PFM Board

Start here => A fire-place conversation with... => Topic started by: FitzFord on February 17, 2015, 23:41:31 GMT

Title: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: FitzFord on February 17, 2015, 23:41:31 GMT
Shanta, whose  condensed cv is a modest presentation of his career in Development Economics at Harvard University and the World Bank, will be with members of, and visitors to,  PFMBoard, will spend the coming Friday morning with us to discuss a crucial set of development issues that he has outlined in a brief note. Both the condensed cv and the discussion note will be posted as well. As usual, there will be exchanges of views, questions and answers that will continue until Thursday 26th. After that the conversation will be closed and remain available online.

Shanta's discussion topic: PFM and public service delivery

"Since the purpose of good public financial management is to improve the effectiveness of government, the discussion will focus at the other end, namely the delivery of public services and ask, how--if at all--PFM can improve their outcomes. First, I will question whether the activities that governments actually spend on are those that they should spend on. Using a simple, welfare-economics framework, I will show that most items in the government budget do not pass the test. In this context, strengthening PFM is like making the trains run the wrong station. Next, I will show that, even those government interventions that meet the welfare test often fail to deliver what they are supposed to because of (i) poor incentives in the service delivery system; and (ii) capture of public funds by political elites. In these cases, better PFM can help only if they change incentives in the same direction as is necessary to improve service delivery. Specifically, better monitoring of public expenditures can help if the information is shared with people who can influence decisions about service delivery. If it is shared with other government entities, it may increase their power over service beneficiaries and reinforce elite capture. Finally, better PFM for aid projects in an otherwise dysfunctional system rarely helps outcomes and may make matters worse, by increasing government's accountability to donors as opposed to its own citizens."
Title: Re: Conversation with Shanta Devarajan, Chief Economist, MENA, World Bank
Post by: SDevarajan on February 20, 2015, 14:34:03 GMT
To get the conversation going, I thought I'd elaborate on the first point I made in my abstract: That governments frequently spend on things that they shouldn't be spending on.  As a principle, governments should spend on things that the private sector, left to its own devices, will not (otherwise, government would simply be crowding out the private sector and wasting the public's money).  In economics jargon, these goods and services are called public goods or goods with externalities.  The classical examples include national defense and lighthouses (although, with GPS technology, the latter have become irrelevant).  But clearly governments spend on more than national defense.  Two of the biggest expenditure items are education and health.  In each of these, there are public-good or externality elements, although there are private goods as well.  For instance, in education, the main benefit from education is that the student earns a higher wage, which is a private good.  There may also be an externality, such as the fact that society as a whole benefits from having a literate and numerate population.  However, governments typically finance and provide all of education, rather than just the externality (which should strictly speaking be addressed with a subsidy to education).  Furthermore, this externality is highest at the primary level, lower at the secondary level and lowest at the tertiary level.  Yet government spending per student is highest at the tertiary level.  This is an example of government spending on private goods (university education) with scarce public resources.  There may be an equity argument for government spending on university education, but this would imply governments should subsidize or give free tuition to poor students, not all students.  In fact, most of the students attending free public universities come from the richest quintiles of the population.  In short, government spending on higher education (sometimes amounting to 1-2 percent of GDP) has very little justification.  What then is the benefit of having PFM systems that track public spending in education closely?  Are we perpetuating a wasteful system?  Let the discussion begin....

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: Napodano on February 20, 2015, 15:32:32 GMT
Hi, Shanta;

It is great that you start the conversation with a policy issue. One well-established criteria that discriminates a good PFM system from a mediocre one, is the capacity to link budget (and more in general public spending) to policy. Prime Minister Office, Ministry of Finance and the Cabinet collectively need to assess policy priorities, weigh spending options and expected results in and then have a budget that consolidate their policy choices.

To this end, I would like to pose the following question (Question #1):

What is your view on PFM reforms that promote performance-based budgeting in developing countries? After an initial enthusiastic start, only a few success cases have been recorded on a permanente basis. Was it premature for countries which do not have proper economic policies in the first place? Was the reform rejected by Governments with powerful vested interest?  Was too much emphasis on planning indicators a waste of Government attention without a monitoring system to track public service delivery?

