Organic Reform rather than New Public Management

Neoliberalism, the belief that the market is the most efficient approach to allocation of resources, is the currently dominant economic paradigm across the world. This has had a major influence on the way in which states are managed and the way in which public sector accountability is viewed.  The governance model of seeing the private sector as being directly relevant and a positive model for the public sector has been termed New Public Management.  This has been sold as modernisation over the last three decades and pushed by the World Bank, IMF, OECD and bilateral aid agencies.  But this is only one approach to public financial management and, as with Neoliberalism itself, New Public Management is being increasingly contested.  Here I outline some possible alternatives.

Introduction

Many developing counties developed significant levels of debt from the 1980s. This provided the IMF and World Bank with the leverage they needed to implement structural adjustment programmes (SAPs) in the 1980s in which privatisation and deregulation were dominant.  The fall of the Berlin Wall in 1989 provided the International Financial Institutions with more confidence, but also the recognition that the state was necessary for effective economic development. In addition, the end of the cold war meant that a blind eye could no longer be turned to corruption which had grown with the demoralisation arising from the failures of independence and state led development to provide sustained economic growth.

The UN and increasingly the World Bank turned their attention to public sector accountability and financial management in the late 1990s.  Thus we had the UN Program for Accountability and Transparency (PACT) established in 1996 as a compilation of existing good practice with the more radical World Bank Public Expenditure Management Handbook published a couple of years later.  This was to provide guidance for the increasingly active role the World Bank played in this area taking over as the prime source of guidance from the UNDP.

The Public Expenditure Management Handbook outlined three main objectives for the management of public finances:

• aggregate fiscal discipline
  
  
• resource allocation and use based on strategic priorities
  
  
• efficiency and effectiveness of programs and service delivery.

It also identified the recent innovations of IFMS and MTEF as the basis for the radical transformation of public sector accountability and financial management whilst still extending the market and reducing the size of the state.  These reforms with decentralisation, independent revenue agencies and, at least in middle income countries, the introduction of accrual accounting became the standard reform agenda across the Global South.

However, many of these reforms were not as successful as expected.  International consultants were used to push a standard reform agenda which did not really fit with the local environment and the expertise of local public financial management officials was not given adequate recognition.  In addition, recent developments have led to a more widespread questioning of both Neoliberalism generally and New Public Management in particular.

The Global Financial Crisis and the Arab Spring

In its World Economic Outlook (September 2011), the IMF stated that:

The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing. Against a backdrop of unresolved structural fragilities, a barrage of shocks hit the international economy this year.

The World Bank's latest Global Economic Prospects (January 2012) said that the world had “entered a difficult phase characterised by significant down-side risks and fragility”.  It also predicted a “turbulent year ahead”, that a “‘Second wave’ of financial crisis will take a toll on developing countries and reduced its expectation of the rate of growth in 2012 by over a quarter.

In addition, the Arab Spring, whilst continuing to bring an end to more dictators across the region, appears to have sparked a global protest movement. Occupy Wall Street spread to many cities across the US, but also to the steps of St Paul’s Cathedral in London, Australia, India and Pakistan.  Whilst in Chile hundreds of thousands are demanding free, high quality education; in Greece the general strikes have now extended to two days; and popular unrest has swept across many countries in sub-Saharan Africa.  In Nigeria, for example, a weeklong general strike succeeded in reducing the recently increased price of fuel by a third.

All this is leading to a continued questioning of the received economic wisdom.  If privatisation, deregulation and deficit reduction do not appear to be working at the economic level; is New Public Management, with its balanced budgets and standard set of reforms, really delivering the claimed benefits?  So what are the alternatives? 

An Alternative Public Financial Management Agenda

Perhaps public financial management reforms in developing countries should be based on the following principles:

·    organic and incremental change – reforms should build on and improve existing systems and procedures rather than the more risky approach of major reforms and fundamental change; public financial management should be more about rebuilding systems than transformational ‘modernisation’

·    tried and tested reforms – one of the few benefits of being a developing country should be that it is not necessary to experiment, but only reforms which evidence clearly show have worked in a similar environment should be adopted

·    support for alternatives – one size does not fit all jurisdictions, there are different approaches to public financial management and variation is healthy; genetic variation is essential for the future of a species, similarly novel procedures, processes and institutions can provide for healthier public finances

·    use of local experts rather than international consultants – it is only the local public financial management officials that really understand their systems; international consultants fresh off the plane, whatever their CVs say, can never have the detailed knowledge of the local context, culture and history of reform that is needed.

