Public Expenditure in the new Development Consensus

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Public Expenditure in the new Development
Consensus

• Anand Rajaram, PRMPS
• PEAM Core Course
• January 12, 2004

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Outline

• Role of PE in the new development consensus
• The challenge for PE work
• Substance policy and institutions
• Process collaborative
• Elements of a new approach

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Development Assistance

• In 2001, ODA from the DAC countries was US57.9
  billion.
• In 2001(FY02), Bank lending amounted to 19.5
  billion of which 50 was adjustment lending.
• In the context of the MDGs, there has been a lot
  of debate as to how much more aid is needed to
  reach targets set for 2015 (est. 16
  billion-50 billion)
• Presumption aid, and, by extension, public
  spending, is a critical constraint to outcomes

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Aid, Policies and Institutions

• While a part of the development discourse is
  about increasing aid, there is still limited
  recognition that institutions and policies matter
  for aid (and the public spending it finances) to
  improve outcomes
• We know from Dollar, Pritchett, et.al. that
  institutions and policies also matter for growth

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Aid can have perverse effects

• Governments are besieged by demands from interest
  groups including diverse donors with financial
  influence and agendas
• Such pressures often contribute to sub-optimal
  outcomes where capacity is weak
• Policy steering by aid agencies (undermines
  ownership and weakens internal policy debate)
• Competitive donor promotion of projects,
  corruption
• Capacity diminution - donors poach limited
  capacity to staff PIUs
• Little attention to budgeting, public
  administration or service delivery
• In this scenario, countries develop in spite of,
  not because of, development assistance

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A revealing experiment - recent 18 country
exercise to evaluate prospects for the MDGs

• Difficult for a number of reasons
• Limited time had to rely on existing analysis
• Aid-growth-MDG links are difficult to assess
• Projecting growth using ICORs not very robust
  since composition of investment matters
• Time frame 12 years some constraints can be
  relaxed which implies
• Non-linearities
• Direct and indirect effects have to be factored
• Cross sector effects are important
• No ready methodology to assess impact of
  investment in rural roads or safe water on
  maternal or infant mortality

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We know economic growth is an important influence
on development outcomes (WDR 2004)
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But public spending on directly related sectors
and outcomes are often weakly related (WDR 2004)
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Missing variables

• Intuitively, differences in policies and
  institutions could explain the weak relationship
  across countries
• WDR identified some core elements
• Budget policy and management
• Organization of tiers of government
• Quality of public administration

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MDG exercise..roughly

• Identified country specific policy and
  institutional constraints based on knowledge of
  country team, and derived
• Actions to stimulate private sector
• Actions to improve public sector capability
• Actions to improve basic service delivery to poor
• Results under 2 scenarios status quo and with
  better policies/institutions and more aid

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With reform, aid could help achieve many, but not
all MDGs
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Consistent with the Monterrey partnership, the DC
concluded that ..

• Developing countries will have to strengthen
  policies and governance so as to ensure that
  domestic resources, private inflows and aid can
  be used effectively in spurring growth, improving
  service delivery and reducing poverty.
• Developed countries will need to move vigorously
  in supporting these efforts with more and better
  aid, debt relief and improved market access.
• Dev.Committee Communique, Sept.2003

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What must change to implement this consensus?

• Home grown policy from PRSP or other process,
  responsive to country priorities
• Effective resource management by country to
  implement policy
• Support from donors to help strengthen, not
  undermine, govt. capacity to manage resources
• This requires a better understanding of govt.
  policies, institutions, systems and processes and
  medium to long term strategies to improve them
  (no quick fixes)

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This New Development Consensus Raises the Bar and
the Challenge for PE work

• Will need to undertake more systematic assessment
  of public finance (tax and spending) and its
  impact on growth and poverty
• Country level PE work will have to clarify and
  check the links between public spending and
  outcomes
• Cannot assume that allocations get translated
  into service delivery
• Will require more work at lower levels of
  government assessment of the central government
  budget will not suffice
• Must be able to assess overall government budget,
  not a selective appraisal

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PE work has two main strands
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The Basis for PE Policy analysis derives from
Public Economics

• Competitive markets yield Pareto efficient
  outcomes, for any given distribution of income
  (Fundamental theorem of welfare economics)
• But state intervention may be needed when
• Lack of competition
• Incomplete market
• Public good (non-rivalry in consumption,
  non-excludability)
• Externality (social cost/benefit differs from
  pvt.cost/benefit)
• Macroeconomic instability
• Equity concerns provide another reason for
  intervention, through public finance

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Even with a market failure, some interventions
may not be efficiency enhancing

• Inefficient program administration weakens the
  case for intervention
• If taxation or borrowing depresses private
  production or investment, it would offset some or
  all of the benefit
• Other sessions today and tomorrow will show how
  these ideas can be applied to sector analysis

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But efficiency is a static concept

• How does one assess the composition of the budget
  in terms of its contribution to growth or medium
  term poverty reduction?
• Need integrative next-level analysis to take
  assessment of sector expenditure in terms of
  standard static efficiency-equity to take account
  of dynamic, cross-sector interactions.

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Basis for PE Management Analysis is New
Institutional Economics

• The budget is a common property resource and
  subject to problems of collective action (free
  rider behavior, prisoners dilemma)
• Pradhan and Campos (1996) defined it in terms of
  the tragedy of the commons.
• Effective systems devise institutional
  arrangements and incentives to enable achievement
  of budgetary goals at 3 levels
• Fiscal discipline
• Strategic resource allocation
• Technical efficiency
• Sessions tomorrow will discuss how a budget
  system can be assessed in terms of its capability
  to achieve these goals

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On Bank and Fund collaboration

• Collaboration has been less than perfect
• Fund takes the lead on advising on the aggregate
  fiscal stance, the Bank on composition of public
  spending
• Recently, greater flexibility in Fund on what the
  appropriate fiscal stance could be (see IEO paper
  and Balducci, et.al.)
• On PEM, both institutions have a role

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Internal Bank collaboration

• Needs to be improved
• No network has the full range of skills to assess
  PE policy and institutions
• But collectively, skills exist
• On institutions, PREM, FM and Procurement have
  forged closer relations
• On policy, we need to initiate cross network
  collaboration of broad scope (PREM-HD underway,
  others to follow)

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PER coverage
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New approach to PE work

• Support country-owned PE reform strategy
• Coordinate diagnostic work among donors to reduce
  transaction cost for countries
• Coordinate technical and advisory assistance to
  countries
• Measure performance of PE system periodically

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Strengthened Approach to Public Expenditure work