Bringing a Political Economy Analysis to USAID’s TA Programming

Posted by Corinne Rothblum, Steve Rozner and Jay Totte[1]

Over the past decade bilateral and multilateral donors including DFID, the Dutch, SIDA and the World Bank have undertaken political economy analysis (PEA) with the goal of informing their programming strategies and approaches.  Building on their methodological tools and experience, in 2014, USAID began testing its own  PEA framework, which is organized around four core themes: foundational factors, rules of the game, ‘here and now’, and dynamics. To date, USAID missions in over a dozen countries have used the PEA framework to examine issues in sectors ranging from health to biodiversity to governance. USAID/Washington staff provide technical support and offer headquarters field-based workshops that explore how to use the PEA framework and other approaches to embed ‘thinking and working politically’ in USAID program design and implementation.

The Capabilities of Finance Ministries

Posted by Richard Allen[1]

How do finance ministries go about performing their tasks, what do they look like as organizations, and does it matter how they are organized? What makes a finance ministry capable of doing its job?

The Overseas Development Institute (ODI) has published a report[2] investigating the capabilities of finance ministries, based on case studies of Germany, Mexico, Nepal, Uganda, Sierra Leone, South Africa, the United Kingdom, and Vietnam. On June 6, 2016, Her Majesty’s Treasury (the U.K’s finance ministry) and the ODI organized a High-Level Roundtable to discuss the findings of the report. Opening remarks were made by the Rt Hon Greg Hands, Chief Secretary to the Treasury, and were followed by a presentation of ODI’s report, remarks by H.E. Do Hoang Anh Tuan, Vice Minister of Finance of Vietnam, and Edmund Koroma, Financial Secretary of Sierra Leone, and a general discussion. Participants in the Roundtable included representatives of the Treasury, ODI, the IMF, think tanks, consultancy firms, academia  as well as specialist media. In the afternoon, a workshop was held to discuss the ODI’s report with a wider audience of experts and practitioners.

Angels and Demons – the Political Economy of PFM Reform

 
Posted by Richard Allen¹ 

In a thought-provoking presentation during the IMF Fiscal Affairs Department’s (FAD) 50^th Anniversary Conference on December 5, 2014, Professor Ravi Kanbur of Cornell University analyzed the intellectual origins and roots of FAD.  In his view, these roots derive not from the influence of Keynes, one of the founding fathers of the IMF, who was more concerned with issues of monetary policy and balance of payments stabilization than with fiscal policy. A much stronger influence on FAD’s development was one of Keynes’ illustrious colleagues at Cambridge University, Arthur Pigou. Professor Kanbur’s main thesis [Presentation_Available here (.ppt)], however, was that FAD, while responsible for many important applications of fiscal policy, had taken little advantage of important recent work on political economy analysis, and the application of behavioral economics to fiscal issues. These developments derive from the work of notable economists such as Knut Wicksell and 2002 Nobel Prize winner Daniel Kahneman. Another strong influence has been the work on public choice theory and the economics of state bureaucracy, a line running from Pareto, through the great Italian school of public finance to the work of scholars such as Buchanan, Tullock and Peacock.

Book Announcement: Reconstructing Iraq's Budgetary Institutions: Coalition State Building After Saddam

 
Posted by James D. Savage, University of Virginia

The invasion of Iraq led to a costly nine-year state-building and reconstruction effort. Reconstructing Iraq's budgetary institutions proved to be a vital element of the state-building project, as allocating Iraq's growing oil revenues to pay salaries and pensions, build infrastructure, and provide essential public services played a key role in the Coalition's counterinsurgency strategy.  Employing a historical institutionalist approach, this book first explores the Ottoman, British, and Ba'athist origins of Iraq's budgetary institutions. The book next examines American pre-war planning, the Coalition Provisional Authority's rule making and budgeting following the invasion of Iraq in 2003, and the mixed success of the Coalition's capacity-building programs initiated throughout the occupation. The budgetary process introduced by the Coalition offered a source of institutional stability in the midst of insurgency, sectarian violence, economic uncertainty, and occupation. This book explores the problem of "outsiders" building states, contributes to a more comprehensive evaluation of the Coalition in Iraq, addresses the question of why Iraqis took ownership of some Coalition-generated institutions and not others, and helps explain the nature of institutional change.

The Politics of Fiscal Squeeze: Book Review

Posted by Richard Allen[1]

The politics of cutting government spending or raising taxes (or both) has dominated public debate in many countries in recent years. A new era of conflict has developed, with old political alignments being tested and new battles emerging over whose expectations are to be disappointed and who should be blamed for fiscal squeeze. Do parties who cut spending always get defeated in the following election? Are there “good practice” cases that every government should follow when it has to cut spending or raise taxes to balance its public finances? Such issues have typically been analyzed from an economic or financial perspective, with a particular focus on the recent financial crisis.

An interesting recent volume of papers focuses on the politics of fiscal squeeze and takes a longer view.[2] In this respect, the commonly held assumption that the financial crash of 2008 and the dramatic policy changes that followed were unique in the history of the world is mistaken. David Heald and Christopher Hood note, for example, that the fiscal travails of the early United States in the 1840s, or the Ottoman Empire after it defaulted on its loan repayments to foreign creditors in 1875, goes beyond anything witnessed in the Eurozone countries in the 2010s.

