Public Finance & Economic Governance: Actors

National governments

National governments hold the primary responsibility for managing public finances. Without sound public finance management, the state's legitimacy is likely to be threatened and tensions may be exacerbated. Although the state should function independently in its management, this is often not the case in developing and post-conflict countries. In these cases, the international community may step in to provide financial and advisory support until capacity is built.

In addition to managing public finance, the state also bears the responsibility for creating a culture of good governance, including economic governance. "The state's functions in establishing good governance are manifold - among them, being the focus of the social contract that defines citizenship, being the authority that is mandated to control and exert force, having responsibility for public services and creating an enabling environment for sustainable human development."1 The government does this by designing and implementing "stable, effective, and fair" legal and legislative frameworks for public activity.2 The creation of semi-autonomous revenue authorities (ARAs) became a popular administrative reform in the mid 1990s. Intended to insulate revenue collection agents from political influence, ARAs have proven effective in survey data at improving the public perception of tax collection and government transparency.3 Many governments are also using Supreme Auditing Institutions (SAIs) as a mechanism for monitoring corruption in the public sector and promoting good economic governance.4

Sub-national government

In addition to the national government, there is significant support for fiscal decentralization measures, which means that sub-national government also has a role in the allocation of resources, and play important functions in collection of revenues.

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Local and international civil society

Civil society organizations, a term with widely diverse notions associated with it,5 are vital players in public finance and economic governance. In principle, they can advocate for and monitor the government's economic governance practices. Civil society organizations "can provide checks and balances on government power and monitor social abuses."6 Though civil society organizations are relatively new participants in public finance there are some positive indications in terms of impacting decision-making and implementation in budgeting and management.7 For example, at a 2006 roundtable discussion organized by the International Monetary Fund (IMF), non-governmental organizations (NGOs) were invited to express their views on public finance management. Participants expressed a desire to participate actively in monitoring public finance practices to ensure transparency and accountability.8

The role of civil society organizations and their ability to represent society in public finance and more broadly, is at times viewed critically. Scholars and many governments in the South, in particular criticize some NGOs for facilitating economic liberalization, which some believe provides "greater freedom for certain economic actors, marginalizing others, while giving rise to new social groups and forms of organization as prompted by changing economic incentives."9 While numerous civil society organizations play an active role in economic governance, a small selection of these is presented here.

Go to Democracy and Governance: Civil Society

International civil society plays an important role in public financial management and promoting good economic governance. An example of a civil society organization working in reforming public finance management (albeit an international one that cannot credibly claim to represent the "civil societies" of the developing world) is the Britain-based Overseas Development Institute (ODI), a leading think-tank on international and humanitarian issues. ODI houses the Centre for Aid and Public Expenditure (CAPE), whose mission is "to improve the quality of international development assistance and to enhance the effectiveness of developing countries' public resource management" through research, professional advisory and evaluation. CAPE conducts its research on the reform of public finance management systems from a political economy perspective.10

Many international organizations partner with southern NGOs and think tanks, which have emerged as leaders in advocating for change in the public sector and the way the international community interacts with the governments of developing countries. The International Budget Partnership is project within the US-based Center on Budget and Policy Priorities which works with civil society organizations around the globe to enhance their influence in their states' budgeting process. Its mission is to "collaborate with civil society organizations in developing countries to analyze, monitor, and influence government budget processes, institutions, and outcomes" with the "aim of making budget systems more responsive to the needs of poor and low-income people, accordingly, to make these systems more transparent and accountable to the public."11 To this end it provides training and technical assistance, measures transparency, provides resources and funding, and builds international and regional networks.12 Publish What You Pay (PWYP) works with partners in roughly 70 countries to hold "governments accountable for the management of revenues from the oil, gas and mining industries."13

A number of other organizations have developed frameworks and guidelines for public finance management and instruments for monitoring economic governance, such as the Kimberley Process and the Extractive Industries Transparency Initiative (EITI).

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United Nations

Several United Nations agencies are involved with public finance and economic governance at some level. This section provides a brief snapshot of two different agencies, the United Nations Development Programme (UNDP) and the United Nations Economic Commission for Africa (UNECA), and their work in these areas.

