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Saturday, December 19, 2009

Review: The Challenge of Reforming Budgetary Institutions in Developing Countries

IMF Working Paper WP/09/96 (2009)


Reviewed by Andy Wynne – andywynne@lineone.net

Some staff with the World Bank, IMF and other donors are taking slow steps in re-assessing the effectiveness of their dominant prescriptions for public sector financial management over the last decade. This has often included large scale mega-reforms such as a Medium Term Expenditure Framework (MTEF), an Integrated Financial Management Information System (IFMIS) and decentralisation.

Richard Allen has been part of this process from the beginning. In this paper he now recognises that the development of sound budgetary institutions in countries such as France, the U.K. and the U.S. has taken a very long time―200 years or more―and is still evolving. Institutional reform is also likely to be very slow in developing countries since the budget is especially prone to rent-seeking influences. This paper discusses the currently fashionable emphasis on complex, multiannual PFM reform strategies, which have been strongly promoted by the donor community; and advocates a simpler approach grounded on Schick’s important principle of “getting the basics right.”

Richard’s conclusions are first, reforming public financial management is a frustratingly slow business. In developing countries, the progress of modernizing budgetary institutions needs to be measured in small steps. Major reforms such as introducing a new treasury system or a medium-term budget framework can take a decade or longer. Second, governments, donors and multilateral institutions almost always underestimate the difficulties and challenges, and overestimate the capacity of government to deliver reforms. They fail to learn from the lessons of the past.

Whilst not criticising his own institution (the IMF) directly he has some trenchant views on technical aid to governments in the Global South. Many technical aid providers, Richards says, have a vested interest in maintaining existing approaches and instruments. Developing countries should not be regarded as a laboratory or playground for the donors. Fresh thinking is required but there is not much incentive for change since technical aid providers are not sufficiently held to account for the imperfections of the models they use, and the advice they offer.

Other examples of similar hard hitting criticisms over the last year are Salvatore Schiavo-Campo (see http://blog-pfm.imf.org/pfmblog/files/MTEFpaperFinal.doc) and Bill Dorotinsky on the ICGFM Blog (see http://icgfm.blogspot.com/2008/12/public-financial-management-reform.html ).

The global recession appears to have provided a welcome space for those who do not accept the current orthodoxy. Such criticism is necessary to try and increase the degree of success with public financial management reforms. It is hoped that the current upturn does not end this opportunity. The lessons of Richard’s paper are important and need to impact directly on reform plans in many countries.

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