These principles can be used to critique the standard reform agenda of New Public Management which is still being pushed by the International Financial Institutions and the donor community.

Alternatives to the Standard Reforms

Rather than thinking about accrual accounting, which does not bring the claimed benefits, we need to be thinking about simple and clear financial statements that parliamentarians and the public can understand.  Accounting standards should be based on existing good practice.  As a recent study by the Africa Capacity Building Foundation (http://tinyurl.com/esaag2012) has shown, many governments in sub-Saharan Africa display aspects of good practice in their annual financial statements which are not necessarily included in existing international accounting standards.

The Medium Term Expenditure Framework (MTEF) still appears to be part of the standard donor reform package despite making little progress in many countries.  One expert recently commented to the World Bank that, “MTEFs act as a huge distraction to good basic budgeting, with questionable results and much wasted resources”.  Incremental reforms may be more effective, especially if they are able to gradually extend the effective budgetary horizon and recognise the political economy reality that many presidents want to retain the power to direct resources during the financial year.  Similarly if governments are struggling to control line item budgets, then programme budgeting, which several OECD countries having been trying to implement since the 1960s, is probably not a priority.

In general terms governments have always borrowed to invest in public infrastructure (including an educated workforce).  The current emphasis on balanced budgets and prudent public finances may lead to an under investment and so inhibit future growth.

It is now accepted that in many developing countries new public financial management laws are in advance of actual practice.  In this situation it may be more effective for Auditors General to improve their approaches to regulatory audit rather than struggling to introduce performance audit.  Similarly, Auditors General are being encouraged to adopt private sector International Auditing Standards to provide an opinion on the financial statements rather than reviewing public financial management as a whole.  For years donors have tried to replace pre-audit with systems or even risk-based audit.  However, at a recent audit conference in Nigeria, a presenter received a round of spontaneous applause when they suggested it would be better to have effective pre-audit to prevent fraud and corruption before it has even taken place.  The traditional approaches to audit may, in certain circumstances, be more effective than performance audit and risk based auditing.

Many countries are still struggling to implement comprehensive Integrated Financial Management Information Systems (IFMIS) when smaller systems have far lower risks.  The Federal Government of Nigeria, for example, recently signed a $29 million contract for an IFMIS with only just over two months to go before the ‘go live’ date of 1^st January 2012.  IT can be useful, but small, smart applications (for example, www.topgov.org) may be far more effective than dreams of being able to monitor the finances of the whole government ‘at the touch of a button’.  The IFMIS in Tanzania was arguably successful because it was, initially at least, just a system to make payments for goods and services from a single office, rather than being a comprehensive financial management system.

Decentralisation is still being pushed in many countries, even quite small ones, but centralisation and regionalisation may be more appropriate in many cases.  Some small island states in the Pacific are implementing co-operative audits between countries to access the skills and experience they need.  The Federal Government of Nigeria is successfully centralising the payment of salaries and other payments rather these being implemented in individual ministries, departments and agencies.

Contracting and procurement are recognised as high-risk areas in terms of bribery and corruption.  So perhaps more governments need to consider the direct provision of services rather than entertaining the risks associated with out-sourcing.  Where external procurement is considered necessary, social and environmental factors should be considered to ensure that ‘whole life costs’ and externalities are taken into account. Sustainable public procurement is a tool which allows governments to use public spending in order to promote the country’s social, environmental and economic policies – see: www.unep.fr/scp/procurement/

Independent revenue agencies may have undermined the development of national tax policy expertise as the agencies are limited to increasing revenue in line with existing legislation.  The reduction in customs tariffs, despite the introduction of VAT have led to a significant reduction in revenue for many developing countries.  An other result is that the tax system is less progressive.  Governments should have a key role in redistributing income.  The erosion of this role (taxing the rich to pay for free public services for the poor) has led to a significant increase in inequality in OECD and developing countries alike.