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: FitzFord on February 20, 2015, 18:15:51 GMT
Question #2

Shanta, will you elaborate on how might the politicians, who may not see the benefits of the system you propose, may be convinced of the superior results that are predicted, and be persuaded that the costs as they may be imagined or real, will be presented in a beneficial
manner in their meaningful time frame?
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 20, 2015, 19:02:54 GMT
Answer to question #1

Napodano:  Thanks for your question.  I think the limited success of performance-based budgeting has to do with many of the items you mentioned--poor policy environment, vested interests, excessive focus on planning indicators.  But there is a fourth reason that I've been concerned about.  Whenever we measure performance, we never specify the counterfactual: what would performance have been in the absence of the allocation?  Yet, unless we use the counterfactual, we create a host of problems for PBB.  For one thing, people will choose easy indicators to be measured against (effectively, indicators that would have been achieved anyway--hence the need to specify the counterfactual).  For another, performance would not be measured against what the private sector would have achieved--the point I made in the earlier post.  A third problem--which is also a problem with performance-based aid--is that there is an inherent risk in any development endeavor.  We don't know for sure whether we will achieve the result.  By making budgetary or aid allocations based on performance, we impose all the risk on the recipient, and none on the donor or budgetary authority.  Not a good way to run a railroad.  Shanta
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 20, 2015, 19:15:12 GMT
Answer to question #2

Fitz: In answer to your question, the only way to convince politicians (of anything) is to have them believe that a majority of their constituents will vote for the new system (or the results of the system).  This will require two things.  First, that voters are well-informed about the quality of service delivery, say, so they value this (as opposed to the politician's religious or ethnic affiliation) at the voting booth.  Secondly, that politicians know this, so they will start catering to voters along service-delivery lines, rather than by simply expecting them to vote their ethnic group.  Neither of these processes takes very long, especially these days with technology-based information sharing.  The process can be self-reinforcing.  For instance, if people start voting for better schools, and politicians deliver better schools, then the electorate becomes more literate, in which case they are even better informed (they read newspapers, etc.) and they start demanding even better services.  Besley and Burgess have documented this process for India.

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: FitzFord on February 21, 2015, 21:08:53 GMT
Question #3


There are implications in some national budgets and expenditures information systems (on computers, and accessible in terms of timeliness, clarity of information and application) that are available to the public and designed to facilitate the public's understanding of what is being spent and delivered. Until fairly recent, these systems were non-existent. However, there has been significant improvements in public finance systems that allow the public to be aware of programs and expenditure allocations within budgets that allow citizens to be aware of allocations and programs that are assigned to their localities.

Do you now to what extent the WB promotes the use of such programs and factor their results and the extent to which governments (i.e. politicians)  are systematically called upon to explain their performances (success and otherwise) and program planning and budgets for the future. This is not to put you or the Bank on the spot; it is essentially to get a useful notion of the effectiveness of what looks like attractive tools, and understanding their utilization and impact.


Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: John Short on February 23, 2015, 15:43:54 GMT
Question #4


Many thanks for spending time on the Board and initiating a discussion on a very important area of PFM.  I must admit I was concerned when I read your first post as I thought it may be too academic (at least for me anyway) and was mightily relieved to see your education example which is a great one.  There is role for the private sector but also cost recovery (and appropriate subsidy in certain cases to provide incentives) where there is public sector provision. 

Please allow me some comments to add to Mauro’s and Fitz’s questions.  I think it is important to distinguish between the policy-making-environment and the technical aspects of delivering policies (and changes in policies after an election). This latter requires development of procedures and processes and the legal basis to implement them as well as the building of capacity (initial and continued renewal).  Ideally they should not change if implemented well.  These do not happen overnight and usually take years (up to 10?).  Linking budgeting with the planning system has to take place in this context and often is not which often accounts for a disconnect between targets and the budget that allocates resources to realise them.  Often the introduction of programme budgeting fails because the preconditions that are needed –budget calendar, a multi-year fiscal framework etc.- are missing. The framework in Jack Diamond’s paper on sequencing (discussed on the Board) is rarely met.  I have been in a country recently where programme budgeting is being pushed by donors at both central and local government levels yet the basics are not in place.  In another, where the processes and procedures backed by a legal framework that worked is being dismantled to give a politician a job!  You mention having an electorate that is savvy – which is important but it is more important that we have a political class that is realistic.  There are many cases including the present in Europe that politicians get elected on impossible promises.  In the UK the issue of higher education student fees is becoming an election topic without the consequences of replacing the reductions in lost revenue to the universities being explained.
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: Napodano on February 23, 2015, 18:38:39 GMT

