Sustainable Public Financial Management

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

If it is true that economic growth by itself does not ensure development, hardly any development can be sustained without economic growth. Therefore, in order to catch up with developed nations, developing and emergent countries need to achieve and sustain higher than average economic growth rates. In order for this to happen, there are some pre-conditions that need to be verified.

One typical way of understanding whether a developing country is in the right path to succeed on its efforts to develop itself is to compare its fundamentals with the ones of countries with a similar level of development and to those of countries towards which we wish to converge.

With the World growing approximately 4% per year, any economic growth rate below that level can easily be considered insufficient to allow developing countries to catch up with the most developed ones.

Savings and Investment levels

The desirable levels of savings and investment change throughout time. Most of this change is related to the fact that the capital intensity tends to increase in line with the relative development level of a nation. By this we mean that the more developed a country is (compared to the rest of the World), the greater the volume of savings and investment (measured in proportion of the GDP) it is required to produce to avoid having its rates of economic growth diminish. Also, any country who wishes to sustain fast growth rates for a long period of time should target gross investment and saving rates higher than 20% of its GDP. In fact, many developing and emerging nations are actually investing more than 30% of their GDP, which helps to explain why their average rate of economic growth is much higher than the one registered in developed nations.

Impact of Emigration

Emigration should be analyzed according to its opportunity cost. Emigration will tend to have a greater positive net impact when developing nations from which people are emigrating have a considerable amount of unemployed/underemployed labor. Also, it becomes more beneficial when externalities such networking through the Diasporas are leveraged, providing new ideas, technologies, skills and investments to developing nations.

The impact of remittances is another important variable. The weight in percentage of the GDP of remittances varies considerably among developing nations. In fact, in certain countries, such as Philippines, remittances represent more than 10% of the GDP (The Economist, Feb 9 2010) more than the overall combined expenditure that this nation has on health care and education.

Two important downsides of emigration should always be mentioned. One is the fact that emigration reduces the stock of labor by reducing the active population as well as birth rates. Such decrease can limit not only the long run economic growth rate but also its ability to sustain its elderly population. One second important downside has to do with the “brain drain” effect than usually comes with emigration. Brain drain can threaten the development process of poor nations by leaving them without valuable skilled labor. Some evidence, though, has been found that an “optimal level” of brain drain actually exists (Lowell, B. Lindsay).

Trade policy: substantial impact in the development process of a country.

There is evidence that, in line with what Classic theory suggests, open markets can lead to greater prosperity by making it easier for countries to specialize themselves and capital to be allocated more efficiently. Despite this, a certain level of protectionism can help countries to foster their development and strengthen their bargaining power.

Foreign Aid: different impact across developing nations.

Opinions regarding the net impact of foreign aid (often referred to as development assistance) diverge substantially. Some believe that it does not have a positive impact on development, while others argue that it actually has some positive impact.

It is important to understand, though, that development assistance is attributed on a highly arbitrary basis. This type of assistance has different types of hidden political agendas and the amount of assistance is everything but homogeneous. Countries such as Liberia, receive large amounts of development assistance, to the point that this type of cash-flow surpasses the entire volume of fiscal revenues. Others, though, such as the Democratic Republic of Congo, get almost nothing.

The size of development assistance, the way it is implemented and the hidden agendas that come with it are crucial aspects that will determine the bottom line effect that assistance will have in the real economy.

Development Impact of Good Governance

Institutions such as the IMF and the World Bank have become more interested in finding ways to access the quality of the governance within countries and on how to improve it. FreeBalance Processes like the Public Expenditure and Financial Accountability (PEFA) framework is helping to focus governments on improving governance factors.

The reason why Governance has become so important now-a-days has a lot to do with the change in the perception of costs and benefits related to corruption. For a long period of time, economic literature argued that corruption relaxed government-imposed rigidities, could increase commerce and allocate investment in a more efficient way. The dominant view, though, today is that corruption benefits mostly “rent seekers”, “is subject to increasing returns that perpetuate it” and creates an environment “that, in time, can lead to the collapse of political regimes” (Vito Tanzi & Hamid Reza, IMF Edition 2000-2182).

