August 2012|bsi|

In OECD countries, a new budget framework law is the crowning achievement of budget reformers. It may be difficult to gather momentum, overcome veto players, figure out the details, make the right deals – but once a new system has been encoded in law, it is pretty difficult to undo. Since budgeting and financial management are both so closely intertwined with the relationship between the legislature and the executive, most budget laws are somehow anchored in the constitution. This makes them even more difficult to change.

Take Mexico. Up until the 1990s, it effectively functioned as a single-party polity, in which public finances were not transparent and served the interests of the party in power. After the transition to democracy that saw the then opposition party gain the presidency in 2000, the underlying fundamentals of budgeting in Mexico changed. All of a sudden elections became a real contest between parties – which completely changed the dynamic for voters. These days there are three roughly equal parties in Congress, and the executive never seems to have a legislative majority – which has completely changed the dynamic for opposition parties.

Over the course of seven years, governments undertook some initiatives; opposition parties demanded others. Finally, in 2006 and 2007 two major legal packages were passed that amount to a new budget framework. The laws introduced new fiscal rules: improved budget transparency; a changed budget approval process; and revisions to fiscal federalism – and those are just the headline items. This was a major achievement and locked in many of the carefully negotiated and bitterly contested changes of previous years. I’m using Mexico because I’ve worked there and previously written about these reforms. But the experience of budget reforms in the US and Germany are both fairly similar. Consider the tortuous history of balanced budget laws in recent US Congressional history. Or the new German debt break which only saw the light of day after years, if not decades, spent in obscure federal reform committees.

I think that budget reforms in low-income countries and fragile states are often approached against the backdrop of countries like Mexico. In the OECD, the underlying political settlement necessary for budget reform is difficult to achieve and once it’s there, it’s codified in law. So if there is an opportunity to get those legal changes approved early on during post-conflict reconstruction (or after the establishment of a new state), then it might be a good way to avoid painful politics later on and force all players to stick to a sound framework. It is also often argued that, since existing laws in fragile states are often dated and no longer reflect the underlying institutions, they should be changed before building new budget systems upon an unsteady legal basis. A 2004 IMF paper argues that establishing a new budget law within the first months had been found to be ”key for initiating budget reforms”.

Or maybe not. The conference report of a 2010 IMF/ODI event notes that “legal reform without institutional capacity is meaningless”; that considerable efforts have been spent on legal changes at the instigation of donors without any effect. Creating new laws falls into the “do less of” category in the report’s recommendations. Our recently completed an eight country study of public financial management reforms in post conflict countries broadly confirms this view. It finds that budget laws were mostly tinkered with in early reform years. Comprehensive legal changes were only taken up several years into the reform process (if at all) in order to consolidate change rather than drive it. Successful reforms didn’t seem to require the early adoption of new legal frameworks, whereas plenty of examples exist where ambitious laws never get implemented. It seems there is a genuine difference in the role of legal reforms between OECD and developing countries.

In any given country, there are several issues to consider. For one thing, even in fragile states, budget practitioners do not operate in a legal vacuum. It is not very helpful to imagine the “founding fathers” getting together in a conference room to vigorously debate the design of a new PFM system from scratch. In Afghanistan, there is a post-Soviet heritage, and even the Palestinian Authority has to consider Jordanian (in the West Bank) and Egyptian (in Gaza) legal heritages. If an “Hour Zero” budget framework law is pointless, then the purpose of comprehensive legal reform in a fragile state actually begins to look a lot like it would in any other country. It is a means to consolidate and lock in a lengthy reform process, once everyone involved is reasonably secure about the new rules.

In the meantime, what to do about a messy legal framework that is contradictory or out of date? It depends a lot on the context. As the old saying goes, in German public administration ‘everything that is not allowed is forbidden’, in England ‘everything not forbidden is allowed’. In some countries, finance ministries and other parts of the government have plenty of authority to regulate parts of the PFM system through decrees, budget circulars and other, similar sub-law instruments. In other countries, civil servants might not pick up a pencil without an explicit law enabling them to do so because doing so might well be illegal. These concerns cannot just be dismissed. However, in countries where informality and fragmentation are widespread, formal laws will matter less than leadership and authority within public administration. In such cases, reformers might be well advised to think of ways to strengthen basic budgetary functions before worrying about the constitutionality of block grants.

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