You mentioned education, I want to add health:

Question #5

what do you think of Obama-care in terms of impact on the budget? How much is it 'exportable' to middle income countries?

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: John Short on February 23, 2015, 19:06:29 GMT
More on Question #5

Or UK National Health Service which is free at the point of use and funded from taxation - which is a dangerous no go political area!  There is also private provision though insurance schemes.

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: Lewis Hawke on February 23, 2015, 20:36:19 GMT
Question #6

It is something of a straw man to pose a scenario where a dysfunctional aspect of the PFM system is made more dysfunctional by improving other very specific parts of the system, such as payment processes or internal reporting. A more interesting discussion for PFM practitioners is why the original dysfunctions exist and are not corrected or controlled.

The study of political economy is becoming a more important aspect of PFM, and Shanta's discussion points are great illustrations of how political economy influences can create and amplify system distortions. Good PFM analysis will take a whole system approach and identify the causes and consequences of inefficient or mis-allocation of resources. It will identify options for addressing them and analyse the likely net impact before proposing solutions. Political economy influences can mean that it is impractical or inefficient to treat the cause directly, for example the returns to populist policies that target swinging voters or the lower costs to protect the status quo than for disbursed and disorganised losers from a policy to act in their collective best interest. Good PFM analysis and policies will identify alternative options within the system that will yield net improvements. For example, this could be by strengthening access to information for NGOs representing wider interests,  or establishing institutions such as independent fiscal councils or non-partisan think tanks to highlight the full implications of inefficient or populist initiatives as a means to limit the incentives or galvanise opposition.

The existence of distortions are not arguments for maintaining poorly performing processes to keep the breaks on efficient resource allocation, but arguments for a systems approach and better targeting of the causes of problems, not taking a narrow emphasis on tweaking (or not) flow of funds and internal access to information.
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 23, 2015, 21:19:34 GMT
Reply to question #3

Fitz, the World Bank has been emphasizing transparency in public budgeting for years, using modern tools, such as open-data, whenever possible.  For example, we have a practice that we will not grant a budget-support loan to any country that doesn't publish its budget online.  We have also been spearheading citizen engagement in public spending decisions, including citizen feedback on our own projects.  That said, the evidence on the effectiveness of these programs is quite thin.  I think the main point is that, even when citizens know that public resources are being misspent, they have little recourse.  Until we can help with this second part, where citizens can sanction policymakers who are responsible for budgetary allocations, I'm not sure what progress we will see.
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: orlandovv on February 23, 2015, 22:53:49 GMT
Question #7

Dear Shanta and PFM practitioners,

There are dozen of initiatives down here at the developing countries to improve service delivery through efficient PFM and Governance Systems. Some I'm personally involved with here in Central America are: the Open Government Initiative, Open Budget, Congressional Open Budget, and along with them PEFA.  My question is what overarching idea should link all these initiatives in a way most people can understand, demand, and support to truly make a lasting difference and have country ownership and donors harmonization?

Kind regards to all,

Orlando Valladares
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: STONE on February 24, 2015, 09:48:38 GMT
Shanta, thanks for your time. Anyone of your academic and professional record (and a Kanbur index of 1) is especially welcome here.

It seems that ‘Reg the Taxi Driver’ (;u=1378 ) has a broken GPS (or has suffered from its battery shorting out in his motor-boat in a storm on the windward side of an erstwhile glowing public lighthouse good) and  ‘Sir Humphrey’s Ghost’ hasn’t walked here since his fit of apoplexy when Matt Andrews popped by to warm his slippers at the fireside, so it looks like you have me. (Old-time PFM Boarders know that I am just difficult, some use other, blunter terms). 

