Chapter

Comments

Editor(s):
Laura Wallace
Published Date:
January 1999
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Gray Mgonja

There are two underlying issues raised in Luca Barbone’s paper. The first is that given resource constraints, governments have to prioritize public expenditures. The second is that there has to be a framework that ensures that resources indeed are made available to the priority areas in the most efficient manner and that the intended impact can actually be assessed.

We start with the premise that the resource envelope available to governments is small. Yet governments of sub-Saharan Africa have a daunting role to play to improve the quality of life of their people—in other words, to reduce poverty. Because public resources are limited, Barbone says rightly that donors, business, and most governments hold the view that market development is the key to poverty reduction. But conditions for market development in Africa are not fully in place, and thus governments have to provide resources to create the enabling conditions, which include infrastructure in the form of transportation systems, communication, energy, regulation, and human resources. Moreover, in the short run, market development is not expected to deliver the basic social services. And even if it could, social service delivery alone may not be sufficient to create the conditions for economic growth.

There is a consensus that economic growth and stability are critical for poverty eradication—indeed, they are perhaps the most important prerequisite for development. We know that without growth, the government’s capacity to spend cannot increase. Yet to achieve growth, there needs to be long-run investment in both economic and social infrastructure. Thus, the question is how to mobilize resources and deploy them in the most effective manner to produce the desired results.

One important way is to establish and maintain macroeconomic stability. In Africa, this means fiscal discipline, which means austerity, which means cutting expenditures, which in turn means less expenditure to the very sectors that require government financing. The debt burden also takes away a sizable amount of government resources, dampening the government’s capacity to create the environment for growth.

In Tanzania, for instance, on a per capita basis, the government is spending nine times as much on debt service as on basic health, and four times as much on debt service as on primary education.1 What is the overall trend on social service outlays? If you compare the 1990s and the early 1980s, expenditure on social services has declined. But if you look at the period 1994–98, outlays on social services have increased. In fact, expenditure on health has risen substantially. Even so, it is not enough. The share of expenditure going to social services is still low compared with the share going to other sectors.

So we have a vicious cycle here. But, of course, life must go on in the manner proposed in Luca Barbone’s paper, which is the adoption of a medium-term expenditure framework. This will enable governments to identify and articulate priorities for public expenditure, within the constraints of resource availability. And on this point, I would like to make a comment on Barbone’s introductory remarks where he said that budgets do not really mean much because they are not related to what actually happens in terms of allocation. I think one point that must be borne in mind is that budgets will be disrupted if there is a shortfall in projected resources, as budgets are made on the basis of projected resources. So whenever resources—both domestic revenue as well as donor or loan disbursements—fall short of target, the budget is disrupted, meaning that expenditure plans are disrupted.

Another important way to mobilize resources and ensure they are used effectively is, as Barbone points out, to move to the program approach as opposed to the project approach. Here, donors are agreeing to adjust their interventions toward a more coordinated approach than has been the case. We also need greater ownership by the recipient governments—of course, with proper accountability. This means that the formulation and articulation of priorities in the context of a medium-term expenditure framework has to be the responsibility of African governments. This will be a departure from the past, where public expenditure reviews were influenced by the wishes of external parties whose terms of reference were prepared in Washington. Missions were undertaken, and volumes of reports were written, only to find their way to shelves as the host governments did not have the incentive to care about the contents and their usefulness.

In Tanzania, until recently, many senior government officials were not truly aware of what public expenditure reviews meant. They considered them to be the property of the World Bank. This phenomenon has changed, however, with the preparation of the current medium-term expenditure framework. The request for such a framework originated with the government. It asked the World Bank to assist in developing a budget guidelines paper, focusing on the priority sectors that the government had already designated—education, health, roads, water, and energy.

Two drafts have been produced, and donors have been asked to provide comments, including information on donor resource flows, both in the recent past and commitments for the next three years. This is rather interesting because we do not even have complete information on bilateral donor flows into Tanzania, including technical assistance. Why? Because of the problem of the project approach. The project approach is such that certain resources are disbursed, but information is not provided to the government.

A promising step is that discussion of the framework will be organized soon with all the stakeholders—including donors. We hope this goes a long way toward addressing public expenditure issues and, of course, takes on board the proposals contained in Barbone’s paper.

Emmanuel Tumusiime Mutebile

Luca Barbone’s paper raises a number of pertinent issues. I would like to comment on two of these in particular: the role of donors in enhancing sustainability in public service provision and capacity building in the public services, and how to improve the planning and monitoring of public service provision.

A Role for Government

Barbone begins by reiterating the need for a substantial role for government in providing basic services. I would add that because levels of basic service provision are so low in much of Africa, the potential returns to public expenditures should be very high, provided that these expenditures are well targeted and efficiently implemented. Moreover, as Barbone notes, Africa suffers from a crisis of state capabilities. The human consequences of allowing the state to deteriorate to the point of collapse—when even basic security for people and property can no longer be ensured—are catastrophic, as has been seen in several countries on the continent including Uganda over the 1971–86 period. Preventing this collapse should be a priority.

The collapse of the state of Uganda led to an economic collapse that shifted the composition of economic activities, as measured by changes in the structure of GDP.2 There was a shift away from activities that were vulnerable to war, such as manufacturing, to activities that were less vulnerable, such as nonmonetary agriculture. This happened because a breakdown of the state leads to insecurity, which changes the economic relationships within the private sector. This happens in three ways.

