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.