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Finance & Development, March 1975
Article

Budgetary reforms in developing countries: need for renewal - Now that the initial enthusiasm for these reforms has died down, the author examines their implementation.

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1975
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A. Premchand

During the early and middle 1920s budgetary reforms were concerned with the development of an organization that could handle budgetary tasks, and with the appropriate relationships between the budget agency and the spending departments. The attempts in the United States at the formulation of the executive budget, and the reforms of Sir Warren Fisher in the system of treasury control in the United Kingdom belong to this period. During the 1930s and later 1940s attempts were made to introduce new budgetary structures. The most significant examples are the Swedish experience with the capital budgets, and the pioneering proposals of Sir John Hicks to restructure the British budget to give a more meaningful presentation of government surpluses and deficits. In the early 1950s, with the concern for growing public expenditure and what was considered to be declining legislative control, budget reform aimed at structural improvements that would permit the computation and presentation of costs of government activities and their achievements. This movement led to the introduction of performance budgeting techniques in government. More recently, however, efforts moved away from structural improvements to ensuring allocative efficiency in government expenditure, among others, through the application of cost-benefit analysis techniques. In turn, this led to the introduction of planning, programming, and budgeting (PPB) systems in the United States, followed by the introduction of similar systems in some of the other developed countries.

Coping with developmental tasks

The experience of the developing countries, however, followed a slightly different pattern. Inherited colonial systems of financial management, which aimed primarily at control of minute detail (which in fact often proved illusory) and narrowly defined accountability, did not prove best suited to the changed role of the governments in the context of the development effort. The budget can be an important instrument of economic policy. Through it, a government may mobilize and allocate resources, accelerate capital formation, generate greater employment, and improve income distribution. Reform of the related procedures implied a recognition of this role.

Over the years, the reform itself has proceeded in two clearly discernible stages. The first stage, during the early 1950s, focused on the definition of the public sector and the improvement of budgetary structures, under the impetus given by the interregional workshops organized by the United Nations. Systematic attempts were made to evolve a functional classification of expenditure to permit priority planning, and an economic classification of expenditure intended to facilitate the measurement of the impact of the government budgets. These classifications, for which appropriate manuals were developed, were also expected to result in a number of other improvements, particularly in areas such as coordination with planning, budget formulation and execution, compilation and consolidation of government accounts, and in the building up of national accounts. In the second stage, the introduction of performance budgeting techniques was emphasized, influenced by the experience gained from their application, first in the United States and later in the Philippines. It was expected that with their emphasis on costs, quantitative indication of results, and assignation of organizational responsibilities, these techniques would prove very useful in development planning. The term performance budgeting itself was given up in the middle 1960s, but a variant of the earlier technique, which placed greater stress on classification of budget programs, was adopted in some countries. More recently, either as an integral part of this budgetary system or as an independent process, a number of countries have been applying cost-benefit and related techniques of project evaluation.

Implementation of reforms

How effective have the reforms been in fulfilling the goals they were set up to achieve? Chart 1 shows some of the more important budgetary deficiencies that these reforms were intended to rectify, with a broad range of action including procedural improvements, introduction of new techniques, and the establishment of new institutions. The majority of the reforms have basically evolved out of experiences in the developed world, particularly in the United Kingdom and the United States. (The broad spectrum of these reforms together with their interrelationships are indicated in the table.) The reforms enumerated, however, simply indicate the wide range of measures taken in the developing world, and should not be deemed as having been implemented either in all or even in the majority of countries. Furthermore, some reforms were essentially “public” where the innovations are visible to all, such as improvements in budget documents and changes in budgetary classification, while a few others, such as the application of cost-benefit analysis, demand management studies, national economic budgets, improved reporting systems, and related techniques, are “private,” or visible only to the participants in the system.

Chart 1.Budgetary reforms in the developing world

The implementation of these reforms has been rather varied, and in some countries too limited to allow any conclusive judgments. Certain generalizations can, however, be drawn from the experience gained from the implementation of budgetary reforms, recognizing that they may not necessarily apply to every developing country.

Planning of public expenditure

Some of the innovations in public expenditure planning, such as the application of cost-benefit analysis, demand management studies, forward planning, and projection of expenditure, are inextricably linked to development planning. Indeed, sometimes these have been undertaken by the planning agencies as a part of the formulation of medium-term and annual plans, rather than as a part of the budgetary process. This was to avoid overloading the latter, and also in view of the distinct possibility that the routine of budgeting might exclude the analysis that is so vital for expenditure planning. But overall experience indicates that cost-benefit analysis is applied to only some of the projects and programs submitted for foreign aid, and is often carried out to meet the requirements of the donors. While in some countries progress has been made in identifying national objectives and the priorities between them, it would still be correct to say that more remains to be done to make cost-benefit analysis part of the process of administrative decision making. Similarly, while some forward planning of public expenditure has been done as a part of plan formulation exercises, these estimates are still characterized by a number of deficiencies. Specifically, many countries appear to have difficulty in projecting the element of continuing expenditure needed for maintaining completed capital projects, and also in making reasonable assumptions regarding the price levels for the commodities and services utilized by the government. Consequently, any forecasts that have been undertaken have tended to be unrealistic and less useful than expected. This has in turn undermined the whole technique, even though the increasing vulnerability of developing economies makes such forecasts imperative.

