Alberto Melo

1
TWO SUCCESSFUL EXPERIENCES IN HARMONIZATION
THE PUBLIC EXPENDITURE REVIEWS OF PERU AND
ECUADOR Presentation at the World Banks Workshop
on Country Analytic Work Washington, DC, June24,
2005
Alberto Melo Inter-American Development Bank
2
PRESENTATIONS OUTLINE

1. Public Expenditure Reviews (PERs) as a diagnostic
   tool.
2. Perus 2001-2002 PER and Ecuadors 2003-2004 PER
   as experiences in harmonization of analytical
   work.
3. Next steps How to deepen harmonization in
   economic and sector work by MDBs and donors.

3
PART I PUBLIC EXPENDITURE REVIEWS AS A
DIAGNOSTIC TOOL
4
THE NATURE OF PUBLIC EXPENDITURE REVIEWS

• A PER is a comprehensive analysis of public
  spending in a given country.
• The purpose is assisting the country in reforming
  public expenditure management.

5
THE NATURE OF PUBLIC EXPENDITURE REVIEWS

• I. PERs frame the discussion of public spending
  in the context of an assessment of the countrys
  overall macroeconomic situation.
• II. The diagnosis seeks to characterize the three
  main components of the Public Expenditure
  Management System, namely
• Fiscal policy management.
• The budget system and practices from the
  standpoint of the rationality of resource
  allocation, and
• The operational efficiency of expenditure.

6
THE NATURE OF PUBLIC EXPENDITURE REVIEWS

• The results from the diagnosis are then used to
  make recommendations on fiscal policy, budget
  reform, spending priorities, and other pressing
  public sector issues of the day.

7
MAIN ISSUES DEALT WITH BY PERUS 2001-2002 PUBLIC
EXPENDITURE REVIEW (I)

1. Perus fiscal challenges and vulnerabilities.
2. How to reorient the budget towards pro-poor
   expenditure?
3. How to improve the efficiency of public
   expenditure?
4. The promises and risks of decentralization.

8
MAIN ISSUES DEALT WITH BY PERUS 2001-2002 PUBLIC
EXPENDITURE REVIEW (II)

1. How to upgrade the civil service?
2. How to improve governance and reduce corruption?
3. The fine-tuning of fiscal and environmental
   policies towards the mining sector.

9
MAIN ISSUES DEALT WITH BY ECUADORS 2003-2004
PUBLIC EXPENDITURE REVIEW (I)

• The structural constraints on fiscal policy
  derived both from the nature of the economy as a
  small, open and oil-dependent system and from the
  character of the prevailing political-economy
  regime.
• The role of fiscal policy in a dollarized
  economy.
• III. The diagnosis of the current fiscal trends.
• IV. The conditions for fiscal and debt
  sustainability.

10
MAIN ISSUES DEALT WITH BY ECUADORS 2003-2004
PUBLIC EXPENDITURE REVIEW (II)

V. The existing fiscal rules, including the rules
governing Ecuadors Stabilization, Social and
Productive Investment, and Debt Reduction Fund
(FEIREP). VI. The issue as to how to create
additional fiscal space for pro-poor
expenditure. VII. The general features of the
public expenditure management system. VIII.
Public expenditure in education and the issue of
the high rates of teacher absenteeism.
11
MAIN ISSUES DEALT WITH BY ECUADORS 2003-2004
PUBLIC EXPENDITURE REVIEW (III)

IX. Public expenditure in health. X. Public
expenditure in water and sanitation, electricity
and telecommunications . XI. The situation of the
oil industry.
12
OUPUTS OF PERUS PUBLIC EXPENDITURE REVIEW
THE MAIN OUTPUT WAS THE PER REPORT, WHICH WAS
PUBLISHED IN TWO BOOKS

• In English World Bank and Inter-American
  Development Bank. Peru Restoring Fiscal
  Discipline for Poverty Reduction. A Public
  Expenditure Review. Washington, 2003.
• In Spanish José R. López-Cálix y Alberto Melo. A
  más disciplina fiscal, menos pobreza. Revisión
  del gasto público en Perú. Banco Interamericano
  de Desarrollo y Banco Mundial, Washington, DC,
  2004.
• First time that a PER-based book appears in
  Spanish

13
OUPUTS OF ECUADORS PUBLIC EXPENDITURE REVIEW
THE MAIN OUTPUT WAS THE PER REPORT THAT IS NOW
PUBLISHED IN ENGLISH

• The World Bank and The Inter-American Development
  Bank. Creating Fiscal Space for Poverty Reduction
  in Ecuador A Fiscal Management and Public
  Expenditure Review. Washington, 2005.
• AND WILL SOON BE PUBLISHED IN SPANISH.

14
PART II THE PERU 2002-2003 AND THE ECUADOR
2003-2004 PUBLIC EXPENDITURE REVIEWS AS
EXPERIENCES IN HARMONIZATION
15
DIMENSIONS ALONG WHICH HARMONIZATION WAS PRACTICED

• The definition of the PERs content and scope.
• Joint planning of the research work.
• Joint conduct of the relationship with the
  national government.
• Joint use of the available diagnostic tools
• Joint dissemination of results.

