The (Fiscal) Benefits of Transparency

Posted by Ben Roseth[1] and Carlos Santiso[2]

Crime doesn’t pay, but what about corruption?

Since the 1960s, some have argued that corruption is the grease on the wheels of development. Inefficient bureaucracies need graft to help circumvent roadblocks of excessive red tape or unmotivated civil servants, increase efficiency and improve outcomes in investment and overall economic growth (see Leff 1964, Leys 1964). This line of argumentation has been pushed back with a slew of empirical research. Numerous widely cited articles now document the deleterious effects of corruption on governance and the rule of law, on economic growth and public investment, and more.  

Nevertheless, in the real world, corruption is still a scourge. Recent events in Latin America have reminded us just how harmful corruption can be. But once the tide of scandals and protests has subsided, will anyone care about corruption? As policymakers and civil servants navigate the turbulent waters of anti-corruption policy design and implementation, perhaps it is useful to focus on a timeless outcome: money. Simply put, when a country suffers from corruption, everyone pays. And when a country improves its corruption indicators, everyone stands to gain.

Vigilance Pays Off: How to Combat Financial Irregularity

Posted by Yugo Koshima[1]

Financial misconduct and irregularities provide a continuing headache for any government’s financial managers. They prevent a PFM system from functioning as it is supposed to do, even if the system is designed perfectly. They may also signal the existence of widespread corruption. In order to detect financial irregularities and allow policymakers to introduce preventive measures, the audit reports prepared by a country’s external audit authority are critically important.

Why Sovereign Wealth Funds Should Not Invest at Home

 

Posted by Andrew Bauer[1]

Developing, capital-scarce countries need domestic investment. Governments in countries such as Angola, Mongolia, and Timor-Leste must invest in education, health and public infrastructure if they hope to achieve middle- or high-income status. What’s more, mineral-rich countries have access to large (yet finite) sources of income that can be used to boost domestic investment and help overcome the poverty trap. On this nearly everyone can agree.

In response to this need for domestic investment, some commentators have recently suggested that there might be opportunities for these countries’ sovereign wealth funds (SWFs) to directly invest at home. Nearly every country with significant oil, gas or mineral exports operates a SWF. Already, governments in Angola, Azerbaijan, Iran, Nigeria and Russia, for example, use their SWFs to channel money to special domestic projects.

Value for Money in African Public Spending

Posted by Philipp Krause¹

The Collaborative Africa Budget Reform Initiative (CABRI) recently brought together 75 delegates from 24 countries for its annual conference in Johannesburg. The topic this year was “value for money in public spending”. CABRI is the peer-led network of African senior budget officials, which aims to improve African public finance management through peer exchange and support. It is being led by its member countries and supported by a small secretariat based in Pretoria.

The Long and Winding……..Fight Against Corruption

Posted by Chris Iles

Corruption is a global scourge.  In the public sector it can be defined as the diversion of public resources or the misuse of public authority for personal gain. It threatens political, social and economic stability, and undermines economic growth and development by distorting the delivery of public goods and services. Transparency International calls it one of the major threats facing society and has worked hard to focus international attention on reducing corruption in the public sphere. Preventing corruption has become a key policy priority for donors, especially in fragile or conflict-affected countries.

A recent paper[1] by Norway’s U4 Anti-corruption Resource Centre reviews how much we know about the effectiveness of different anti-corruption interventions.  The answer seems to be “not much”.  The paper reviews the fairly scant literature on the impact on corruption of various reforms such as direct budgetary support, PFM technical assistance, using donor systems and applying international norms. Evidence presented by the reviewed literature suggests that most anti-corruption measures are of disputable benefit.

The notable outlier seems to be PFM reform; there is, according to the study, (relatively) strong evidence that PFM reforms have a substantial anti-corruption impact. This is gratifying for PFM practitioners but also somewhat surprising since reducing corruption is not the explicit goal of PFM reform.

