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Public Expenditure in the new Development Consensus

Public Expenditure in the new Development Consensus. Anand Rajaram, PRMPS PEAM Core Course January 12, 2004. 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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Public Expenditure in the new Development Consensus

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  1. Public Expenditure in the new Development Consensus Anand Rajaram, PRMPS PEAM Core Course January 12, 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 A.Rajaram PEAM 2004

  3. 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 A.Rajaram PEAM 2004

  4. 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 A.Rajaram PEAM 2004

  5. 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 A.Rajaram PEAM 2004

  6. 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 A.Rajaram PEAM 2004

  7. We know economic growth is an important influence on development outcomes(WDR 2004) A.Rajaram PEAM 2004

  8. But public spending on directly related sectors and outcomes are often weakly related (WDR 2004) A.Rajaram PEAM 2004

  9. 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 A.Rajaram PEAM 2004

  10. 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 A.Rajaram PEAM 2004

  11. With reform, aid could help achieve many, but not all MDGs A.Rajaram PEAM 2004

  12. 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 A.Rajaram PEAM 2004

  13. 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) A.Rajaram PEAM 2004

  14. 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 A.Rajaram PEAM 2004

  15. PE work has two main strands A.Rajaram PEAM 2004

  16. 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 A.Rajaram PEAM 2004

  17. 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 A.Rajaram PEAM 2004

  18. 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. A.Rajaram PEAM 2004

  19. 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 A.Rajaram PEAM 2004

  20. 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 A.Rajaram PEAM 2004

  21. 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) A.Rajaram PEAM 2004

  22. PER coverage A.Rajaram PEAM 2004

  23. 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 A.Rajaram PEAM 2004

  24. Government PFM Reform Strategy and Action Plan Coordinated program of capacity building work Standardized Assessment Government/Donor Policy Dialogue Performance indicators Donor country Assistance Strategy 2 Strengthened Approach to Public Expenditure work A.Rajaram PEAM 2004

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