WP/09/96



The Challenge of Reforming Budgetary
Institutions in Developing Countries

Richard Allen

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© 2009 International Monetary Fund WP/09/96





IMF Working Paper



Fiscal Affairs Department

The Challenge of Reforming Budgetary Institutions in Developing Countries

Prepared by Richard Allen

Authorized for distribution by Marco Cangiano

May 2009


Abstract

This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent
those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are
published to elicit comments and to further debate.

The paper notes that the development of sound budgetary institutions in countries such as
France, the U.K. and the U.S. has taken a very long time―200 years or more―and is still
evolving. It discusses Douglass North’s prediction―which is supported by available
data―that institutional reform is also likely to be very slow in developing countries since the
budget is especially prone to rent-seeking influences. Finally, the paper discusses the
currently fashionable emphasis on complex, multiannual PFM reform strategies, which have
been strongly promoted by the donor community; and advocates a simpler approach
grounded on Schick’s important principle of “getting the basics right.” The paper identifies
several areas where further research would be fruitful.

JEL Classification Numbers:

Keywords: PEFA, public financial management, budget, institutions, platform approach,
reform, developing countries, World Bank, donors, Paris Declaration, Accra
Agenda for Action

Author’s E-Mail Address: RAllen2@imf.org

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Contents Page

I. Introduction ............................................................................................................................3
II. Historical Development of Budget Reforms.........................................................................4
III. The Challenges Facing Reformers in Developing Countries ..............................................7
IV. A Suggested Approach for Developing Countries ............................................................21
V. Conclusion ..........................................................................................................................24

Table
1. Selected Dates in the Development of Budget Systems: France, the U.K., and the U.S.......6

Figure
1. Illustration of the "Platform Approach"...............................................................................17

Box
1. Cambodia: Weaknesses of the "Platform Approach" ..........................................................19

Selected References .................................................................................................................26

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I. INTRODUCTION1

Interest in strengthening budgetary institutions2 and public financial management (PFM) can
be traced back for at least two thousand years. For example, Roman planners of the Claudian
aqueducts considered eventual O&M costs in selecting alternative routes and designs. In
more modern times, there is evidence of a stream of reforms from the “tally sticks” used to
record the budget in seventeenth century England, to the latest techniques of fiscal rules,
fiscal risk analysis, expenditure ceilings, medium-term fiscal frameworks, performance-
related budgeting, accrual accounting and budgeting, and expenditure review. In Europe and
the United States, a detailed history of the development of budget systems goes back for two
hundred years or more. Yet the processes and determinants of this evolution, as societies
move through varying stages of development, while critically important issues, are
imperfectly understood.

The issues addressed in this paper are as follows: first, what are the main factors that
determine the development of budgetary institutions systems over time; second, what lessons
can developing countries learn from the long experience of more advanced countries in
improving their budgetary institutions; and third, how can the international financial
institutions (IFIs), especially the IMF and the World Bank, and other providers of financial
and technical support, facilitate the process of reform in developing countries—what
adjustments are required to the approaches and models they currently apply? These issues are
complex, and the conclusions reached by the paper tentative, and to some degree subjective,
and will be controversial to some readers. The paper identifies several areas where further
research would be helpful.
The paper is structured as follows. Section II provides a conceptual framework for
strengthening budgetary institutions and an historical perspective; against this background,
Section III outlines the challenges for developing countries in reforming their budgetary
institutions; Section IV sets out a possible framework for such reform; and Section V
provides some concluding remarks.

1 The author is grateful to Salvatore Schiavo-Campo and several colleagues at the IMF and the World Bank for
helpful comments on an earlier draft of this paper, which was also presented at the December 2008 Winter
Conference of the International Consortium on Governmental Financial Management (ICGFM), and a World
Bank seminar. The views expressed are the author’s own and not necessarily those of the IMF.
2 Following North (1991), “institutions” can be defined as the laws, procedures and rules that determine and
regulate the behavior of public officials and organizations.

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II. HISTORICAL DEVELOPMENT OF BUDGET REFORMS
It can be argued that the reform of budgetary institutions is closely related to the
development of political and economic institutions as described by North, Wallis, and
Weingast (2006), drawing on the seminal work of North (1991). In this framework, societies
pass through three essential stages—primitive societies; natural states (or “limited access
orders”) that are dominated by elites which have primary access to power and resources, and
are vulnerable to violence and political conflict; and “open-access orders” that are
characterized by competition in political and economic markets. North, Wallis, and Weingast
(NWW) conclude on the basis of extensive historical analysis that natural states tend to
perpetuate for very long periods of time, and that the transition from natural states to open-
access societies is problematic and depends on the adaptation of their institutions,
organizations, and behavior (“doorstep conditions”). Natural states exist on a continuum
ranging from fragile states, characterized by political instability and violence at one extreme,
to mature natural states—such as emerging markets—that are close to satisfying the doorstep
conditions. Even today, few countries outside Western Europe and North America have
evolved beyond this stage, and natural states comprise approximately 95 percent of countries
(NWW, 2006).