Enhanced incentives for opportunism. Insecurity makes more visible any mobile assets that are more likely to be stolen or expropriated. Insecurity also affects the incentives faced by individuals in their personal conduct. It does this by drastically shortening people’s time horizons, which has a direct impact on the incentives for honest—as opposed to dishonest or opportunistic—behavior. When people are expected to behave in an honest fashion, then it usually pays to conform since dishonest behavior is obvious to the rest of society and is straightforward to sanction.

Breakdown of social capital. The shortening of time horizons also affects those institutions that can be thought of as mechanisms for guaranteeing long-term commitments. Insecurity affects the incentives faced by individuals who constitute or operate institutions such as the legal system or the accounting profession. A perceived shrinking of prospects of promotion or the chances of continued job security leads to increased rent-seeking behavior and erodes the reputation of the institutions where they work. Specific individual past behavior is inferred from what is normal in society. The elimination of the presumption of trust (which is a collective public good) and other publicly provided mechanisms that initiate against dishonest behavior—such as the legal system, prompt enforcement of contracts, credible audit, and standardized weights and measures—make the detection and sanction of dishonest behavior harder. It then becomes easier to survive by being dishonest because honesty does not pay.

Increased transaction costs. This happens because transactions between individuals can no longer rely on any presumption of trust, and because the institutions for contract enforcement have broken down. The increase in transactions costs leads to a sharp decline in the transaction demand for money and a demonetization of the economy.

Capacity Building and Institutional Development

So where do donors fit in? Barbone bluntly admits that foreign aid has done little to build sustainable capacity to deliver public services in the recipient countries, but he does not answer the question of why this is so. One reason is that much of the technical assistance provided by donors is focused on individuals, or on individual projects, and not on building public institutions. For example, a large amount of donor resources are spent on providing academic and vocational courses, workshops, and the like for public servants, often abroad. But in many cases, the content of this training has only a tenuous connection to the actual duties of the public servants, and when it is relevant, its value to the public service is often lost when the individual leaves public service in search of better remuneration elsewhere.

Paradoxically, the brightest and best-trained public servants, who will have gained the most from donor-funded capacity building exercises, are among those most likely to leave public service. Their skills are highly marketable and sought after—not least by donors, international organizations, and nongovernmental organizations, who pay salaries that the public service cannot compete with. The resultant brain drain is a major impediment to enhancing efficiency in public institutions, and will be halted only by improving the salary structure and providing better career prospects.

Barbone recognizes that capacity building requires institution building. In this context, I would like to note one point of particular relevance to the World Bank. The type of detailed conditionality for structural adjustment loans increasingly imposed by the World Bank and the IMF can be counterproductive to long-term institution building. A key aspect of institution building is creating institutions that can take and implement public policy decisions serving the wider public interest—despite the opposition of vested interests, especially those with strong political influence. This is not just a question of the technical capacity of these institutions but of their relationship with the political process and the wider society. Forcing the authorities to take politically difficult decisions through conditionalities may have short-term economic benefits. But because it removes the responsibility for taking these decisions, it may impede long-term institutional development.

A key aspect of institution building relates to personnel policies and management. The weaknesses in these areas are another reason why the resources devoted to capacity building have had limited benefits. Better management training and systems of personnel management—along with greater attention to evaluating candidates’ personal management skills—are needed if the public service is to be made more efficient.

Efficiency can also be enhanced by introducing private-sector types of incentives and management strategies—for example by creating autonomous agencies to deliver services with performance-based pay for their staff, or by contracting services out to the private sector. This will help promote an essential change in the management culture of the public service, which needs to put greater emphasis on performance and efficiency, rather than on maintaining existing programs and their associated budgetary allocations.

Planning, Monitoring, and Accountability

Barbone offers two solutions to the problem of developing efficient and effective public services: the medium-term expenditure framework and monitoring.

Medium-Term Expenditure Framework

The introduction of MTEFs in a number of countries—including Uganda—supported by the World Bank and donors, has been motivated by the desire to improve long-term expenditure planning, consistent with available resources, developmental and political objectives, and management capacities. The MTEF sets out the budget strategy and strategic choices, and prioritizes expenditures across all sectors, within a resource envelope determined by the macroeconomic framework. The MTEF process enables line ministries to participate more actively in budgetary planning and, given the hard budget constraint, forces them to focus more clearly on key goals and priorities and thus, vital expenditure allocations within their own particular sectors.

The shortcoming of MTEFs in many countries is that they include only recurrent and domestically funded capital expenditures—excluding donor-funded projects, which in most African countries comprise the largest share of the development budget. As a result, the development budget is often a collection of individual projects, which do not necessarily form a coherent investment program or reflect the overall sectoral priorities of the government. Sectoral investment plans have gone some way in addressing this problem, at least with regard to intrasectoral investment allocations. But the optimal solution would be to integrate all development projects into the MTEF, with donors financing a share of the overall development budget rather than individual projects.

The efficacy of the MTEF to deliver improved expenditure quality depends on the medium-term stability of the macroeconomic environment and available resources. Shortfalls in revenue that force unanticipated cutbacks in budgetary allocations can severely reduce efficiency in service provision, as cutbacks are often concentrated on the procurement of goods—meaning that public servants have insufficient materials with which to do their work. This underscores the need either to reduce the economy’s vulnerability to exogenous shocks by diversifying sources of government revenue, or to impose fiscal adjustment to get a better balance between revenues and expenditures.

