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Jul192012

Why most publications about PFM sequencing are missing the point.

Author: ODI Researcher Philipp Krause

Public financial management is a relatively placid field of international development. Other development specialists have fierce arguments over the faults and merits of, say, Millennium Villages, or randomized controlled trials. For the most part, PFM specialists acknowledge that while there is a strong technical core to public finances and budgeting, there is a lot we don’t yet know about the political and institutional side of establishing and reforming systems in developing countries. Arguments are rarely had in the open.

One of the more profound disagreements in the field is over the proper sequencing of PFM reforms. Given that many governments face challenges with budget formulation and budget execution; as well as external oversight and internal control, where should they start? Is it necessary for bureaucracies to first establish control over inputs before they can link allocations to results? Must we establish credible annual budgets before we worry about medium-term budgeting? Are there budgetary basics as well as advanced budgetary systems? If so, what are the prerequisites for advanced systems to work?

This post could have been titled “Why Allen Schick is always right”, because the major exponents of the sequencing debate implicitly base their claims on Schick’s work. They are also mostly wrong. Schick’s seminal 1998 article explains “Why most developing countries should not try New Zealand's reforms”. In a presentation given the same year that was unfortunately never published, he makes the more general argument and warns aspiring reformers to “look before you leapfrog”.

Schick established the notion that there is a sequence to budget development, and that budgetary basics must come first. This means that control over inputs precedes control over outputs; cash accounting before cost accounting; rules before flexibility; as well as integrated and centralized departments before autonomous agencies.

The PFM field has since taken sequencing in several directions. First of all, concerns over sequencing are still often ignored in practice. In a survey of PFM reforms in 31 African countries, Matt Andrews finds that the overwhelming majority of governments have tried to introduce “advanced” reforms. This includes medium-term expenditure frameworks, accrual accounts and performance budgets. Many of them failed. The most obvious conclusion from Schick’s argument is that we should not try advanced budgetary reforms in developing countries. Perhaps unsurprisingly, this argument has not caught on.

Recently, the most influential take on sequencing has been to advocate rapid progress through “platforms”. Instead of shying away from reforms that go beyond basic budget systems altogether, or trying to immediately implement more advanced budgetary systems, a quick step-by-step approach is advocated.

The most commonly cited formulation of the platform approach suggests countries should first establish credible budgets; then move to establish internal accountability; then link policy and planning; and finally establish performance management. This is all meant to take place over an eight year period(!).

By the letter, the platform approach is very faithful to Schick’s “Basics First” message. The wild optimism of this approach, however, has since come in for an entirely uncharacteristic (for the PFM community) amount of criticism and ridicule. For instance, Richard Allen has rightly argued that today’s rich countries took centuries to move through these stages.

But this debate misses the most important point about Schick’s original paper. Yes, the elements of budget reform do somehow build upon one another. But, more importantly, a country’s PFM system - and its bureaucracy more broadly - is inexorably linked to wider societal norms and private sector practices.

The establishment of Weberian bureaucracies requires governments to develop administrative formality and controls over inputs. This process happens either in parallel with similar advances in the private sector or because a more advanced private sector demands that the lagging public sector cleans up its act. Further reforms towards a New Zealand style contractualism – where managers are given discretion over the use of funds and held accountable for outputs or outcomes - rely on societal norms of formality and transparency to be already firmly in place. Schick is quite explicit that public sector norms may catch up with the private sector, or both may advance in lockstep, but only very rarely does the public sector move ahead in isolation of the private sector.

Budget systems are a product of the broader political, economic and social context in which they came about. They are not very portable. The broad societal changes required to get from pervasive informality to acceptance of formal contractual arrangements may not take centuries. But for those sitting in a Ministry of Finance, they probably take long enough to be well beyond their planning horizons.  

Virtually all comprehensive budget reform strategies implicitly assume that reforms within central finance agencies can spearhead similar changes in the wider public sector. They also assume that public sector reforms will somehow take society along for the ride. To the extent that we ponder sequencing issues, we focus on the technical requirements of PFM systems (i.e. we need the budget to be predictable over 12 months before we can enforce ceilings for 3 years). We hardly ever focus on the external preconditions for reforms to make sense in the first place. Matt Andrews and others have long called for the “other stuff” of PFM reform to be given primary importance. To date, the internal technical logic of a PEFA assessment will still win out over any other consideration. But the unfortunate fact is that a discussion about sequencing makes little sense if it does not include non-technical sequencing as well. Unless we prioritise getting a better understanding of how PFM interacts with the wider political environment, we’re unlikely to move beyond what we knew 15 years ago.

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Reader Comments (5)

See my response to this here: http://whitehallwatch.org/2012/07/27/co-evolution-of-the-development-of-public-administration-democracy-and-capitalism/

July 27, 2012 | Unregistered CommenterColin Talbot

Two reflections from a non-PFM specialist.

