Two decades ago, when I interned at the French Embassy’s economic mission in Moscow, I was asked to look into bankruptcy laws and their implementation. The Embassy wanted to advise French companies on how to get business done in the new Russia—we are talking mid-1990s—when there were no reliable guidebooks on how to navigate the transition to a market economy.
So I was asked to read recently approved, Western-inspired bankruptcy laws, given a phone book and asked to find two dozen companies around Moscow. I was to meet with their CEOs and find out how insolvency and bankruptcy procedures actually worked in practice.
I came away with one key finding: In fact, the distortions brought about by hyperinflation, bartering and the transition from Soviet to Western accounting meant the liquidity and solvency ratios that underpinned the institution of bankruptcy had essentially become meaningless.
A number of imaginative, well-connected creditors had decided to take advantage of this chaotic transition from a centrally controlled to a market driven economy. They convinced some judges to work with them and compel a sample of the most valuable businesses in Moscow, those that held sizable real estate holdings, to file for bankruptcy.
As soon as this was done, real estate assets were stripped, sold for a song to the creditors who had triggered the legal action in the first place and transformed into juicy real estate deals, with the well-oiled complicity of local government officials.
The paradoxical effect of the implementation of the bankruptcy laws in this particular context was that only the most valuable businesses had a realistic prospect of being declared bankrupt. Judges were not interested in processing other cases.
– bankruptcy did not have the same meaning in the US as in Russia, even though the formal rules on the books may have looked similar. This has profound implications for work in development.
As development practitioners, we assume that apparently identical rules and procedures, say on budget execution or parliamentary oversight, have the same impact in London and Abuja or in Paris and Bangui at our peril.
As my colleagues and I argue in a recent paper, this distinction between rules on the books and the way the public sector actually functions is critical to understanding public financial management (PFM).
When developing countries undertake PFM reforms, usually presented as “best practices”, the key objectives—fiscal prudence, budget credibility, reliable and efficient resource flows and institutionalized accountability—often get lost in translation.
Instead, what we too often end up with are reforms that are used as “signals” of the good intentions of the authorities to the outside world. Yet, despite these formal changes, the underlying functions are not really better performed by the public sector. What we have are Potemkin reforms.
We have a new procurement code and an independent procurement authority, but is there value for money in road construction? Or is the taxpayer paying for eight inches of road and getting only four? We have a brand new Integrated Financial Management Systems (IFMIS) to execute our budget, but are there stock outs of essential pharmaceuticals despite vast sums of money being spent on their purchase?
We have a Supreme Audit Institution and a Public Accounts Committee, but is the head of the power utility being held accountable when millions of dollars are wasted on inefficient, badly maintained diesel generators that break down after a few months?
As we argue in the paper, part of the problem is that what typically gets measured in PFM is the existence or formal approval of the rules on the books, standards, systems and “best practices” that, if correctly implemented, should in theory help improve these core functions.
Unfortunately, this is a very unreliable gauge of PFM performance. Like in the Russian bankruptcy example, in PFM the gap between rules, systems, procedures and their actual implementation can be very large indeed.
This does not mean of course that we should throw the baby with the bathwater – just because the introduction of an IFMIS does not always yield the intended functional improvements, it does not follow that we should never support IFMIS reforms.
What it means is that, in order to successfully introduce an IFMIS, it is critical to understand the context, the functional problem the authorities are trying to solve, and to pay close attention to those who need to be in the room in order to effect a change in behaviors.
This is an exciting agenda, one that calls for a different way of supporting PFM reforms and doing development.
Great article. Thanks for sharing these very insightful views about the need to understand the context of PFM reforms
Many thanks for this illuminating blog. It reminds me of a similar period, around 1999, when I authored a Bank paper describing the legal and policy environment governing business in Bulgaria at that time. We also had to make the very point that on paper and in practice often didn't look the same.
thanks so much Paul for this. I know that this is not new to you as we have already discussed these issues. Good luck for your efforts to move PFM reform forward in South Asia!
Wonderful example and thank you for the article Renaud.
I very much agree that broad adoption of PFM best practices often fail to consider the idiosyncratic complexities faced by developing countries. As such, the factors offered for success are often palliative and largely fail to solve the problem. Sometimes the solutions are directed solely to the context of design versus the realities faced on the ground. Though best practices are a step in the right direction, they overlook important factors such as the role played by the organizational culture in the ministries, departments and agencies within developing countries. Understanding how these internal complexities work is important to the success of PFM reforms.
the article should set the framework for the Use of Country System (UCS), ie, context matters and the transition shouldn't rushed. A phased approach might produce better results than an outright rolling out of the recommendations
Thanks Renaud for this insight. Closing the GAP between PFM rules and their actual functionality to boost Governement effectivelness, is the main challenge for PFM practitioners. Linking PFM reform to service delivery in sectors and enhancing the culture of Accountability are critical steps toward the absorption of the said PFM Gap.
Excellent use of the Russian example. It is good to see this increasing acknowledgement of the need to contextualize "good practices" in the PFM community. While these provide a much needed guideline for what a country may aspire to achieve the political economy can have a great influence on their success in meeting desired objectives.
Excellent paper. Your diagnostic is right on target.
potemkin reform is too often what we get. But we are putting the building blocks in place so that one day when the context is ripe, the real transformation will occur swiftly. In the mean time may I suggest that we need to complement PFM reform with public sector reform
Thanks for sharing. This also points to the fact that all PFM diagnostics tools needs to keep a balance of assessing the availability of systems as well as the outcomes it intends to achieve.
You are absolutely right and fixing rule of law gap is a critical challenge for development practitioners. Implementation is much more difficult than designing or providing regulations because of the human behavior, vested interests and the resistance to change.
Indian CST (www.indiancst.in) has developed an innovative tech-tool called GPMS which is a panacea for all evils in PFM. It is under implementation in BBMP for the last six years and the World Bank is aware of this. The implementation of GPMS needs to be supported by the World Bank, the national and sub national governments and replicated in other urban bodies. Public Finance Management can truly reach great heights by this.