Practice Area: Public Finance and Economic Development
Sound public finances are a cornerstone of good governance and a pre-condition for economic development in developing and transition countries around the world. Three sub-themes define IDG’s expertise in this practice area. First, a sound fiscal policy framework is needed in order for any government to achieve its strategic policy objectives and achieve poverty reduction. Second, public revenues and expenditures should be managed in a technically sound and accountable manner. Third, fiscal decentralization reform and the reform of intergovernmental finances forms an important fiscal policy issue in many developing and transition economies. Needless to say, these topics within public finance and economic development are closely intertwined with IDG’s other practice areas, including public administration, governance, and local government administration.
Key UI Experts in Public Finance & Economic Development: Jamie Boex, Francis Conway, Tony Levitas, Ritu Nayyar-Stone, Juliana Pigey
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A country's overall development finance strategy should provide a clear statement of the country's development priorities, and the overall fiscal strategy that the country intends to pursue to achieve its development objectives. Such a fiscal strategy should not only specify clear macroeconomic objectives such as controlling the government deficit, but also prioritize the government's strategic poverty-reduction objectives.
Although Poverty Reduction Strategy Papers (PRSP) are often used to state the country's development goals, these documents often end up as a wish-list of desired spending, rather than providing a realistic policy framework for prioritizing the public sector's scarce resources. Without clear government priorities, the budget formulation process is often reduced to an exercise of providing all government program with an equal, incremental increase.
The first step in achieving an effective development finance strategy is to analyze the country's long-term fiscal architecture and to determine the fiscal space available in the medium-term to direct resources to priority spending programs. Within these parameters, the prioritization of government expenditures should be guided by careful analyses that show the incidence and economic impact of different government spending programs.
The preparation of a sound development finance strategy is a necessary -but not a sufficient- condition to sustain economic growth and to achieve policy outcomes such as poverty reduction. Once a pro-growth and pro-poor budget is formulation and adopted, the financial management processes that are in place should assure that the budget is executed as planned in a transparent and accountable manner.
A critical step in achieving a sound and accountable public expenditure management process during budget execution is to regularly analyze the performance of budget execution vis-à-vis the budget plan. After all, consistent implementation of the government’s fiscal policies can only be assured during budget implementation when systematic deviations from the budget plan are quickly uncovered and addressed.
Other public expenditure processes should be analyzed on an annual basis as part of Public Expenditure and Fiscal Accountability Review (PEFAR) to assure that the overall budget process is generally sounds and provides funding consistent with the government’s stated policy objectives.
Many developing and transitional countries recognize that excessively centralized decision-making often leads to an unresponsive public sector that is ineffective in delivering adequate public services. As a result, there is an important role for regional and local governments in the public sector of most countries. In fact, fiscal decentralization reform and the reform of intergovernmental finances forms an important fiscal policy issue in many developing and transition economies.
The design of an intergovernmental fiscal system involves four distinct pillars. First, expenditure responsibilities should be assigned to each level of government in accordance with the subsidiarity principle. Second, to the extent possible, subnational governments should be assigned own and shared revenue sources with which to fund their expenditure responsibilities. Third, a system of intergovernmental fiscal transfers should be put in place to supplement the own and shared revenue sources provided to the subnational level. Finally, whenever possible, a framework for subnational borrowing should be set up that would allow qualifying local governments to borrow for capital infrastructure purposes.
However, the available evidence suggests that the success of fiscal decentralization reforms depends not necessarily on the quantity of decentralization, but rather on the quality of the decentralized financing arrangements. Because subnational governments often received a large majority of their resources from intergovernmental fiscal transfers, the reform of intergovernmental fiscal transfer systems is arguably one of the most common -but perhaps also one of the most challenging- components of fiscal decentralization reforms.
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