Political economy drivers of PFM reforms: a systematic look at what we all know somehow

Over the past two decades, almost every developing country has adopted some form of public finance management (PFM) reform plan, with many currently pursuing second or third generation plans. Over the same period, development partners have provided substantial support – a total of over $20 billion since 2002. However, some countries have seen strong progress, while others have seen little, or have even experienced backsliding (see Graph 1 a and b).

A new study on political economy aspects of PFM reforms digs into factors that may explain this uneven progress, and what could be done differently to achieve more. While ‘political commitment’ or ‘political will’ are widely considered important, there has been little systematic analysis of how such commitment emerges and how it matters for reform progress.

The study includes a quantitative analysis that looks at changes in PFM performance by region and income groups, and how PFM performance correlates with a range of economic, social, and political variables. It then systematically compares five country experiences and how reforms related to different stages of the budget cycle were shaped by political economy drivers.

Graph 1: earliest and most recent average PEFA scores relative to per capita incomes
   Note: for the methodology used, please see the full report

Here are some key findings:

• Transformative progress can happen, but it is rare.  When governments have a strong reform mandate and ‘big picture’ policy goals that require having a better functioning public sector, they are more likely to truly pursue transformative PFM reforms. In most countries and time periods, political interest in PFM reforms is more limited, and progress accordingly incremental, or possibly even stagnating or backsliding. External support needs to be tailored to such differing trajectories. This includes an even greater focus on how to respond rapidly when (typically brief) windows of opportunities for major progress arise.  
• Institutional starting points influence how PFM reforms can happen. First, attempts at comprehensive PFM reforms face increased risk when PFM functions are distributed among several government agencies, for example when treasuries and other PFM functions are outside a Ministry of Finance. Second, parliaments are a critical institution. While they are often considered primarily as an accountability institution – reviewing budget execution results ex post – they actually also play a major role in approving PFM reform legislation, as well as in approving annual budgets on time. Third, central-sub-national relations matter:  central governments have very different, and in many countries declining, direct control over how public funds translate into front-line service delivery.
• From a political economy perspective, we need to think differently about the sequencing of PFM reforms. While ‘basic’ reforms are fundamental for impactful PFM reforms, they are also often particularly difficult because they are focused on constraining rent-seeking. It is for this reason that they are so rarely fully achieved before moving to ‘advanced’ reforms, such as introducing Medium Term Expenditure Frameworks (MTEFs) or adopting advanced accounting standards. Rather than simply accepting an inverse sequence, or insisting on unachievable ‘basics first’, reformers and development partners should keep pursuing the basics throughout: ‘basics continually’.  
• Citizen demand for PFM reforms was found to play a limited role in driving PFM reforms even in countries with relatively active civil society organizations. However, citizens’ attention still matters. When citizens care about better services and eliminating corruption, they may provide a strong reform mandate through elections. Such a mandate can open important windows for PFM reforms. Moreover, to strengthen direct citizen involvement in PFM reforms, development partners and reformers can do much more to convey what reforms are being pursued and why in easily accessible and clear terms.  
• It is important to be more realistic about the expectations of particular reform tools.  As the case studies show, there are repeatedly unrealistic expectations that implementing certain tools and systems will bring about wide functional improvements, even if these have rarely been observed in practice. Furthermore, political commitment to use systems as intended – to produce timely and honest accounts, to align budgeted and actual expenditures – remains critical even after initial implementation.  
• Ensuring that previously introduced reforms are making a tangible positive impact should receive much greater attention. Many countries have introduced new PFM systems in recent years – Integrated Financial Management Information Systems (IFMIS), newly designed budget preparation processes, new accounting rules, and so on. In many cases, there remains a disconnect between having these systems in place and real functional improvements, from more credible budgets to commitment controls to overall more efficient use of funds. Greater attention to embedding and ensuring good use of systems includes shifting the focus of monitoring further to actual use and impact. 

What are your experiences with how political economy drivers affect PFM reforms? Tell us in the comments below.