Demand management studies are now undertaken in countries with considerable experience in development planning. But even where they are undertaken, they are not integrated into the budgetary process. The main approach to budgetary policy making in the developing countries continues to be the determination of current account surpluses or deficits, and the extent of financing by the central banks. This approach, in the absence of detailed analysis, is restricted, and may prove to be of limited value; indeed, the situation is exacerbated by deficient forecasting. During the last few years, however, substantial progress has been made in the developed countries in this area through the introduction of a number of techniques and concepts seeking to measure the impact of government operations on demand management. But, at the moment, the absence of well-developed national accounts data and the lack of modification of these techniques to meet structural nuances of the developing countries would appear to thwart their application.

New budget systems

Several developing countries have tried variations of program and performance budgeting techniques. These broadly implied a specification of government objectives, the application of evaluation techniques, appropriate budget classification in terms of functions, programs, and activities, the evolving of workload measurements, and the installation of suitable reporting systems. While the implementation of these techniques varied from one country to another, there is a pattern in the broad experience gained thus far. In a few countries the new systems have been introduced selectively in a few departments, such as public works. In others, only the first stage of the installation of the new systems—budget classification—has been undertaken. Even here some have made changes in the main budget documents, while a few others retained the existing classifications, adding the new classification as a supplementary feature. Very little progress has been made in developing workload measurements and in establishing reporting systems. On the whole, the new systems have remained auxiliary to traditional budget systems and have rarely replaced them.

Viewed purely as an educational and promotional venture, the implementation of these techniques has accomplished much in creating greater awareness of the systems and in obtaining positive decisions from governments to introduce them. But viewed from a functional point of view, this has led to the application of only some of the aspects rather than the whole system. In some countries, owing to legislative opposition or administrative difficulties, there have been de facto reversals to the traditional system, making the question of any further effective spread of the new systems debatable.

Budget structures

A major feature of the last two decades has been the considerable fragmentation in budgets. The scope of the central budget has vastly diminished with each attempt at setting up autonomous budgets that have earmarked or allocated revenues. While this process was essentially a technique of decentralization, aimed at more efficient administration, recent experience has shown that it may have become counterproductive. An awareness of the problems inherent in such a process to achieve budgetary control and to implement stabilization plans is now starting a movement back toward budget consolidation; in Ecuador, for example, attempts are now being made to consolidate the budget coverage.

A related aspect of budgetary structure that is frequently raised is current and capital classification. Immediately following World War II, a number of countries, including some former colonies, resorted to the organization of capital budgets in the context of growing budgetary deficits. In the early 1950s, owing to problems—in particular, the determination of the criteria according to which these budgets were to be organized, and also the influence that separate capital budgets can have on approaches to budget making—it was suggested that it might be preferable to have unified budgets. In practice, however, several countries still have current and capital budgets, often with an arbitrary allocation of items between them, and frequent shifting from one to the other. In some African and Asian countries developmental budgets, consisting of programs and projects financed by foreign aid, have come to be organized in lieu of capital budgets. In a few other countries, such as Korea, although the budget itself is not split into current and capital, a number of special accounts are organized for what are broadly considered to be capital projects. The present situation is characterized by a considerable proliferation of budget categories; where the categories are restricted to current and capital, the system and basis of classification are often arbitrary. Budgetary structures of developing countries, certainly, cannot conform to a standardized pattern, as each country has to evolve its own in the light of its administrative traditions and immediate requirements, but the multiplicity of budget categories has rendered the formulation and execution of budgets even more complex, thereby only adding problems rather than reducing them.

Substantial progress has, however, been made in the development of functional and economic classification of expenditure. In many countries in Africa, Asia, and Latin America, government budgets were reorganized on funcional lines. In a large number of other countries, supplementary classifications were developed by the budget agencies and the central banks. Economic classifications of expenditure have also been undertaken in a large number of countries. The progress is gratifying, but some of the very purposes for which the classifications and their analysis were evolved are not being served, because they are inadequately integrated into the main budgetary process. In many developing countries the classifications are undertaken as a supplemental exercise, and there is frequently a considerable time lag since they are often initiated only after the budget is formulated. So, instead of being used as inputs for determining the budget, they have come to be used as windows on the budget and, later, as a base for further analytical studies.

Budget execution

The important development in this area is the growing decentralization of power and delegation of authority to the spending departments after the budget is approved by the legislature. India and Pakistan are good examples of this. In some countries, the system of quarterly allotments has been introduced with a view to having greater control over cash flows, and, as a corollary, they have also developed some reporting systems. On the other hand, very little progress has been made, especially in Africa, to establish well-staffed prepayment audit units in large departments, despite the vast sums of money that they handle. Similarly, much remains to be done in terms of reviewing the actual progress made, with the consequence that the fiscal management scene is still dominated by, for instance, underspending and overspending, accumulation of unpaid bills, and cost escalations.