The United Nations Development Program (UNDP)emphasizes a point of view that goes beyond traditional managerial reforms of resource mobilization and public expenditure policies towards a more holistic strategy of developing institutional capacity "to analyse fiscal policy options and trade-offs."14 UNDP provides assistance to states for technical support in formulating fiscal policies, advisory services for project design, training, expertise on pro-poor resource mobilization, support for the development of Medium-Term Fiscal Frameworks, and guidance in public finance policies with the millennium development goals.15

Go to Economic Recovery: Public Finance - Activities: Strategic frameworks

UNDP has positioned itself at the "forefront of the growing international consensus that good governance and sustainable human development are indivisible." UNDP supports the idea that good governance, including economic governance, is a key priority in reducing poverty. The agency conceives of governance within three domains - the state, the private sector, and civil society - which all play a distinct role in the promotion of human development.16

A number of other UN agencies and bodies are involved in key issues of economic governance, such as the United Nations Economic Commission for Africa (UNECA), the co-chair agency of the United Nations Special Initiative for Africa in the area of governance. In this capacity, UNECA partners with UNDP and other UN agencies to organize forums, conferences, and consultations on issues related to peace, development and governance.17

Go to Economic Recovery: Economic Recovery Strategies- Definitions: Human development and Debates: Human development vs. economic growth

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International Financial Institutions

In a post-conflict setting, multilateral development banks (MDBs) and international financial institutions (IFIs) assist transitional authorities to revive public finances, as well as institutions for economic management.18 In addition, the IFIs strongly support the good governance agenda and encourage their client countries to adapt good governance practices.

World Bank

Originating from a desire to help what they refer to as "client governments" function better and learn from experiences in East Asia and Russia, the World Bank's public sector management focus officially took form in the Bank's 1997 reorganization. The restructuring created five major thematic networks, including the Public Sector Governance Group, which falls under the Poverty Reduction and Economic Management (PREM) Network.19 "The Public Sector Group's objectives are based on the view that the Bank must focus more of its efforts on building efficient and accountable public sector institutions - rather than simply providing discrete policy advice."20

Two of the key objectives of the Public Sector Governance Group are:
  • To strengthen and deepen the Bank's work on public sector institutional reform;
  • To design and help implement the Bank's anticorruption strategy.21
The Public Sector Governance Group partners with multilateral and bilateral donors and non-governmental organizations (NGOs), at both the global and country levels. Specifically related to anticorruption and governance issues, the Bank coordinates with the four major regional development banks (the Asian Development Bank (ADB), African Development Bank (AfDB), European Bank for Reconstruction and Development (EBRD), and Inter-American Development Bank (IDB)) through the Working Group on Anticorruption, Governance and Capacity Building. The Bank also has strong working relationships with the Organisation for Economic Co-operation and Development (OECD) and UNDP.

Within the Public Sector Governance Group, the Bank maintains a Public Finance division, which provides specialized reports on issues such as expenditure, tax and customs policy administration, and budgeting, as well as the Enhanced Heavily Indebted Poor Countries Initiative (HIPC) assessments and Medium-Term Expenditure Framework (MTEF) country reports.

The International Monetary Fund

The International Monetary Fund(IMF) attempts to provide technical assistance to its member countries to strengthen governance and economic development, as well as offer balance-of-payments support via lending. The IMF had played a less significant role in the fiscal lives of most developing countries, and had remained relatively supportive of domestic fiscal agendas, prior to the US adoption of a floating interest rate, the rapid climb in US interest rates, and the consequent debt crisis in the late 1970s and early 1980s. Once debt burdens overwhelmed domestic macroeconomic policy, governments found themselves with less room to maneuver, and the IMF grew in importance, both on domestic scene as an advocate for budget scale-down and government retrenchment, and currency stability, and on the international scene as a stabilizer of exchange rates.22

The "Articles of Agreement of the International Monetary Fund" state that one of the IMF's purposes is to "promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems."23 Specifically related to public finance, the IMF provides assistance to improve tax and customs administration, public resource management and financial sector soundness.24 The IMF prioritizes good governance when recommending policies and providing financial support.

In post-conflict settings, the IMF seeks to provide immediate assistance to governments that lack the capacity to effectively managepolicy planning and implementation, including those governing the public finance sector.25 However, the Fund often only provides financial support in exchange for country's meeting specified conditions, such as market liberalization and good governance targets. Once a country has developed a certain capacity level, it is expected to enter into an agreement with the Fund to repay any accrued debt that was acquired through aid assistance. Most recently, countries that are poor and heavily indebted may be eligible for the Heavily Indebted Poor Countries Initiative (HIPC), which provides emergency debt relief.26

Go to Economic Recovery: Public Finance - Activities: Strategic frameworks: PRSPs and Debates: Debt relief

