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July 20, 2011

Program or Performance: What Comes First?

Posted by Holger van Eden

Inspired by the success of the PEFA diagnostic tool, staff from the Fiscal Affairs Department (FAD) and their counterparts from World Bank and EC, have been having a creative debate/not seeing eye-to eye/duking it out (all depending on one’s perspective of course) on how PEFA indicator scores should impact PFM reform programs in countries. Is there a one on one relationship between PEFA score and design of reform programs? This interesting question is not the topic of this post, however. The answer on how best to integrate PEFA in reform design is still pending. Interesting work has been done recently by Jack Diamond, Daniel Tomassi, and Ron Quist on the issue, and there seems to be some consensus at least that PEFA scores can help identify which of the “basic” PFM capacities in a country need upgrading. But this still leaves questions on optimal strategy and sequencing unanswered.

PEFA in any case says very little about the sequencing of advanced budget reforms such as MTEF and performance budgeting, as the indicators deal mostly with the basic functionality of PFM systems. One of the interesting questions in sequencing of advanced reforms is how the introduction of performance oriented budgeting should be handled. In recent years, the standard answer by many in the profession has been that program budgeting, including a fully defined program classification, has to be introduced first. Once program budgeting has become the core of the budget management system, then gradually performance indicators, first output and then outcome indicators, can be attached to the program structure. At that point, voila, one has performance budgeting.  How effective the program is in achieving policy objectives can be measured by setting targets for outcomes, and the efficiency of programs can be assessed by measuring costs of outputs relative to, for example, some benchmark, or over time.

Recently, I was reading one of Allen Schick’s seminal works on program and performance budgeting: “The Road to PPB: the Stages of Budget Reform” (attached below) published in December 1966. It’s strange how little the debate in budgeting has changed in the last 45 years or so. The paper, highly recommended reading, deals with the gradual introduction of a performance and planning orientation in the US budget system. Schick lays bare the different origins in the US of performance budgeting versus those of program budgeting. While performance budgeting had its roots in the scientific management revolution of the early 20th century, program budgeting started as a planning and programming tool in the 1950s, looking at what objectives should be pursued by government entities (originally mostly the US Department of Defense). As Schick puts it for the US: “performance budgeting is concerned with the process of work (what methods should be used) while program budgeting is concerned with the purpose of work, what activities should be authorized.”

Should these different origins of performance and program budgeting have consequences for sequencing in developing countries today? Is the standard recipe adequate? Should performance information perhaps be entered into the budget process before program budgeting is introduced? These are intriguing questions. Fact is that many developing countries—China, Indonesia come to mind—have introduced performance management systems before having introduced program budgeting, which neither of them has done up to now. Perhaps the political need to get some grip on the efficiency of government expenditure is sometimes so great that “the long route to performance budgeting” through introduction of program budgeting first, is disregarded. However, do those performance management systems in developing countries actually have any impact on the budget process, i.e. do they actually help improve management and allocation of government resources?         

Download The Road to PPB_ the Stages of Budget Reform

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I think, the Critical Path Method holds good here too! Both should compliment and supplement each other:)

This piece is a treasure trove of information.

I agree that program budgeting is a fundamental building block for performance budgeting. My recent research article on performance-oriented reforms in Indianapolis shows that performance information is correlated with intra-departmental, program level appropriation changes by the executive branch, and argues that future performance budgeting reforms should focus more at that level rather than on the legislative phase. Yet, some of the feedback for me by U.S. local officials is that they don't have a program budget structure in place, and so they can't do program-level performance budgeting. So indeed, Schick's article has been written a long time ago and is a classics and should be re-read, but it seems that institutional changes toward program-performance budgeting may be moving quite slowly, at least among many U.S. local governments.

On China's performance budgeting, my observation and discussion with Chinese officials about the reform show that they are indeed focusing on "program spending". In the Chinese budget structure, spending is divided into two parts -- the "basic" budget that is for personnel and various overhead spending and is driven mostly by formulas and mandates. Performance budgeting pilot reforms of most subnational governments do not try to deal with this part. The second part of the budget is the "program budget" of departments, and that is where pilot performance budgeting reforms have been focusing on.

Alfred Ho
School of Public Affairs & Administration
University of Kansas

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