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Using Political Economy
Analysis to Inform the
Sequencing of PFM
Reforms
Early Findings from the Bangladesh PEIR
Alma Kanani, Sr. Economist, South Asia
From Diagnostics to Action: Sequencing and Politics of PFM,
WB Seminar, March 21st, 2008
Outline
 Why undertake PE analysis on PFM
 Scope of PE Analysis
 Political Economy and Institutional Analysis at
the three levels of budget outcomes – an
application in the case of Bangladesh
 What does the PE analysis tell us about PFM
institutions and PFM reforms
 How to use it to inform strategy and actions
 Concluding Remarks
Why undertake PE Analysis?
 The main elements of PFM are both political and technical.
 Changes in the way public resources are allocated and used involve




powerful winners and losers.
Countries seem to pursue PFM reforms for a long time with marginal
results or no fundamental change in budget management practices
– the case of some African countries, Bangladesh.
Countries engage in formulation of medium/long term strategies for
PFM reform that are very technical in nature.
Bank ESW rarely uses PE analysis to inform its often politically
charged policy and institutional reform recommendations.
Reform sequencing is country specific. Some general principles
may apply but they may take a different place in different settings.
One needs to understand the dynamic of the budget process and
changing circumstances on a continuous basis.
The scope of PE analysis
 Distinguish between PE Analysis of the budget
process and PE analysis of the PFM reform.


PE Analysis of the budget process focuses on the role
and interaction of the main actors, including political
actors, with substantial influence over budget policy
making and other budgetary decisions and ultimately
budget outcomes.
PE analysis of PFM reforms uses the above to
determine who are the potential winners and losers of
proposed reforms and define a politically feasible
strategy/course of action.
 Both are complementary.
PE analysis - the budget process
 Tries to address the questions:
 who are the players that influence budget outcomes at
three levels -- aggregate fiscal discipline, allocative and
technical efficiency?
 What are the formal and informal
institutions/processes, (including political and
administrative) that shape their behavior in making
decisions about allocation and use of public
resources?
 What are the key failures and how can processes be
improved in a way that is politically feasible?
PE analysis - the budget process in Bangladesh
Aggregate fiscal discipline
Figure 3: Recent Trends in Overall
Budget Deficit


The analysis looks at key institutional
arrangements for maintaining fiscal discipline:


FY
90
FY
92
FY
94
FY
96
FY
98
FY
00
FY
02
FY
04
FY
06
% of GDP
7
6
5
4
3
2
1
0
Outcome – good fiscal discipline, lowering fiscal
deficits and sustainable domestic financing.


Figure 4: Recent Trends in Deficit
Financing
6
% of GDP
5

Net Foreign Financing
4

3
2
1
0
Net Dom estic Financing

Control over fiscal aggregates
Use of macroeconomic
programming
Legal limits on borrowing and
spending
Ex ante agreements in the
executive or legislature
Accountability for budget
performance –ex-post
Comprehensiveness
Conclusion: Centralized decision making at
the powerful MOF, and early consensus on
budget aggregates among the main players is
crucial to these results, in the context of weak
accountability and shortfalls in
comprehensiveness.
Effective Fiscal Discipline Index and
Inflation – cross country evidence
8
7
Brazil 85-94
Log of CPI Inflation
(Averaged over periods shown)
6
5
Brazil 64-84
Turkey 90s
4
Lebanon 90s
Iran 90s Brazil 95-99
3
Egypt 80s
Algeria 90s
Yemen 96-00 Indonesia 90-97
Egypt 90s
2
Bangladesh 01-06
Jordan 90s
Korea 90s
1
UAE 90s
Tunisia 90s
Morocco 90s
Kuwait 90s
USA 90s
NZ 94-98
0
0.00
0.10
0.20
0.30
0.40
Effective Aggregate Fiscal Discipline Index
0.50
0.60
PE analysis - the budget process in Bangladesh
Allocative Efficiency-Strategic prioritization
Outcome: Broad inter-sectoral allocations are in line with strategic priorities

FY98-FY02 Average
FY03-FY07 Average
Interest
Transport and
Communication
Housing and
Community
Fuel & Energy
Health
Education
Public Order
and Safety
2.5
2.0
1.5
1.0
0.5
0.0
Social Security
& Welfare
Recreation,
Culture &
Agriculture,
Fisheries &
Mining,
Manufacturing
Rural
Development &
Ministry of
Chittagong Hill
Ministry of
Commerce,
Ministry of
Science &
Conclusion: The domination of central agencies, such as MOF and Planning and a limited role of
the line ministries and the Parliament to make substantial changes maintain broad allocations in
line with the stated strategic priorities.
Defence