In addition to this, corruption can be perceived as an extra tax on the economy that further distorts its activity and introduces uncertainty (Shang-Jin Wei, Nov. 1997). Like almost any tax, this limits economic activity to a suboptimal level and tends to slow down economic growth.

Empirical evidence has been found that corruption not only depresses the long run economic growth of a nation but also contributes to higher poverty rates and greater income distribution inequity.

Final remarks

Over the past twenty years, Emerging and Developing countries have managed to boost their growth and increase their weight in the overall world economy. In 1991, their share in the World GDP (PPP) was as small as 31%. This year, 2011, they are expected to produce 49% of the World GDP (about half of the World income) and by 2013, the IMF expects Emerging and Developing economies to surpass the total amount of real income of the Advanced Economies.

Emerging and Developing countries have been improving their public financial management, increasing public and private savings and shifting current account deficits towards the most developed nations. This has allowed them to improve in a consistent way their levels of development and improve their future economic outlook.

Despite all recent growth, there is still a long way to go. Advanced economies still have a GDP per capita (PPP) six times the size of the rest of the World. Even so, twenty years from now, we will probably look back in time and describe these years as an historical growth period, in contemporary history, for most of the developing World.

Carlos Lipari, FreeBalance Washington

This is a blog series discussing factors that impact development in developing countries. As a For Profit Social Enterprise (FOPSE), improving country growth through good governance is the core company mandate at FreeBalance. As such, FreeBalance participates in governance, development, foreign aid, ICT for development and transparency discussions globally.

(Source: IMF)

When analyzing the World investment and economic growth trends, we find something very peculiar. Growth has apparently registered a slight increase over the last 30 years while investment levels seem to have experienced an opposite trend.  As we know, in order to increase growth with lower levels of investment, a country has to increase significantly the productivity of its investment which is usually done by improving technology. At the world level, though, another explanation could be given for achieving potentially higher economic growth rates, while at the same time investing a lower percentage of the world GDP.

I would like to analyze one extremely important fact that has been changing over the last 30 years and that might provide us with a good explanation to why we can have World Investment and Growth trends moving slightly in opposite directions.

Investment: Developed vs. Developing Countries

(Source: IMF, results reflect current/nominal values of Investment)

Over the last 20 years, a major shift in the origin of the World investment has occurred. Developed economies used to produce in their economies about 80% of the World investment (measured in current prices), against approximately 20% of the Emerging and Developing Economies. Today these two set of countries are investing about the same amount of money.

Therefore, over the last 20 years, developed nations moved from a position where they were investing four times as much as the rest of the world towards a position where they currently invest approximately the same amount.

Savings: Developed vs. Developing Countries

One might ask if this increase has been done via saving transfers from developed to developing nations but the reality shows us that, in general, the increase in investment in Emerging and Developing economies has been financed with savings generated among these set of countries. In fact, most of the world gross savings are already been produced in Emerging and Developing nations.

(Source: raw growth data IMF)

This big shift in the World investment distribution might help us understand why we have experienced a shift in the world economic growth from the so called “first world” towards the “third world” but also why we might be experiencing an increase trend of the world economic growth while investment, in percentage of the GDP, appears to have diminished slightly.

Growth: Developed vs. Developing Countries

For this assumption to hold, though, one should expect a higher ratio of growth/capital in developing nations to exist.  Is this actually the case?

(Source: raw growth data IMF)

Analyzing historical data from the IMF allows as to see that by 2007, before the last world crises began, emerging and developing countries were already responsible for about 2/3 of all the World real economic growth (twice as much as the growth generated by the so called Developed world) and they were doing so with just 34.6% of the World volume of investment.

This finding is relevant because it indicates that the Emerging and Developing countries, right before our most recent world economic crises, were being able to grow much faster than developed economies for the each dollar they invested in their economy. This becomes even more relevant when we acknowledge that they are already producing most of the world savings.

With such high saving, developing nations could afford to maintain high investment growth rates during the latest economic crises. In fact, recent stimulus packages to promote growth in China and other developing economies, looking forward to sustain growth while World exports were plummeting during the 2008/2009 crises, might help to explain part of the most recent jump in the World investment quota that less developed experienced. Also, this increase might contribute to a lower gap between the productivity of investment in Developed nations and the rest of the world. In fact, some evidence can be found that this might be happening since 2008 even though Emerging and Developing nations continue to register on average roughly twice as much real economic growth as the one registered by developed economies per each nominal dollar of gross investment.