Obscure Board-cultural references aside... Question #8

Lewis Hawke, may have made this point better already, but is it not the case that public financial management, good, bad, or indifferent, is policy neutral? 

In a six-phase presentation of the PFM cycle, we journey-people of the (minor) Guild of PFM ‘Bricoleurs’ begin with ‘policy design and review’ and move swiftly on to the ‘techie’ bits of PFM, serenely uninterested (and, of course, disinterested) in policy content. If pressed to opine on whether or not food stamp/child benefit programmes should include non-poor families, do we not and should we not ask only if the policy is of high enough priority rank to justify the triumph of effectiveness of sustained (through subsidy-seeking votes of the non-poor) provision to poor families over short-term concerns of efficiency or economy?
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: FitzFord on February 24, 2015, 16:16:40 GMT
Question #9


The Bank is promoting and supporting Citizen Engagement (CE) and have engaged with some academics as well as others in an effort to extend and strengthen CE in order to develop more involvement environment with politicians and their behavior and products, providing timely information and feedback for in planning and implementation AND adjustment of strategy and implementation. To what extent is that effort engaged with financial planning, managing and assessment? Or in the other way around?

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 25, 2015, 14:09:41 GMT
Reply to John Short (Question #4):

John, while I agree with the thrust of your comment, I would question the distinction you make between the policymaking environment and the technical aspects of delivering policies.  Often, this distinction is part of the problem.  The policymaking environment (especially if driven or dominated by external actors, such as aid donors) yields policies that are not implementable.  Your example of program budgeting is a case in point.  I think the policymaking environment should be infused with people (like yourself?) who have a clear sense of what is feasible and what is not, and these questions should be asked of those designing the policies beforehand.  There is a second, related problem with the distinction.  Both policy design and its implementation are replete with political interests.  Some of these political interests are shrewd enough to realize that they can "give up" something in the policy design phase, only to recapture it in the implementation phase.  For instance, those opposed to labor regulations may agree to a tightening of these regulations in the policymaking process, knowing full well that the new regulations will never be enforced.
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 25, 2015, 14:22:13 GMT
Reply to Lewis Hawke (Question #6): 

Lewis, I would agree that a systems approach can take us a long way towards identifying the distortions in the system and ways in which they could be remedied (and the political obstacles therein).  But two words of caution:  First, I'm not sure the systems approach you have in mind (which derives from PFM) can capture all the distortions, or even some of the major ones.  For instance, about 80 percent of health spending (even by poor people) for curative care is in the private sector.  A system approach that follows where public money is allocated would miss this salient fact (the Minister of Health in one country where we derived this result couldn't believe it, until we pointed out that all the information he was getting was about the use of the public clinics in the country).  Secondly, while everyone would agree that a systems approach is better than a piecemeal approach, the former is often seen as complex, time-consuming and expensive.  And there is pressure "to get something done."  So agencies opt for the piecemeal approach, saying that they will eventually get to the systemic approach.  This is where what you call the "straw man" comes in.  The piecemeal approach sometimes exacerbates the existing distortion (for instance, we make sure the public money reaches the public clinics, even if the doctor's never there and it represents only 20 percent of health spending.  This same money could be better spent on genuine public goods, such as immunization or better sanitation).  The net result is that the system gets so distorted that a systemic approach is too difficult.  Shanta
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 25, 2015, 14:28:37 GMT
Response to Orlando (Question #7): 

Orlando, before asking for ideas that link these initiatives, create ownership and donor support, we should ask:  What is the rigorous evidence that these initiatives improve outcomes?  My understanding of the literature is that rigorous impact evaluations of such initiatives are quite few (see my paper with Khemani and Walton in the World Bank Research Observer, 2013).  While we would all like to see more openness, transparency and citizen engagement, we need these rigorous impact evaluations so that we know how these initiatives affect outcomes.  Once we understand the channels, we can then develop an overarching idea that could bring citizens, governments and donors together.  I don't think we are there yet.  Shanta
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 25, 2015, 14:48:13 GMT
Reply to Stone (Question #8): 

