October 2016|bsi|

About a decade ago, I worked on budget reforms in Eastern Europe. I remember advising and consulting on different countries’ efforts to create medium term budgets, performance based budgets, fiscal rules, and other new institutions. The same reforms were being tried in all countries, often with the support of external agencies. These reforms were sold to governments using similar lines: “New Zealand does it like this”; “Sweden budgets in this way”; “This is the way Australia and other OECD countries do it.”

When I look back at the countries I was working in, I find most have laws that require medium term, performance and rule-based budgets.  Most produce multi-year projections that have little influence on annual budgets or spending, however, and the performance documents they generate are separate from the budgets; unwieldy and unused. Fiscal rules that still sit on the books are commonly ineffective and fail to constrain spending, deficits or debt. In short, many of the reforms have changed the way the budget process looks but have done little to sustain improvements in functionality.

This is something I see in developing countries across the world where similar new budget institutions were introduced. For instance, data from the Public Expenditure and Financial Accountability (PEFA) assessments show that 8 out of 10 developing countries have significantly better laws than implementation of said laws (in many instances 15 to 20 years after the laws were introduced). Similarly, the recent Open Budget Index shows that countries exhibit much greater transparency in budget preparation (where they make budget promises) than they do in budget execution (where they actually spend money).  They look better after reforms but performance is not really better, and actual spending problems still fester.

In my recent book I suggest that these kinds of gaps between what governments look like and how they actually function emerge because of the way we do institutional reform in development. The approach I see in vogue uses four or five year projects to introduce best practice reforms (like medium term and performance budgets) in developing countries, typically under the auspices of a minister of finance who acts as the reform ‘champion’. The interventions commonly prove poorly fitted to the political and capacity realities in the countries, however, and are impossible to implement and make real.

Interestingly, the very countries we draw these best practices from did not follow this kind of reform approach. Take Sweden, for instance.

  • Budget reforms were not introduced as best practice solutions looking for problems. Instead, they emerged as fitted solutions to real problems that Swedish authorities identified in the 1980s and early 1990s. These problems came into the spotlight after the macroeconomic crisis that peaked in 1992. Budget officials used the crisis to point to problems that they had talked about for years, and drew attention to these problems by using data to show that the Swedish system was one of the weakest in Europe (second only to Italy). Because a problem drove the change process, government officials were able to reflect on the need for change, start a purposeful search for relevant solutions, and build coalitions to lead change.
  • Reforms emerged gradually as budget officials and others drew on past experiences with reforms (where lessons had been written up in reviews), prior ideas (like fiscal rules, which had been proposed in Sweden in the 1930s), and examples from a variety of other countries (not one, but four or five that were doing interesting things). They  were not plucked from some outside example and pre-designed in some four or five year project. Ideas from all of these sources were experimented with for a number of years, lessons were learned, adaptations were made, and hybrid reforms emerged that were peculiarly ‘Swedish’. Some of these hybrid structures were turned into law in 1997, but since that time the government has continued to experiment, learn and adjust, finding and fitting reforms that function.
  • The reforms emerged as a result of work by many different agents at different levels of government, in different ministries and sectors in government, and outside of government in places like academia. It is true that the finance minister who held office at the height of the reform process is considered the ‘champion’; but documentary evidence over the past twenty years shows that this minister was only responsible for providing authority and motivation when it was needed. Others  helped to make the case for reform,  came up with ideas, structured the reform experiments, and ensured lessons were learned from them. And others ensured that the many parties met and connected and talked.

I call this kind of process Problem Driven Iterative Adaptation (PDIA). I think it is the kind of process we see when governments in more advanced countries have found and fitted their most impressive institutions. It is a completely different process to the one development organisations use to promote reforms in developing countries. I wonder why, and strongly argue that we should be promoting PDIA in development.

We would still be copying from the best practice countries – we would just be copying the best practice process, not the best practice product.

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