The Challenge of Reforming Budgetary Institutions in Developing Countries

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The Challenge of Reforming Budgetary Institutions
in Developing Countries

• Richard Allen
• Fiscal Affairs Department
• Presentation to AFR, October 22, 2009

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Why strong budgetary institutions are important

• Enhance efficiency of public spending
• Promote transparency and enhance governance
• Allocate budgetary resources to priority economic
  and social areas
• Exit from current crisis unwinding stimulus
  measures, restraining deficits, and reducing debt
• Public sector resource management and
  accountability is by far the most widely featured
  category in LIC program conditionality

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Sound budgetary institutions support sustainable
and credible fiscal/expenditure policies by

• Robust macroeconomic and fiscal forecasting that
  helps eliminate optimism bias in budget
  planning
• Effective medium-term fiscal/budget frameworks
  linking short-term objectives with medium-term
  resource availability
• Comprehensive legislative oversight
• Credible fiscal reporting and timely information
  on fiscal risks

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And facilitate the work of AFR country teams by

• Providing reliable fiscal data, improved coverage
  , and capacity to understand where fiscal
  problems may arise
• Allowing authorities and country teams to analyze
  better the causes of fiscal problems and explore
  policy options

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Substantial evidence that budgetary institutions
in LICs are very weak

• Following two slides illustrate data from an
  ongoing study by SPR/FAD/AFR on budget
  institutions and fiscal performance in low-income
  countries
• This study has attempted to construct an index
  for measuring the quality of budget institutions
  (47 LICs and 28 emerging market countries)
• The data come from PEFA assessments, fiscal
  ROSCs, OECD, FAD and other sources

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Score for each criterion ranges from 0 (lowest)
to 2 (highest).
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Score for each criterion ranges from 0 (lowest)
to 2 (highest).
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And little evidence that budget institutions are
getting stronger

• HIPC (2000-2004) and PEFA data (since 2005) not
  conclusive
• Some relative success stories, e.g., Botswana,
  Liberia, Mozambique, Namibia, but these are few,
  and will progress be maintained as donor support
  is withdrawn?
• Also progress in some of the shining stars of the
  1990s, e.g., Ghana, Tanzania, Uganda has
  flattened out or reversed

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Some technical areas of the budget system (e.g.,
classification, accounting) may be easier to
reform than others (e.g., budget allocations,
TSA) directly affected by rent-seeking and
patronage

• Evidence from FAD TA suggests that revenue
  administration is often easier to upgrade than
  expenditure side of the budget

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Historical evidence confirms that reforming
budgetary institutions is a very slow process .
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Selected Dates in the Development of Budget
SystemsFrance, the United Kingdom, and the
United States
France The United Kingdom The United States (Federal)
1791 Accounting Office reporting to parliament 1807 Independent Cour des comptes 18141819 First Restoration Baron Louis reforms 1862 Imperial decree on rules for budgeting and treasury single Account _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1959 Medium-term budget framework for investments 1968 Rationalisation des choix budgetaires (RCB) 200106 Program budgeting From 2006 Accrual accounting 2008 Full medium-term expenditure framework (MTEF) 1787 Consolidated Fund Established 1866 Exchequer and Audit Departments Act (established modern budgeting and accounting system) 1866 Comptroller and Auditor General established _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1960s Public Expenditure Survey (PES) and Program Assessment Review (PAR) 1980s Next Steps Program 1990s Comprehensive multiannual budgeting 1991 Citizens Charter 1998 Public Service Agreements 200004 Resource (accrual) budgeting 1776 Treasury Office of Accounts established 1809 Appropriations Act (modified in 1870 and 1874) 188789 Consolidated accounting, bookkeeping, reporting procedures (Cockrill Commission) 1894 Dockery Act established Comptroller of the Treasury consolidated annual statement of revenues and expenditures 1921 Budgeting and Accounting Act established Bureau of the Budget and General Accounting Office 1940 Consolidation of uniform standards and procedures for accounting and reporting 1950 Accounting and Auditing Act _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1982 Federal Managers Financial Integrity Act 1990 Chief Financial Officers Act 1993 Government Performance and Results Act 1994 Government Management Reform Act
Measures that established the basic framework
of accounting and budgeting are shown above the
line items shown below the line are subsequent
(new wave) reforms.
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Other evidence of slow progress is quoted in my
Working Paper, e.g., World Bank Economic
Development Reports from 1950s and 1960s identify
similar problem areas of PFM compared to recent
FAD TA reports and World Bank diagnostic
assessments
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Why is reform so difficult?

