Government Budgets, Aid and Development Outcomes Anand Rajaram and Bill Dorotinsky, PRMPS Public Expenditure Perspectives for HD, Session 1, November 12, 2003 HD week, 2003

A Question If a key MDG objective is to be achieved in a country (say100% primary enrollment), should we: Insist that the goal is included in the PRSP of the country? Develop conditionality to increase public spending on that sector? Design and implement a multi-year Bank project/program to achieve the outcome? Ensure coordination with donors to achieve the outcome? This question or a variation is intended to provoke responses and to assess the knowledge level of the audience. The WDR brief prepared by Mallika could be used to critique the common practice of including increased expenditure on health etc. in conditionality.

Emerging development consensus “Developing countries will have to strengthen policies and governance so as to ensure that domestic resources, private inflows and aid can be used effectively in spurring growth, improving service delivery and reducing poverty.” “Developed countries will need to move vigorously in supporting these efforts with more and better aid, debt relief and improved market access.” Dev.Committee Communique, Sept.2003 The communique is in part a comment and endorsement of the DC paper on Financing that is included as background reading for this session. It sets the stage for a discussion of what we mean by better aid and the relative responsibilities for country and donors.

Aid can have perverse effects Governments are besieged by demands from interest groups – including diverse donors with financial influence and agendas Such pressures often contribute to sub-optimal outcomes where capacity is weak Policy “steering” by aid agencies (undermines ownership and weakens internal policy debate) Competitive donor promotion of projects, corruption Capacity diminution - donors poach limited capacity to staff PIUs Little attention to budgeting, public administration or service delivery In this scenario, countries develop in spite of, not because of, development assistance This illustrates some of the common problems when aid overwhelms country authorities. Project level interventions can fail when systemic issues are not addressed.

What must change to implement this consensus? Home grown policy – from PRSP or other process, responsive to country priorities Effective resource management by country to implement policy Support from donors to help strengthen, not undermine, govt. capacity to manage resources This requires a better understanding of govt. institutions, systems and processes and medium to long term strategies to improve them (no quick fixes) It might be useful to emphasize that the PRSP, if it is to be country owned – must not be over-constrained by our own policy preferences. You might indicate that there exist current instruments PERs, CFAAs etc but indicate that they will take different shape in the coming years.

Key institutional factors for effective service delivery Recent WDR highlighted the following Budget Management Formulating and implementing budgets in line with policy objectives and fiscal constraints Organization of tiers of government Appropriate assignment of responsibilities and fiscal resources to different levels of government Public Administration Motivating and managing public employees for effective service delivery These three themes could be flagged with reference to the later sessions that deal with each more comprehensively.

What are implications for work? Country teams will have to Incorporate a medium term program of analytical work on public expenditure policy and management, Ensure corresponding work on issues of public administration and tiers of government and its impact on service delivery in each sector Assist government in defining their strategy to address policy and management weaknesses Coordinate donor support to government strategy to strengthen institutions and govt. capabilities The idea here is to get across to HD sector staff that they will be expected to invest in knowledge of PE issues and to contribute to PRSP discussions. It also acknowledges the value of project insights for systemic assessment.

Implications …… continued  All sectors to pay more attention to the chain of links between broad policy objectives and the capabilities needed for resource management and service delivery  Country teams to form a collective view on the cross and intra-sectoral choices in the annual government budget and include it in sector and PRSP dialogue Increasing support to PRSPs via PRSCs that provide predictable resource inflows to government

Implications for project work Integrate the PE system perspective into project level work Feed project insights into broader assessment of system performance (incentives and staff motivation, corruption, etc.)

Key Messages The government budget is a key instrument for linking policies, resources and outcomes Channeling development assistance through the government budget can reduce transactions costs and strengthen domestic capacity International goals such as the MDGs require donors and aid receiving governments to match resources with better policies and institutions Donor (including Bank) assistance strategies must be based on a good understanding of public expenditure policies and institutions of resource management

Thank You