of years, such as fiscal transparency, the analysis of fiscal risks, the work we are doing on the organization of finance ministries, work on spending reviews, the oversight of state-owned enterprises, and public investment management, of course. All these are potentially productive areas of TA, provided they are genuinely demanded and owned by the authorities. We also need to think more about our business model, the way we deliver technical assistance. Is it best done through our “standard” product, which is a two-week mission and red cover report delivered once a year, or once every two years. Or is it best done through regional advisors who work closely with our clients in the field, or through short-term expert missions, or a combination of these methods? The evidence suggests that in low-capacity countries the traditional model of delivering TA doesn’t work very well. Countries receive their red cover reports, they take a look, and then the reports are shelved, FAD comes back a year or two years later and discovers that things haven’t really changed very much. I do think we need to look for better and more effective ways of delivering our TA.
CR: I agree fully, except that your argument applies in almost all countries, not only those with low capacity. And we need to be advising countries much more on the “how” as well as the “what” of reform. It’s easy to recommend that a country should introduce an MTBF, say, much harder to advise on how it should be done. There are some examples of where we have done that well - in Nigeria for instance with the successful introduction of a treasury single account. But that is quite rare and we should be working more with countries to see how they can change their institutions, and remove institutional blockages to reform. In addition, our interaction with area departments is critical to responding to the needs of programs and the Fund’s ongoing surveillance work.
RA: Finally, could I ask you about FAD’s analytical work related to PFM issues. A lot of work goes into the preparation of board papers, working papers, the new series of “How To” notes, Technical Notes and Manuals, and so on. How important is this work, and can sufficient time be found for it alongside our regular work on technical assistance?
CR: I believe strongly that undertaking high quality analytical work is a critically important complement to our technical assistance activities. FAD is at the frontier of knowledge on public financial management. Our staff appreciate working on analytical topics, rubbing off against experts in all the other specialisms covered by FAD – tax policy, revenue collection, expenditure policy, and so on. Our analytical work helps us support the surveillance work of the country teams in the area departments. Of course, we need to find a balance between the time spent on analytical work against our mainstream activities in delivering TA, reviewing country papers, and backstopping our PFM advisors in the field. Some of our current analytical work is of great importance and relevance to our TA operations, our work on low-capacity fragile states, for example, the balance sheet approach to fiscal policy, and gender budgeting.
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.