Politics Matter…But PFM Reforms Do Too.

Posted by Carlos Scartascini*

The recent CAPE 2013 conference organized by ODI provided a forum for discussing where PFM is and where it is going. While many interesting issues arose from the discussions, one theme was ever present: namely, the importance of considering PFM as much more than a purely technocratic process. Politics matter, and they tend to determine the way reforms are implemented, and their probability of success. In this note, I highlight the reasons why politics matter for the budget process and how this issue can be dealt with.

Budgeting in the Real World - What Do We Know? What Should We Do?

This is the keynote speech given last week, November 13^th, by Antoinette Sayeh, Director of the IMF’s African Department at the UK’s Overseas Development Institute’s annual CAPE Conference in London on why PFM matters, why reforms are difficult, and what we know to make them successful…..

I am delighted to have the opportunity to deliver this keynote address and would like to thank Messrs. Ed Hedger, Kevin Watkins, and Philip Krause for inviting me to this important conference and for that generous introduction.

Let me start by saying that from the IMF’s perspective, good governance is important for countries at all stages of development. Transparent government accounts and effective public resource management are preconditions for sustained economic growth and prosperity. Indeed, budget formulation, implementation, and oversight lie at the core of good economic governance. Strong budget institutions are essential for countries to achieve sound fiscal policies and effective expenditure programs. Budgets can only be spent once. Getting the priorities right all the way from formulation to execution, and being efficient at it, is all the more important. Transparency and fairness are most important in ensuring that expenditures are aligned with broadly agreed priorities, and in securing society’s buy-in. While most can agree to the underlying principles, the hard part is to have systems and capacity in place that actually ensure that they are respected all along the process chain. As so often, the devil is in the detail. 

Fiscal Rules and Councils: Most Effective When Used Together

Posted by Elif C. Arbatli [1]

Adopting numerical fiscal rules has been an integral part of the policy response to the medium-term fiscal consolidation challenge posed by the global financial crisis. According to Schaechter et. al. (2012), since 2009, at least 16 countries have adopted new national fiscal rules and many others are in the pipeline. The crisis has also revealed the need for reforming supranational rules, such as the Stability and Growth Pact of the EU and as a result new structural budget balance rules will be adopted in almost all of the EU member states as part of the “fiscal compact.” A recent paper by Charles Wyplosz titled “Fiscal Rules: Theoretical Issues and Historical Experiences,” is a timely review of the theoretical underpinnings of fiscal indiscipline and how numerical fiscal rules can help. Wyplosz argues that fiscal rules are neither necessary nor sufficient to achieve fiscal discipline; but that thoughtfully designed fiscal rules can be effective when supplemented with fiscal institutions (and in particular fiscal councils) that are tailored to the political institutions of the country.[2]

The paper first looks at the theoretical underpinnings of fiscal indiscipline, known as the “common pool problem”. The common pool problem arises when the beneficiaries of public spending or tax policies do not take into account the externalities that these policies impose on other groups (within a population, across different generations, among different levels of government or different states within a monetary union). Fiscal rules can in principle reduce these externalities by imposing explicit principles for fiscal behavior and thereby lowering the scope for deficit bias. According to Wyplosz, there are two key challenges: 1) fiscal rules cannot be fully contingent and hence they are subject to the “time-inconsistency problem” and 2) fiscal rules cannot be fully binding since they can be manipulated, changed or simply ignored. He argues that fiscal institutions (in particular, fiscal councils or other arrangements that give authority to an independent body to interpret rules) can help overcome these challenges.

Going Broke? Why Pension Reforms Are Needed in Emerging Economies?

Previously published in iMFdirect (The International Monetary Fund's global economy forum), by Mauricio Soto

We’re all getting older, and there’s no doubt that pension reform is a hot topic in the advanced economies. But it’s also critical in emerging economies.

Our analysis here at the IMF shows that across emerging economies pension spending is projected to rise as the population ages. On average, these spending increases are not that large. But reforms are needed to increase coverage of the system without making pension systems financially unsustainable over the long term.

 

The Political Economy of Budget Reforms in Aid-Dependent Countries: Domestic and External Factors Shaping Success

Posted by Paolo de Renzio, Senior Research Fellow, International Budget Partnership and Research Associate, Global Economic Governance Programme, University of Oxford

The quality of governance and institutions is increasingly seen as a fundamental factor in shaping the development prospects of poor countries. As a consequence, donor agencies have increasingly allocated resources to providing support for improving governance standards in such countries. Their interventions are based on the assumption that, through a combination of financial and technical assistance, they can provide better incentives for reform and affect the quality of institutions in positive ways. Despite this existing consensus, research on how institutions develop and change over time is still incipient, especially in developing countries. Research on how donors’ influence affects governance trajectories and processes of institutional change in aid-dependent countries is even more scarce.

