Public Finance & Economic Governance: Definitions & Conceptual Issues
This section outlines key terms relevant to economic recovery and public finance. The first set of terms focuses on terminology related to the public sector, while the second set of terms is more specific to economic governance. The last section briefly articulates the relationship between these definitions.
Organisation for Economic Co-operation and Development (OECD), "The public sector comprises the general government sector plus all public corporations including the central bank."1 Meanwhile, the U.S. Department of Treasury defines the public sector as "general government, plus all public corporations and quasi-corporations."2 This definition is more nuanced and expansive, since quasi-corporations, may be understood as "[u]nincorporated enterprises owned by the government that are engaged in market production and which operate in a similar way to publicly owned corporations."3 Generally speaking, there is an understanding that the public sector pertains to arenas owned, controlled or financed by the general government.
An additional analysis introduces some question over the relationship between the public sector and non-governmental organizations (NGO). The Public Report D-20, a research project under the European Union Fifth Framework Program, identifies three definitions of the public sector: legal, financial, and functional. In this framework:
- The legal definition identifies the "public sector as including government organizations and organizations governed by public law."
- The financial definition includes those defined under the legal definition, but also "private organizations largely funded by public means, including non-profit organizations providing education and health care."
- The functional definition "includes all organizations in the field of public administration, social security, law and order, education, health care, and social and cultural services, irrespective of their funding source and the legal form of the supplier."4
This functional definition presents the possibility that where NGOs or private sector bodies replace organs of the state for certain public functions, (e.g., healthcare or education service provision), they could be considered as part of the 'public sector'. Therefore, this definition proves problematic. Critics have observed that outsourcing of tasks for which the government is typically responsible reduces accountability to citizens and sovereignty of that government, and represents reliance on a sector whose contributions may not be sustainable. This definition also runs the risk of conflating civil society with government. Though the relationship between these arenas is of significant dispute, some contend that it is necessary for such civil society to be distinct from government in order to function successfully.5 On this basis and for the purposes of this writing, non-governmental organizations and corporations shall be considered distinct from the public sector.
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[Back to Top] 6 that is, SOEs are either publically owned or publically managed (or both), the definition specifically excludes those which are publically funded. Thus, "[t]his definition excludes much state-owned sector activity, such as education, health services, and road construction and maintenance, which are financed in other ways, usually from the government's general revenue."7
[Back to Top] 8 This collection, allocation and expenditure of public resources are defining functions of a state and the platform for economic development.9
[Back to Top] 10 Activities related to financial management include the raising of revenue, the management and control of public expenditure and financial accounting and reporting, and in some cases, asset management.11
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Fiscal policy "refers to government policy that attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances)."13
Meanwhile, monetary policy is, "What a central bank does to control the money supply, and thereby manage demand. Monetary policy involves open market operations, reserve requirements and changing the short-term rate of interest (the discount rate)."14 Monetary policy therefore is the means through which power is exercised to manage issues such as inflation, unemployment, and the exchange rate.15
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Economic governance has been defined as "the manner in which power is exercised in the management of a country's social and economic resources for development through dynamic processes."16 According to the United Nations Development Programme (UNDP), it includes decision-making processes that affect a country's economic activities and its relationships with other economies, with major implications for equity, poverty and quality of life.17
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[Back to Top] 18 This section uses key components of governance to articulate some key tenets of economic governance in contributing to peacebuilding; as such, they underlie all aspects of public finance management.
The Australian Agency for International Development (AusAID) suggests that the most successful good governance programs, which include economic governance, involve public disclosure, access to information and transparency - aspects that underlie all of the ADB elements of good governance.19 The Asian Development Bank (ADB) identifies accountability, participation, predictability and transparency as the four elements of good governance.20 These elements are explored in greater depth below, however, it is critical to understand that these components of governance are "mutually reinforcing and cannot stand alone."21
AccountabilityAusAID defines accountability as "the obligation to give answers and explanations covering one's actions and performances to those with a right to require such answers and explanations."22 In other words, policymakers in government, the private sector and civil society should be accountable to the public and institutional stakeholders for the decisions they make.23 According to UNDP, the impetus for increased accountability in public finance management often comes from the citizens themselves.24 When citizens pay taxes, they demand accountability and service provision.25 This demand encourages accountability, reduces corruption and builds state legitimacy. "When greater accountability is achieved through transparency and revenues are redirected toward poverty alleviation and improved governance, the propensity for grand-scale corruption by government officials and violent conflict in resource-dependent poor countries is likely to be diminished."26
In economic terms, accountability is thought to increase both productive efficiency (the cost effectiveness of public goods provision) and allocative efficiency (the correspondence between public goods provided and the preferences of those served). In the first case, this is because accountability enables agencies to use performance-based criteria to evaluate the level of productivity of civil servants and reward or punish them accordingly. In the second case, punitive measures can be taken against government agents that use resources (whether efficiently or no) in ways that go against the wishes of so-called beneficiaries (e.g., expenditures that only serve a small minority when a large majority could have been served). Furthermore, changing preferences can be proactively addressed.27 Such allocative efficiency may be especially pertinent in post-conflict countries, in which the avoidance of conflict relapse may depend critically on the reduction of horizontal inequalities between various societal groups and broad-based recovery.28
ParticipationThe principle of participation in economic governance "derives from an acceptance that people are at the heart of development." Participation is conceived of in two ways. It may refer to popular participation, which implies a bottom-up process of encouraging disenfranchised populations to engage in decision-making.29 This first sense is a key aspect of improving allocative efficiency in public goods provision. Participation also connotes stakeholder involvement and the contributions by all parties in the implementation of chosen projects.30
Participation has been seen as seminal to the peacebuilding process, because it may enhance the deliberative quality of policy-making, help generate political consensus and a sense of ownership of state reforms, and activate the latent potential of local communities - all elements that are often lacking in post-conflict reform processes.31 Some actors even consider this to be a fundamental human right.32 However, not all actors agree with the utility of participation, noting that it can at times bring tensions to the fore, and in practice, slows processes and may not be particularly inclusive.