The NWW thesis can be criticized for being oversimplistic and potentially misleading,
especially in its assumption that progress is linear. Other writers on public choice and rent-
seeking, while not embracing the full analysis of NWW have nevertheless accepted the
crucial role played by institutions―and the “rules of the game”―in determining the
opportunities for and progress of reform in the public sector, including the budget area.3 This
literature predicts, in general, that the development of political institutions is likely to
precede that of economic institutions, which in turn precedes the development of budgetary
institutions. However, there are exceptions to this pattern4 and discontinuities in the
development process.5

3 See Schiavo-Campo (1994), Campos and Pradhan (1998), and Tanzi (2000). Tanzi, for example, argues that in
the real world―as opposed to the ideal world described in classic public finance literature in which the state
plays a “normative” role―policymakers assign more weight to their own welfare and that of individuals close
to them than to the general population; and that policies are often greatly influenced by small groups of people
who in their privileged positions as relatives, close friends, or political associates, have easy access to top
policymakers so that they are able to influence them. The power of these “keepers of the gate” can be
extraordinary, and can distort policies in directions that are far removed from the ideal. Often such keepers of
the gate influence not so much general policies as how these policies are carried out and who benefits from
them, e.g., who is exempt from a tax or import duty.
4 The People’s Republic of China, for example, where liberalization of economic and, to a lesser extent,
budgetary institutions has preceded political liberalization.
5 Salvatore Schiavo-Campo gives the example of Germany in which the postal service continued to deliver mail
for several months after the death of Hitler and the collapse of the regime’s political institutions.

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Good fiscal outcomes (for example, aggregate fiscal discipline and an economically efficient
allocation of budgetary resources to priority sectors) depend upon having in place processes
and procedures for preparing, executing, and overseeing the budget. The budget, however, is
both a central institution of the state and a key mechanism for determining the distribution of
resources and economic rents to the elites that dominate natural states, and to the wider
groups that influence the development of open-access societies. Because of this, the budget
is, almost by definition, very hard to reform except in the unlikely circumstance that such
improvements enhance or facilitate rent-seeking behavior.

Evidence for the extremely gradual evolution of budgetary institutions can be found in the
history of the three countries—France, the United Kingdom, and the United States—that is
illustrated in Table 1. In all three countries, a similar pattern can be observed: first, a period
during which basic systems of accounting, budgeting, and financial reporting were
established, according to a uniform set of standards and procedures. In France and the U.K.,
these basic requirements were laid down broadly in the first half of the nineteenth century, a
period during which modern institutions of economic and political competition were also
being established. There followed a period of approximately one hundred years in which
these institutions were refined and consolidated. For example, although most funds were
appropriated by the parliaments in the British system of the mid-nineteenth century, there
was no single document reporting all government expenditures, no comparison between
budgeted expenditures and actual expenditures, and different accounting mechanisms used
by various departments and ministries. By the end of the nineteenth century, the framework
for modern budgeting (unity, comprehensiveness, and control) had emerged in Europe. In the
U.S., a broadly similar development can be discerned, but extended over a somewhat longer
period: the establishment of basic budgetary institutions in the course of the nineteenth
century, with further developments and modifications in the first half of the twentieth century
(partly reflecting the periodic disputes between the president, the Treasury Department and
Congress over the control of the budget).

The important point to emphasize in the context of this paper is that these developments were
taking place at a time when France, the U.K., and the U.S. were establishing the democratic
and competitive economic and political institutions that mark the transition from a natural
state to an open-access society.

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Table 1. Selected Dates in the Development of Budget Systems:
France, the United Kingdom, and the United States 1/
France
The United Kingdom
The United States (Federal)



1791: Accounting Office
1787: Consolidated Fund
1776: Treasury Office of
reporting to parliament
established
Accounts established



1807: Independent “Cour des
1866: Exchequer and Audit
1809: Appropriations Act
comptes”
Departments Act (established
(modified in 1870 and 1874)

modern budgeting and

1814–1819: First Restoration—
accounting system)
1887–89: Consolidated
Baron Louis’ reforms

accounting, bookkeeping,

1866: Comptroller and Auditor
reporting procedures (Cockrill
1862: Imperial decree on rules
General established
Commission)
for budgeting and treasury single --------------------------------------------
account
1960s: Public Expenditure
1894: “Dockery Act”
-------------------------------------------- Survey (PES) and Program
established Comptroller of

1959: Medium-term budget
Assessment Review (PAR)
the Treasury; consolidated
framework for investments

annual statement of revenues

1980s: Next Steps Program
and expenditures
1968: “Rationalisation des choix


budgetaires” (RCB)
1990s: Comprehensive multi-
1921: Budgeting and

annual budgeting
Accounting Act established
2001–06: Program budgeting

Bureau of the Budget and

1991: Citizen’s Charter
General Accounting Office
From 2006: Accrual accounting



1998: Public Service Agreements 1940: Consolidation of
2008: Full medium-term

uniform standards and
expenditure framework (MTEF)
2000–04: Resource (accrual)
procedures for accounting

budgeting
and reporting



1950: Accounting and
Auditing Act
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1982: Federal Managers
Financial Integrity Act


1990: Chief Financial Officers
Act

1993: Government
Performance and Results Act

1994: Government
Management Reform Act
1/ Measures that established the basic framework of accounting and budgeting are shown above the
line; items shown below the line are subsequent (“new wave”) reforms.

