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January 18, 2008

Public Financial Management Reform in Difficult Environments

ODI Publishes findings of CAPE conference in London

Posted by Ian Lienert

Odi The Overseas Development Institute (ODI) recently published the main findings of its conference on “Tales of the Unexpected: Public Financial Management Reform in Difficult Environments” (see posting of December 3, 2007). The Executive Summary make ten main conclusions on the interface between the technical dimensions of public financial management (PFM) reform, the policy agenda on governance, and the political economy of reform.  Read on to discover these ten conclusions.

The following key points arose from the conference proceedings (The full report can be downloaded by clicking on this link.)

  • There are complexities in defining ‘governance’. This makes it difficult to establish the relationship between governance quality and successful PFM reform. Aggregate governance concepts and broad typologies for groups of countries may disregard important country specific differences that influence PFM reform progress. Equally, formal interpretations of governance may exclude the informal accountability relationships that are prevalent in many developing countries.
  • There is a lack of consensus on how to define ‘successful’ PFM reform. Progress towards substantive PFM reform is a journey rather than a destination, and ‘success’ is often declared too early without due regard to the substance and sustainability of the reform. The notion of success may also be viewed differently by different stakeholders in the reform process.
  • There is demand for a more sophisticated framework to explore the influence of different types of governance environments for PFM reforms. Moving beyond simple typologies, it is important to understand country-specifi c complexities and to focus on the combination of positive governance conditions that is ‘good enough’ for a particular set of PFM reforms to succeed.
  • The role of politics in motivating and sustaining PFM reforms is integral to succesful implementation. Political leadership of the reform process is an important driving force that may be harnessed by making more explicit the political gains from a particular PFM reform path. Senior technocrats can play an instrumental role in highlighting the political benefits and proposing the sequence of reforms.
  • Greater attention should be directed to domestic ‘demand-side’ actors in the reform process. These actors include: the taxpaying electorate, the legislature and civil society groups. The influence of these actors remains weak in many developing countries, but they have the potential to play a forceful role in motivating reforms, especially when they form alliances with reformers in the executive.
  • International ‘donor’ agencies have a beneficial influence in developing countries when they act coherently as providers of technical advice to domestic reformers. However, they may be most effective when they stimulate enhanced domestic accountability by placing information on PFM performance in the public domain and helping to strengthen public expectations for improved PFM outcomes.
  • The ultimate success of PFM reform is dependent upon making progress with corresponding civil service reform. The two types of reforms are integrally linked and must proceed in parallel for there to be real changes in PFM outcomes such as fi scal sustainability, more efficient resource allocation, and improved service delivery. As providers of technical advice, donor agencies can help to ensure better alignment between these two sets of reforms and greater overall reform coherence.
  • The development of the PEFA framework for measuring PFM performance has resulted in significant benefits, most notably the wide international consensus over a single set of indicators. However, as the framework continues to develop greater attention may need to be focused on whether the normative assumptions underlying the framework undermine neutral dialogue on PFM performance and reform objectives.
  • Better analytical tools are needed that can go beyond establishing a technical understanding of PFM reform and attempt to understand more fully the political and institutional dynamics of reform in a particular country context. This needs to include robust, systematic and deeper examination of a range of cases of both stronger performance and weaker performance.
  • Further research is required to better understand the complex nature of public financial management reform in poor governance contexts so that clear implications may emerge for policy-makers and practitioners.

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Comments

We know that we do not know ... but even that is a progress when said by the IMF. This report on "Public Financial Management Reform in Difficult Environments", could be summarized as:

1. We do not know what governance is.
2. We do not know what success in PFM reform is.
3. Different things work in different places.
4. No reforms without indulging in politics.
5. No reforms without local stakeholder involvement.
6. Donors must coordinate to be relevant.
7. Sustainability of public finance reforms needs civil service reforms.
8. It is good to measure things, but measuring is impossible without normative assumptions.
9. We need political economy tools to understand relevant context.
10. More research is needed.