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PredictabilityPredictability is defined as "result[ing] primarily from laws and regulations that are clear, known in advance, and uniformly and effectively enforced."33 In terms of economic governance, it is important for governments to be able to predict the levels of revenue that can be mobilized in order to design and allocate budgets effectively. Additionally, "economic actors require reasonable assurance about the future behavior of key variables such as prices, the exchange rate, and employment levels."34 Predictability should not be confused however, with rigidity, and it remains important for governments to adapt to changing situations. For this reason, fixing the money supply (or its growth rate) is rarely advocated, as it limits the ability of the government to stabilize the interest rate in the face of shocks. 35
Governments attempt to enhance predictability on the revenue collection side by investing in improved revenue collection mechanisms, strengthening macroeconomic analysis, and forecasting and budgeting all revenues, and on the revenue expenditure side, by budgeting all agency expenditures, passing constitutionally- or legislatively mandated constraints on aggregate expenditure and borrowing, and passing well-publicized rules related to budget preparation, approval, execution and monitoring.36 Medium-Term Expenditure Frameworks (MTEFs), which is a strategy being used for planning and managing national budgets, are also used to increase predictability. Other means of promoting predictability include adopting fixed exchange rates, targeting interest rates, limiting (or targeting) money supply, and targeting price levels as ways to control inflation, though the relative successes of such programs is a point of debate. There is some theoretical evidence, however, that price level targeting is more effective than interest rate targeting at stabilizing domestic output in small, open economies.37 Put simply, "the more predictable a [fiscal] programme, the more it is worthwhile for politicians and social activists to invest in learning about it and in trying to mobilise around it."38
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TransparencyAt its most basic level, transparency is access to information.39Transparency can formally be defined as the "free flow of low-cost information that is understandable, reliable and timely."40 Transparency is linked to good economic governance as a fundamental criterion and "is essential if more money is to be released for basic pro-poor services."41 However,achieving transparency can be difficult, as it may expose corruption amongst government officials and other stakeholders.
Transparency may result in the following outcomes, reducing the risk of corruption:
1. change the incentive structure of the potentially corrupt agent,
2. decrease the government's ability to offer incentives to such agents,
3. make it easier to hire honest bureaucrats,
4. reduce information asymmetries that make rent-seeking possible, and
5. builds public-private cooperation and trust.42
However, experts Gavin Hayman and Corene Crossin of Global Witness note the limitations of transparency with respect to economic governance: "Transparency in revenue payments is not a panacea for problems of revenue mismanagement. Rather, it is a necessary first step for corporate and government accountability -you cannot manage what you cannot measure."43 Likewise, Kolstad and Wiig assert that in addition to the information that transparency provides, "you need an ability to process the information, and the ability and incentives to act on the processed information."44
1. Organisation for Economic Co-operation and Development (OECD), "Glossary of Statistical Terms: Public Sector."
2. U.S. Department of Treasury, "Glossary."
3. Richard Allen and Daniel Tommasi, "Glossary," in Managing Public Expenditure - A Reference Book for Transition Countries, ed.Richard Allen and Daniel Tommasi (Paris: OECD Publishers, 2001), 467.
4. Per Koch and Johan Hauknes, "Innovation in the Public Sector," Publin Report No. D20 (Oslo: NIFU STEP, 2005), 17.
5. Mari Fitzduff, "Civil Society and Peacebuilding - The New Fifth Estate?" (The Hague: Global Partnership for the Prevention of Armed Conflict, 2004), 1.
6. Paul Starr, "The Meaning of Privatization," Yale Law and Policy Review 6 (1988).
7. Scott Wallsten, "State-owned Enterprises - A Definition," The World Bank.
8. Heinrich Boll Foundation, "Glossary of Terms" in Gender, Macroeconomics and the IFIs Dossier 2007.
9. Madalene O' Donnell, "Public Finance in Post-conflict Statebuilding," (New York: Center on International Cooperation, March 2005).
10. Organisation for Economic Co-operation and Development (OECD), "Glossary of Statistical Terms: Financial Management," August 7, 2002.