16

• THE IMF WAS AN IMPORTANT PARTNER IN BOTH
  HARMONIZATION EXPERIENCES
• In the PERU PER, the IMF contributed with
  analytical inputs in the areas of tax reform,
  public debt management and sustainability, and
  the review of Perus Fiscal Prudence and
  Transparency Law.
• In both the PERU PER and the ECUADOR PER, the IMF
  contributed to the oganization of dissemination
  events.

17
THE GOVERNMENTS APPROPRIATION OF THE PERs
ANALYSES AND CONCLUSIONS THE CASE OF PERU (I)
PERs analyses and conclusions were used by the
Government of Peru as inputs in the discussions
that led to

• The revamping of the Prudence and Fiscal
  Transparency Law.
• The tax reforms of 2003-2004.
• The deepening and widening of the policy of
  providing budget protection for key social
  programs.

18
THE GOVERNMENTS APPROPRIATION OF THE PERs
ANALYSES AND CONCLUSIONS THE CASE OF PERU (II)

• The definition of the conceptual and legal bases
  for decentralization.
• The further development of Perus Integrated
  Financial Management System (SIAF).
• Measures to improve the targeting of social
  expenditures.
• The adoption of a royalty regime for mining.

19
OTHER BENEFITS FOR THE COUNTRIES FROM THIS
HARMONIZATION EXPERIENCE (I)

• Use of diagnostic tools was aimed at building
  institutional capacity (fiscal institutions,
  budget protection for social programs,
  strengthening of SIAF, etc.).
• Coverage of issues was wider than would have been
  otherwise.
• The joint realization of the PER contributed to
  (i) stronger coordination between the banks and
  the government and (ii) closer coordination
  between the World Bank and the IDB.

20
OTHER BENEFITS FOR THE COUNTRIES FROM THIS
HARMONIZATION EXPERIENCE (II)

• A substantial portion of the research work was
  carried out by Peruvian consultants, thus
  contributing to strengthening national analytic
  capacity.

21
THE PER ALSO STRENGTHENED THE TWO BANKS COUNTRY
WORK
In the case of PERU, the PERs analyses and
conclusions were used in the elaboration of the
World Banks Country Strategy for Peru and in the
preparation of the following projects by both
Banks

1. The WBs series of four Programmatic Social
   Reform Loans.
2. IDBs Modernization and Descentralization
   Program.
3. IDBs Fiscal Reform Program.
4. The WBs series of Programmatic Decentralization
   and Competitiveness Structural Adjustment Loans.
5. The IDB Policy-Based Loan to Support the Reform
   of Poverty Reduction and Human Capital
   Development Programs.

22
OTHER BENEFITS FOR THE BANKS

• Duplication of efforts was avoided.
• Adoption by the Government of Banks policy
  recommendations was facilitated.
• Scope and coverage of dissemination was wider
  than would have been otherwise.

23
PART III DEEPENING HARMONIZATION IN ECONOMIC
AND SECTOR WORK
24
WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND
SECTOR WORK? (I)

• There is still a long way to go on the road
  towards harmonization of multilaterals and
  bilaterals economic and sector work.
• A modest and simple step can bring about a
  quantum leap in harmonization.
• The step I propose the creation in each country
  of a mechanism for collective discussion of all
  the donors annual economic and sector work plans
  for the particular country.

25
WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND
SECTOR WORK? (II)

• The mechanism I propose is to hold an annual
  technical meeting of the countrys authorities
  and the multilaterals and donor organizations
  where those plans are presented for deliberation.
  
• Each multilateral organization and bilateral
  donor participating in the exchange of ideas
  would provide the rationale behind its economic
  and sector work plan.
• Meetings will be open to all donors and will be
  chaired by a Government representative.

26
WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND
SECTOR WORK? (III)

• In a typical LAC country setting, the roster of
  participating institutions would include the WB,
  IMF, the agencies of the UN System, the IDB, the
  European Union, USAID, JBIC, DFID, GTZ, other
  bilateral donors, and the country-relevant
  sub-regional organizations such as CAN, CAF,
  Fonplata, BCIE, CDB, and other donors.
• The country annual meetings will be
  roll-up-sleeves work events and not ceremonial
  gatherings.

27
WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND
SECTOR WORK? (IV)

• The main purpose of the meetings would be to open
  an exchange of ideas on the pertinence and
  appropriateness of each participants analytical
  work plans with the aim of harmonizing, improving
  and refining those plans.
• The obvious premise of those intellectual and
  technical exchanges is the respect for the
  autonomy of the participants both on the
  governments side and on the donors side to
  define their own analytical work plans and carry
  them out.

28
WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND
SECTOR WORK? (V)
The proposed annual meeting is bound to generate
a number of byproducts that may strengthen
harmonization. In particular, institutions
attending the meetings may decide to reach
agreements on

• Carrying out joint economic and sector work.
• Sharing terms of reference for upcoming economic
  and sector work.
• Sharing diagnostic tools and data bases.
• Sharing draft research reports.
• Reciprocal peer reviewing of economic and sector
  work.

29
TWO SUCCESSFUL EXPERIENCES IN HARMONIZATION
THE PUBLIC EXPENDITURE REVIEWS OF PERU AND
ECUADOR Presentation at the World Banks Workshop
on Country Analytic Work Washington, DC, June24,
2005
Alberto Melo Inter-American Development Bank