Rwanda: A Decade of Difficult but Sustained Public Financial Management Reforms

Posted by Lewis Kabayiza Murara

Only a decade ago Rwanda did not possess a properly articulated public financial management system, and there were few qualified staff to run the system, especially public accountants. Since then the government has put in place many of the elements required for a sound system of public financial management. Some weaknesses remain, in particular in relation to local accounting capacity, but the government of Rwanda appears firmly committed to establishing a modern, efficient, transparent and accountable PFM system. In 2006, the government put in place a Public Financial Management Action Plan aimed at strengthening several aspects of the existing public financial management system. In particular, the government sought to strengthen accounting capacity, improve the audit function, and put in place more robust financial controls and reporting procedures, new rules on fiscal and financial decentralization, and procurement reforms. Subsequently, and following the first-ever PEFA assessment on Rwanda in 2007, a comprehensive and ambitious five-year Public Financial Management strategy was prepared in 2008 and is now being implemented, with some degree of success as evidenced by a repeat PEFA assessment concluded in December 2010.

This blog post attempts to summarize salient features of Rwanda’s public financial management landscape, including a short paragraph on public procurement (which tends to be forgotten by IMF and other PFM specialists as a key area in public financial management and tends to be treated separately).

Daniel Kaufmann (Brookings): Can Corruption Adversely Affect Public Finances in Industrialized Countries?

Posted by Michel Lazare

PFM Blog readers will remember that we published two previous posts on Daniel Kaufmann's blogs. The first one when Daniel created his own blog (Warm Welcome to "The Kaufmann Governance Post") and the second when he started posting on the Work Bank's blog Governance Matters (Another Warm Welcome to Daniel Kaufmann Who Does It Again).

Nowadays, while keeping his personal blog quite active, Daniel is a Senior Fellow at the Brookings where he does research and publishes on governance and anticorruption.

One of latest articles is a well-crafted piece titled: Can Corruption Adversely Affect Public Finances in Industrialized Countries? in which Daniel "departing from traditional “developing country” focused studies of corruption, [asks] whether corruption may adversely affect public finances in industrialized countries. With recent data, [he explores] the link between corruption (and other governance variables) and the public budget deficit of industrialized countries.

Government Payroll Management: Removing the Ghosts in the Databases

Posted by Franck Bessette 

The wage bill is usually one of the biggest items of government expenditure and susceptible to weak control, misappropriation, and even corruption. From an expenditure policy perspective, the political economy of wage bill management often creates inflexibility because of pay increases linked to the electoral cycle, political preferences for wage scale compression, political or electoral based hiring, or the role of trade unions which favor seniority based promotions and management through the number of positions. This policy issue nevertheless requires a proper understanding of public financial management perspectives and the use of appropriate tools for budgeting and controlling personnel expenditures.

This post, based on a small sample of countries, looks at some PFM instruments and their linkage to personnel management issues.

The Pile of Books on the “Resource Curse” Just Keep Growing !!!

So, why we should read “Escaping the Resource Curse”?

Posted by Teresa Dabán

Devising policies and institutions for the prevention of the “resource curse”—a term used to describe the surprisingly negative outcomes of resource-rich countries—has been the object of an extensive literature. One of the most recent contributions is Escaping the Resource Curse, a book edited by Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz under the auspices of the Initiative for Policy Dialogue at the University of Columbia. The book reviews the main challenges posed by the management of resource revenues and proposes some interesting ways to address them.

To strengthen resource revenue management, for instance, the book proposes creating innovative budgetary  bodies and management arrangements that would operate in “parallel” to the existing ones. This post definitely recommends reading Escaping the Resource Curse, but argues that the benefits of creating such additional bodies and arrangements need to be carefully weighed against the risk of undermining and alienating existing budgetary institutions and discouraging reform efforts, especially in low-income countries, weakening governance and fragmenting already weak public finance systems.

Automating financial management systems -- it's not just the hardware

Posted by Bill Dorotinsky

As donors and governments spend enormous sums of money on automating financial management information systems in countries around the world, a great deal of attention is paid to the hardware and computer software. Debates over off-the-shelf or customized software, getting the right hardware, and setting up the right procurement arrangements, would fill volumes. But some recent cases illus rate the importance of paying attention to the 'soft' systems that surround the automated system -- the human systems that both serve and are served by the FMIS, the rules and controls embedded in and surrounding the systems.

On February 17, 2007, the Ugandan Daily Monitor broke a story ("Exposed: money racket in government") on an alleged scam being run from the Ministry of Finance and Ministry of Public Works, where fictitious suppliers where created in the computerized database, and payments were made to these suppliers for fictitious goods and services delivered. The article describes some of the means used to skirt what controls did exist, and but also illustrated that there were other controls missing.

