Public finance and development: five things to read in September

12 September 2019
Insight
Trader on the Stock Exchange, Ghana, 2006. Photo: World Bank/Jonathan Ernst CC BY-NC-ND 2.0

Over the summer, this round-up on public finance and development has taken a welcome holiday. But as I get up and running again, it’s difficult not to be jarred by writing blogs on issues related to ‘governance’ in a ‘development’ context in the UK. This blog by the UK’s former minister for overseas development is on the mark in asking whether Britain is becoming a failed state.

On a more positive note, there has been lots of great material published over the summer.

Why are finance ministries often ‘pockets of effectiveness’?

Building the capacities of fiscal institutions has been a major feature of international development programmes for the past twenty years. Yet, as previous ODI work on the capabilities of finance ministries has shown, the ability of a finance ministry to perform its functions goes much beyond simply the skills of its staff.

Within the Ghanaian, Rwandan, Ugandan and Zambian public sectors, for example, new research by the Effective States and Inclusive Development (ESID) Research Centre looks at how political factors have contributed towards finance ministries being perceived as ‘pockets of effectiveness’ (in other words, high-performers relative to other government agencies).

A common theme that stands out for me here is how the interactions between both domestic and international political constituencies have shaped the development of the finance ministries in these countries. Since the 1980s, finance ministries have become the main intermediaries between the government and the traditional multilateral order, which has played a part in the willingness to invest in these agencies by governments and donors alike.

Improvements in macroeconomic management tend to be particularly marked when both the international and domestic political interests are aligned.

Democratising tax research and expertise

When it comes to research on development, we often hear two common complaints. First, it is predominantly written by researchers from the global north. Second, it usually responds to academic incentives rather than practical policy questions from governments or other actors.

In my experience, civil servants are always keen to learn about how other bureaucracies deal with similar problems to the ones that they are facing – and democratising this type of knowledge is really important. This way, governments do not have to merely rely on the well-travelled (and well paid) international adviser.

Therefore, The International Centre for Tax and Development deserves great credit for their Tax Administration Working Paper series. These papers – largely written by tax administrators themselves – describe common problems that administrators are grappling with such as cleaning up tax payer registries, taxing government agencies and making it easier for companies to file tax returns.

Revisiting sin taxes

On the face of it, sin taxes (taxes on goods such as alcohol or tobacco) are a very appealing proposition for governments: they can help in raising additional revenues, while also improving the health of the population.

Two recent blogs by the Centre for Global Development (CGD) dig deeper into the incidence and design of such taxes. The first explores who is likely to bear the burden of such taxes in poor countries. It finds the poor in poor countries smoke more than might be expected.

A second on the ‘syntax of sin taxes’ argues that such duties are potentially relatively easy to administer and more palatable politically than other taxes. Economist Richard Bird’s 2015 paper remains an excellent guide for those looking to explore in more depth some of the intricacies of designing and implementing such policies.

The drivers of pro-cyclical fiscal policy

Macroeconomists tend to agree that governments can spend more (or tax less) during recessions to help economic recovery. However, in poorer countries, you typically see the opposite. Governments ramp up spending when the economy is doing well and cut back when the economy slows. Three new World Bank working papers explore what explains this ‘pro-cyclical’ approach to fiscal policy.

Many of the factors associated with procyclicality identified by the authors in an overview paper are not easily changed (for instance, natural resource dependence and ethno-religious stability).  

The second paper suggests fiscal rules – a key tool used by governments to help address this problem - have limited impact unless they are combined with ‘better institutions.’

The paper I found to be most relevant in practical terms looks at the role ‘budget rigidities’ play in hindering fiscal adjustments. The authors explore whether governments who spend more on salaries, interest payments and social contributions – categories of spending that are typically harder to adjust – find it more difficult to amend their fiscal policy stance.

The limits of transparency

Providing citizens with information about services given by local schools and clinics has been seen by the development community as a promising route for improving service delivery. This Vox Dev blog summarises a recent study pointing to limits in what might be reasonably expected from ‘bottom-up pressure’ in terms of improving the quality of services.

To the credit of people working in this field, there is a lot of critical reflection published on this topic. This thoughtful 3ie blog suggests that people should not be too surprised when small-scale interventions deliver small-scale results.

And for those who missed it, there is a series of really useful materials published by the International Budget Partnership questioning assumed relationships between the publication of information and accountable government. My sense is – perhaps unfair – that much of this critical thinking has yet to be integrated into the programming of public financial management reforms.

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This is an output of the following project: Public finance and development: monthly round-up blogs

Authors

Senior Research Fellow – Head of Programme (acting)
Mark’s research focuses on how the international community engages on questions of public finance [...]