October 2016|admin|

Carlos Scartascini is a Principal Economist at the Research Department of the Inter-American Development Bank (IDB). This post draws extensively on joint work with Mariano Tommasi. The opinions expressed in the note are those of the author and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent. For more information on the author and his publications, see www.cscartascini.org

In a recent post on the IMF-PFM blog, I highlighted the relevance of politics in the budget process. In particular, I point out that by understanding the role of politics in the budget process and the role of the budget for political bargaining, it is possible to understand why, when and under what conditions public financial management (PFM) reforms may work or not. Moreover, because of the interrelation between budget and politics, the post emphasised a property of PFM reforms that is usually neglected: PFM reforms can have a role beyond the budget process into the confines of politics. The fact that politics matter was one common argument heard at the 2013 CAPE conference, from academics, practitioners and policymakers alike. Another salient topic discussed was the role of government capabilities for making PFM reforms work. This post tackles the latter.

Do capabilities matter?

There are many interrelated and complex concepts that try to capture capabilities. ‘State capacity’, ‘state capabilities’, and ‘government capabilities’ are just a few. Here we refer to a particular view of government capabilities for understanding institutions, policymaking processes, and policy implementation in Latin America that the Research Department of the IDB has been developing and implementing. The type of characteristics of a polity that reflect high government capabilities are, for example, a legislature made up of professional legislators, with adequate organisational structures to facilitate the development of relatively consensual and consistent policies over time; and a strong, independent and professional bureaucracy that is likely to improve the quality of implementation of public policies.

As a growing body of research shows, higher institutional capabilities correlate positively with policies that are more stable (if working, they do not change just because political winds change), more adaptable (but if failing, they do change), and that tend to favour the broadest sector of the population (see also Political Institutions, Intertemporal Cooperation, and the Quality of Policies). These are all policy features that would lead any country into higher and more equitable levels of development.

Higher government capabilities have also been shown to correlate positively with policies that are associated with long-term gains in productivity. This includes less distortive tax systems and government subsidies, a larger formal sector, higher quality infrastructure, labour market flexibility, and ease of firm entry. Moreover enhanced government capabilities generate the conditions for a)higher financial development; b) more rapid advancement in achieving development policy goals in social sector areas; and c) more effective health and education spending.

What is the evidence regarding fiscal results? Countries with higher capabilities might be able to implement sounder fiscal policies, such as countercyclical macroeconomic policies, and to design better fiscal frameworks. For example, as the figure below shows (see here for details), a more capable bureaucracy may help to generate the conditions for the implementation of advanced PFM systems such as budgeting for results (higher values of the index in the vertical index mean more developed performance budgeting systems).



Barry Anderson, among others, has provided additional reasons why capable government bodies are relevant. For example, he highlighted the benefits of having a capable and independent legislative budget analytical unit: it simplifies complexity; promotes transparency; enhances credibility; promotes accountability; improves the budget process; serves both the majority and minority, and provides rapid responses.

However, despite the pleas from Barry and colleagues, and from donors and multilateral institutions, few countries have attempted to provide their legislatures with such an office. Among those that have, the experience has not always been successful. For example, Colombia’s 2006 attempt proved unsuccessful; Venezuela established a Parliamentary Budget Office with high technical standards, but the government closed it when it enacted the new constitution in 1999; and Peru has yet to develop one, despite taking steps in the direction.

Also, as the figure above shows, higher government capabilities are not a magic bullet (nor a sufficient condition). Countries with relatively high levels of capabilities may still not advance with many relevant reforms. This is not necessarily a prerogative of developing countries. The repeated failure of the US Congress to approve a budget on time, despite the strong competencies of its bureaucracy, is a prime example that capabilities are a necessary but not a sufficient condition.

How are capabilities accumulated?

There are multiple investments in the workings of the public sector that might lead to higher capabilities. Still, the evidence suggests that the big structural and permanent changes cannot be introduced exogenously. Instead, government capabilities are the equilibrium outcome over time of endogenous choices by key political actors. Tim Besley and Torsten Persson have recently reinvigorated this notion in a series of papers and a book exploring the historical dynamics of legal and tax capacities across countries. In joint work with Mariano Tommasi, we have developed a related conceptual scheme that attempts to capture these stylized facts in which investing in institutionalised policymaking arenas (which increases government capabilities over time) is an explicit decision of political agents. As experience shows, it’s not necessarily the case that government officials and political actors want to increase the capabilities of the government agencies under their command. When a former President declared “If they want to get us out from every one of the (Congressional) Committees, let’s let them do it; we have the streets of the people” he was surely not betting on strengthening Congress. Similarly, when public officials decide to scrap the legislative units in charge of analysing the budget or replace troublesome judges and prosecutors with more servile ones, they are not investing in increasing government capabilities.

Consequently, the practical message emerging from this view is that government capabilities are the equilibrium outcome over time of endogenous choices by key political actors. Hence, they cannot be built by fiat; which raises a flag against some naïve tendencies of external observers to believe too much in technocratic approaches to (often donor-driven) capacity building. There are plenty of examples from Latin America and elsewhere of copying foreign institutional practices without substantial results. Government capabilities evolve over time as the result (and as part) of dynamic social equilibria.

Read part 2 of Public finance reforms: politics matters, but so does government capability

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