A continent away, in Washington, D.C., a similar story unfolded in the District of Columbia tax office, where sham corporations were recorded in the automated information system, and tax refunds approved for these corporations. In some cases, the properties did not even exist, indicating absence of automated data-matching with property records or tax records to help control for such abuses. (See , for example, the November 14, 2007, Washington Post article, "D.C. Tax Scam Could Total $32 million".)

The Value of PETS

Public Expenditure Tracking Surveys: Detecting Leakages in Public Service Delivery Chains

Posted by Francois Michel

The major argument of the World Development Report 2004 : Making services work for poor people was that developing public services is fundamental for achieving the eight Millennium Development Goals and, beyond, creating conditions for sustainable growth. In addition, the report convincingly showed that the issue was not only one of funding. In most sectors and developing countries, there is a weak association between spending and outputs—more money does not translate directly into better “front-line” services. Associating inputs with outcomes appears to be an even thornier issue.

Public Expenditure Tracking Surveys (PETS) are one of the tools developed by the World Bank to grapple with the issue, as Doris Voorbraak and Kai Kaiser (respectively Senior Public Sector Specialist and Senior Economist, Poverty Reduction and Economic Management, World Bank) presented at an FAD seminar on December 20, 2007 (Download public_expenditure_tracking_surveys.ppt ).

Eyes wide shut? Understanding the politics of government auditing

He who lives outside the budget lives in error.
            Carlos Fuentes, La Silla del Águila, 2003.

Posted by Carlos Santiso (AfDB)

In the second generation PFM reform, strengthening transparency and accountability in public finances is a defining challenge for emerging economies seeking to foster fiscal responsibility and curb corruption. There is thus renewed interest in those oversight agencies tasked with scrutinizing public spending and enforcing horizontal accountability within the state.

Recent research by Carlos Santiso, titled Eyes Wide Shut? The Politics of Autonomous Audit Agencies in Emerging Economies, explores the external oversight of public finances. It models and measures the effectiveness of autonomous audit agencies, developing an index to evaluate their performance, and assesses their reform over time. It examines the institutional trajectory of the AAAs of Argentina, Brazil and Chile, which illustrate the three models for organizing the external audit function in modern states and three distinct trajectories of reform (or lack thereof).

A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries - IMF Working Paper

Posted by Luc Leruth

A well-functioning public expenditure management (PEM) system is considered a critical pillar of government efficiency by most practitioners, who place it at par with a low-distortion tax system and an efficient tax administration. It is therefore unfortunate that economic research has shown so little interest in the design of PEM systems, especially on the theoretical side. A recent IMF Working Paper entitled "A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries" by Elisabeth Paul and myself discusses Public Expenditure Management (PEM) systems in developing countries using an analytical framework based on principal-agent theory.

African Parliamentarians Discuss Ways to Promote Good Governance in the Management of Public Finance

Posted by Lubin Doe

The training center known as the Joint Africa Institute (JAI), created by the World Bank, the IMF and the African Development Bank (ADB), organized a five-day seminar in Tunis on the “Role of Parliamentarians in Promoting Good Public Financial Management (PFM) and Accountability.”

The seminar regrouped 26 legislators and officials from 8 English-speaking African countries (Ethiopia, Ghana, Liberia, Malawi, Mauritius, Rwanda, Sudan, Tanzania and Uganda). The team of presenters included Messrs Mitchell O’Brien (World Bank), Lubin Doe (IMF), Per Eldar Sovik (ADB), Augustine Ruzindana (African Parliamentarians Network Against Corruption), Adams Fusheni (Canada Parliamentary Center) and Niall Johnston (parliamentary consultant).

OECD Celebrates 10th Anniversary of its Anti-Bribery Convention

Posted by Luc Leruth

On November 21, 2007 in Rome, the OECD celebrated the 10th anniversary of its "Convention on Combating Bribery of Foreign Public Officials in International Business Transactions."