Ever since Uganda started on economic reforms back in 1987, the government has recognized that budget discipline is a nonnegotiable issue. In a country like Uganda, where the monetary sector is shallow and instruments of monetary policy are lacking, aggregate fiscal policy is the key instrument for delivering macroeconomic stability. Much of Uganda’s success with pursuing a wide-ranging and ambitious reform program can be attributed to its commitment and success in maintaining overall macroeconomic stability since 1992/93. For the last five years, the average annual rate of inflation has been in single digits, compared with triple digits before the reform program began.

While overall fiscal control may be the necessary starting point, the composition and quality of expenditures are also critical if the budget is to succeed in delivering necessary services in a cost-effective way. In a country such as Uganda, with low tax revenues as a proportion of GDP, achieving the most appropriate composition and the best quality of what expenditures can be afforded is vital. When money is short, achieving allocative and technical efficiencies are all the more important. In this connection, in recent years Uganda has focused on two areas:

  • creating an enabling environment to facilitate the needed increases in private investment for sustainable broad-based growth—including macroeconomic stability, reductions in the cost of doing business in the private sector, and complementing markets rather than displacing them; and
  • focusing budget resources on areas critical for poverty reduction—such as primary education, primary health care, and infrastructure—where market failures impede the optimal participation of the private sector and where equity considerations apply.

One indicator of the evolution in expenditure policies is Uganda’s Public Investment Plan for capital expenditures. Over a four-year period, from 1995/96 to 1998/99, it shows the government withdrawing from areas well suited to the private sector—with budgetary allocations to agriculture dropping from 12 percent to 5 percent—and an elimination of all budgetary allocations to manufacturing. Over the same four-year period, the Public Investment Plan shows government commitments to investments in transportation and communications rising to 42 percent from 17 percent of total public expenditure.

Monitoring

There is undoubtedly a need to put more emphasis on targeting the performance of public services rather than simply controlling inputs. But Barbone’s proposals for monitoring performance may not be feasible as many governments lack the capacity to make detailed assessments of the effectiveness of expenditures. The manpower resources needed for this type of monitoring are considerable. The problem is compounded by poor data. Indeed, the data needed to evaluate project or program outcomes—for example farmers’ earnings in an agricultural extension project—will not be available in many cases.

Certainly, greater accountability would help improve performance. This can be done by making the public expenditure process more transparent, thereby involving the public as a complement to the government’s own monitoring efforts. In Uganda, there have been sharp increases in budget allocations channeled through districts—for sectors such as primary education, primary health, and feeder roads—as part of a decentralization process. Budget transfers to each district are announced by advertisements in the press, while the districts are required to publicly display the amounts received and transferred to individual schools, and the schools are also required to display the amounts received. As a result, all stakeholders, from members of parliament to parents, know what transfers are taking place and, therefore, can demand accountability.

Sectoral Composition of Public Spending

Another issue that is central to the quality and composition of public spending is what happens at the sectoral level. It is now widely accepted that the composition of public expenditures has a major impact on both the efficiency of public expenditures, in terms of social rates of return, and on their distributional effects.

Thus, there are two basic rules that should govern expenditure choices:

  • Public expenditures should be focused on supplying goods and services that, because of market failures, the private sector will not supply in an optimal manner, such as pure public goods or goods subject to positive externalities. This mainly involves inter-sectoral choices.
  • Within this category of goods, the government should focus expenditures on items that are most cost-effective. Often this involves intrasectoral allocations, such as between primary and curative health care. But even within the same sector, different types of interventions can vary widely in terms of cost-effectiveness. This means that estimating the cost-effectiveness of different interventions—even if these are of necessity only tentative estimates—and using these estimates to guide intrasectoral allocations, could have a large impact on the cost-effectiveness of overall sectoral spending programs.

Recent budgetary reforms in Uganda have focused on reallocating expenditures to raise social rates of return and reduce poverty. Uganda accords a high priority to providing universal primary education, with overall expenditures (both capital and recurrent) having doubled in real terms in the last three years. Primary education expenditures have high social rates of return and a strong, positive, long-term impact on equity and poverty alleviation. The Organization for Economic Cooperation and Development estimates that the social rates of return to primary education in Africa is 24 percent. Primary health care, such as mass immunization programs, has similar benefits.

Although there is a strong consensus that primary education and health care should be a priority in budgetary allocations, there are other areas where choices are less clear-cut, such as infrastructural provision and support for agriculture. More work is needed to determine which expenditures within these sectors are most cost-effective, and where the private sector should be encouraged to play a greater role.

Governments also need to be aware of the potential tradeoff between rates of return to spending and the impact on poverty. The incidence of poverty tends to be highest in the rural areas where farmland is marginal, hence agricultural productivity is very low and production is vulnerable to drought. But because farmland is marginal and population densities probably lower than elsewhere, rates of return to spending in these areas may not be as high as areas with greater agricultural potential. Nevertheless, expenditures in marginal areas may be justified because the impact on poverty reduction—especially the reduction of acute poverty—may be strongest in these areas.

Takuma Hatano

I would like to make some comments on the role of the government in the building up of infrastructure.

In 1997, the Export-Import Bank of Japan conducted a survey, in close collaboration with the World Bank, on private infrastructure investment. We found that the overall investment in developing countries for infrastructure buildup was around $250 billion, with private investors accounting for about 10–15 percent of the investment. We also know that the share of the private sector is increasing. And for countries like Chile, Pakistan, or the Philippines—and in Africa, for Côte d’Ivoire—private infrastructure investment is emerging as a growing area for project financing.

Let me take the case of Pakistan as an example. Pakistan embarked on its first independent power project roughly eight years ago, with the World Bank and Japan’s Export-Import Bank providing a partial political risk guarantee. Eight years ago, the maximum term of a commercial loan to Pakistan was five years; in other words, long-term commercial financing was not available. But under this scheme, commercial loans with a maturity of 15 years were syndicated, and the bids were actually oversubscribed.