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Regional Organizations

Regional organizations such as the African Union (AU), the European Commission (EC), the Organization of American States (OAS), the Organisation of Economic Co-operation Development (OECD), and the Association of Southeast Asian Nations (ASEAN), provide a wide variety of support in the areas of public finance management and economic governance. They do so by developing strategic frameworks and offering technical support. An example of this is the EC's assessment of countries' Public Expenditure Framework Accountability (PEFA) program. Additionally, the regional bodies may promote public financial management reform, such as ASEAN's support for the privatization of state-owned enterprises (SOEs) in its member countries.27

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Institutional mechanisms for public finance management

(Semi-)Autonomous Revenue Authorities

(Semi-)Autonomous Revenue Authorities (ARAs) represent an administrative reform geared to insulate the tax-collecting authority from the political pressures that can generate corruption and obscure transparent operations. Specifically, many countries have taken the step of sundering their revenue authority from the ministry of finance, thereby granting their tax administrations higher levels of managerial and financial autonomy. This has the effect of (1) separating the collection and expenditure functions of government, and (2) holding revenue collected in what amounts to an escrow account. Such a reform then provides a more credible assurance that (1) on the collection side, taxes are not being collected in a biased way that privileges certain politically connected entities, and (2) on the expenditure side, revenues will only be disbursed from the public purse when there is a legal and transparent mandate to do so. 28

Supreme Auditing Institutions

Supreme Auditing Institutions (SAIs) are another institutional mechanism for monitoring corruption in public finance and encouraging transparency and participation. SAIs have received constitutional recognition in many countries around the world as the watchdogs of public finance. According to a World Bank report, audits are a basic building block for accountability in public finance. "Auditing is a function that serves accountability as it adds credibility to the assertions of the person or entity rendering account, and it provides valuable insights and information to the person or entity conferring the responsibility."29 Auditing contributes to accountability and transparency by making the public aware of any fiscal transgressions through a cost-effective process of monitoring and evaluation.30

The functions of SAIs, as stated by the World Bank report, "include, in addition to ensuring that the executive complies with the will of Parliament (as expressed through parliamentary appropriations), the promotion of ethical behavior, efficiency and cost effectiveness and the encouragement of sound internal financial controls to reduce the opportunities for corruption and increase the likelihood of its detection."31 In addition, SAIs can serve as a key link between the public sector and civil society,32 which is especially important in establishing trust in the government following conflict. This is particularly useful where public auditing measures are used, which allow participation and engagement of civil society actors in reporting on budgetary practices.33 However, this link can be somewhat weak in many developing countries due to lack of institutional capacity and failures to make all information easily accessible to the public.34 Finally, there are several determinants of SAI success: having a clear mandate; independence (both from the executive and to investigate issues at its sole discretion); adequate funding and staff; and the sharing of knowledge and experience.35

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Intergovernmental institutional mechanisms

Public Expenditure and Financial Accountability

Public Expenditure and Financial Accountability (PEFA), created in 2001, was started by a consortium of intergovernmental organizations and donor nations to improve the capacities of aid recipients and donors to assess a country's public expenditure, procurement and financial accountability systems and to develop strategies for reform and capacity building. PEFA seeks to accomplish these goals by:

  • Encouraging country ownership;
  • Reducing the transaction costs to countries;
  • Enhancing donor harmonization;
  • Allowing monitoring of progress of country PFM performance over time;
  • Leading to improved impact of reforms.36
More concretely, PEFA has developed a "Strengthened Approach" to support the development and implementation of nationally owned, results oriented reforms and a performance measurement framework. This strengthened approach has three components: (1) a country-led public financial management (PFM) frameworks, (2) coordinated IFI support of PFMs, and (3) a shared information pool of performance measures. PEFA is jointly funded by the World Bank, the European Commission, the UK's Department for International Development (DFID), the Swiss State Secretariat for Economic Affairs (SECO), the Royal Norwegian Ministry of Foreign Affairs and the French Ministry of Foreign Affairs, as well as the International Monetary Fund and the Strategic Partnership with Africa (SPA). The Secretariat is based at the World Bank and the Program is managed by a steering committee of members of these organizations.37

An evaluation of countries that have adopted PEFA found that there is evidence that PEFA assessments have had a positive impact; although, studies are limited by the short timeframe since implementation. The evaluation also points out that while there have been positive effects and reforms that are directly attributable to PEFA assessments, there are far more indirect effects. "In terms of more indirect effects, the PEFA assessments served both to provide governments with a comprehensive perspective on the achievements and challenges of the PFM system, based on evidence rather than perception."38 Particularly noteworthy, is the recognition that PEFA assessments have had a far greater impact on donors, especially where coordination between donors and governments is strong.