Dear Stone:  You're right.  I don't understand the cultural references (I don't even know what a Kanbur index of 1 means--and he's a good friend of mine!)  Nevertheless, I'll attempt to answer your question which, as you suggest, is similar to Lewis'.  I think it's dangerous for PFM people to be uninterested (or even disinterested) in policy content, because good PFM in a misguided policy environment can make matters worse.  When you look at the huge misallocations of public resources (health spending on hospitals--which benefits the rich disproportionately--dwarfs spending on public goods such as immunization), it is a disservice to society to make the funds allocated to hospitals flow better.  And if you think that nothing can be done about these policies because they are the result of a political process (where the non-poor have greater voice), then the same can be said about PFM because, as you know, that too is susceptible to political pressures (ask any local budget officer).  So I would say that the Bricoleurs should take on the design and review of policy with the same vigor that they take on PFM.  Shanta
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 25, 2015, 14:52:16 GMT
Answer to Question #9: 

Fitz, some of the CE work inside and outside the Bank involves financial planning, management and assessment.  For example, the work on citizen budgeting.  But even if it didn't, I don't think this is the main problem.  That is that, even when citizens are engaged, by for instance giving their opinion or information about a program or policy, it isn't clear what sanctions they can place on politicians if their voices aren't heard.  Until and unless CE looks at the relationship between politicians and citizens, and how all this information can be used to strengthen that accountability (of politicians by citizens), I'm not sure it will take us very far.
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: Gord Evans on February 25, 2015, 16:35:12 GMT
Question #10

Excellent topic.  While avoiding econosemantics on whether a particular good is rivalous, excludable, prone to free riderism, etc., it is interesting to look back at how the notion of what could or should be provided by the public and private sectors has changed over the years and the underlying assumptions. 

In the 1950s through the early 1960s, governments pretty much conformed to the principled view where armies, lighthouses and a few other things should be run by government and not much else.  Private sector companies did not need Government Relations Departments, other than those companies which were partaking in the fabled military-industrial complex. 

Beginning in the mid 1960s through the 1970s – yes, I’m that old and still vaguely sentient – there was an emerging belief that government could and should solve societal problems.  In the US, the War on Poverty was launched and civil rights legislation enacted.  In Canada and Europe, we were rapidly constructing the social safety net and welfare state, as well as setting up all sorts of state-owned enterprises.  At this point in time, the rationale for government intervention was both expansive (asserting human rights; reducing inequality) and competitive (doing something more cheaply and efficiently than the private sector).   In fact, Canada established its own national oil company (since privatized) simply because we didn’t trust the intentions of the US multinationals (mistrust Exxon; say it ain’t so).  By this time, private sector companies were scrambling to establish Government Relations Departments.

In the 1980s through the 1990s, first with Reagan and Thatcher and then with, shudder, the NPM onslaught, the all-out assault on government revenue, aka waste and red tape and job-killing taxes on high-income earners, began in earnest.  We needed to reform ourselves, ideologically and structurally.  Hello Washington consensus.  Now, the principles of what was appropriate for government to do began to produce a much narrower list of core governmental functions. So we privatized, divested, contracted out and found many, many ways to reclassify what was formerly a government function into something that could be delivered by the private sector alone, under contract, or in partnership.  Schools, military operations, jails, hospitals, highways were all fair game.  The rationale flipped from the proactive 60s/70s: Given the inherent efficiency of the private sector, government functions should be transferred outright or deconstructed and parcelled out to the private sector whenever a business case could be made for such an action.  Functional reviews were ascendant.  Many business cases were made.  Meanwhile, a new government industry based on contract oversight and PPP coordination was born. 