A paper recently published by the Global Economic Governance Programme at the University of Oxford investigates the domestic and external factors affecting the outcomes of reforms aimed at improving the quality of government budget institutions across a group of 16 aid-dependent countries. Government budgets are a key area of government action, through which policy objectives are chosen and acted upon, and the necessary resources are collected, allocated and spent. They have also become a crucial area being promoted by donors, backed by an increase in funding for technical assistance from US$ 170 million in 1997 to US$ 1.6 billion in 2007), covering a range of initiatives aimed at strengthening the rules and procedures which underpin budget processes. How has such external assistance worked? Were donors able to ‘buy’ better governance? What other factors shaped the outcomes of budget reforms? These are the key questions that the paper seeks to answer.

An Interview with Vito Tanzi

 
 

Posted by Carla Sateriale

Vito Tanzi was director of the IMF Fiscal Affairs Department for 20 years, from 1981 to 2000. Since then he has served as Senior Associate at the Carnegie Endowment for International Peace, Undersecretary for Economy and Finance in the Italian government, and consultant and scholar to various international institutions and research institutes. Since his retirement from the Fund he has authored 11 books. Last week Mr. Tanzi’s latest book, Government versus Markets: The Changing Economic Role of the State, was presented at IMF headquarters in Washington. FAD research assistant Carla Sateriale interviewed Mr. Tanzi on his new publication.      

 

What inspired you to write this new book, Government versus Markets, at this point in your career?

I’ve had at least three, maybe four careers throughout my life, which have shaped my perspective. I started in academia—studying at Harvard, and then teaching at American University and George Washington University. I spent 27 years at the Fund, then two years as a minister in the Italian government, and then several more years as a researcher and scholar at the Carnegie Endowment and at the Inter-American Development Bank. Finally, I decided to do what I had always wanted—have a period of my life with no formal commitments. I wanted to allocate all my time to reading, research, and writing. In many ways it has been the most productive period of my life. I have been able to publish five books between last year and now. Two of them in particular, The Charm of Latin America and Russian Bears and Somali Sharks, allowed me to weave together my perspectives on economics with my concrete experiences. Government Versus Markets gave me the opportunity to combine my observations on fiscal policy and regulation with my interest in the historical evolution of the role of the state.

Ireland Publishes Independent Review of Its Finance Ministry

Posted by Richard Hughes

In the lacuna between the general election in late February and the formulation of the new government earlier this month, Ireland’s Department of Finance (DoF) published the conclusions of an independent review of its performance over the decade leading up to and including the global economic crisis. The review was conducted by three person panel chaired by Rob Wright, former Deputy Ministry of Finance in Canada. 

While the report, entitled Strengthening the Capacity of the Department of Finance, complimented the DoF’s management of crisis itself, its account of the DoF’s performance in the run-up serves as a timely reminder of challenges that all finance ministries face in trying to chart a prudent course through the good times. Looking at the DoF’s advice to its ministers, the Cabinet, and Parliament (the Dáil) over the last ten years, the report found that the DoF did provide early and clear warnings about the pro-cyclicality of fiscal policy in Ireland. However, these admonishments went largely unheeded and, from the late 1990s onward, the fiscal stance of the final budget approved by Cabinet in November and the Dáil in December were consistently looser that that recommended by the DoF in June.

Le compte unique du Trésor : une idée révolutionnaire…en 1806!

Billet de Franck Bessette        

Si le concept de Trésor public a vu le jour en France au XIII^ème siècle, en ce sens que les fonds publics ont été séparés de la caisse personnelle du roi, la monarchie française a continué à recourir à des comptes distincts pour divers usages. Le concept du Compte unique du Trésor (CUT) a été le produit des difficultés qu’ont éprouvées pendant de longues années les divers gouvernements révolutionnaires qui se sont succédé après 1789 pour satisfaire leurs besoins de liquidités. Pendant l’essentiel de la période révolutionnaire, ce sont des banquiers privés («faiseurs de services»), dont certains se chargeaient de collecter les impôts, qui avançaient à l’État les liquidités nécessaires, mais à un coût très élevé. L’institution du Compte unique du Trésor a été l’aboutissement d’un long processus qui s’est accompli pour l’essentiel au cours de la première moitié du XIX^ème siècle. Il serait difficile de faire ici l’historique détaillé des réformes du système du Trésor en France au cours de cette période, mais on peut distinguer trois grandes étapes.

Treasury Single Account: A Revolutionary Idea…in 1806!

Posted by Franck Bessette        

While the concept of a State Treasury (le Trésor in French) was created in France in the XIIIth century in the sense that public monies were at that time separated from the king’s personal cash-box, the French monarchy still used separate bank accounts for various purposes. The concept of the Treasury Single Account (TSA) in France was the result of the long struggle of the various revolutionary governments after 1789 to meet their cash needs. During most of the revolutionary period, private bankers, some of them in charge of collecting taxes, were providing central government with the necessary cash but at a very high cost. The creation of a TSA in France was a gradual process, mostly accomplished during the first half of the XIXth century. It would be difficult here to give a detailed account of the reforms of the Treasury system in France during this period but this post would like to briefly underline the three major steps of this process.