public expenditure in the new development consensus anand rajaram, prmps peam core course january...

Public Expenditure in the new Development Consensus

Anand Rajaram, PRMPS

PEAM Core Course

January 12, 2004

A.Rajaram PEAM 2004 2

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


Development Assistance

In 2001, ODA from the DAC countries was US$57.9 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


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


Aid can have perverse effects

Governments are besieged by demands from interest groups – including diverse donors with financial influence and agendasSuch 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


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


We know economic growth is an important

influence on development outcomes (WDR 2004)


But public spending on directly related sectors and outcomes are often weakly related (WDR 2004)


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


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


With reform, aid could help achieve many, but not all MDGs


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


What must change to implement this consensus?

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


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 povertyCountry level PE work will have to clarify and check the links between public spending and outcomesCannot assume that allocations get translated into service deliveryWill require more work at lower levels of government – assessment of the central government budget will not sufficeMust be able to assess overall government budget, not a selective appraisal


PE work has two main strands

P o lic ie s M a na ge m e nt

P u b lic E xp e nd itu re


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

D ecision Tree fo r Eva luating Pub lic P rogram s

1. M anufacturin gO ther activ ity displa cing private secto r

N o rationa le

CafetariaG overnm en t Building M aintenanc e

G arbag e picku p

O u tsou rc ing

Schola rship sSchool V ouchers

S u b s idy

Environm en tSecuritie s and E xchang e

E lectric ity & Tele com m unication sW orker Safety

R e g u la tion

W h at a re th e fis ca l cos ts?(tradeoffs based on costs )

Prim ary Educatio nSafety Nets

Security (internal & external)Basic Health Educatio n

P u b lic p ro v is ion

W hat is the r igh t instrum en t ?

T he re is a rationa le

W hat is the rationale for public in tervention?M arket F a ilu re or

R ed is tr ibu tion


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


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.


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, prisoner’s 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


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 spendingRecently, 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


Internal Bank collaboration

Needs to be improvedNo network has the full range of skills to assess PE policy and institutionsBut collectively, skills existOn institutions, PREM, FM and Procurement have forged closer relationsOn policy, we need to initiate cross network collaboration of broad scope (PREM-HD underway, others to follow)


PER coverageSelect PERs 1999-2003

Reform Strategy

Country Basic

Debt S

usta

in.

Fis

cal R

isk

Revenue

Expenditure

Education

Health

Socia

l

Pro

tection

Rura

l/

Agriculture

Wate

r/

Sanitation

Infa

str

uctu

re

Budget

Form

ula

tion

Budget

Execution

Legis

lative

Accounta

bility

Pro

cure

ment

Civ

il S

erv

ice

Refo

rm

Decentr

aliz

.

National PERsEthiopiaGuinea x x x x x x x x x x xMalawi x x x x x x x xMozambique x x x x x xTanzania x x x x x x x x xUganda x x x x x x x x xZambia - 01 x x x x x x x x x x xZambia - 03 x x x x x x xCambodia x x x x x xIndonesia - 00 x x x x xIndonesia - 98 x x x xMalaysia x x x x x x x x xThailand x x x x x x x x x x x x xVietnam x x x x x x x xAlbania x x xCroatia x x x x x xCzech Rep. x x x x x x x x xCzech Rep. (Intgvnt) x x xKazakhstan x x x x x x x x xKyrgyz Rep. x x x x x x xMacedonia x x x x x x xRussia (PIR) x x xTurkey x x x x x x x x x xBrazil - Northeast x x x x x xNicaragua x x x x x x xPeru x x x x x x x x x xNepal x x x x x x x x x

Provincial PERsEthiopia - Oromiya x x x x x x xEthiopia (Regionaliz) x x x xChina x x x x x x x x x xIndia - Maharashtra x x x x x x x x x xPakistan - Punjab x x x x x x x x x x Total 32 24 8 17 3 20 19 20 9 9 3 12 24 21 7 2 9 10 19

Macro Sector PEM Public SectorBudget

Composition


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

25A.Rajaram PEAM 2004

Strengthened Approach to Public Expenditure workStrengthened Approach to Public Expenditure work2

Government PFM Government PFM Reform Strategy and Reform Strategy and

Action PlanAction Plan

Coordinated program of

capacity building work

Donor country Assistance

Strategy

Government/Donor

Policy Dialogue

Standardized Assessment

Performance indicators

public expenditure in the new development consensus anand rajaram, prmps peam core course january...

Documents