The African Peer Review Mechanism

The African Peer Review Mechanism (APRM) "is a mutually agreed instrument voluntarily acceded to by the Member States of the African Union (AU) as an African self-monitoring mechanism."39 NEPAD promotes APRM as an innovative approach "implemented by Africans for Africa."40 APRM aims to ensure that participating countries adhere to policies and practices that promote the four focus areas: democracy and political governance, economic governance, corporate governance and socio-economic development. The framework intends to accomplish these goals through periodic reviews of policies and practices without punishment or conditionalities.41

The peer review process is comprised of five stages. The first stage entails a background study and collection of information, the second stage requires consultation with local actors, the third stage comprises preparation of a draft report, the fourth stage entails submission of the report to government,42 and the fifth and final stage involves various actions based on the findings of the report. For example, if the report demonstrates government will to remedy shortcomings, member countries, and where appropriate, donors, will provide assistance. On the other hand, if a government fails to demonstrate active interest in addressing shortcomings, participating countries may put the government "on notice of their collective intention to proceed with appropriate measures by a given date.43

In his assessment, Kanbur cautions that the APRM should limit its scope of reviews to specific focus areas avoid exceeding its current capacity level. Kanbur also recommends that APRM not be conducted in isolation, but rather in conjunction with other assessment frameworks from various stakeholders, including civil society.44 In addition to Kanbur's assessment, David S. Nalo, of the Kenya Ministry of Planning and National Development, found, "In Kenya, APRM has received high-level political support as evidenced by the personal contributions to this process" by the President and the Cabinet. Nalo continues, "APRM strengthens existing government initiatives to ensure integrated monitoring and evaluation systems including policy reforms and broad economic reforms. It also makes it possible to subject the delivery of all sectors in the areas of governance."45 However, he concludes the review of Kenya's APRM experience by acknowledging that there is an acute need for human and financial resources to ensure a well-coordinated and accurate process.46 As a relatively new framework, further analysis of the successes and challenges of APRM are needed to determine long-term viability and effectiveness.

Economic Governance Initiative (EGI)

The New Partnership for Africa's Development (NEPAD), which was adopted in 2001, aims to reverse the underdevelopment of Africa. In order to meet its development goals, NEPAD has prioritized good economic governance through the Economic Governance Initiative (EGI). "Within the EGI, NEPAD's scope is limited to capacity building of the state in order to promote growth and development as well as implement poverty reduction programmes." NEPAD seeks to achieve these goals through encouraging private investment, setting up coordinated mechanisms to fight corruption and to provide technical assistance to "accelerate the implementation of the programme of action, including strengthening Africa's capacity in planning and development management, financial and infrastructure regulation, accounting and auditing, and development, construction and management infrastructure.47

Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

Based on the assumption that "all countries share a responsibility to combat bribery in international business transactions," on November 21, 1997, Organisation for Economic Co-operation and Development (OECD) member countries and five non-member countries adopted the Convention on Combating Bribery of Foreign Officials in International Business Transactions.48 "The momentum to develop this Convention was born out of the conviction that bribery of foreign government officials in international business transactions is a serious threat to the development and preservation of democratic institutions."49 According to OECD, bribery impedes economic development and misdirects revenue. The Convention makes bribery of foreign public officials a crime in the countries that adopted it. "Each country must adopt the necessary national legislation to criminalise the bribery of foreign public officials and address related obligations under the Convention."50

Go to Economic Recovery: Private Sector

Although monitoring of the Convention is the responsibility of individual countries, the OECD provides a monitoring framework, which is supported by the Anti-Corruption Division.51 In addition, every participating country holds a responsibility to ensure that other countries are adhering to the Convention. The OECD Working Group on Bribery, which is comprised of all parties, seeks to accomplish this goal through monitoring and surveillance. The monitoring and surveillance process occurs in two phases: phase 1 evaluates the adequacy of countries' legislation effectively52 andphase 2 assesses whether a country is applying this legislation effectively.53Following these evaluation phases, "The Working Group evaluates each country's performance and makes recommendations that are forwarded to the Government of each participating country."54

Geoffrey Watson, a law professor, offers several criticisms of the Convention. Most notably, the Convention limits those that are considered to be a "foreign public official." For example, the definition does not include public party officials or candidates for public office, which in some states is an extreme source of bribery and corruption. Additionally, the Convention fails to criminalize all bribery of officials of state-owned enterprises, which creates a serious loophole for public officials to avoid criminal prosecution.55