The analysis looks at institutional arrangements for allocative efficiency:

Prioritization

Participation of line agencies

Flexibility of line ministries

Breadth of consultations

Comprehensiveness

Accountability

Program evaluation
General Public
Services

Effective Allocative Efficiency Index
cross country evidence
Public Education Expenditure as % of Total Public Expenditure
(Averaged over the periods shown)
30
Korea 90s
25
Yemen 96-00
Jordan 90s
Iran 90s
20
UAE 90s
Morocco 90s
Tunisia 90s
Algeria 90s
Bangladesh 01-06
USA 90s
NZ 94-98
Brazil 95-99
15
Egypt 90s
Turkey 90s
10
Kuwait 90s
Egypt 80s
Indonesia 90-97
Lebanon 90s
5
Brazil 85-94
0
0.01
0.10
Overall Allocative Efficiency Index (Log Scale)
1.00
PE analysis - the budget process in Bangladesh
Operational Efficiency

Outcome: Very weak operational
efficiency

Capital (ADP) Budget Deviation
(Actual from Budget)
40.00
30.00
20.00
10.00
0.00
1999 2000 2001 2002 2003 2004 2005 2006

The analysis looks at institutional
arrangements for operational
efficiency
 Agency autonomy
 Merit based recruitment and
promotion
 Accountability for performance
 Predictability of resource flow
 Average tenure of line agency
Managers
 Competitiveness of salaries
 Resource availability for day to
day operations
Conclusion: Low scores on all of
these dimensions, especially on
accountability and merit based rec.
and prom. make these the main
issues to be addressed.
What does the PE analysis tell us about PFM
institutions and prospects for reform?
 Institutional arrangements for PFM are highly influenced by the
political developments and the political structure:
 A high degree of political fragmentation makes the alignment
of interests very difficult.
 A long and difficult way to a democratic system of
governance (1970-1991) does not promote establishment of
well functioning institutions.
 Nature of political parties (patronage systems and rent
seeking) does not provide incentives for the politicians to
focus on long term reforms with higher social returns (such
as ACSR)
 Limited degree of institutionalization of the political process
does not provide incentives to the politicians to follow the
rules but rather bent them to the benefit of their political
game.
 The highly central character of the parties means that top
politicians have little interest in devolving power in the
administration of policies and resources.
The Result…
 A very centralized administrative and PFM structure.
 The system manages to deliver on more visible results, such as




fiscal discipline and broad budget allocations towards important
programs.
Weak operational efficiency - the weakest aspect of the PFM
systems, which requires a certain degree of autonomy,
decentralization and greater accountability.
Weak accountability institutions.
A system that fails to deliver in less visible and not easily
observable quality dimensions of public service.
PFM reforms take a long time to produce any significant results
and fundamental change in the way policy is formulated and
implemented.
PE Analysis – PFM reforms
From analysis to actions
 To advance on PFM in a more fundamental way there
is a need to broaden the constituency for reform:


Within the Government:
 Initially support the group of technocrats in MOF and
the line ministries.
 Begin building some ownership for reform with the
political class (changes in the current political arena
might present an opportunity).
Outside the government—
 Align with segments of the private sector/civil society
that are requesting change.
 Educate the media.
 Supreme Audit Institutes.
PE Analysis – PFM reforms
From analysis to actions
 Anchoring PFM reforms on the MTBF approach has proved
beneficial to broaden their constituency within the Government:
 Positive incentives for the line ministries –greater autonomy.
 Engagement of senior level management and more
progressive politicians in the budget formulation process.
 Focus on performance.
 Increase transparency for engaging with groups outside the
Government:
 Improving quality of budget data at all stages is crucial (i.e)
modernization of accounting systems, IFMS.
 Publish audit results.
 Building capacity at certain think tanks/civil society and
media groups to review budgets, especially to provide info
on how they affect public service delivery.
Concluding Remarks
 Understanding the political economy factors that affect the
structure and performance of PFM is crucial to:
 Design a well sequenced PFM reform strategy.
 Understand the key constraints and needed remedies,
which may lie outside the PFM arena.
 Adjust expectations for achieving desired results.
 Use the various instruments in the right way.
 Build necessary partnerships and alliances to push
reforms.
 Reform sequencing is country specific. General principles
may apply, but they may take a different place in different
settings. One needs to understand the dynamic of the
budget process and changing political circumstances on a
continuous basis.