1. Public Expenditure Analysis and Management Introduction and Overview Anand Rajaram, Lead Economist, PRMPS

2. Motivation Why are we interested in PEAM? Does public expenditure influence development or does development influence public expenditure? Or are both influenced by other factors?

3. We know economic growth is correlated with development outcomes (WDR 2004)

4. GDP and Pub. Exp are loosely related We know richer countries generally have better (financed) government but the size and role of govt. varies quite widely Korea (19% of GDP) – Nordics (almost 60%) On average OECD about 45% of GDP High middle income countries have a wider range – 53% Hungary and 13% Mauritius Low income countries, most below 30% of GDP, often supplemented by significant ODA Certainly no striking evidence that more public spending creates sustained development

5. Public spending on directly related sectors and outcomes are often weakly related (WDR 2004)

6. Missing variables Intuitively, differences in policies and institutions could explain the weak relationship across countries WDR identified some core elements: –Budget policy and management –Organization of tiers of government –Quality of public administration

7. Whether public expenditure is productive matters enormously for the aid debate.. “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

8. PE work has two main strands

9. Basis for PE Management Analysis is New Institutional Economics The budget is a common property resource and subject to problems of collective action (free rider behavior, prisoner’s dilemma) Pradhan and Campos (1996) defined it in terms of the “tragedy of the commons”. Effective systems devise institutional arrangements and incentives to enable achievement of budgetary goals at 3 levels –Fiscal discipline –Strategic resource allocation –Technical efficiency Bill Dorotinsky will discuss how a budget system can be assessed in terms of its capability to achieve these goals

10. The Basis for PE Policy analysis derives from Welfare/Public Economics Competitive markets yield Pareto efficient outcomes, for any given distribution of income (Fundamental theorem of welfare economics) But state intervention may be needed when : –Lack of competition –Incomplete market –Public good (non-rivalry in consumption, non-excludability) –Externality (social cost/benefit differs from pvt.cost/benefit) –Macroeconomic instability Equity concerns provide another reason for intervention, through public finance

11. Market Failure must be balanced against potential Government Failure Inefficient program administration weakens the case for intervention If taxation or borrowing depresses private production or investment, it would offset some or all of the benefit Session by Dr. Tanzi will discuss how forces other than economics have influenced public spending and the role of the state, for better and for worse

12. What about PE and growth and poverty ? How does one assess the composition of the budget in terms of its contribution to growth or medium term poverty reduction? Pro-poor expenditure - has policy advice run ahead of conceptual clarity? Need integrative next-level analysis for assessment of sector expenditure to take account of dynamic, cross-sector interactions to assess impact on growth. Ref: “How does the composition of spending matter?” Paternostro, Rajaram, Tiongson, WB Working Paper (forthcoming)

13. Some thoughts on process in PE work What is unique about PE work relative to macro/sector work? –Budget as a common property resource – collective action problems – free riders, prisoner’s dilemma, non-cooperative behavior –Forces you to confront political/institutional issues – need to blend economics with country specific history –Requires a different style of work to be effective – with government and within Bank

14. Roles of Bank and IMF? Traditionally: –Fund advises on aggregate fiscal –Bank advises on composition of spending –Shared responsibility for PEM In recent years, active bilateral agency involvement with more/less coordination Country-led reform a desirable but elusive goal – lot of “reform steering” by donors

15. Will need effective country level collaboration across networks On institutions, PREM, FM and Procurement have forged closer relations On policy, we need to initiate cross network collaboration of broad scope (PREM-HD- INFunderway, others to follow) No network has the full range of skills to assess PE policy and institutions But collectively, skills exist

16. PER coverage

17. Outline –Day 1 – Roles and Management of Government Vito Tanzi, Kai Kaiser, B. Dorotinsky –Day 2 – Macro fiscal, health and social sector policy and data issues S. Herrera, G. Schieber, M. Grosh, M.Lundberg. –Day 3 – Education and Infrastructure Abu-Ghaida, Berryman, Bashir Foster, Irwin –Day 4 – Case Studies