The point here is that investing in infrastructure is basically attractive to private investors, provided that economies are stable and regulatory frameworks are reliable. So how can governments help attract private investment? I would like to explore three ways.

First, in the developing world, 80 percent of investment still rests in the hands of the government or public sector. This means that the efficiency of those investments is vital—in particular, the government’s subsidy must be minimized or streamlined as an initial step. According to the World Bank, actual subsidies in this area are sufficient to finance all the necessary amount of new investment without any additional government borrowing. Also vital is the optimal combination of private investment and public investment. Take Indonesia, for example. We are now working on a big independent power project there—Paiton II, a coal-fired power generation project—which will be completed in 1999. But the construction of a transmission line, which the government is handling, has been delayed. Of course, this may reduce the rate of return for investors in the power project.

Second, the role of government is fundamental when it comes to planning capacity and a reliable regulatory framework. To facilitate private investment in infrastructure, we have found that the role of the government should be to change from project owner or manager to project planner and regulator. But planning capacity is very scarce, not only for developing countries but also for some industrialized countries. In Japan, for example, because of the lack of planning capacity, the private sector’s share of infrastructure investment is still very low, even less than that of Côte d’Ivoire and France. By contrast, in Indonesia, the planned capacity of independent power projects now well exceeds future demands for power.

The pricing policy is also vital. In India, the authority to issue power licenses rests in the hands of the local government, and the local government heavily subsidizes the tariff to the farmers. With many local governments running a deficit, however, investors consider this situation unsustainable. Of course, India is such a big country that there is much private investment in the manufacturing sector, but it is striking that there has been no sizeable private investment in infrastructure. In other words, private sector investment in infrastructure is a different story.

The third area is the importance of macroeconomic stability—a lesson from the recent Asian financial crisis. To begin with, a country needs foreign exchange stability. The way independent power projects are set up, the entire foreign exchange cost is passed through to the wholesale price, which the national power company must pay investors and lenders. Thus, if a currency is devalued, the gap between the wholesale price and retail price, which is the basis of revenue for the national power company, becomes negative or enlarged.

Let us look at what happened in Indonesia in 1998. At an exchange rate of 6,000 rupiahs per dollar, the wholesale price of power under an independent power project was around five to eight cents per kilowatt. But the post-devaluation retail price, in dollar terms, was only two cents per kilowatt. The solution for this negative price gap would have been to raise the retail price, but this was politically impossible to do as a quick adjustment. As a result, the national power company, Perusahaan Listrik Negara, fell into serious financial difficulties. In fact, after the company’s president told parliament that it was nearly insolvent, one of the European banks announced that Perusahaan Listrik Negara was in default. This is the kind of lesson we should learn from the Asian crisis.

Fiscal soundness, of course, is also important. Under the independent power project arrangement, the government generally undertakes or is expected to undertake responsibility for the obligations of the national power companies. But this is an off-budget obligation, a contingency liability for the government. Let me give two examples.

In the Philippines, the foreign debt of the National Power Corporation amounts to about $5 billion, which constitutes 20–25 percent of the nation’s total foreign debt. Because most of the National Power Corporation’s debt is, in fact, guaranteed by the government, and the utility strictly produces a local product—that is, no exports—if the currency is devalued, the utility’s financial burden suddenly increases.

In Indonesia—unlike in the Philippines—the government does not provide a legal guarantee, but it does undertake to provide support for the national power company. We lenders call it the comfort letter for the obligation of the power company. But if several large independent power projetcs are completed in the near future, it is quite likely to be difficult for the national power company to honor paying the wholesale tariff to investors. If this happens, the magnitude of this public debt would be far from negligible, as these obligations constitute almost 10 percent of the government’s annual budget.

In conclusion, the answer to the question I raised at the beginning of how governments can help attract private investment—is in three ways. They can do this by ensuring that public investment is efficient, providing a sound regulatory framework, and pursuing sound macroeconomic policies. In other words, governments stand to play a decisive role in private infrastructure investment.

Jan Willem Gunning

It is a pleasure to comment on Luca Barbone’s excellent paper. It is a thoughtful contribution on a very important topic and I very much agree with most of his points. In this comment, I would like to focus on three issues: the effectiveness of donor monitoring of public expenditures; the reasons for poor provision of public services; and the issue of ownership.

Donor Monitoring of Public Expenditures

That donors are concerned about the level and the composition of public expenditures is unsurprising. What is surprising is that in Africa this legitimate concern has led to attempts by donors to monitor public expenditure in minute detail. Even in countries where government policies enjoy broad donor support, donors seem obsessed with the details of government spending. The representative of a major donor in Uganda once remarked to me that it would have been highly desirable to place a “spy” in the ministry of finance; this would enable the donor to get more detailed information on public expenditure.

I have three objections to this donor obsession with fiscal monitoring.

  • Monitoring is, of course, intrusive and the use of spying terminology is very revealing. Detailed monitoring unnecessarity adds to the strain of the relationship between donors and governments.
  • It may well be misguided. The donor may be deluding himself when he thinks that the expenditure accounts measure what they purport to measure. A recent World Bank study that tracked public expenditure in Uganda found that less than 40 percent of nonsalary education expenditures actually reached the schools.3 Hence a study of the data in the ministry of finance in Kampala would give a very misleading impression of public expenditure on schooling.
  • As Barbone rightly stresses, the focus on measuring the costs of inputs is misplaced. The current system of monitoring, at best, establishes how much is spent on schools, not what is achieved with that money. Current monitoring is heavily biased in favor of measuring project implementation rather than project results. The preoccupation with inputs rather than outputs reflects a worrying disregard for efficiency. The 20/20 Initiative of the Copenhagen Summit is a good example where the emphasis is not on results but on ensuring that recipient governments devote at least 20 percent of their expenditure to health, education, and other social sectors.

