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