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!

Annual Financial Reporting by Governments - What is Good Practice in Africa?

Along with the auditor’s report, a government’s annual financial statements provide the essential financial data necessary for accountability purposes. It is the prime document enabling parliaments and citizens to hold their governments to account for their management its financial resources.

This study aims to identify and collate existing good practice in terms of annual financial reporting by governments in sub-Saharan Africa. As such, it is a bottom-up study of annual financial statements as an aid to developing international accounting standards for governments in the global south. There have been a range of studies on public financial management in sub-Saharan Africa in recent years, but few of these provide details of how governments report annually on their financial management.

The international accounting standard promoted for governments of sub-Saharan Africa is the Cash Basis IPSAS, but it is not based on existing good practice and, as a result, not a single government globally has actually been able to implement its key requirements. Similarly, in Africa at least 31 governments have tried to implement the standard, but none have actually implemented its key mandatory requirements (nearly nine years after the standard was issued). This standard is now planned to be revised and we hope that the results of this research will facilitate this process.

Draft report now available from: http://tinyurl.com/esaag2012

Africans Revolt Against New Public Management as well as for Democracy

Africans Revolt Against New Public Management as well as for Democracy

Andy Wynne

After a slow start, the US and other western powers are now expressing support for the North African revolutions and calling for an orderly transition to democracy. Their hesitation is because these revolts are against dictators who were their key allies in the region. Mubarak was the second greatest recipient of US aid in the world (after Israel) and received an estimated $30billion over the last thirty years. Ben Ali, in Tunisia, was heavily backed by France (receiving €147million, the third highest amount of official development assistance for any country in 2005) and the French foreign minister resigned after holidaying in Tunisia in December 2010 and flying there in a private jet belonging to a friend of the ousted Tunisian dictator. France last shipped tear gas grenades to Tunis just two days before the President, Ben Ali, was toppled from power. After coming in from the cold, Gaddafi was supported and armed by the UK in recent years. The British Prime Minister managed to combine a visit to the protesters in Egypt with an arms selling tour to the remaining dictators of the Gulf region.

The support to Mubarak, Ben Ali and others was in return for the political support for western policies in the region, but also for their support for the Neoliberal project of privatisation and deregulation including New Public Management style reforms of public financial management.

The governments of the Middle East and North Africa re-affirmed their support for Neoliberalism in the Marrakech Declaration on Governance and Investment of November 2009 in which they declared their, “strong commitment to private initiative to generate employment and raise living standards” and “a vibrant business environment”. The autocratic governments signing the declaration went on to claim that they:

Reaffirm our commitment to involve citizens and civil society in policy-making and to use consultation mechanisms prior to decision-making as an effective means to ensure better public services and successful policy implementation

The revolutions are a problem for globalisation and the assumption that the market must shape affairs across the planet. Ordinary people created a mass movement that finally gave them a chance to reject the political and economic policies they endured for over 30 years. The revolts raise huge questions about Egypt and Tunisia as models for economic reform. The revolutions has delivered a resounding “No” to free market neoliberal capitalism, but also to New Public Management and the associated ‘modernisation’ of public financial management. The financial crisis which provoked the global economic recession led to a questioning of the dominant economic orthodoxy. The North African revolutions provide the beginnings of an alternative to the domination of neoliberalism and New Public Management.

One of the things that make the Egyptian and Tunisian revolutions potentially important on a global scale is that they took place in states that were already neoliberalised. The complete failure of neoliberalsm to deliver "human well-being" to a large majority of Egyptians was one of the prime causes of the revolution (Abu Atris 2010).

Before the global rise of Neoliberalism, with Regan and Thatcher, President Sadat of Egypt introduced the “infitah” or “opening”. This was a commitment to dismantle the social and welfare provisions of the state and to hand the initiative to private business. Mubarak embraced this and in the 1980s and 1990s he reduced state subsidies on staple foods—government spending on bread, flour, rice, sugar and cooking oil declined by two thirds.

In 1991, the newly appointed Prime Minister, Ebeid, agreed to the International Monetary Fund/World Bank Structural Adjustment Programme in return for a $300 million stand-by loan, a $28 billion loan from the Paris Club and $15 billion in debt restructuring, and inaugurated Egypt's privatisation programme.

In 2007 the World Bank declared that Egypt was “the world’s top reformer”. Economic journalists in Cairo described Mubarak as “an IMF poster child”. The regime became a model for the IMF. States worldwide have been encouraged to follow its example. Similarly in Tunisia, Ben Ali's neoliberal restructuring won praise from the World Bank and Western governments.