Barbone departs from this method. He advocates the monitoring of outputs rather than the inputs of a project. This is a welcome step towards performance-based lending.4 What I am somewhat skeptical about is when he seems to suggest that measuring outputs is not only necessary but also sufficient, so that public service provision will be satisfactory provided that outputs are monitored. This is like saying a patient’s fever would go away if only his temperature were taken often enough.

Public Service Provision

There is now substantial literature on public service provision in Africa.5 A key lesson from this literature is that while public service provision is extremely poor by almost any indicator, this cannot be attributed to insufficient spending. Potentially productive government expenditure (excluding defense spending and interest payments) is actually higher in Africa (as a share of GDP) than elsewhere.6

The literature suggests a number of reasons for poor public service provision. One is that in many African countries the state was captured by narrowly based, urban elites who used the public sector to create jobs for the rapidly growing group of urban, educated workers. With the objective of job creation paramount, wage levels were reduced and nonwage expenditure was squeezed—resulting in low productivity levels. In addition, public service delivery became heavily biased in favor of the urban elites. For example, while outside of Africa the amount spent per university student is 3 to 14 times as high as the amount spent on a primary school pupil, in Africa the ratio is 44.7

Another reason for poor public services is that where civil liberties were constrained, the power of popular protest was undermined, and thus low returns on public projects went unchallenged.8 If such explanations are right, the monitoring that Barbone advocates will find the symptoms of the disease but it will not address the fundamental problem.

Ownership and an Appropriate Role for Donors

Lack of ownership has become a very serious issue in Africa. This was a major theme in our external evaluation of the IMF’s concessional loan facility, the ESAF,9 and is also stressed in Barbone’s paper. He usefully distinguishes three levels of government activity. For the second level, that of political choices, he says that donors should be “honest brokers between political players to maintain the MTEF agreement.” Here I strongly disagree. However well intentioned donors may be, I cannot see how they can play a role as brokers between political players without fundamentally undermining ownership. It is not right for donors to enter the political discussion on a medium-term expenditure framework.

At a more technical level, I welcome the switch from evaluating projects to a broad assessment of the government’s fiscal stance. But here, in my view, Barbone does not go far enough. His broad assessment still involves quite detailed monitoring of “the number of graduates from a technical school” or “the number of methods learned by farmers.” This would still leave thousands of indicators to be monitored by donors—which seems difficult to reconcile with ownership. The sort of performance-based lending that I and others have advocated would limit the donor’s assessment to a few key variables (e.g., aggregate growth and investment, poverty, and literacy). Donors would stand ready to offer advice, but they would let governments decide how to achieve such broad targets.

Sanjeev Gupta10

This session raises a number of important questions about how the government can strengthen its role in improving the formation of human capital and physical infrastructure; how to strengthen the links between government spending and the delivery of public services, especially to target groups; and how to measure progress in this area.

While Luca Barbone’s paper stresses the links between government spending and the delivery of services, and the importance of monitoring project implementation, it only briefly notes the need to improve public expenditure composition in African countries. I will, therefore, dwell on this issue in some detail, complementing Barbone’s presentation on the microeconomic aspects of project implementation, management, and monitoring. The reason for this focus is that IMF-supported adjustment programs are not only concerned with the level of government spending, but also the quality and composition of this expenditure.11

In terms of the budgetary framework laid out in Barbone’s paper, the IMF is thus concerned not only with budgetary discipline (level 1) but also the effectiveness of expenditure (level 3).

While the IMF respects member governments’ political choices concerning the allocation of budgetary resources (level 2), we also recognize that how these resources are allocated has many vital economic implications for external adjustment and growth—areas in which we collaborate closely with member governments.

Formation of Human and Physical Capital

In Africa, as Barbone notes, human development and the formation of human capital is still lagging behind other regions of the world, and there is a continuing need for governments to finance social services. One way that African governments could further accelerate the formation of human and physical capital is through allocating a higher share of budgetary resources for education, health, and capital formation. The question is whether such a change in the composition of expenditures is taking place in Africa.

A review of spending patterns for 22 African countries supported by the IMF’s concessional ESAF during 1985–95 shows that these countries have made distinct progress in improving the composition of spending, although by somewhat less than inititally envisaged (see Table 1). These countries were able to boost capital spending as a share of GDP, in part reflecting better project implementation capacity.12 But current spending declined as a share of GDP, in part due to lower spending on wages, salaries, subsidies and transfers. Does this shift from current to capital outlays bode well for Africa’s long-term growth potential? That is difficult to determine, as information on the quality of this additional public investment is not readily available.

Table 1.Performance in Sub-Saharan African Countries Supported by ESAF Program(Averages of countries in sample, in percent of GDP; data for CFA franc zone countries given in parentheses)
Preprogram

Year
Latest

Year
Latest Year

Minus

Preprogram

Year
Actual

Result

Minus

Target
Number

of

Countries1
Total expenditure and net lending25.9 (24.8)25.1 (21.6)–0.8 (–3.2)–0.1 (–0.7)22 (8)
Current expenditure18.5 (17.7)17.3 (15.3)–1.2 (–2.5)0.5 (0.1)22 (8)
Wages and salaries6.8 (7.8)6.1 (5.9)–0.6 (–1.8)0.2 (0.1)22 (8)
Subsidies and transfers2.5 (1.5)2.2 (1.7)–0.3 (0.3)0.2 (0.2)17 (7)
Capital expenditure and net lending7.1 (6.4)7.5 (6.0)0.4 (–0.4)–0.8 (–1.1)22 (8)
Source: Abed and others (1998).