The World Bank and the IMF have recognised that charging for primary education and health was a failure and are now assisting governments in provide these services at no cost.  However, health insurance is being encouraged in several countries.  This is unlikely to be successful as if the poor cannot pay for health care when they are ill they are even less likely to be able to do so when they are still healthy.  In many cases providing free public services, like health, education, water and roads is the only way to make these services available to the majority of the population.

Conclusions

The global donor community met at the 4^th High Level Forum on Aid Effectiveness in Busan, South Korea at the end of 2011.  A review of the targets the donors had set at previous forums in Paris and Accra were, “sobering. At the global level, only one out of the 13 targets established for 2010… has been met, albeit by a narrow margin”.  So we need to look at constructive alternatives to New Public Management and Neoliberalism.

We should disseminate the evidence on the actual costs (and lack of benefits) of accrual accounting and facilitate the development of accounting standards based on existing good practice (in contrast to the existing Cash Basis IPSAS).

We should develop and publish critiques of the MTEF, including programme budgeting, and develop practical alternatives to achieve effective budgetary control.  We should recognise that a key role of government is to borrow to fund investment in public infrastructure.

We should not be demanding that external auditors adopt performance audit and internal auditors change from pre-audit to risk based audit.  Adopting new work practices is demanding for all of us and in an environment where corruption is widespread regulatory audit may be the most effective approach.

Similarly with IFMIS and other items in the standard donor public financial management tool kit, we need to ensure that practical approaches that can be easily accommodated within the existing environment are implemented and can be maintained locally.  This will only happen where the reform agenda really is locally owned and local public financial management officials have a core role in designing and implementing the reforms.

If poverty is really to be reduced, then the state must undertake some redistribution by taxing the rich and providing basic services at no cost. Creating a ‘business friendly’ environment to attract foreign direct investment will not lead to a trickle down of wealth from the rich to the poor.  In contract, all the evidence suggests Neoliberalism and New Public Management results in wealth gushing up and increased inequality.

Tearing us Apart: Inequalities in southern Africa

This moving, inspiring, but damming book starts with the following summary:

The current levels of inequality in Southern Africa are amongst the highest in the world, tearing apart communities and societies in the region. Although several promising initiatives were taken after independence to expand social services and to redress the colonial legacies, none of the countries covered by this study - Angola, Malawi, Namibia, South Africa and Zimbabwe - managed to significantly reduce inequality.

The country case studies show that each are these five countries are characterised by unacceptable levels of inequality and paint a detailed picture of the historical nature and current manifestations of this inequality. The book clearly shows that to reduce poverty we need to reduce inequality.  As an immediate intervention to free millions of people in the region from the debilitating and dehumanising effects of poverty, the introduction of an unconditional basic income grant seems an appropriate measure to take.  A report of the positive effects of introducing even a very small grant of around $10 a month per individual in one community in Namibia is available from:

www.bignam.org/Publications/BIG_Assessment_report_08b.pd

For public financial management experts the book raises the key issue of what the role should be for governments that really want to see a world free of poverty (to use the World Bank’s misused strap-line). Shouldn’t Governments work to reduce inequality by having progressive taxation systems?  This should mean that the rich pay a significantly higher proportion of their income and wealth in taxation than the middle classes, whilst the poor are totally exempt from taxation.  Governments should then use this income to provide services - mainly aimed at the poorer sections of society.  So these services should be provided at no cost to the direct users.  Fees or ‘cost-sharing’ will exclude the poor and should therefore not be used.

The book was edited and the chapter on Namibia co-written by Herbert Jauch, the former director of LaRRI, the trade union research centre in Namibia.  He ends with the overview of the real road to eradicating poverty:

Changing the entrenched neo-liberal development paradigm will certainly be an ongoing struggle as different class interests (and imperial interests) will inevitably clash. An alternative development agenda will have to be built from below and place redistribution and social justice above the interests of global corporations and their allies among governments. The market-based development paradigm of the past decades simply offers no hope for the poor.

