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April 28, 2010

Going Local Without Going Loco

Posted by David Gentry 

All technical assistance providers in the area of public financial management face a common problem: how to adapt widely accepted principles of good PFM practice to local circumstances? For example, one of the most widely accepted PFM principles is that budgets should be comprehensive, meaning that a single budget should include all revenues, expenditures, and other actions affecting the financial condition of the State. A comprehensive budget makes possible, among other things, presenting accurate and relevant fiscal aggregates and at the same time prioritizing all competing expenditure proposals so that funds are freely allocated to their best use.

There are a number of reasons why budgets are not exactly comprehensive in practice. Governance concerns often lead to social insurance funds being separated from the main budget. Self-financing services of government encourage the matching of revenues and expenditures, and retaining these revenues off-budget. Permanent or standing appropriations for debt payments assure capital markets that debt servicing will be made fully and on time. Legally defined eligibility and benefits give predictability and confidence of fair treatment to recipients of such services as public pensions, income support to the poor, and inter-governmental transfers. All perfectly good reasons, it seems, to avoid guiding principles.

PFM principles are called principles because they should guide development and evaluation of PFM practices, and efforts to establish such principles in practice are worthwhile. But implementation entails trade-offs arising from what makes each country unique—constitution, institutions, political and administrative culture, capacity, leadership, and history.  Thus, implementation details vary from country to country. At a certain point implementation variation can of course stretch a PFM principle beyond recognition, but that is not really the point I want to make.

How should technical assistance be conducted if principles are adapted to local conditions? There are two basic approaches in my view to adaptation, to going local if you will: local as seen by the TA provider and local as seen by the TA recipient.

The first route adjusts general advice to reflect local conditions. Under this approach, the TA provider must know enough about local conditions to make such judgments. This approach favors in my view the use of resident advisors with multiyear assignments and short-term advisors who provide repeated assistance over a long period of time. Advisors must establish close working relations with their counterparts in order to learn the real constraints to PFM improvements and to adjust reforms as implementation difficulties come to light. Such technical assistance tends to be selective about problems to be addressed as well as solutions offered, and should focus on implementation as much as promoting new PFM improvements.  Advisors who are experienced generalists may be more effective here than specialists. Detailed TA work plans will likely evolve over the course of providing technical assistance. 

The second approach, often preferred by developed countries with substantial own capacity, offers just international best practice advice. The TA recipient, or client, must then know enough to make judgments about what aspects of best practices, and to what degree, should be altered to fit local conditions. For such clients, TA can be provided for periods of short duration, can focus primarily on solutions to problems identified by the client, and should not be overly concerned with implementation capacity. Advisors who are specialists can be very effective.  Specific TA deliverables can be identified with assurance at the start of the TA assignment period.

The two approaches are choices when designing the mode of technical assistance, but they also apply to the day-to-day conduct of the technical assistance advisor. The first approach usually requires a highly collaborative working relationship between advisor and counterpart, with give-and-take discussions and mutual discovery. The second approach allows an advisor to work much more at arm’s length from the counterpart, with limited daily contact, and TA recommendations being prepared by the advisor and reviewed by the counterpart in relative isolation from each other. While I have only seen IMF TA missions from a distance they obviously use the second model—even if the team doesn’t fully realize it. Highly-qualified experts fly into a country for two weeks and basically say “this is how it’s done”. They should add “in other countries”, as it’s really impossible to absorb local circumstances in the span of two weeks.

The danger of offering either type of technical assistance inappropriately is significant. Providing the first type of technical assistance to a client capable of receiving the second type of technical assistance is wasteful, in terms of unnecessary learning by the TA provider and spending too much time on the TA assignment as the client phases in implementation. TA recipients may complain that the advisor is ineffective because he is telling them what they already know.

Providing the second type of technical assistance to clients of the first type is potentially more harmful.  The TA recipient may select an inappropriate local solution for the problem at hand, or may create a new problem as it endeavors to solve an initial problem. The TA recipient may underestimate the time and resources (especially staff capabilities) necessary to implement a PFM improvement. Implementation failure may injure the reputation of the client and the TA provider, exhaust the goodwill of persons implementing the reform that failed, or diminish enthusiasm for second attempts at the PFM reforms in the future. The TA recipient may lose control of the PFM reform, for example if cabinet or parliament takes a different view of the proposal, resulting in deterioration rather than improvement in PFM practices. 

In conclusion, there are a number of PFM principles that are universal, but the details of their implementation are not. Someone must adapt principles to local conditions and determine what variations from the principles are warranted. TA adaptation risk is very common and often quite high.  Who makes adaptation judgments has major consequences for how technical assistance is carried out and the likelihood of successful PFM reform.

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.

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