Accounting systems

Reforms in this area have consisted largely in restructuring accounting formats in line with the revised budgetary classifications, introducing trading accounts for government commercial departments and public sector enterprises, and electronic processing of accounting data. But accounting continues to be conducted somewhat as an independent operation, unrelated to the tasks of immediate financial control. Accounting data are often considerably delayed. Few attempts are made to measure the costs of inputs and outputs. On the other hand, experience also shows that while mechanization had undoubtedly created an apparatus with great potential, it also gave rise to a number of issues that remain to be tackled effectively. These include the need for greater standardization of procedures, forms, and related data elements, improvements in man-machine communication, and the integration of data outputs with the actual decision making process.

The lessons of experience

Although there was considerable enthusiasm to experiment with the new techniques, the implementation itself has been rather slow. This is due to a variety of factors. First, there was an inadequate recognition of the power groups and their reactions to the proposed reforms. In some countries where new budgetary classifications were introduced, the legislatures insisted on the traditional line-item budget presentation, in the belief that any change from the tradition could lead to a dilution of legislative control. Elsewhere, in a case where the Ministry of Finance installed a computer to make a detailed economic analysis of the budgetary requests of the spending agencies, the agencies also sought to install computers, as they felt that without them the centralized control of the Ministry of Finance might grow unchecked. In a few other cases where attempts were made to introduce techniques of evaluation, the spending agencies did not reveal all the necessary information, with the consequence that the decision making processes remained as before.

The introduction of these techniques often overloaded the machinery, since the techniques made inadequate allowances for the specific features of the country’s administrative system. Also, in the absence of adequate hybridization, they remained somewhat alien, thus reducing the possibility of their complete integration into the administrative system.

The introduction of the new systems was not always preceded by the training of the needed manpower nor by the appropriate changes in the supporting systems. While it is true that considerable efforts have been and are being devoted to provide training that would enable the acquisition of needed technical skills, the programs were not as extensive as they should have been. There were cases where operational levels were trained but the policy levels were neglected, and vice versa. This uneven emphasis naturally resulted in a situation where the mutual reinforcing of administrative levels could not be achieved. Similarly, in new systems, such as program and performance budgeting, several modifications are needed in supplementary areas such as accounting. But as these were not always phased in a comprehensive manner, with adequate recognition of how the systems should complement each other, the benefits expected of the new systems did not materialize, and disillusionment set in very early.

In several countries implementation lagged because of the absence of a centralized authority entrusted and empowered to carry out the reforms. In those situations the introduction of reforms soon resulted in the development of countervailing powers that effectively prevented the further spread of the reforms. Finally, it is clear that the implementation was also substantially affected by the inconvenient combination of extensive needs and low capacities that are so endemic to the developing countries.

The net result is a situation where either budgetary reform is being implemented in a halting way or the implementation is so diffused that no identifiable benefits can be derived.

Immediate tasks

Budgetary reform is still in the transitory phase, and much remains to be done if the goals are to be achieved. Meanwhile, during the last five years, new pressures have arisen on the fiscal front, making reform even more imperative. The continuing growth in public expenditure with associated complexities in its management, increasing recognition of the indirect links between the quality and quantity of public services, on the one hand, and the willingness to pay taxes, on the other hand, and the growing vulnerability of developing economies to international developments emphasize even more strongly the need for renewed efforts for reform. Reform in the 1970s should aim largely at consolidating the gains already made and in making further progress, on the following lines:

  • Greater emphasis should be laid on public expenditure planning. Efforts should be devoted to the development of long-term surveys and to the integration of economic analysis with the budgetary process.

  • The installation of program and performance budgeting needs to be carried further. As a corollary, program review and analysis should be stressed, as well as the development of work and cost standards. Attention should also be focused on hybridizing these systems to meet the specific requirements of each country.

  • As governments expand, it will become increasingly necessary to decentralize financial management responsibilities, which should be envisaged within a framework of checks and balances to permit efficient financial management. Greater attention will need to be paid to building up the necessary administrative apparatus in the spending agencies to enable them to undertake the tasks devolving on them.

  • The budgetary systems and associated procedures of budget formulation need to be made more flexible, so that appropriate action could be taken in the context of growing budgetary burdens arising from inflationary conditions.

  • Accounting systems and any improvements to be made to them should seek to serve the purposes of financial management. Efforts would also need to be made to minimize the problems arising from the introduction of electronic data processing.

  • The efforts at budgetary reform made thus far have generally been confined to the central government level. It is necessary to extend these efforts to the state and local levels as well.

The new challenges can only be met by strengthening the budgetary system. The extent of reform achieved in this area would determine the degree of success with which the challenges can be met.

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