Number of countries for which data are available for a given expenditure category. If the sample size varies for different columns, the maximum figure is given.

Source: Abed and others (1998).

Number of countries for which data are available for a given expenditure category. If the sample size varies for different columns, the maximum figure is given.

Moreover, progress was uneven across regions. In the CFA franc zone, for example, subsidies and transfers increased, on average, while capital spending and net lending declined as a share of GDP, owing in part to sharp declines in these outlays in a few selected countries.13

For Africa as a whole, we also see improvements in the functional distribution of spending (see Table 2). Outlays for military spending, on average, were reduced as a share of GDP, as well as those for general public services (such as planning and printing), which may have reflected declining administrative costs. Encouragingly, infrastructure spending—as proxied by economic services, and transportation and communication outlays—has risen since the preprogram year, especially in CFA franc zone countries.14

Table 2.Expenditure by Function in Sub-Saharan African Countries Supported by ESAF(Averages of countries in sample, in percent of GDP; data for CFA franc zone countries given in parentheses)
Preprogram

Year
Latest

Year
Latest

Year

Minus

Preprogram

Year
Number

of

Countries1
Total expenditure and net lending25.9 (24.8)25.1(21.6)–0.8 (–3.2)22 (8)
General public services4.2 (3.5)3.7 (2.8)–0.3 (–0.7)13 (5)
Military spending3.2 (2.4)2.2 (2.1)–1.0 (–0.3)17 (5)
Education24.0 (4.1)4.0 (3.7)0.0 (–0.4)20 (6)
Health21.5 (1.2)2.1 (1.4)0.6 (0.2)19 (5)
Economic services5.0 (3.4)5.3 (4.0)1.0 (0.6)13 (5)
Transportation and communication0.8 (0.6)1.1 (1.6)0.4 (1.1)9 (3)
Memorandum items:
Education (percent of total spending)213.5 (15.5)14.6 (16.7)1.1 (1.2)20 (6)
Health (percent of total spending)24.8 (5.0)6.8 (7.0)2.0 (2.3)19 (5)
Real education spending per capita2,3–0.7 (–2.9)20 (6)
Real health spending per capita2,32.5 (4.0)19 (5)
Source: Abed and others (1998) for all data except education and health; Gupta, Clements, and Tiongson (1998), country authorities, and IMF staff estimates for education and health data.

Number of countries for which data are available for a given expenditure category. If the sample size varies for different columns, the maximum number is given.

Data on education and health are drawn from a more recent sample of 20 countries with ESAF programs, and hence are not comparable to figures on total expenditure and net lending.

The numbers refer to average annual rates of change between the preprogram year and the latest year for which data are available.

Source: Abed and others (1998) for all data except education and health; Gupta, Clements, and Tiongson (1998), country authorities, and IMF staff estimates for education and health data.

Number of countries for which data are available for a given expenditure category. If the sample size varies for different columns, the maximum number is given.

Data on education and health are drawn from a more recent sample of 20 countries with ESAF programs, and hence are not comparable to figures on total expenditure and net lending.

The numbers refer to average annual rates of change between the preprogram year and the latest year for which data are available.

What Happened to Expenditure Allocations? An Overall Shift from Current to Capital Outlays

How about health and education? On average, African countries were able to increase health spending as a share of GDP and to maintain spending on education. Both education and health spending rose in relation to total government outlays, suggesting that social spending became a higher priority. There were some differences in spending outlays across regions, however, as CFA franc zone countries, on average, reduced education spending as a share of GDP. A more mixed picture also emerges for increases in real spending per capita, with real health spending rising sharply for African countries as a whole and education spending falling. But the decline in education spending should be interpreted cautiously, as it reflected a decline in teacher salaries after the CFA franc devaluation, and thus does not necessarily imply fewer educational services. For a more accurate analysis of changes in the volume of social services, we would need separate deflators for both wage and nonwage costs. But such data, which would need to be consistent with the aggregate spending figures, are typically not available over program periods.

How about social indicators? Africa’s increase in education and health spending has, on average, gone hand-in-hand with better social indicators, such as the illiteracy rate, gross enrollment rates, and infant mortality rates.15 Nevertheless, it is clear that achieving substantially more rapid progress on these fronts, as noted by Barbone, will require more than simply increasing aggregate social spending. Greater attention also needs to be paid to the efficiency and composition of such expenditure.

Stronger Links Between Spending and Target Groups

Next, we need to assess how well the government’s outlays translate into better services, especially for targeted groups. Barbone’s paper focuses on the institutional and political processes that determine how social spending is allocated. It is also useful, however, to consider how these outlays benefit different target groups, so that we can improve the composition of this spending.

Indeed, the degree to which the poor have access to education and health services is an important aspect of the link between spending and the delivery of public services. In this context, a worrisome feature of social spending in Africa is the way it has been allocated among different sectors. A large portion of social sector spending is still allocated to higher education and curative health care, which has a less favorable impact on human development and social indicators than other forms of social spending, such as primary education and preventive health care. Let me cite a few examples.