The complete book is available for free down load from:

http://www.osisa.org/books/economic-justice/regional/tearing-us-apart-inequalities-southern-africa

International Journal of Governmental Financial Management - latest issue

The latest issue of the International Journal of Governmental Financial Management is now available for free down load from: www.icgfm.org/journal.htm

Below is the editorial from this issue on public sector financial accountability and an introduction to the individual papers:

“Government accounts generally… [have an] orientation towards accountability requirements” (UN 1970: 21[1]).  This is recognised by the Cash Basis International Public Sector Accounting Standard (IPSAS) which accepts that financial reporting “is necessary for accountability purposes” (Page 7).  However, this Standard is not based on existing good practices and so breaks some of the fundamental traditional precepts of financial accounting in the public sector.

The budget cycle includes three key stages, authorisation of the budget by Parliament, implementation by the executive and reporting back to Parliament on the budget out-turn.  Before the beginning of the financial year, parliaments traditionally provide authority to the government to raise taxes and details how this shall be spent (the budget).  The annual financial statements or appropriation accounts subsequently account to Parliament how the funds raised have actually been spent by the various ministries, departments and agencies.

Clearly it is important that accurate accounts of the receipts and disbursements should be kept, and it is evident that these accounts should be in such a form as will enable the revenue actually collected and the amounts actually disbursed to be compared readily with the Estimates of Revenue and Expenditure [the budget] (Colonial Audit Department 1951: 17[2]).

The next stage of the accountability cycle is then the audit.  The auditors work on behalf of parliament (or in some cases the president) to confirm that the, “moneys made available by the legislature are expended properly and for the purposes for which appropriations are sanctioned” (UN 1970: 34).  Thus auditors confirm that the budget was complied with and that all payments were made in line with the Financial Regulations.  Where this is not the case, such irregularities, if significant are included within the auditor’s annual report.

In addition, to a detailed comparison of the actual receipts and payments with the budget agreed by parliament, the annual financial statements traditionally included a statement of assets and liabilities.  The balance of this statement shows, “the territory’s accumulated balance available for appropriations, i.e., available for disbursements on government services” (Colonial Audit Department 1951: 29).  The final main statement was the Statement of Public Debt which showed the government’s outstanding liability to repay loans it had raised.  It also may show any associated Sinking Funds which have been established to pay off each of the loans when they fall due.

Despite the recent renewed interest in the level of government debt, the Cash Basis IPSAS does not require governments to maintain the traditional practice of reporting on the level of this liability.  In contrast the Standard does require a full consolidation of all controlled entities including government business enterprises (GBEs, also called parastatal organisations or government corporations).

GBEs have traditionally used commercial accounting and so “depreciation accounts will customarily be maintained” (UN 1952: 17[3]).  Thus it is practically very difficult to consolidate the financial statements of GBEs with those of central government ministries, departments and agencies as this would first require the conversion of their accrual based financial statements back to the cash (or modified cash) basis.

This explains why South Africa, for example, produces separate “Consolidated Financial Information” for its public entities (GBEs).  These statements are not consolidated with financial statements from its national departments (ministries).  In addition, the two sets of “Consolidated Financial Information” for the ministries and separately for public entities merely present an aggregation of financial information without the elimination of all inter-entity transactions (see http://tinyurl.com/SAaccounts2011).

Similarly the Ugandan Government produces consolidated financial statements for its central ministries, departments and agencies, but its GBEs are excluded as the benefits are not considered to be worth the effort.  The Government Accounting Standards Board of India goes further (2008[4]) saying:

Though this is fundamental requirement of Cash IPSAS, it is likely to cause more distortion than bringing in clarity in the financial statements of government… Further, consolidating Government Companies accounts with that of Government will result in artificial inflation of cash inflows and outflows and is not likely result in any improved presentation of financial statements (page 9).

The objective of producing consolidated public sector financial statements is not clear as the main objective of these financial statements has been for individual Accounting Officers to by held to account by parliament on the way in which funds allocate to them in the budget have been utilised. It is this personal responsibility to parliament (and specifically the Public Accounts Committee) that is at the core of the Westminster approach to public financial accountability and the control of public funds.  The French approach is similar as the accounts of individual Public Accountants are audited by the Court of Accounts and, if the funds have been used appropriately, they are cleared or given quitus.

Unfortunately, the Cash Basis IPSAS does not follow this traditional approach and is not based on the existing good practices which have been developed in many countries over the last few decades.