Shift from “Developed Countries”

In conclusion, the shift in the origin of investment towards Emerging and Developing countries over the last 20 years seems to have allowed the World economy to grow slightly faster even though its investment rate did not followed the same trend. Different reasons could be pointed out for this to happen but any future analysis should always include the impact of profound changes in the global distribution of investment and economic growth. One thing is clear, with or without an increase in its overall economic growth rate the world is living an historical process of rapid reduction the gap between developed nations and the rest of the world. This gap reduction process was intensified over the last 10 years and it seems very likely to continue for many years to come.

Carlos Lipari, FreeBalance Washington

What affects the development of a developing nation? This was the question asked during my interview at FreeBalance. The following series of blog entries summarizes my analysis.

Explaining Growth Factors

Trade policy, emigration, remittances and foreign aid (also known as development assistance) are some of the factors that impact economic growth. There are others, though, such as the levels of investment, savings and the volume of current account deficits that tend to have an even greater impact. Higher investment and savings rates tend to translate in faster growth, helping a country to develop itself, whereas large and systematic current account deficits tend to indicate lack of savings and competitiveness of a given economy and therefore, problems down the road, with lower economic growth and development levels along with higher unemployment rates.

With the world economy growing 4 to 5% per year, a developing nation should not be satisfied with less than 4% growth. If it does not reach that level of growth, probably it needs to increase savings, invest more and gain competitiveness by devaluating or depreciating its currency. But in order to grow and invest, it is vital for a country to save a considerable part of its income. A considerable part might mean 20 to 30% of its GDP, but some countries actually save much more than this and, therefore, achieve impressive and consistent economic growth rates. China, for instance, is saving 54% of its GDP and, therefore, has resources to finance an investment rate of almost 50% of its GDP, achieving 10% yearly rates of economic growth.

Savings

Saving money is something that is particularly hard to do in poor countries, due to low income. Governments in these countries are tempted, therefore, to run budgetary and external deficits, making use of foreign debt and some development assistance to compensate for low levels of savings. But these sources of financing can only provide a limited amount of help to boost growth. At the same time, they can, in the long run, if not properly managed, block the development process of that country. The external debt of African countries was, until recently, pointed out as one of the main development obstacles as interests on debt were depriving governments from essential resources to invest in infrastructure and education.

I will address the following development topics in a series of blog entries:

1. Human Development Index
2. Impact of Investment on Growth
3. Real Economic Growth: Developed vs Emerging & Developing Nations
4. Impact of Savings
5. Impact of emigration and remittances on developing countries
6. Development Impact of Trade Policy
7. Development Impact of Foreign Aid
8. Development Impact of Good Governance
9. Conclusions

James Elrick
PR Specialist

2010 saw some of the worst natural catastrophes. The devastating earthquake in Haiti. The extreme flooding in Pakistan. Events such as these garnered international support from governments and individuals as they donated money and provided aid to these countries through non-governmental organisations (NGOs), donors and other aid agencies. With the money raised, however, it also brought attention to the effectiveness of aid money. That is, how to ensure aid is being used where it is most needed without duplication of efforts by various and potentially competing donors.

The ideal way is for donors to be more transparent about how they are allocating and distributing aid funds. That is the goal of the International Aid Transparency Initiative (IATI) and associated NGO, Publish What You Fund. Publish What You Fund is one of the most active participants in IATI.

The Publish What You Fund Aid Transparency Principles include:

1. Information on aid should be published proactively
2. Information on aid should be comprehensive, timely, accessible and comparable
3. Everyone can request and receive information on aid processes
4. The right of access to information about aid should be promoted

Publish What You Fund advocates and lobbies for greater aid transparency. Publish What You Fund believes donors should publish their information on a regular basis in a standardised format that is comparable with other countries and accessible to all. A standard that is mappable, searchable, and useable.