In many ways, similar beliefs, trends and organizing principles continued throughout the 2000s and 2010s.  We still certainly intuitively believe that government intervention should be restricted to things the private sector cannot or will not do.  Which is a highly circuitous route back to Shanta’s opening statement concerning what governments should not do (e.g., university education).  But it is interesting to flip the question and ask if there are things that the private sector should not do.  In Canada, airport security is clearly a private sector activity, whereas in post-9/11 USA it is definitely something that, although the private sector can do (they were doing it up until then), it has now been deemed something that they should not do.  Back in Ontario, Canada, we have been debating for ages whether to privatize the massive state-run monopoly on selling liquor.  But successive governments, right and left wing, keep hemming and hawing because it makes a ton of money and has phenomenal buying power.  In fact, I attended the Cabinet discussion where the Premier who had promised to privatize the liquor board, on being presented with the cost-benefit analysis, said “We really should sell it, but we can’t afford to.”  So, I think the word “should,” with respect to public policy, should be understood as a malleable, ever-mutating, context and era-sensitive construct. 

Sorry for the long-winded tour down governance memory lane, but let’s close with that poor troglodytic PFM analyst who is analyzing potentially useless program expenditures somewhere in the bowels of the Ministry of Finance.  They may be tracking a structurally unsound activity, but at least they periodically surface with some evidence to be considered by those who decide what governments should or should not do, at least for now.  Cheers.   
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: FitzFord on February 25, 2015, 18:42:48 GMT
This discussion is now engaging in some of the deeper and more difficult substantive and strategic arenas and what may be potentially feasible solutions to issues with which we all, in practice, have grappled with and must continue to wrestle. In order to extend this richness further, Shanta has agreed to continue our discussion beyond Friday to over the weekend, until Monday. Despite my salivating, I am going to wait for someone else to contribute, before jumping back into the fray.

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: STONE on February 25, 2015, 21:15:26 GMT
Shanta,  I am so sorry; I meant to say a Kanbur 'number' of 1.  And Ravi, would surely, but gently, on the one hand, chide an ageing former student for such a mistake, and on the other hand, and surely as gently, point out that he relishes having a Devarajan number of 1. Simon
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: Glen Wright on February 26, 2015, 05:39:49 GMT
Question #11

Greetings Shanta:  Thanks for this opportunity to learn more about the issues of PFM reform. My question is simply this:

How much of the fault of the poor performance in implementing PFM (program budgeting, MTEF, etc) is due to the lack of building an adequate foundation (accounting systems, statistics, etc) for implementing program budgeting, etc, by the donors (WB, etc) through the bottom level technical assistance as opposed to funding consultants who go in and attempt to implement a high level budget method that should be the culmination of the PFM as opposed to starting with Program Budgeting, MTEF.  Are we constructing the roof before we have the foundation of the house.  Who is responsible for this.
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: harnett on February 26, 2015, 13:19:25 GMT
Question #12


We seem to have established that as technicians we can organise a reasonable PFM system but political economy really determines how that is used.  I am drawn to the words of the premier fighter against corruption in the world, Eva Joly - - who in a BBC interview last year suggested that "It's people's money and this is why it is serious and this is what it's all about, all time, all over the world.  It is how to get public money become private.  How can I get my pumps into the public money to enrich myself."  .  If this is her view of politicians and business leaders in general, then it would suggest that well-functioning PFM systems are almost irrelevant given the state of world political economy.  To bring this down to the level we experience as practitioners, I have conducted many PEFAs where the architecture for procurement in a country is world class (often driven by donors), but the implementation of that architecture is, by many accounts, riven by corruption.  Eva also suggests in this interview that corruption has not improved over the past 10 years (a period in which PFM architecture has presumably improved for many countries).  So I was wondering where you stand in terms of perceptions of corruption and legalised capture of public funds for private business and political economy.  Certainly in Britain, we have seen massive transfers of public funds to private business through PPIs, privatisation of NHS services, rail networks, bank bailouts and then the greyer area of tax evasion wrt Starbucks, Apple, Amazon and others with the most recent schemes of HSBC now up for legal scrutiny.  And.... at the same time we see a reduction in the quality of public services, despite the targets etc. of PFM systems etc.  And the Uk is not unusual in this regard!