Education and Health Spending Becomes a Higher Priority

  • In education, the most recent data available for a sample of 9 African countries show that 24.3 percent of outlays were absorbed at the tertiary level, compared with 13.7 percent in 9 Asian countries and 20.4 percent for a sample of 37 developing and transition countries outside of Africa.16
  • In health care, outlays on curative care absorbed the lion’s share of the health budget, accounting for about 65 percent of spending in a sample of 7 African countries, compared with 64 percent in 5 Asian countries and 59 percent for a sample of 26 developing and transition countries outside of Africa.17

These results largely confirm the findings of an earlier study,18 which showed that social expenditures in sub-Saharan Africa were biased against primary education and primary health care over the 1980s, with no evidence of restructuring of priorities in social spending during the decade.

So what can be done? First, a better intrasectoral allocation would increase the share of the benefits of public spending captured by the poor, as a large amount of social spending in Africa appears to be benefiting middle- and higher-income groups. A sample of nine African countries reveals that the percentage of benefits of education expenditure accruing to the poorest quintile of the population averaged 11.8 percent, compared with 32.3 percent for the richest quintile.19 And while countries like Ghana and Kenya have made some progress in improving the benefit incidence of social spending, health spending in countries like Togo remains concentrated in higher-income regions. Thus, a reallocation of spending to primary education and preventive health could improve the efficiency and equity of social spending in a number of countries.

Second, shifts in the geographical targeting of social spending would also improve its distributive incidence. For example, a reallocation of spending away from higher income urban areas to rural regions—where most of the poor reside—would in many cases enhance their access to public services and thereby result in a larger share of the benefits accruing to them.

Third, the mere provision of additional social services by the government is not sufficient. The quality of services has a considerable impact on social outcomes as well. Thus, there is scope for improving the efficiency of social spending by rationalization of the input mix. In many cases there are severe imbalances between wage and nonwage inputs, with a high wage bill crowding out spending on more productive inputs, such as medicine and teaching materials. Only limited progress, however, has been made on civil service reform in Africa.20 While spending on wages and salaries has been reduced in many countries, often this has been realized through decreased real wages, rather than the envisaged reductions in employment. A few examples follow:

  • In Zimbabwe, all targets for reducing the size of the civil service were missed under the ESAF program, although most expenditure targets for the wage bill were met.
  • In Ghana and Kenya, initial reductions in government employment were offset by new hires.
  • In some countries, including Ghana and Togo, wages have absorbed an extraordinary share of current education spending, leaving little for teaching materials and maintenance spending.21 A recent study suggests that African countries are less efficient in the provision of health and education services than countries in Asia and the Western Hemisphere, possibly reflecting both the impact of relatively high government wages in the education sector and the intrasectoral allocation of government resources.22

Fourth, there is clearly a need to strengthen civil service reform, with a view to reducing low-productivity employment and releasing resources for selected nonwage inputs with high productivity. Civil service reform should be seen as an essential component of the strengthening of public sector institutions that Barbone indicates is central to the World Bank’s approach for improving the delivery of public services. A major shortcoming of civil service reform efforts has been an excessive focus on securing short-term budgetary savings, rather than building up the necessary civil service institutions needed for a more efficient provision of public services.23

Fifth, increasingly, countries in Africa (e.g., Benin, Ethiopia, and Uganda) are devolving spending to the lower levels of government, often aimed at aligning local preferences with public spending on critical social services. In the short run, however, this may not necessarily improve service delivery, due to weak administrative capacity at the local level.24 In Ethiopia, for example, where local governments account for over 70 percent of total spending on education and health, the efficient devolution of expenditure has been hampered by the lack of basic infrastructure and communications equipment at the local level, with some local governments even lacking telephones and electricity.25

Decentralization can also lead to lower social expenditures if local officials chose to allocate central government block grants—that are given specifically for these purposes—for other purposes. In Uganda, for example, preliminary evidence indicates that decentralization has been associated with a decrease in the share of education expenditure reaching the school level.26 Equally important is whether the resources are distributed to local governments in an efficient and equitable manner, given that the bulk of the revenue is mobilized by the central government.

Sixth, as noted by Barbone, the role of the private sector should not be overlooked when assessing options for improving living conditions for the poor. Government actions should seek to encourage and complement private sector provision of health and education services, which is substantial in many African countries.

Finally, it is also necessary to press ahead with the “second generation reforms” that are incorporated into many IMF-supported adjustment programs. These reforms include a strengthening of the judicial system, improved transparency in public sector operations, improved expenditure management, and improved tax administration. Some of these reforms can contribute to more equitable and efficient expenditure policies. For this reason, the IMF will continue to support these institutional reforms with its technical assistance in the areas where it has expertise.

Measuring Progress

The final question is how do we measure progress in this area, and how do we move forward? We need to improve our database on social expenditures. In many African countries, there are no comprehensive data on education and health expenditure that capture fully all current and capital expenditures (including those financed by donors). We also need to collect data on the intrasectoral composition of spending that is consistent with the aggregate data. And we need to make greater use of social indicators to gauge development progress.

With this in mind, the Organization for Economic Cooperation and Development, United Nations, and World Bank have identified a working set of indicators in different areas, including education and health. Their use in assessing progress would help in understanding whether public spending is indeed having a perceptible impact on the delivery of social services. This approach would complement the indicators-based monitoring of projects that Barbone advocates to improve the efficiency of project spending in Africa. But a better database on indicators—at both the project and more aggregate level—may require that the countries themselves increase the amount of financial and human resources committed to their generation.

