Download Public Expenditure Analysis and Management

Public Expenditure Analysis
and Management
Introduction and Overview
Anand Rajaram, Lead Economist, PRMPS
Motivation
• Why are we interested in PEAM?
• Does public expenditure influence
development or does development
influence public expenditure? Or are both
influenced by other factors?
We know economic growth is correlated with
development outcomes
(WDR 2004)
GDP and Pub. Exp are loosely related
• We know richer countries generally have better
(financed) government but the size and role of
govt. varies quite widely
• Korea (19% of GDP) – Nordics (almost 60%)
• On average OECD about 45% of GDP
• High middle income countries have a wider range – 53%
Hungary and 13% Mauritius
• Low income countries, most below 30% of GDP, often
supplemented by significant ODA
• Certainly no striking evidence that more public
spending creates sustained development
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
Whether public expenditure is productive
matters enormously for the aid debate..
• “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
PE work has two main strands
Public Expenditure
Policies
Management
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
• Bill Dorotinsky will discuss how a budget system can be assessed
in terms of its capability to achieve these goals
The Basis for PE Policy analysis derives from
Welfare/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
Market Failure must be balanced against
potential Government Failure
• 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
• Session by Dr. Tanzi will discuss how forces
other than economics have influenced public
spending and the role of the state, for better and
for worse
What about PE and growth and poverty?
• How does one assess the composition of the
budget in terms of its contribution to growth or
medium term poverty reduction?
• Pro-poor expenditure - has policy advice run
ahead of conceptual clarity?
• Need integrative next-level analysis for
assessment of sector expenditure to take account
of dynamic, cross-sector interactions to assess
impact on growth.
•
Ref: “How does the composition of spending matter?” Paternostro, Rajaram,
Tiongson, WB Working Paper (forthcoming)
Some thoughts on process in PE
work
• What is unique about PE work relative to
macro/sector work?
– Budget as a common property resource – collective
action problems – free riders, prisoner’s dilemma,
non-cooperative behavior
– Forces you to confront political/institutional issues –
need to blend economics with country specific history
– Requires a different style of work to be effective –
with government and within Bank
Roles of Bank and IMF?
• Traditionally:
– Fund advises on aggregate fiscal
– Bank advises on composition of spending
– Shared responsibility for PEM
• In recent years, active bilateral agency
involvement with more/less coordination
• Country-led reform a desirable but elusive
goal – lot of “reform steering” by donors
Will need effective country level
collaboration across networks
• On institutions, PREM, FM and Procurement
have forged closer relations
• On policy, we need to initiate cross network
collaboration of broad scope (PREM-HDINFunderway, others to follow)
• No network has the full range of skills to assess
PE policy and institutions
• But collectively, skills exist
PER coverage
Select PERs 1999-2003
National PERs
Ethiopia
Guinea
Malawi
Mozambique
Tanzania
Uganda
Zambia - 01
Zambia - 03
Cambodia
Indonesia - 00
Indonesia - 98
Malaysia
Thailand
Vietnam
Albania
Croatia
Czech Rep.
Czech Rep. (Intgvnt)
Kazakhstan
Kyrgyz Rep.
Macedonia
Russia (PIR)
Turkey
Brazil - Northeast
Nicaragua
Peru
Nepal
Provincial PERs
Ethiopia - Oromiya
Ethiopia (Regionaliz)
China
India - Maharashtra
Pakistan - Punjab
Total
32
x
x
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x
x
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x
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8
x
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x
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x
x
17
x
x
x
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x
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x
x
x
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x
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x
x
x
x
Public Sector
x
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3
20
x
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19
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20
x
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9
x
x
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24
3
x
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x
x
x
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12
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9
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9
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10
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x
Reform
Strategy
Decentraliz.
Civil Service
Reform
Procurement
Budget
Execution
Budget
Formulation
Infastructure
Water/
Sanitation
Rural/
Agriculture
Social
Protection
Health
Education
x
x
x
x
x
24
x
x
x
x
x
x
x
x
x
x
x
x
Expenditure
Revenue
x
PEM
x
x
x
x
x
Fiscal Risk
Debt Sustain.
Basic
Country
Sector
Legislative
Accountability
Budget
Composition
Macro
x
21
7
2
x
x
x
x
19
Outline
– Day 1 – Roles and Management of Government
• Vito Tanzi, Kai Kaiser, B. Dorotinsky
– Day 2 – Macro fiscal, health and social sector policy
and data issues
• S. Herrera, G. Schieber, M. Grosh, M.Lundberg.
– Day 3 – Education and Infrastructure
• Abu-Ghaida, Berryman, Bashir
• Foster, Irwin
– Day 4 – Case Studies