On this note I find Gord's contribution essential.  His history of solutions to services being predominantly targeted by the public or private sector also correlates to concentrations of wealth on the planet (I bow to Piketty's analysis!).  So I will suggest that a logical conclusion of Gord's analysis may well be a greater role for the public sector, if only in "bridling" the private sector.

You (maybe) intimated your view, Shanta, with respect to your remarks on education.  Maybe you could expand on your thoughts and in the context of the above perceptions of corruption.
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 28, 2015, 15:49:36 GMT
Reply to Gord Evans, Question #10: 

Thanks very much for that succinct Cook's Tour of public economics through time.  A few comments. 

First, the rationale for government intervention has always been twofold: efficiency (market failures), and equity.  Musgrave's book also includes a third rationale, stabilization, but that's not relevant to our discussion now. 

Second, when there is a rationale for government intervention (efficiency or equity), it is important to ask whether government should only finance the activity, or both finance and provide it.  I think this was the discussion around air traffic control, prisons and the like in North America in the 2000s.  The issue here is whether the incentives within government lead to inferior outcomes in areas where there is a legitimate rationale for public intervention.  One area which has interested me for a long time is education.  The rationale for government intervention in primary education say, is that there is an externality associated with having a literate and numerate population.  I benefit from your having an education, and vice-versa.  But this externality only means that government should finance (strictly speaking, subsidize) education.  And we find that, when government also provides education, the incentives in public schools is such that you have high rates of teacher absenteeism (25 percent in India, for example).  So an alternative is for government to continue to finance education, but then contract the teaching out to whoever is most efficient at providing it.  It's interesting that Bangladesh does precisely this for its secondary education, and has better outcomes than neighboring India.  Of course, as you say, this requires having the capacity to design and monitor contracts, something that a weak government may not have.  The bottom line is that we have to balance market failure (the rationale for government intervention) with government failure (the incentives that lead, even legitimate government activities to under-perform). 
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on February 28, 2015, 15:57:35 GMT
Reply to Harnett, Question 12:

Fully agree.  This is corruption.  In other  writings, I have called teacher and doctor absenteeism "quiet corruption", because it doesn't make the headlines, and yet hurts poor people more than the latest financial scandal.  That said, I'm not sure if calling it corruption actually helps us do something about it.  I prefer to start with the desired outcomes (educated children, health citizens, etc) and point out that government is failing to reach these outcomes.  Then you can have a fruitful discussion about incentives and systemic problems, without necessarily implying that something illegal is going on and someone should go to jail! 
Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: FitzFord on February 28, 2015, 23:14:30 GMT
Question 13


Your answer to the last post opens a door that I have found interesting. I would be interested in the response you have developed for when you are confronted with this argument: The culture here will not allow this proposed system. The fact that different cultures ave developed and cemented into their own operating system. India and China are good examples. Most of us in this arena (including me) believe in transparency, because it empowers the population with the ability to hold their governments to account because an explicit promise was made and the results (and reasons for failure or success) are apparent. We (including me) spend a great deal of time thinking through how to have (usually) transparent systems so that those who fulfill this promise would be rewarded and those unable to deliver are removed. Do we, the outsiders, apply the punishment (right!) or do we expose the failure,to promote local punishment. And, if there is no local punishment?

Title: Re: Conversation with Shanta Devarajan, Chief VP, MENA, Economics, World Bank
Post by: SDevarajan on March 02, 2015, 03:40:28 GMT
Reply to Question 13

Fitz, you always ask the hard questions.  On questions of transparency and making knowledge available to the public, I find the "culture" argument hollow.  When I know something, I have an obligation to share it with people to whom it may be important, whether other people think it's culturally sensitive or not.  This is the principle I have practiced throughout my career.  It hasn't been easy. I've had finance ministers  (and one head of state) calling the president of the World Bank to complain about me.  And people inside the Bank thinking I want to foment revolutions.  But unless I adhere to this principle, I wouldn't be able to live with myself.  Besides, our clients are the world's poor. Governments are intermediaries, and what I'm trying to do is make them better intermediaries.   

As this is the final post, I want to thank all the participants. I've learned a lot from your thoughtful comments and questions, and look forward to the next occasion.  Shanta