The meeting was chaired by Secretary General Angel Gurria and opened by Mr. Romano Prodi, the Italian Prime Minister. It ended with the unanimous adoption by all 37 states party to the convention of a statement reaffirming their commitment to fight bribery of foreign public officials in international business transactions.  Download Statement.pdf

For details on the 10th Anniversary Convention, please click here.

Motherhood, Apple Pie, and Good Governance

Posted by Michel Lazare

Like motherhood and apple pie, we all love good governance. Right?

Indeed, finding somebody --or an institution-- who does not claim to support good governance might be challenging. But defining good governance is equally challenging.

An illustration of this difficulty was given in a December 3, 2007 PFM Blog post, where our colleague Ian Lienert wrote:

A framework for relating the stages of PFM reform with governance categories, ranging from States that are “failing or collapsed” through to “institutionalized and competitive”, was presented. However, it was difficult to pin down the links between PFM reform frameworks and governance, in part because the concepts of “governance” and “political economy” are multi-dimensional and ill-defined.

Corruption and Tax Revenue Generating Capacity Draft Paper

Posted by Davina Jacobs

A draft paper by Davina Jacobs and Patrick Imam, "Effect of Corruption on Tax Revenues in the Middle East" focusing on the impact of corruption on tax revenue performance was discussed at the International Institute of Public Finance (IIPF) 63rd Congress, in Warwick, U.K. (see October 10 blog post) This is the first study that estimates the impact of corruption on the revenue generating capacity of different taxes in the Middle East. We find that the low revenue collection as a share of GDP in the Middle East compared to other middle-income regions is due in part to corruption.

World Freedom Atlas: A Nice-Looking Tool to Visualize Good Governance Indexes

Posted by Michel Lazare

The time-series dataset (1990-2006) put together by the Quality of Government Institute of the Göteborg University (Sweden) is now available as an interactive mapping application in the World Freedom Atlas.

This data set is a very rich one. It contains dozens of data series and over 300 variables originating from a large variety of sources: World Bank, UNDP, NGOs, academia, etc. These data series cover not only good governance issues but also freedom, human rights, and democracy. Some of them relate to issues faced when reforming PFM systems (e.g., bureaucratic compensation) or could show, over time, the impact of PFM reforms (e.g., government effectiveness).

Illuminating Resource Revenue Transparency - A New Guide

Posted by Jon Shields

Available today (October 19) for the first time in hard print, the revised IMF Guide on Resource Revenue Transparency is a comprehensive handbook on good transparency practices for countries with substantial revenues from extractive industries. For governments, it provides detailed advice on  the information they need to make good decisions about the collection and use of these revenues - from the design of tax regimes to the management of resource funds. For citizens and other stakeholders, the Guide gives examples of good practice around the world and what can realistically be expected to be shared with them.

The Guide supplements the revised IMF Manual on Fiscal Transparency (see yesterday's Oct 18 blog). It applies the principles of the revised IMF Code of Good Practices on Fiscal Transparency to the unique set of transparency problems faced by countries that derive a significant share of their revenues from natural resources. The Guide has been revised to reflect the new Code and to provide more recent examples of good practice by individual countries. It provides a framework for assessing resource-specific issues within broader fiscal transparency assessments (including so-called ‘fiscal ROSCs’). Since its initial release in 2005, the Guide has been used by the governments and legislatures of resource rich countries, civil societies, the Extractive Industries Transparency Initiative (EITI), providers of technical support and interested academics and observers.

Anti-corruption: you know Bono and U2….What about U4?

Well, U4 is not a rock  band, but it nevertheless rocks.

It is actually an "Anti-Corruption Resource Centre [that] assists  donor practitioners to more effectively address corruption challenges through  their development support."

Public Financial Management and Anti-corruption: prevention through stronger PFM systems

Corruption is a hot  topic in international circles these days, and particularly with respect to country public finance systems. The IMF Fiscal Affairs Department has made a contribution to understanding how improvements in  public financial management systems can help fight corruption.

While  not an 'idiots guide to corruption',  a recent FAD staff paper (Dorotinsky,  William and Shilpa Pradhan), published in "The  Many Faces of Corruption: Tracking Vulnerabilities in the Sectors" (World Bank, 2007), explores the conditions of PFM systems that enable corruption to flourish, the ways corruption commonly manifests itself, and  develops a model for assessing the vulnerability of country PFM systems to  corruption.