• Political economy factors are dominant see
  North (1991) and North, Wallis and Weingast
  (2006).
• Incentives for change are weak
• Most AFR countries are at a similar position in
  developing their budgetary institutions as now
  advanced counties 150-200 years ago.

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In addition, there are technical reasons why the
budget is especially difficult to reform .

• The budget is a prime source of rent-seeking and
  political patronage
• Ministries of finance are typically quite weak in
  most low-income countries
• Ministries of planning often have more weight
  than MoF
• Central banks often responsible for macrofiscal
  functions
• The annual budget competes with the national plan
  and the PRSP as the primary policy statement of
  government
• Lots of off-budget accounts and funds
• Responsibilities for preparing and implementing
  capital investment and recurrent budgets are
  often divided (dual budgeting)
• Donor aid is frequently off-budget, and poorly
  coordinated

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Donors and the international community are often
part of the problem rather than part of the
solution .

• Conflicted incentives - loan driven culture that
  oversells the possibility of rapid reform
• Failure to learn from lessons of the past
• Territorialism competition between donors to
  divide up the TA cake
• Weak evaluation and follow-up on implementation
  of TA recommendations
• Recipient governments often play one donor off
  against the other in order to gain access to
  generous loan finance with few strings attached
• Paris Declaration (2005) and Accra Agenda for
  Action push countries (and donors) to use country
  PFM systems before they are ready

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And medium-term PFM reform plans are not well
suited to the needs of recipient countries

• Far too complex, too many measures e.g.,
  platform approach in Uganda and Kenya
• Over-mechanistic approach, with too much weight
  placed on PEFA scores
• Unrealistically short time frame for
  implementation
• Insufficient focus on political economy factors
• Little attention to building local capacity (as
  opposed to filing key line positions with
  expensive international consultants)

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A better approach might include the following
elements

• Focus on the ultimate goals of budget reform
• Avoid complex designs (however seemingly
  intelligent) adaptation and evolution are the
  key concepts
• Avoid importing solutions from advanced countries
  that dont fit LICs
• Choosing rather than sequencing is the right
  approach
• But, for each individual reform sequencing IS
  important
• Focus on Schicks half-forgotten notion of
  getting the basics right (1998)
• Dont let donors (and high paid consultants) run
  the show, they should be servants not masters
• Follow-up by monitoring and evaluating outcomes,
  and hold officials to account for success/failure
  of reform initiatives

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Getting the Basics Right (Illustrative)
Initiative Budget calendar Budget classification MTFF Cash planning Control of arrears Comprehensive data on donor aid Unified budget law TSA Independent external audit Transparency, EITI Core fiscal risks (guarantees, PPPs) GFMIS Years 1-2 Years 3-5 Years 6-X
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But note that

• None of these basic elements should be as
  sophisticated as in a developed country
• Sequencing the basics is actually quite complex,
  and will need many years to complete X in the
  diagram could be 10, 20 or more years.
• Some reforms, e.g., MTEF, TSA, external audit,
  may never be fully completed for political
  economy reasons
• Enabling reforms need to take place in parallel,
  e.g, civil service, consolidating planning and
  finance functions, rule of law, strengthening
  local capacity

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And what should (generally) NOT be included in a
reform action plan for an LIC

• MTEF (MTFF however IS among the basics)
  existing MTEFs in AFR countries have not been
  successful
• Fiscal rules/FRL without MTFF
• Accrual accounting and accrual budgeting
• Performance-related or program budgets, except in
  rudimentary form, e.g., tracking PRSP spending
• State-of-the-art fiscal risk analysis (but record
  guarantees, main contingent liabilities, etc.)
• Fiscal decentralization (unless supported by
  strong central oversight and control)

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Thank you!