The Cash Basis IPSAS was first issued in January 2003, but although it has been widely promoted by the donor community, PEFA and IFAC, not a single government in the world has actually been able to adopt this standard.  This is not from want of trying, many governments have looked at the standard, but recognised that it is not practical to implement its key requirements.  It is estimated, for example, that at least 31 governments in Africa have tried to adopt this standard.  One international consultant recently estimated that he had worked in around 30 countries trying to adopt the standard, but that its key requirements had not proved practical.

As a result of these problems, the International Public Sector Accounting Standards Board is planning to fundamentally revise the Cash Basis IPSAS.  However, this process appears to have stalled.  The IPSAS Board has not considered this issue since its June 2010 meeting and no further progress has been made to revise the Standard.

What is needed is for existing good practices to be identified and used as a basis for ensuring that the Cash Basis IPSAS becomes a practical standard that most governments can implement within the medium term.  A start has been made with a study, funded by the African Capacity Building Foundation.  This reviewed the annual financial statements of 12 governments from across sub-Saharan Africa and identified attributes of good practice (see www.scribd.com/doc/94003101). 

We begin this issue of our Journal with An Overview of Accounting in the Nigerian Public Sector which is the first chapter of a recent book by two eminent Nigerian authors, Eddy O. Omolehinwa and J. K. Naiyeju.  This paper reviews the differences between public sector accounting and that undertaken in the private sector.  It then discusses the different types of public sector organisation and the approaches to public sector accounting which have been developed for each of these institutions. Finally the authors consider the research challenges in the area of public sector accounting.  They note that the most important has been access to data, but that this has improved in recent years with the annual and even quarterly financial statements now being made available for the Nigerian public sector on the Internet.

Administrative Cameralistics is a particular accounting model developed for use by governmental organizations in German-speaking European countries.  In this paper, Norvald Monsen builds on previous papers in this Journal with a practical example.  This illustrates the two developed variants of Administrative Cameralistics.  These both include two core financial statements: the Statement of Revenues and Expen­ditures and Statement of Financial Status.  These examples again show that the public sector has traditionally been based on the modified cash basis of accounting.

In our third paper, Udaya Pant, considers Public Financial Management Reforms in Nepal.  He presents an analysis and scrutiny of the evolution of the Nepali public financial management system and recent reform efforts.  A description of the historical background should help readers to understand the subject and the key issues.  He concludes that basic reforms need to be institutionalized. The intent should not be to ‘push reforms’ to please the donors. Rather, the basic systems may be tried first, to internalize the skills and the spirit of reform and ensure that the reforms are monitored regularly.

Our next paper provides a reflection on public financial management reforms in Liberia (West Africa) by a senior financial official from the public service of India.  Amitabh Tripathi notes that despite the consensus on its importance, post-conflict public financial management capacity building is a tale of two contrasting ideal types – one that is prescribed, in theory and another that is practised. The paper argues that despite the ‘intrusive’ international engagement, capacity building in Liberia evolved through a slow and incremental process.

In our final paper of this issue, Andy Wynne briefly outlines why business style accrual accounting is not generally appropriate for the public sector. This conclusion is based on the actual evidence for the costs and benefits of business style accrual accounting from Britain, Australia and New Zealand.  He also reviews the significant problems around the implementation of accrual accounting in the Cayman Islands.  The paper concludes that incentives are needed to develop existing approaches to public sector financial reporting in ways which recognize the distinctive objectives and nature of government in the provision of public goods and services.

We again end this issue with a section reviewing recent public financial management publications and other resources which we hope will be of interest to readers of the Journal.  We would be pleased to receive reviews and suggestions of other resources which we should refer to in future issues.

Please email Andy Wynne (andywynne@lineone.net) to discuss contributions to future issues of this Journal.

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[1] United Nations, Department of Economic and Social Affairs (1970) A Manual for Government Accounting, United Nations: New York

[2] Colonial Audit Department (1951) An Outline of Colonial Accounting and Financial Procedure, Colonial Audit Department: London

[3] United Nations, Department of Economic Affairs (1952) Government Accounting and Budget Execution, United Nations: New York

[4] Government Accounting Standards Advisory Board (2008) A Study on Gap Analysis of Indian Government Accounting with International Standards, New Delhi: GASAB Secretariat

www.gasab.gov.in/pdf/Gap_Analysis.pdf

18 Governments Adopt Accrual Accounting by 2012

I currently have a post on the IMF Public Financial Management Blogspot which you may care to have a look at, please provide your own comment if appropriate:
http://blog-pfm.imf.org/pfmblog/2012/05/what-accounting-standards-for-governments-of-the-global-south.html#more

I am in the process of developing a longer paper on annual financial reporting by governments – please contact me if you would like to see a copy at this stage.