Egyptians have long known who benefits from pro-business policies. Mubarak enriched himself and his family, but also protected a network of new capitalists, financiers and speculators who acquired huge wealth. According to the Egyptian commentator Abu Atris on al Jazeera:

Privatization provided windfalls for politically well-connected individuals who could purchase state-owned assets for much less than their market value, or monopolise rents from such diverse sources as tourism and foreign aid (2010).

On the other hand, inequalities increased. In 2000 the World Bank said that 16 percent of Egyptians lived on under $2 a day, just before the revolution it had reached 40 percent.

In April 2010 the Egyptian Gazette reported (Kamel 2010) that there were only 153 State-owned companies left out of 314 firms back in 1991. This led to a huge increase in unemployment as employment in the country's public-sector firms fell from one million in the 1990s to around 373,000 in 2009, according to official reports. This contributed to an official level of unemployment of around nine percent in 2010.

In Tunisia, the official jobless figure was around 14 percent, but it was much higher levels in towns such as Sidi Bouzid, where the uprising began. There were also extremely high levels of youth and graduate unemployment. It was this unemployment that sparked the revolts, but they did not come out of the blue.

In late December 2006 over 20,000 Egyptian textile workers in Mahal el-Kubra went on strike against privatisation and won. Workers drove out the hated security police during their strike. They also held massive rallies that became a symbol of freedom in a country where speaking out was considered a crime. The victory at the al-Mahala Textile Company was the first significant victory by Egyptian workers for a generation.

In Tunisia a rebellion had rocked the phosphate mining region of Gafsa in early 2008.

What is neoliberalism?

In his Brief History of Neoliberalism, the eminent social geographer David Harvey outlined "a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterised by strong private property rights, free markets, and free trade." Shivji (2009) argues it is “par excellence the ideology, nay, the propaganda of, for and by the vested interests of the status quo” (page 23).

According to Neoliberalism, guaranteeing the sanctity of markets is the limit of legitimate state functions, and state interventions should always be subordinate to markets. So New Public Management and ‘modern’ public financial management reforms are part of the Neoliberal project. Each of the currently standard reforms of public financial management aim to produce or facilitate a smaller state and the introduction of private sector type approaches to the management of the public sector.

The emphasis on balanced budgets, reduced deficits and low government debt all reduce the reach and size of government. If government borrowing is reduced then the resources available for the state are lessened. Pressure is increased as the abolition of capital controls has increased the ease with which money can be exported and the banks have been give a greater say in the rates of interests which governments are forced to pay for their loans.

The emphasis on efficiency, performance and value for money also aims to reduce the size of the state. There is supposed to be a balance between inputs and outputs in maximizing efficiency. But it is economy, or reduced spending, which is dominant and is clearly the major aim. So, for example, the UK National Audit Office claims to save eight pounds for each pound it spends, whilst the US GAO says it saves $95 for each $1 of its budget.

Programme budgeting and the Medium Term Expenditure Frameworks (MTEF) facilitate this process by eliminating expenditure which is not directly related to the government’s core objectives. They also assist governments in ensuring that their future plans are sustainable, thus providing a further brake on the growth on government spending.

The objective of governments to reduce poverty through redistribution is side lined. Poverty reduction is expected to be achieved through economic growth. So progressive taxation like import duties, income taxes and property taxes are reduced whilst regressive taxes like Value Added Tax (VAT) are promoted.

In this brave new world, subsidies on basic commodities are reduced and so we see the huge boom in global food prices and the associated rise in hunger. Public services can no longer be provided free, to guarantee access to the poor, but cost sharing has become the norm.

Decentralisation helps to reduce the size and power of the central state and so its ability to try and plan for the future.

Integrated Financial Management Information Systems (IFMIS) and accrual accounting are private sector tools and approaches which are touted as being part of the process of transformation and modernisation of the public sector.

Similarly the rise of ‘civil society organisations’ are promoted as an alternative to provision of services by the central state. However, trade unions, often the largest CSOs after religious institutions, are usually ignored. There potential power was again emphasised with their central role in the overthrow of Ben Ali and then Mubarak.

A recent World Bank review of public financial management reforms across North Africa and the middle east (World Bank 2010) concluded that, “Egypt’s experience during the past decade clearly illustrates that successful implementation of PFM reform is much more than a technical exercise. With the support of donors, and under the leadership of the Ministry of Finance, Egypt has tackled many of the crucial dimensions of PFM.” (page 14). This report also noted that, “it is encouraging that public financial management (PFM) reform and modernization has occupied a prominent place on Egypt’s policy agenda over the past decade. The reforms have covered a range of areas, including revenue administration, financial information systems, cash management, financial decentralization and internal financial control.” (page 12).