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A “new wave” of reforms since the 1970s

More recently, in the past twenty-five years or so, a “new wave” of public sector and
budgetary modernization has swept developed countries. While not the first of such bursts of
activity6, it has had unusual durability, and wide influence around the world. This new wave
was initiated in New Zealand, followed by other developed countries that are primarily in the
Anglo-Saxon or Northern European tradition of public management. These countries include
Australia, Canada, Denmark, France, the Netherlands, Sweden, the United Kingdom, and the
United States. Many such reforms have been associated with demands from citizens for
greater accountability of their political leaders, and increased access to budget information
and processes.

The modernization process has usually been supported and led at a high political level. In
New Zealand, for example, the political leaders were successive finance ministers who, with
the consent of the cabinet of ministers, strongly supported by the treasury—also a main
driver of the reforms. In France, by contrast, the reforms were led by parliamentarians who
demanded the restoration of budgetary powers over the adoption of the budget but were
subsequently taken up by the ministry of economy and national finance.7

A useful summary of the literature is provided by Westcott (2008), who notes that, in the
fiscal area, “new wave” reforms have covered diverse fields such as budget consolidation and
restructuring; a move to multiannual fiscal and budget frameworks; regular use of
performance information within the budget process; a shift from cost accounting to accrual
accounting; the development of computerized information systems; consolidation of revenue
collection; and greater use of devolved budget management. In many cases, improvements in
the budget area have comprised only a relatively small part of the overall reform program
which includes institutions such as the civil service, the legislature, and the judiciary.


III. THE CHALLENGES FACING REFORMERS IN DEVELOPING COUNTRIES
As noted above, strengthening budgetary processes and systems in low- and middle-income
countries is likely to be constrained by the poor quality of public institutions; weak centers of
government and cabinet systems that create problems of policy coordination and efficient

6 Multiple reform waves have occurred before, e.g., the planning, programming and budgeting system (PBBS)
reforms originating in the U.S. in the 1960s, and the Plowden/Fulton reforms in the U.K. in the 1960s and
1970s.
7 Chevauchez (2007) notes that, prior to the enactment of the new budget law in 2001, 35 proposals for budget
law reform had been put forward by the members of parliament, whose limited role in the budget process had
come to be characterized as “Liturgy, Litany, and Lethargy,” following the famous expression coined by Edgar
Faure, President of the National Assembly.

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planning; strong patronage systems in which heads of public agencies are filled by friends
and followers of the president; and weak capacity in human resources and information
systems. In addition, such countries have insufficient financial resources to spend on
necessary technical systems and capacity building.
Several of the “doorstep conditions” proposed by NWW, and noted above, would seem
relevant in the budget area. For example, the rule of (budget) law (condition #1) is an
important precondition for improving PFM. Elegantly drafted laws, advocated by donors and
adopted by parliaments but never implemented, do not meet this condition. Similarly,
perpetual forms of organization, including the state itself, are important for the achievement
of better budgetary outcomes, but first ministries of finance have to be restructured and
empowered, to replace the overriding fiscal power of the president found in many low-
income countries (condition #2). Political control of the military (condition #3) may be less
relevant to the budget process than to other institutions of government, but when there is
anarchy or civil disruption, neither economic development nor the development of budgetary
institutions can take place.
Finance ministers have an important potential role in coordinating and driving improvements
in the budget process; indeed, without their intervention and active leadership, such
improvements are unlikely to take place. Unfortunately, in most developing countries, they
do not enjoy the powerful status they have in the developed world. Indeed, the national plan
(or poverty reduction strategy) is often regarded as the preeminent policy document for
planning the allocation of national resources and for attracting donor financing. The division
of responsibility for the budget between capital investment projects (managed by the minister
of economy) and recurrent expenditures (minister of finance)—another common practice in
developing countries—not only fragments the budget process, but significantly weakens the
role of the finance minister as a potential leader of the reform process.
Systematic long-term data are lacking to demonstrate the long time periods required for
budgetary improvements to take root in developing countries, but relevant and suggestive
experience is summarized in Gupta and others (2007) and in evidence drawn from the rich
experience of the IMF’s technical assistance work in the field, especially in Africa. In some
cases, isolated progress has been made—for example, in implementing a concrete provision
(for example, a revised budget calendar, a commitment control system, or a simple cash
accounting system). In general, however, the reform process has been frustratingly slow,
even in narrow technical areas of the budget system.

A recent study by the Independent Evaluation Group (IEG) of the World Bank (2008)
tentatively indicates some improvement in PFM systems in countries supported by the
Bank’s lending programs during the period 1999–2006, but the data used may be

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