I have also done a bit of research on those governments which have adopted the accrual basis for their financial statements.  The only 18 countries which have actually issued accrual based financial statements for their central government ministries are as follows:

• Spain (1989) – national standards (IPSAS from 2011)
• New Zealand (1991) - IFRS  
• Australia (1994) - IFRS
• USA (1998) – national standards
• UK (2002) - IFRS
• Canada (2003) – national standards   
• Latvia (2003) – national standards
• Estonia (2004) – national standards
• France (2006) – national standards
• Colombia (2006) – national standards
• Romania (2006) – national standards
• Switzerland (2007) - IPSAS
• Denmark 2007) – national standards
• Slovak Republic (2008) - IPSAS
• Cayman Islands (2008) – national standards
• Lithuania (2009) – national standards
• Czech Republic (2009) – national standards
• Barbados (2012) – national standards.
  

I would be pleased if you were able to amend, update or correct this list.

UN and World Bank Agree that Inequality Reduces Economic Growth

" Never has the world been so prosperous, however, inequalities have also never been so great!"

Jospin de Villepin, Prime Minister of France at the United Nations in October 2005

There is increasing recognition that inequality both within and between countries is a serious impediment to economic growth and that one of the key objectives of all governments should be to try and reduce or at least mitigate this inequality. One of the main components of the Millennium Development Goals is having the number of people living in extreme poverty by 2015. The World Bank’s World Development Report for 2006 had as its theme equity and development and concludes that “greater equity can, over the long term, underpin faster growth”. These views are supported by the United Nation’s Human Development Report 2005 on aid, trade and security in an unequal world. Thus there is an increasing recognition that governments have to do more than merely ensuring an environment in which private enterprise can thrive. Governments also have responsibility for maintaining equity and avoiding the extremes of poverty and wealth.

The World Bank defines equity as meaning “individuals should have equal opportunities to pursue a life of their choosing and be spared from extreme deprivation in outcomes”. It now recognises that the complementarities between equity and prosperity arise for two broad sets of reasons. First there are many market failures, at least in developing countries, notably in the markets for credit, insurance, land, and human capital. Thus governments have a responsibility to act to correct such failures and ensure widespread access to such essential services as education and health. As the World Bank notes “public action has a legitimate role in seeking to broaden the opportunities of those who face the most limited choices”. The World Bank has long said it was working for a world free of poverty. But now it has gone further and called for "more equitable access by the poor to health care, education, jobs, capital, and secure land rights, among others".

“The second set of reasons why equity and long-term prosperity can be complementary arises from the fact that high levels of economic and political inequality tend to lead to economic institutions and social arrangements that systematically favour the interests of those with more influence”. Thus governments have a responsibility for “levelling the playing field—both politically and economically and in the domestic and the global arenas” to “broaden the opportunities of those who face the most limited choices”.

As a result, the World Bank report argues, societies which are more equitable are likely to have faster economic growth as “greater equity implies more efficient economic functioning, reduced conflict, greater trust, and better institutions, with dynamic benefits for investment and growth”. In contrast, global inequality “contributes to economic inefficiency, political conflict, and institutional frailty”.

The UN report is more explicit in detailing the effects of global inequality. It hails the world’s response to the December 2004 tsunami noting that “within days of the tsunami, one of the worst natural disasters in recent history had given rise to the world’s greatest international relief effort, showing what can be achieved through global solidarity when the international community commits itself to a great endeavour”. The report, however, immediately notes that 1,200 children die each hour which is:

Equivalent to three tsunamis a month, every month, hitting the world’s most vulnerable citizens—its children. The causes of death will vary, but the overwhelming majority can be traced to a single pathology: poverty.

The UN goes on to note that:

One-fifth of humanity live in countries where many people think nothing of spending $2 a day on a cappuccino. Another fifth of humanity survive on less than $1 a day.