1These figures include domestic debt service and scheduled external debt service; if the figures were adjusted to include only domestic debt service and external debt service actually paid (i.e., after debt relief), the ratios would be cut by about half.
2Emmanuel Tumusiime Mutebile and N.M. Henstridge, “Africa, Markets, and Underdevelopment,” paper presented at Queen Elizabeth House, University of Oxford, July 6, 1995.
3Emmanuel Ablo and Ritva Reinikka, “Do Budgets Really Matter? Evidence from Public Spending on Education and Health in Uganda,” Policy Research Working Paper No. 1926 (Washington: World Bank, 1998).
4Paul Collier and others, “Redesigning Conditionality,” World Development, Vol. 25 (September 1997), pp. 1399–1407.
5Paul Collier and Jan Willem Gunning, “Explaining African Economic Performance,” Journal of Economic Literature, Vol. 37 (March 1999), pp. 64–111.
6Sanjay Pradhan, “Evaluating Public Spending: A Framework for Public Expenditure Reviews,” World Bank Discussion Paper 323 (Washington: World Bank, 1996).
7See Pradhan (1996).
8Jonathan Isham, Daniel Kaufmann, and Lant H. Pritchett, “Governance and the Returns to Investment: An Empirical Investigation,” Policy Research Working Paper 1550 (Washington: World Bank, 1995).
9International Monetary Fund, External Evaluation of the ESAF: Report by a Group of Independent Experts (Washington, 1998).
10The author wishes to thank Ke-Young Chu, Christian Schiller, Benedict Clements, Calvin McDonald, Edgardo Ruggiero, and Rosa Alonso for advice and assistance in preparing this comment. Erwin Tiongson provided computational help.
11George T. Abed and others, Fiscal Reforms in Low-Income Countries: Experience Under IMF-Supported Programs, IMF Occasional Paper No. 160 (Washington: International Monetary Fund, 1998).
12This does not necessarily imply there was an increase in infrastructure spending, as these outlays include capital spending in education and health. The issue of whether infrastructure spending rose is addressed in the context of the discussion on changes in the functional distribution of spending.
13In Togo, for example, capital expenditure and net lending fell by 7.4 percentage points of GDP, and by 5.3 percentage points in Niger.
14These data on expenditure by function should be interpreted with caution, given the small sample size.
15Since the preprogram year, illiteracy rates fell by an average of 2.2 percent a year, while gross primary enrollment rates rose by 1.0 percent. Stronger progress was made by African countries at the secondary level, with gross enrollment rates increasing by 1.5 percent a year. The repeater rate—a proxy for quality of education—improved at both the primary and secondary level, with especially sharp increases at the secondary level. Similarly, a number of health indicators improved, as life expectancy increased by 0.1 percent a year and infant mortality rates fell by 1.2 percent a year. There were sharp increases in access to health care, safe water, and sanitation, and equally rapid increases in immunization rates.
16Sanjeev Gupta, Benedict Clements, and Erwin Tiongson, “Public Spending on Human Development,” Finance and Development, Vol. 35, No. 3 (September 1998), pp.10–13.
17These figures on curative spending should be interpreted with caution, as they are based on proxies for curative outlays as a share of total health spending. The data are drawn primarily from the IMF’s Government Finance Statistics database, with spending on hospitals and medical equipment as the proxy for curative expenditure.
18David E. Sahn and René Bernier, “Evidence form Africa on the Intrasectoral Allocation of Social Sector Expenditures,” Working Paper No. 45, Cornell University Food and Nutrition Policy Program (Ithaca, NY: Cornell University, 1993).
19Florencia Castro-Leal and others, “Public Social Spending in Africa: Do the Poor Benefit?,” World Bank Research Observer, Vol. 14 (February 1999), pp. 49–72. For a more recent view that confirms the notion that upper-income groups disproportionately capture the benefits of education and health spending, and also assesses the incidence of social expenditure in seven African countries, see David E. Sahn and Stephen D. Younger, “Poverty and Fiscal Policy: Microeconomic Evidence” (unpublished; International Monetary Fund, April 1998).
20Ian Lienert and Jitendra Modi, “A Decade of Civil Service Reform in SubSaharan Africa,” IMF Working Paper 97/179 (Washington: International Monetary Fund, 1997).
21In the period between the first and second ESAF programs, education spending in Ghana increased sharply, but with wages and salaries accounting for about 95 percent of current spending. In Togo, between 1990 and 1996, wages accounted for two-thirds of total education outlays, with investment spending accounting for only 5 percent.
22Sanjeev Gupta, Keiko Honjo and Marijn Verhoeven, “The Efficiency of Government Expenditure: Experiences from Africa,” IMF Working Paper 97/153 (Washington: International Monetary Fund, 1997).
23See Abed and others (1998).
24Vito Tanzi, “Fiscal Federalism and Decentralization: A Review of Some Efficiency and Macroeconomic Aspects,” paper presented at the World Bank’s “Annual Conference on Development Economics,” Washington, May 1–2, 1995.
25For an examination of fiscal federalism issues in Ethiopia, Nigeria, and a number of other countries, see Teresa Ter-Minassian, ed., Fiscal Federalism in Theory and Practice (Washington: International Monetary Fund, 1997).
26This evidence should be interpreted with caution, as the decline in the share of resources for schools could reflect short-term transition problems in moving to a more decentralized system. See Emmanuel Ablo and Ritva Reinikka, “Do Budgets Really Matter? Evidence from Public Spending on Education and Health in Uganda,” Policy Research Paper No. 1926 (Washington, World Bank, 1998.

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