The World Bank report (2010) noted that support for Egypt’s public financial management reforms was provided by a range of multilateral and bilateral sources. These included the United States, Netherlands, European Commission, International Monetary Fund and the World Bank. The largest donor by far was the United States, which has invested heavily in improving PFM. Among the reforms supported by the United States Agency for International Development (U.S.AID) have been tax policy and administrative reform, financial management information systems, introduction of the Treasury Single Account, budget reform and organizational development of the Ministry of Finance.

The same World Bank report (2010) also provided praise for the public financial management reforms in Tunisia. Which it claimed showed, “solid performance on [World Bank Institute] governance rankings and is well ahead of the rest of the region in terms of government effectiveness, control of corruption, rule of law and regulatory quality (page 67). The report went on to praise the political support at the highest level for the public financial management reform programme, noting:

The 2004 Presidential electoral program proposed PFM reforms, such as performance based budgeting, which were then integrated in the XIth Development Plan (2007-2011). The 2009 presidential program added the accounting and public administration reforms (e-governance and public service quality) (page 67).

These reforms included decentralization of powers to the 24 governorates who were responsible for “an increasing amount of public expenditures” (page 68). They also include the introduction of MTEFs, at least on a pilot basis:

Initially, three ministries and a division of the Ministry of Education have been selected as pilots for the MTEF and performance budgeting initiative. The 2008 agreement with the EC provides for three additional pilot ministries in 2010. The whole Ministry of Education has been made pilot in late 2009, at the request of its minister and staff. The [World] Bank and the EC will provide technical assistance in these pilots. (page 75)

An OECD study (2010) of public management reforms in the Middle East and North Africa noted the following standard public financial management reforms as common features across the region:

i) “modernising audit and control functions to reinforce ex post performance audits; and

ii) granting managers more spending autonomy in exchange for firm obligations to deliver measured outputs and eventually outcomes.” (page 98)

What should we support?

In February 2010 independent trade unionists in Egypt outlined “a workers’ programme” which included the following eight demands:

1. Raising the national minimum wage and pension

2. The freedom to organise independent trade unions

3. Job security and protection from dismissal

4. Renationalisation of all privatised enterprises

5. Complete removal of corrupt managers

6. The right of Egyptian workers to strike

7. Decent health care for all workers

8. Dissolution of the Egyptian Trade Union Federation.

Similarly, in mid-February the giant factory, Misr Filature et Tissage was on strike. The workers were demanding the sacking the chief executive of the factory, Fouad Hassan, who they accused of corruption. They were also demanding an increase in their salaries and benefits and improvements in their working conditions (Le Monde Diplomatique, March 2011, page 13).

These recent developments reflect the concepts of popular livelihoods, popular participation and popular power, developed by Prof Issa Shivji of the University of Dar es Salaam in the late 1990s, as the three cornerstones of a new consensus. Shivji uses the term popular to mean being anti-imperialist, based on the mass of the poor people in the towns and rural areas and to be based on customs and cultures developed in a “living terrain of struggles” (2009, page 14).

Popular livelihoods are necessary to address the poverty of millions who cannot be expected to make further sacrifices when the corrupt elite prosper whilst “their children’s lives are reduced to sub-human existence” (page 15). So the workers of Egypt are correct to demand pay increases for themselves and increases in the minimum wage.

Popular participation describes the extension of politics to include the “issue of control and distribution of resources and differences in society” (page 15). So, for example, the demands of the Egyptian workers for the dismissal of corrupt managers and the renationalisation of all privatised enterprises are justified.

Finally popular power draws attention to political legitimacy and the institutional organisation of state power. We have to develop a new consensus which does not restrict politics to the casting of votes every five years and allows the majority of people greater control over their lives. The Egyptian workers are correct to demand greater job security, an end to temporary contracts and the right to form independent trade unions and the right to strike.

Shivji (2009) has also questioned the legitimacy of the current governance agenda of the IMF, World Bank and other donors. He points out the hypocrisy of these institutions which in the past provided despotic colonial regimes, organised the overthrow, and in some cases the assassination, of radical nationalist leaders such as Kwame Nkrumah of Ghana, Patrice Lumumba of what is now the Democratic Republic of the Congo and Thomas Sankara of Burkina Faso. They also supported such corrupt and autocratic dictators as Mobutu in the Democratic Republic of the Congo and, until a couple of months ago, Mubarak of Egypt and Ben Ali of Tunisia. As a result,

economic and political conditionalities, including those on good governance, are an expression of the reassertion of imperial domination, however it may be labeled. (page 26)

In terms of public financial management these principals mean that poverty reduction will only be successful if it includes the redistribution of wealth, income and power and so states should have this as one of their main objectives. As Roy Radner once put it, “When you allocate resources by market prices, you discriminate against poor people.” This is because in the market price you have one vote for each dollar that you posses. In a democracy each person has one vote. Progressive taxation of wealth and income should be used to increase state incomes to fund quality public services which are accessible to the poor (and so have to be provided at no direct cost to the recipients).