The World Bank now recognises that “global inequities are massive” and doubled in the 175 years to 1992. It is only because of significant growth rates in China and India that the long-term trend towards greater global inequality has begun to reverse in recent years. However, “if China and India are excluded, global inequalities have continued to rise”. As a result, as the UN notes “Income inequality is increasing in countries that account for more than 80% of the world’s population”.

A long-run diverging trend in income inequality:

Source: Authors’ manipulation of data from Bourguignon and Morrisson (2002).

This situation is made worse by the widespread observation of intergenerational immobility. The UN notes that “health outcomes in the United States, the world’s richest country, reflect deep inequalities based on wealth and race”. But also, someone born into a poor family has a small chance of escaping from this situation, the World Bank notes that “new evidence from the United States (where the myth of equal opportunity is strong) finds high levels of persistence of socioeconomic status across generations”.

Thus the World Bank would probably agree with the UN that:

Human development gaps within countries are as stark as the gaps between countries. These gaps reflect unequal opportunity—people held back because of their gender, group identity, wealth or location. Such inequalities are unjust. They are also economically wasteful and socially destabilizing. Overcoming the structural forces that create and perpetuate extreme inequality is one of the most efficient routes for overcoming extreme poverty, enhancing the welfare of society and accelerating progress towards the Millennium Development Goals.

Whilst the World Bank recognises that action to alleviate inequality and the adverse effects of poverty have to be adapted to the specific conditions in each country, it also recognises four main areas in which action is needed:

• human capacities, including early childhood development, schooling, health and taxes for equity
• ensuring equity in terms of access to justice, land and infrastructure
• markets and the macro-economy
• the global arena.

The World Bank has recognised for several years that the introduction of primary school fees denied the opportunities of education to children from the poorest families. It now accepts that governments should go further as there is “a considerable body of evidence showing that scholarships conditional on attendance have significant impacts” especially in encouraging the attendance of girls from poor families.

The Bank also recognises the significant externalities involved with health-care especially with immunization programmes and the provision of safe water and sanitation. As a result it notes that “public provisioning makes sense in these areas”. Others have gone further noting that the global risk of diseases such as HIV/AIDS, SARS and avian flu provide convincing arguments for designating basic health services as global public goods. As a result, the funding of such services should be a global responsibility and not be subject to the vagaries of budgetary constraints within individual countries.

The World Bank also appears to have moved some way from its broad support for privatisation as this report notes “poorly designed privatizations may be captured, transferring public assets, at excessively low prices, into private hands”.

In the global arena the World Bank report recognises that “global markets are far from equitable, and the rules governing their functioning have a disproportionately negative effect on developing countries. These rules are the outcome of complex negotiating processes in which developing countries have less voice. Moreover, even if markets worked equitably, unequal endowments would limit the ability of poor countries to benefit from global opportunities”. Thus the Bank concludes the rules are in need of reform to make them equitable to the poor.

The UN is also more explicit in the need for redistribution of resources in favour of the poor arguing that:

Reducing inequality in the distribution of human development opportunities is a public policy priority in its own right: it matters for intrinsic reasons. It would also be instrumental in accelerating progress towards the MDGs. Closing the gap in child mortality between the richest and poorest 20% would cut child deaths by almost two-thirds, saving more than 6 million lives a year—and putting the world back on track for achieving the MDG target of a two thirds reduction in child death rates.

And thus the UN proposes that “Far more weight should be attached to improving the availability, accessibility and affordability of public services and to increasing poor people’s share of the growth”.

Turning to international development assistance the UN report argues that:

Aid is sometimes thought of in rich countries as a one-way act of charity. That view is misplaced. In a world of interconnected threats and opportunities aid is an investment as well as a moral imperative—an investment in shared prosperity, collective security and a common future. Failure to invest on a sufficient scale today will generate costs tomorrow.

The UN report welcomes the adoption of the Millennium Development Goals (MDGs), but notes that “there remains a large aid shortfall for financing the MDGs. That shortfall will increase from $46 billion in 2006 to $52 billion in 2010”. The UN goes on to argue that the resources are now available to achieve these goals, but that they need to be redirected:

Since 1990 increased prosperity in rich countries has done little to enhance generosity: per capita income has increased by $6,070, while per capita aid has fallen by $1. Such figures suggest that the winners from globalization have not prioritized help for the losers, even though they would gain from doing so.

