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December 01, 2010

Elephants, Blind Men, and the Problems of Specialization in PFM

Posted by David Gentry

Everyone has heard of the Indian fable of the blind men and the elephant. The blind men touch different parts of the animal and draw very different conclusions on what they are facing from that part. The 19th century American poet John Godfrey Saxe popularized the legend in the West through his poem of the same name. The legend was applied metaphorically to describe public debates of the time on religion, which the last stanza of the poem makes explicit:

So oft in theologic wars,
The disputants, I ween,
Rail on in utter ignorance
Of what each other mean,
And prate about an Elephant
Not one of them has seen!

Budgeting is a multi-faceted undertaking, with a number of different functions that together constitute the budget system. Staff from widely varying backgrounds determine fiscal policy, conduct program policy reviews, prepare detailed budget estimates, negotiate budget agreements, execute the budget, manage organizations, prepare financial statements, and evaluate performance.

These PFM functions often correspond to distinct disciplines, each with its own schools of thought and best practices.  These disciplines sometimes lose sight of the fact that they are part of a larger effort and subsequently best practices of some disciplines may conflict with each other. Conflicts occur more often than we might think. Here are a few examples:

1.  Top-down budgeting and performance budgeting

Top-down budgeting involves setting a maximum spending amount and allocating funds within that amount. Spending limits are always set in terms of total expenditures. Proponents of top-down budgeting often go further and apply spending limits to subsidiary budgetary units such as line ministries, programs or sectors. Aggregate spending limits it is thought are best enforced if subsidiary budget units also exercise spending restraint.

Performance budgeting links results with funding. There are a number of ways to do this but the simple aim is that we reduce funding for what does not have sufficient priority, demand or effectiveness, and increase funding for what does. Evaluation of performance is based on the study of specific policies, programs or organizations.

Conflict arises when top-down budgeting sets expenditure limits on a ministry, program or sector basis. This practice makes it more difficult to shift funds to their best use. The more detailed the budget subsidiary units that are given spending limits in a top-down budgeting scheme, the greater the impediments for performance budgeting. Marc Robinson raises this issue in his IMF PFM blog of August 2009, entitled Top-down Setting of Sectoral Ceilings Problematic.

2. Fiscal space and incremental budgeting

The term “fiscal space” has achieved a good deal of currency in recent years.  Peter Heller in a 2005 IMF policy discussion paper, entitled Understanding Fiscal Space, defined fiscal space as: “In its broadest sense, fiscal space can be defined as the availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position”. In other words, it is money available, after taking care of existing commitments and responsibilities, for new or expanded services.

The concept of fiscal space is based on marginal analysis of the budget. That is to say, incremental budgeting.  Allen Schick, in his 2009 OECD Journal on Budgeting article, entitled Budgeting for Fiscal Space, points this out. Incremental budgeting has been criticized for many years, and is often held up as the practice budget reforms are intended to root out. But it is not possible to use the term, and apply the concept of, fiscal space while at the same time rejecting incremental budgeting.

3.  International standards and local conditions

International organizations are fond of budget related standards. Standards are useful to generate well defined and comparable data, and to foster the adoption of good practices. There are the IMF’s Code of Good Fiscal Practices and Government Finance Statistics (GFS) standards, the UN’s Code of Functions of Government (COFOG), and the multi-donor Public Expenditure and Financial Accountability (PEFA) framework, to mention just a few.

However, budget standards almost always require some adjustments to reflect local conditions and to create a sense of “buy-in” or “ownership”.  Matt Andrews in an August 2010 IMF PFM blog, entitled A Stock-Take on African PFM, reviewed PEFA data collected on African countries and concluded that certain conditions and history in a country, or the context of PFM reform implementation, were correlated with the degree of success in realizing various types of PFM reforms. The implication of Mr. Andrews’ analysis is that planned PFM reforms should be attempted selectively based on local circumstances.

4.  Medium-term budgeting and new policy initiatives

Medium-term budgeting has been promoted for a number of years. Two often cited benefits of medium-term budgeting are that a time horizon longer than one year is necessary to see the benefits of public programs, and that a longer term view will promote predictability and thus better management by program administrators. These benefits accrue regardless of how the budgets of forward years of the medium term are calculated.

At the same time, a number of experts promote the benefits of re-allocating funding for new priorities on a regular basis, sometimes going so far as to require a baseline budget to be reduced by a fixed percent annually to free up funds for new or expanded programs. Many in the budget community contend that the base budget fosters complacency, and that a shakeup is always a good thing. But at some point policy and program reviews create uncertainty at a level that diminishes the benefits deriving from a medium term view.

PFM specialization is here to stay. Mr. Saxe’s last stanza is heavy handed but it does make a point.  Perhaps the best we can do is to remind ourselves occasionally that PFM specialties are not independent of each other in practice, conflicts will arise among well intentioned professionals and compromises are frequently necessary.       

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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Comments

Thanks David, for an interesting piece.
In most developing countries the following is lacking:
Money, skills, people, very basic systems which prevent useful application of international standards (to wit, accrual) , lack of cash which forces short term time horizons. That leaves most of the areas where thinking is done by academics and consultants rather bereft of support. There is not much performance budgeting to be done when human resources are lacking both in numbers and skill. Similarly, for incremental budgeting, little can be done because of lack of analysis. International standards like accrual may sometimes be difficult to implement again because of skill deprivation or simply because the costs of developing asset registers may far exceed the benefits of accrual accounting or budgeting. Basics must be attended to before these exotic debates can even begin.
So would it not be better to catch the elephant by the (basics) tail, rather than feeling it up blindly?

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