First, I think the parallel between "Basics first in PSM" and MDGs must be taken with a pinch of salt. One of the weaknesses of the MDGs has been to focus on agreed numeric indicators and forget a bit about what had to accompany them to be really meaningful as development results. Hence, for instance, lots more 'bumps on seats' but what Kevin Watkins calls an educational crisis as many children don't count and read after years at school. Now, the argument goes, you can't do everything at the same time (cost, capacities etc. so very much the same kind of arguments as for avoiding sophisticated PSM reforms in the first stages) and to an extent I buy this, hence also the "basic first", but only to an extent. Aspirations to do more/better are important.

Second, yes, PSM reforms in isolation of deeper societal transformation isn't going to happen (or will be mimicry and won't hold water). As Talbot says there must be 'co-evolutionary processes', each reinforcing, and being reinforced by, the others. What I think is dangerous though, is to believe that these co-evolutionary processes necessarily should/will take place along the same broad path as what happened in now developed economies/societies. I found Talbot's conclusion a little disturbing: "This all suggests, as Krause indeed does, that careful attention needs to be paid not just to the sequencing of public administration or public finance reforms, but to democratic and corporate reforms at the same time and same level to create a mutually reinforcing co-evolution of development."

My first reflex was to say mmmm... Does he mean that democracy and corporate reforms the way WE understand them are the only way? Thinking about Limited Access Order societies and Open Access Order societies and possible paths of transition from the former to the latter, yes, perhaps. But that's something else.

July 30, 2012 | Unregistered CommenterCatherine

Shades of grey

Without wishing to sit on the fence, my response to both Philip and other contributors is Yes but.. I would suggest that there are instances in PFM reform where correct sequencing is fundamental for example any project manager should have a clearly sequenced implementation schedule for the implementation (not installation) of a computerised financial management system.
In other cases, for example changes to budgeting, the correct timing and pace, which looks at technical and non-technical issues may be the more important issues to consider. The budget in all countries is a highly political process and there is a difference (everywhere !) between formal systems (how things are supposed to work) and informal practices (how things actually work).

As the team noted in the recently published practitioners guide to capacity development in PFM "The challenges of making changes in PFM are well known. PFM reform is not for the faint-hearted, nor the time constrained. In both developing and developed countries, progress to date has been mixed. Politics and the budget process are intertwined." This does not mean that improvements are not being made on a daily basis, but rather that the pace of change does not always meet stakeholder expectations

There is a growing recognition that a long-term focus is needed, that developing capacity in PFM is a continuous and dynamic process not a discrete and mechanical one. The fact that it is continuous and dynamic implies that both a long-term and flexible approach is required. There is greater recognition that capacity development requires change in peoples’ behaviour, and in PFM this means many people and many organisations. As money makes the world go round, PFM is not just for economists and accountants. However, there seems to be less understanding of the fact that peoples’ resistance to change is not always rational or logical. What is also not clear is whether external stakeholders are willing to allow governments, organisations and individuals to learn through their mistakes – dismissing ideas that may have incremental success in favour of more radical ‘ideal’ solutions.

If we are honest, what should be done and is not done, and what is done but probably should not be done (square pegs in round holes !) is often also the result of various pressures.
• Peer pressure and international ‘best practice’ -. The concept of going back to basics is often not palatable and for West African Economic and Monetary Union (WAEMU) countries not even possible.
• Private sector interests (e.g. profits). The for-profit sector may dismiss what the organisation really needs (basic accounting software) in favour of ‘the latest technology’ (highly sophisticated multiple modules using multiple currencies etc.) in their drive for greater profits or continuing existence.
• Donor organisations’ internal management requirements (e.g. lending policies), agendas (e.g. gender and green budgeting) and performance targets (e.g. amount disbursed) may lead to a solution being offered, rather than an answer to a problem.
• Professional pride (the desire to implement the latest trend); and
• Individual incentives (financial and non-financial).

To move forward, perhaps not as fast as Usain Bolt but in a forward direction, maybe we need to apply a little more common sense. In order to do this, the above mentioned study noted that we need to - know your country, know your subject and understand yourself/your organisation.

July 30, 2012 | Unregistered CommenterCarole Pretorius

Thanks Colin, Carol and Catherine - these are very useful and interesting comments. I will post a more thought-out response in a few days.

I absolutely agree that this is a very complicated field and there is of course a place for quite PFM-specific, technical sequencing. One, because there sometimes just is a logic that needs to be followed, and two, to draw up a vision of what's beyond next year. However, an exclusive focus on this is what's the problem. I don't think that technical sequencing is sufficient to design a successful reform.

August 8, 2012 | Unregistered CommenterPhilipp Krause

You have posted a fantastic blog here thanks for sharing it. Keep posting this kind of posts

December 13, 2014 | Unregistered CommenterAlex

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