Public financial management reforms should be firmly based on existing good practice and should be resolutely controlled by local people (not the sham of country led development which means reforms have to be consistent with the currently dominant international agenda). Government’s should not longer be required or encouraged to waste untold millions on repeated white elephants of MTEFs or IFMISs, but should incrementally improve their financial systems based on approaches which have been clearly demonstrated to work in similar environments (a key advantage of countries in the Global South should be that they do not repeat the mistakes of industrial countries). As a recent report by regional public financial management officials in Africa said: “it is difficult to determine whether governments themselves would have embarked on various budget reform approaches, such as Medium Term Expenditure Frameworks (MTEFs), programme budgeting or the introduction of Integrated Financial Management Systems (IFMSs) in the absence of donor pressure to do so” (CABRI 2010, page 28).

Transparency should mean accessible and understandable by the poor majority of people, not the complexity of accrual accounting or programme budgeting. Key revenue streams should be published including taxation income provided by the larger taxpayers and natural resource rents received by the government. Expenditure reports should include the resources made available to local public services units, for example, schools and health facilities, as well as the salaries and other benefits provided to higher paid public officials and the ubiquitous consultants.

Central states need to be strengthened and enabled to undertake effective regulation of the private sector. Far from requiring decentralisation, many states in the Global South need to come together so that they are able to collectively regulate and tax the multi-national corporations that operate in their jurisdictions. Rather than an endless game of beggar thy neighbour to attract foreign direct investment, states in the global south should co-operate to increase the rate of taxation of the international companies.

References

Abu Atris (2011) A revolution against neoliberalism? Egyptian commentator on Al Jazeera, 24 Februrary

http://english.aljazeera.net/indepth/opinion/2011/02/201122414315249621.html

CABRI (2010) Good Financial Governance in Africa: The Status Report
www.cabri-sbo.org/en/e-networking/blog/11-general/145-gfgblog2

Kamel, Ahmed (2010) Looted public assets, Egyptian Gazette, Tuesday, April 20

http://213.158.162.45/~egyptian/index.php?action=news&id=6782&title=Looted%20public%20assets

Marrakech Declaration on Governance and Investment

Adopted in the context of the Ministerial Conference held in Marrakech, Kingdom of Morocco, on 23 November 2009

www.innovazionepa.gov.it/media/533141/ministerialdeclarationang.pdf

World Bank (2010) Public Financial Management Reform in the Middle East and North Africa: An Overview of Regional Experience, Part II: Individual Country Cases, Washington: World Bank

http://go.worldbank.org/715WJLXHF0

Egyptian independent trade unionists’ declaration, Cairo, 19 February 2011
http://righttowork.org.uk/2011/02/egyptian-independent-trade-unionists’-declaration-cairo-19-february-2011/

OECD (2010) Progress in Public Management in the Middle East and North Africa – case studies on policy reform, Paris: OECD

http://browse.oecdbookshop.org/oecd/pdfs/browseit/4210071E.PDF

Shivji, Issa (2009) Where is Uhuru? – reflections on the struggle for democracy in Africa, Cape Town: Fahamu Books

Good Governance or the Struggle for Democracy in Africa

In the week after Hosni Mubarak was overthrown after 30 years as president of Egypt we should perhaps reconsider the role of the ‘development partners’ in bringing good governance to Africa.

For thirty years Mubarak was heavily supported by the US and other industrial countries receiving an estimated 30 billion dollars in aid. In return it is estimated that Mubarak stole 70 billion dollars and the people of Egypt suffered a state of emergency, repression and the lack of even the most basic human rights.

In contrast, the people of Egypt eventually rose up and after 18 magnificent days Mubarak eventually gave in.

So who are the best guardians of good governance in Africa? The donor community or the people themselves?

Eight years ago Issa G Shivji, then professor of law at the University of Dar es Salaam considered these issues in his brief paper, “The Struggle for Democracy” (see the previous post). He mapped out the history of good governance: the struggle against colonialism, the cold war and the Structural Adjustment Programmes (SAPs). He argues that democracy is “the struggle of the African people to reclaim their humanity and dignity and the right to think for themselves and to chart their destiny”, much as happened in Egypt immediately before Mubarak left power. That democracy has three critical elements, popular livelihoods, popular power and popular participation. This rather than the ‘good governance’ agenda of the development partners is what we have seen flowering in Egypt over the last few weeks.