12. The Economist, "Macroeconomic Policy"in Economic Terms A-Z.
13. Heinrich Boll Foundation, "Glossary of Terms," 2007.
14. The Economist, "Monetary Policy" in Economic Terms A-Z.
15. Heinrich Boll Foundation, "Glossary of Terms."
16. AusAID, "Economic Governance and the Asian Crisis: An Evaluation of the Australian Aid Program's Response," Australian Agency for International Development, Quality Assurance Series, No. 30, April 2003, 6.
17. United Nations Development Programme (UNDP), "Governance for Sustainable Human Development: A UNDP Policy Document."
18. AusAID, "Economic Governance and the Asian Crisis," 6.
19. Ibid., 8.
20. Asian Development Bank (ADB), Governance: Sound Development Management, Philippines: ADB, August 1995.
21. United Nations Economic Commission for Africa (UNECA), "High Level Regional Consultative Meeting on Financing for Development and Preparatory Meeting for the Third UN Conference on LDCs: Governance, Peace and Social Stability," United Nations Economic Commission for Africa, Issues Note, ESPD/High Level/2000/4, November 2000, 2.
22. AusAID, "Economic Governance and the Asian Crisis," 8.
23. UNECA, "High Level Regional Consultative Meeting," 2.
24. UNDP, "Governance for Sustainable Human Development."
25. O'Donnell, "Public Finance in Post-conflict Statebuilding,"1.
26. Gavin Hayman and Corene Crossin, "Revenue Transparency and the Publish What You Pay Campaign," in Profiting from Peace: Managing the Resource Dimensions of Civil War, ed. Karen Ballentine and Heiko Nitzschke (Boulder: Lynne Rienner Publishers, Inc., 2005), 281.
27. Fred Thompson and Mark T. Green, eds., Handbook of Public Finance (New York: Marcel Dekker, 1998), 235, and Organisation for Economic Co-operation and Development (OECD), Performance Budgeting in OECD Countries, (Paris: OECD, 2007).
28. Tony Addison, "Africa's Recovery from Conflict: Making Peace Work for the Poor," (Policy Brief, UNU-WIDER: Helsinki, 2003), 9 and Gudrun stby, "Horizontal Inequalities, Political Environment, and Civil Conflict: Evidence from 55 Developing Countries, 1986-2003," Post-Conflict Transitions Working Paper No.7 and World Bank Policy Research Working Paper 4193, World Bank (April 2007).
29.United Nations Department of Economic and Social Affairs, Participatory Dialogue: Towards a Stable, Safe and Just Society for All, (New York: United Nations, 2007), 11.
30. World Bank, The World Bank Participation Sourcebook, (Washington, DC: World Bank), 6.
31. Keng-Ming Hsu and Chun-Yuan Wang, "The Institutional Design and Citizen Participation in Local Governance," in Jak Jabes (ed), Selected Papers from the Launching Conference of the Network of Asia-Pacific Schools and Institutes of Public Administration and Governance, The Role of Public Administration in Alleviating Poverty and Improving Governance, Kuala-Lumpur, Malaysia, December 6-8, 2004, 338; International Monetary Fund. International Monetary Fund, "The Fund's Engagement in Fragile States and Post-Conflict Countries-A Review of Experience-Issues and Options," IMF Policy Development and Review Department, 2008), 14.
32. UNECA, "High Level Regional Consultative Meeting,"2.
33. AusAID, "Economic Governance and the Asian Crisis," 8.
34. Asian Development Bank (ADB), "Governance: Sound Development Management."
35. Vivek H. Dehejia and Nicholas Rowe, "Macroeconomic Stabilization: Fixed Exchange Rates vs. Inflation Targeting vs. Price Level Targeting," Manuscript (2000).
36. Florence Kuteesa, "Aid Effectiveness and Good Governance: The Case of Uganda," paper presented at a Research Meeting convened by Global Economic Governance Programme at the IDRC, Ottawa, Canada, March 9, 2005, and World Bank, Public Expenditure Management Handbook (Washington, D.C., World Bank, 1998).
37. Dehejia and Rowe, "Macroeconomic Stabilization."
38. Anuradha Joshi and Mick Moore, "The Mobilising Potential of Anti-Poverty Programmes," Institute of Development Studies, IDS Discussion Paper 374 (2000), 7.
39. Joseph Stiglitz, Globalization and Its Discontents, (New York: W.W. Norton and Company, Inc., 2003), x.
40. AusAID, "Economic Governance and the Asian Crisis," 8.
41. Tony Addison, From Conflict to Recovery in Africa (Oxford: Oxford University Press, 2003), 4.
42. Ivar Kolstad and Arne Wiig, "Is Transparency the Key to Reducing Corruption in Resource-Rich Countries?" World Development vol. 37 no. 3 (2009): 521-532.
43. Gavin Hayman and Corene Crossin, "Revenue Transparency and the Publish What You Pay Campaign," in Profiting from Peace: Managing the Resource Dimensions of Civil War, ed. Karen Ballentine and Heiko Nitzschke (Boulder: Lynne Rienner Publishers, Inc., 2005), 281.
44. Kolstad and Wiig, "Is Transparency the Key to Reducing Corruption in Resource-Rich Countries?," 524.