The UN report also points out that:

For every $1 that rich countries spend on aid they allocate another $10 to military budgets. Just the increase in military spending since 2000, if devoted to aid instead, would be sufficient to reach the long-standing UN target of spending 0.7% of GNI on aid.

Indeed with the budget for 2006 the US will have spent $420 billion on the invasion of Iraq and the eminent economist, Joseph Stiglitz, has estimated that the eventual total costs are likely to be in excess of $2,000 billion.

Put another way, the UN notes that:

The $7 billion needed annually over the next decade to provide 2.6 billion people with access to clean water is less than Europeans spend on perfume and less than Americans spend on elective corrective surgery. This is for an investment that would save an estimated 4,000 lives each day.

Or again, the rich countries:

Now spend just over $1 billion a year on aid for agriculture in poor countries, and just under $1 billion a day subsidizing agricultural overproduction at home

The UN concludes by saying that:

The international community has an unprecedented opportunity to put in place the policies and resources that could make the next decade a genuine decade for development. Having set the bar in the Millennium Declaration, the world’s governments could set a course that will reshape globalization, give renewed hope to millions of the world’s poorest and most vulnerable people and create the conditions for shared prosperity and security. The business as usual alternative will lead towards a world tarnished by mass poverty, divided by deep inequalities and threatened by shared insecurities. In rich and poor countries alike future generations will pay a heavy price for failures of political leadership at this crossroads moment at the start of the twenty-first century.

The UN and World Bank clearly recognise that governments across the world have a major responsibility for reducing current levels of inequality both within and between countries. Can we ensure that our governments face up to the challenge of global inequity and poverty? If we do then the benefits are likely to be greater economic development for us all and a safer world for us and our children.

Links:

World Bank World Development Report 2006: Equity and Development

http://tinyurl.com/awwdr2006

United Nation’s Human Development Report 2005

http://hdr.undp.org/en/reports/global/hdr2005/

Latest issue of IJGFM now available

The latest issue of the International Journal of Governmental Financial Management was recently published and is now available for free download from: www.icgfm.org/journal.htm

In the first paper of this issue, David Hall provides the second half of his study on public finance. David notes that taxation tends to increase as a proportion of GDP as countries develop, but also that the burden of taxation has become less fair, because countries have moved towards regressive taxes such as value added tax (VAT), which hit lower incomes harder. He also argues that rather than reducing public sector spending as many European countries, for example, are now being encouraged to do, the better alternative is to develop stronger and fairer taxation systems and to continue to grow public spending to meet the challenges of the future, including climate change.

In our second paper, Michael Parry reviews and compares the financial reporting (IPSAS) and statistical standards for financial information about public sector institutions – particularly sovereign governments. He concludes that there appears to be a general acceptance that statistical reports and financial statements have different objectives and will never be fully harmonised.

In the next paper, Robert Quaye and Hugh Coombs investigate Ghana’s organised economic crime legislation strategy and the extent to which it has met international requirements in respect of anti money laundering measures. The research objective was to acquire a bottom up and comprehensive picture of Ghana’s experience of such legislation and associated regulation. The paper discovered there was general agreement amongst practitioners that, while Ghana had passed relevant legislation relatively quickly, there was concern over how the legislation worked in practice and the cultural acceptance of corrupt behaviour.

In our fourth paper, Sidhakam Bhattacharyya and Gautam Bandyopadhyay consider the background to urban local bodies in India. In particular they consider imbalances between their constitutional responsibilities, their financial resources and the impact of certain financial controls on the performance of these bodies as measured by their annual level of recurrent surplus of deficit.

In our final paper, Mohamed Moindze reviews the modernisation of internal control of public expenditure in francophone African countries. He concludes that it would be unrealistic to establish an internal control system that aims to eliminate any risk of loss. But the costs of any internal control system should be balanced with the benefits of reduced errors, fraud and corruption (this paper is in French).

We again end this issue with a section reviewing recent public financial management publications and other resources which we hope will be of interest to readers of the Journal.

Finally we have included a short questionnaire with this issue. The aim is to consider how well the Journal is meeting the needs of its readers and contributors and what further improvements may be made. We would greatly value feed-back from our readers – we look forward to hearing from you!