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January 14, 2008

Understanding the Politics of the Budget: What Drives Change in the Budget Process?

Posted by Carlos Santiso, Governance Division, African Development Bank

Understanding the politics of the budget is central to appreciate the institutional factors and governance context that influence the actual functioning of budgetary systems and their reform. A political understanding of fiscal governance and public budgeting is important to encourage and support “good enough” reforms in public financial management and accountability; identify drivers of pro-poor change, strengthen checks and balances and support demand for good financial governance from within and outside government; and improve aid effectiveness by informing donor support and instruments.

In 2007, the United Kingdom Department for International Development (DfID) published a briefing note on Understanding the politics of budgeting: What drives change in the budget process? The note was intended to:

  • distill the findings of political analyses of the budget process in developing countries;
  • highlight why a good political understanding of the budget process is important to improve aid effectiveness, particularly in the context of direct budget support;
  • suggest entry points for donors to engage with the politics of the budget and strengthen domestic demand for accountability in public finances; and,
  • provide operational guidance on how to undertake politics of the budget reviews.

The briefing note is largely based on evidence drawn from case studies of Ghana, Malawi and Mozambique). Its main findings are as follows:

Why is budget reform so difficult to achieve? Political governance affects the functioning of public finance management systems and the sustainability of budget reform. The studies of the politics of the budget in Ghana, Malawi and Mozambique highlight an important gap between the fiction of formal systems and the reality of informal processes. They reveal that dysfunctions and distortions occur in all stages of the budget process, as formal rules can be resisted, neutralized or subverted. They emphasize that the budget is a political process, rather than a purely technical one.

Why does political economy matter? Politics make a difference. It is not possible to separate technical budget reforms from the wider governance environment required to make them work and the political system in which they are embedded. Effective reforms are those that are technically sound, administratively possible, and politically feasible.  It is important to bring power and politics into policy analysis. Political economy issues influence the scope and timing of reform, as well as governments’ abilities and incentives to embark on reform. They determine the choice of reform alternatives and the capacity to implement it. The electoral cycle often shapes the policy space for reform.

Donors need to be much more aware of the political economy factors which influence the behavior of partner governments, including the potential impact of their own behavior on domestic processes.  This is particularly important in aid dependent countries where donors are actors in the budgetary process. Aid dependency can have the perverse effect of emphasizing partner governments’ external accountability to donors over their internal accountability to citizens.

What explains change? Political economy factors affect the trajectory of change and the credibility of governments’ commitment to reform. The studies underscore that demand for better governance and greater accountability is a key driver of change in budgetary systems. This demand emerges from both the formal institutions (such as parliaments or general audit offices) and informal systems of budget oversight (such as civil society, the media and citizens). However, these institutions and mechanisms are often weak and ineffectual. They can be circumvented or subverted. Formal institutions can only effective if informal institutions reinforce, rather than undermine them.

How does change occur? The studies suggest that incremental reforms are more likely to be more successful than “big-bang” approaches seeking to transpose models from abroad. Realistic reforms are often “second-best solutions” seeking to “get the basics right first.” Pursuing a large number of reforms simultaneously, without considering their technical feasibility and political viability is likely to fail. There is often limited policy space and technical capacity within partner governments to manage complex reform processes. There are also important adverse forces favoring the status quo, which need to be considered.

It is therefore important to:

  • identify the formal rules and informal practices shaping the budget process and the institutional and political contexts in which budgetary systems are embedded;
  • assess the overall trajectory of change and the agents of change in the budget process; and,
  • ensure that budget reforms are adequately prioritized, realistically sequenced and tackle the root causes of weak public budgeting.

What can donors do? Traditionally, donor support focuses on the machinery of government and the strengthening of public finance management systems within the executive branch, principally through capacity development. While these efforts should be continued, they ought to be complemented by efforts to strengthen domestic budget accountability. Donors can play an important role to encourage budget transparency, support demand for change and encourage greater external scrutiny of the budget.

Understanding political risk is particularly important for budget support. Where we are considering direct budget support, with funds passing into and through national systems, more robust political analysis is critical. The joint evaluation of general budget support recommended donors improve their understanding of the influence of political factors on budgetary processes and, therefore, budget support and fiduciary risk.

Politics of the budget reviews help identify and support drivers of pro-poor change in public finance management. A challenge for donors, reflected in the case studies, is translating knowledge into action through, for example, country programming, budget support, or conditionality. Actionable recommendations will obviously depend on country circumstances.   

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