1. 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, 3.
2. Ibid.
3. Talierco, Jr., "Administrative Reform as Credible Commitment."
4. Kenneth M. Dye and Rick Stapenhurst, "Pillars of Integrity: The Importance of Supreme Audit Institutions in Curbing Corruption," The Economic Development Institute of the World Bank, 1998, 4.
5. Thania Paffenholz and Christoph Spurk, Civil Society, Civil Engagement, and Peacebuilding, Conflict Prevention & Reconstruction Working Paper No. 36, Washington, DC: World Bank, October 2006.
6. UNECA, "High Level Regional Consultative Meeting."
7. Vivek Ramkumar and Warren Krafchik, "The Role of Civil Society Organization in Auditing and Public Finance," The International Budget Project, 2005.
8. International Monetary Fund, "Roundtable Discussion with NGOs: Public Financial Management Reform," 2006.
9. Bjorn Beckman and A. Sjgren, "Civil Society and Authoritarianism: Debates and Issues - an Introduction" in Civil Society and Authoritarianism in the Third World, Eds. B. Beckman, E. Hansson, and A. Sjgren, (Stockholm: PODSU, Stockhold University, 2001).
10. Overseas Development Institute, "Centre for Aid and Public Expenditure."
11. International Budget Partnership, "About the Partnership: Mission," International Budget Partnership.
12. International Budget Partnership, "About the Project: Activities," International Budget Partnership.
13. Publish What You Pay (PWYP), "About us," PWYP.
14. United Nations Development Programme (UNDP), "Capacity Development Services in Application: Public Finance Capacities."
15. Ibid.
16. United Nations Development Programme (UNDP), "Governance for Sustainable Human Development: A UNDP Policy Document."
17. UNECA, "High Level Regional Consultative Meeting."
18. United Nations Development Programme (UNDP), Bureau of Crisis Prevention and Recovery (BCPR), "Sustaining Post- Conflict Economic Recovery: Lessons and Challenges," Occasional Paper 1, October 2005.
19. Note: This section draws on the content from The World Bank, "Public Sector and Governance: An Overview."
20. Ibid.
21. Ibid.
22. David Kennedy, "The 'Rule of Law,' Political Choices, and Development Common Sense," in David M. Trubek and Alvaro Santos (eds.), The New Law and Economic Development: A Critical Appraisal (Cambridge: Cambridge University Press, 2006), 95-173.
23. International Monetary Fund (IMF), "Articles of Agreement of the International Monetary Fund: Article I - Purposes."
24. International Monetary Fund (IMF), "The IMF and Good Governance: A Factsheet," May 2008.
27. Association of Southeast Asian Nations, "Joint Ministerial Statement of the 4th ASEAN Finance Ministers Meeting" (Bandar Seri Begawan, Brunei Darussalam: ASEAN, March 25-26, 2000).
28. Robert R. Talierco, Jr., "Administrative Reform as Credible Commitment: The Impact of Autonomy on Revenue Authority Performance in Latin America," World Development vol. 32 no. 2 (2003): 213-232.
29. Kenneth M. Dye and Rick Stapenhurst, "Pillars of Integrity: The Importance of Supreme Audit Institutions in Curbing Corruption," The Economic Development Institute of the World Bank, 1998, 4.
30. Ibid.
31. Ibid, 5.
32. Ibid.
33. Vivek Ramkumar and Warren Krafchik, "The role of civil society organizations in auditing and public finance," The International Budget Project, 2005.
34. Ibid.
35. Dye and Stapenhurst, "Pillars of Integrity," 7.
36. Public Expenditure and Financial Accountability (PEFA), "About PEFA."
37. Ibid.
38. Mary Betley, "Assessing the Impact of the PEFA Framework: A Study for the PEFA Steering Committee, Public Expenditure and Financial Accountability," June 2008.
39. NEPAD, "African Peer Review Mechanism."
40. Ibid.
41. Ibid.
42. Ravi Kanbur, "The African Peer Review Mechanism (APRM): An Assessment of Concept and Design," Cornell University, January 2004, 3.
43. Ibid.
44. Ibid, 11.
45. David S. O. Nalo, "Increasing Prospects for Success of APRM in Africa: The Case of Kenya," (Kenya: Ministry of Planning and National Development), 2002.
46. Ibid.
47. Akpan H. Ekpo, "Economic Governance and the Partnership for African Development (NEPAD)," Prepared for presentation at the African Forum for Envisioning Africa, Nairobi, Kenya, April 26-29, 2002.
48. Organisation for Economic Co-operation and Development (OECD), "OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions."
49. Ibid.
50. Ibid.
51. Ibid.
52. Ibid.
53. Ibid.
54. Ibid.
55. Geoffrey R. Watson, "The OECD Convention on Bribery," ASIL Insights, The American Society of International Law, March 1998.

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