I am not sure, whether we have learned anything from this, but it is a very difficult nut to crack so one should not expect too much. The other question is whether it is the right approach. Dani Rodrik thinks not (http://rodrik.typepad.com/dani_rodriks_weblog/2008/01/why-i-dont-do-p.html.) But what is the alternative?


The summary is rather simplistic for a decidedly complex set of issues. The Conference, and IMF summary, were intended to explore these complexities and move beyond the simplistic, to operationalize the concepts in developing country contexts.

1. Governance. There is often a confusion over the colloquial use of the term ‘governance’ (something akin to ‘good stewardship’) and the academic definitions (formal rules of the games, etc.). The term ‘governance’ litters the development literature, often with little attention to its meaning. And when one gets to the question of “How to improve Governance in country Y?” the real challenge starts. So, in a way, your point is right.

2. Success in PFM reform. Read the post again. It does not say we don’t know what success is. But there are differences in how one defines ‘success? ‘ For example, a country has weak cash management, generating arrears in payments to suppliers. A new law is passed improving treasury organization and responsibility. Is that success? Or only progress towards success? The country then installs new procedures and automates its cash management. Is that success? Or only progress? It may be ‘success’ in terms of the one episode of improvement (automating the cash system), but not success with respect to outcomes or solving the performance problem. Or a country finally succeeds in reducing arrears. Success? Perhaps over one year, but would you wait to see 2-3 years with no arrears to declare ‘victory’ and ultimate ‘success?’ Different organizations and individuals measure success in different ways, for different purposes, and at different stages of reform.

3. Different things work in different places. Yes. The point of the conference is the need to better understand the drivers behind these differences, and the minimal set that need to be in place to have the reform be fully implemented.

4. No reforms without indulging in politics? Hmm. Not quite what was said. Senior officials can and do influence what happens inside government, and their support or acquiescence to a reform is an important dimensions of its implementation. That is different from ‘engaging’ in politics. Installing a treasury system in a country requires a minister and treasurer to support the reform. Of course, if you define ‘politics’ as an human interaction and decision-making, then I suppose your quip is correct, but hollow.

5. No reforms without local stakeholder involvement. True. Sadly, honored in the breach far too often. A real challenge.

6. Donor coordination for relevance. Yes. Central for effectiveness, and recognized by many in the Paris Declaration on Aid Effectiveness and other fora. But each donor is ‘sovereign,’ accountable to its financing and administrative masters. The incentives each aid agency faces are unique, and not always focused on outcomes for the recipient (as opposed to outcomes of their own project). In any given country, the aid agencies need to work together and coherently. Does this always happen? No. So we need more effort.

7. Sustainable PFM reform needs civil service reform. In many cases, yes. Not always recognized in practice. Your new treasury system may not operate long unless you can attract and retain the skills to operate it.

8. Normative measurement frameworks. I agree, it does sound like a simplistic conclusion. Normative frameworks undermining objective dialogue with a country? No. The alternative is not to measure, and not be able to document improvements. And, with PEFA, it represents the consensus of PFM practioners of what a good system looks like. Normative judgments are minimized compared with most assessment frameworks commonly in use. The summary conference criticism of measurement is a very simplistic, an easy challenge to lob. Meaningless point, unless you are a relativist, and think we live in the best of all possible worlds – any standard for improvement is normative, after all. So, I agree.

9. Need for political economy tolls to understand context. Yes. There is a gap between academic approaches to political economy, and those struggling on the ground to actual make improvements in a country, a specific system, or solve a specific problem.

10. More research needed. Yes. As with any field, yes. Much has been learned, and much remains to be learned. Less a conclusion than a re-affirmation of work underway and still to be done.

In essence, I think your point was regarding political economy specifically. Will there be a magic check-list emerging which, if followed precisely, would guarantee a ‘successful’ reform every time? A magic recipe that assures those cookies and cakes are perfect every time? No. But, with continuous effort, and research, and application, we might get far enough to make more people better cooks and improve success rates (however you measure it).

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