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Meet your new friend, the finance minister

Philipp Krause's picture

Finance on scrabble board with buildings superimposed on it.King James had it right early on. “All Treasurers, if they do good service to their masters, must be generally hated”, he remarked after he couldn’t protect his own treasurer Lionel Cranfield from being thrown into the Tower of London in chains. Cranfield had made too many powerful enemies by opposing an expensive war the treasury couldn’t afford. His many successors through the ages can probably relate without too much difficulty.

Finance ministries are control agencies. Unlike spending ministries, the spending they directly execute is a small proportion of the budget they are in charge of. They do not have the same incentive to increase spending and instead serve as an institutional counterbalance to spending demands coming from all over government. Whether it is to do with funding early modern wars or keeping 21st century deficits under control, being unpopular is the job of the finance ministry. Empirically, the more powerful the finance ministry, the better a country’s fiscal performance (see examples from Europe and Latin America). It is quite reasonable to assume that, all things being equal, strengthening the formal powers of the finance ministry will have a positive effect on fiscal performance.

But what if things aren’t so simple? In many countries, there are significant differences between formal and informal institutions, de jure and de facto, form and function. In Europe, we can distinguish between countries with single-party governments and those that produce minority governments or unstable coalitions. In Africa, there is a measurable gap between the formal mandate and the reality of public financial management (PFM). The budget process has been called mere theater, staged to hide the real decisions being made behind the curtain. A recent World Bank study identified many ways in which external factors can inhibit the work of the finance ministry.

How can finance ministries overcome these limitations? They can’t do it on their own; they need friends. In principle, that’s true everywhere. Very few ministers of finance would have the legal power and political backing to withstand the onslaught of all the other ministers ganging up on them in cabinet.  In practice, it just doesn’t happen that way, because the budget process is heavily institutionalized and finance ministry officials often wield considerable informal influence. Where such informal institutions are lacking, in practice the finance ministry can be ignored or sidestepped.

A comparison with central banks is instructive. One of the ingredients of the success of central bank independence is that, as organizations, they can go about their work without much coordination. Strengthening their analytical capabilities contributes to better understanding of monetary policy, which independent central banks can translate directly into better policy choices. The capabilities required of finance ministries are different. Better analytical capability helps, but is pointless in isolation. Finance ministries regulate the spending behavior of others, and need to coordinate a highly complex, multi-actor administrative process: the budget. A well-spent, prudently managed budget is an outcome requiring a cast of thousands.

What can development agencies and reformers in developing countries learn from this? There is a lot of potential to better utilize existing research and learn from successful reformers. The following three ideas may be useful starting points:
 

  • Don’t dismiss the formal institutions, but focus on realistic choices. The growing body of research into formal fiscal institutions may be of limited direct use in many developing countries, but it is far from useless. Many of the findings related to the party systems and elections in parliamentary systems that prevail in Europe do not travel well, but the general findings about the drivers and consequences of fragmented budgetary power very well may. There are certain elements in the PFM reform toolkit that require centralized authority – for instance the introduction of multiannual spending ceilings. In fragile states, where fragmentation is high, such reforms usually fail.
  • Close the gap first. Before adding on extra responsibilities and powers, it will often be sensible to work with finance ministries to narrow and eventually close the gap between rules and their implementation. For finance ministries, this may not always be the most appealing reform work. But in terms of reform dynamics, it has the great advantage of only holding the country to standards of its own making, and to those that are already on the books. Needless to say, some egregious examples of donor-inspired laws will not be fit for purpose at all, but it is nonetheless a good place to start.
  • Make allies – finance ministries can’t be successful alone. The status quo, by default, will have some supporters, and many spending units will be just fine with the way things are. Many officials may feel unexcited or threatened by change. Some ways to break the status quo could include making common cause with other agencies in the executive core, such as planning ministries. This is especially so when fragmentation in the core can’t be feasibly overcome by just merging fragmented units. In relation to spending units, some reforms carried out by the finance ministry can offer better services or other benefits. For instance, treasury single accounts reduce discretion inside the spending bureaucracy, but also greatly increase the efficiency of cash management. Sold well, that might be enough for managers, budget officers and accountants in spending units. Such reforms worked well in such difficult environments as West Bank and Gaza or Nepal. Slowly, finance ministries could build momentum and develop an agenda the rest of the public sector can buy into.

This is far from a finished agenda – it’s a live debate with many moving pieces. On November 13-14, we will discuss finance ministries, realistic reforms and other issues at ODI’s 2013 CAPE Conference, “Budgeting in the real world”. All the sessions will be streamed live online. The framing paper is available here.
 

Comments

Submitted by Nicolai Schulz on

Thank you for your very interesting blog! Particularly, the case study of Nepal is fascinating. Having lived in Kathmandu for half a year, I heard a lot of negative assessments of Nepal's bureaucracy, especially concerning corruption and rent-seeking. It is very interesting to get some other insights here. Looking forward to more blogs on the fiscal governance topic!

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