Recently, Publish What You Fund released its 2010 Aid Transparency Assessment. You can play with the data, alter the visualisations, download the data, and view the presentation. The assessment demonstrates that aid information currently made available by donors is poor and that all donors still need to improve transparency.

The Publish What You Fund website also includes numerous PDFs on such topics as Why Aid Transparency Matters, and the Global Movement for Aid Transparency, Briefing Paper with ODI and IBP: Greater Aid Transparency: crucial for aid effectiveness, and more.

Improving aid transparency is an important first step. The next step is to track the aid money once it’s in-country. Governments need to know what aid is coming in so that they can budget accordingly. If aid becomes a non-budget line item, corruption and waste fast become options.

To improve recipient aid transparency, emerging-economy governments can use the FreeBalance Accountability Suite, a public financial management (PFM) system. Governments use FreeBalance to track aid, budget it and report on it creating an audit trail. Donors gain visibility into the effectiveness of their funds. Using FreeBalance, a government improves aid recipient transparency and increases accountability. This leads to good governance, a key goal to improving a country’s economy through aid.  

The Web 2.0 Digital Divide

The promises of Web 2.0 tools, when conceived of in advanced industrial countries, are almost unequivocally welcomed with open arms. Consider Web 2.0 in emerging countries, however, and the issue becomes a great deal murkier. What good is this web-based phenomenon when fewer than 10% of people in many emerging countries can even access the internet?

Concerns about this problem – commonly known as the ‘digital divide’ – tend to dampen enthusiasm regarding the rise of Web 2.0 as a tool for governance and sustainable development. It’s bad enough that the digital divide between rich countries and poor countries is as wide as it is. But if one takes a closer look at the statistics, it emerges that even within poor countries, the statistics reflect the usage of an elite few. The numbers, in other words, are worse than they seem. The demographic most in need of basic services is also least likely to find the tools to access them.

And even as Web 2.0 – and Government 2.0 – advances in emerging countries, can a ‘networked culture’ be more exclusionary than inclusionary? As more and more social and governmental services move online and begin to use the internet as their primary means of communication, will those beyond the digital divide be even further disadvantaged?

Mobile Telephony

The odds seemed pitted against Web 2.0 until a simple observation about the popular conception of the ‘digital divide’ turned things around. The notion of the digital divide mostly focuses on the differential access to computers and the Internet among people in a society. But as Mark Warschauer, author of Technology and Social Inclusion: Rethinking the Digital Divide points out, “this binary definition fails to do justice to the complex reality of various people’s differing access to technology.”

 Differing access to technology… A-ha! What about the cellular phone?

Bingo. A cursory internet search revealed that the prospects, suddenly, were not so bad after all. Examples of how mobile telephony is breaching the digital divide – and more importantly, providing access to once inaccessible services – abound. As observed in a recent article in the Economist, the many “anecdotal examples … illustrate the myriad unseen ways in which mobile phones are improving people’s lives across the world, and in the developing world in particular.”

We won’t burden you with these examples since they’re all public information, but here’s an especially illustrative and interesting one. An enterprising civil servant in Pakistan’s Jhang District developed a novel way (the ‘Jhang Model of Governance’, as it came to be known in the Pakistani press) to counter corruption. Zubair Bhatti directed clerks who handled land transfers to submit a daily list of transactions along with the mobile phone numbers of buyers and sellers. He explained that he would call these citizens at random to inquire whether they’d been asked to pay bribes. Once charges were brought against a clerk who made light of Mr. Bhatti’s resolve, it became clear that Mr. Bhatti meant business. A sudden improvement in service was reported. Mr. Bhatti introduced this method to other sectors within his control, and efforts are now underway in the provincial government to extend the concept elsewhere.

Yet another article argues that traditional forms of society are more conducive to collaboration and information-sharing, and that this culture can be leveraged more efficiently with the use of mobile technologies.

Emerging country development

It’s clear that utilizing mobile technologies to provide more widespread access to information and services still requires a deep and long-term commitment on the part of emerging country governments. There are still millions of people out there who don’t have access to mobile technology. But suddenly, the cost barrier isn’t quite as high. Unlike efforts at minimizing the digital divide by distributing more and more computers to the underprivileged, the incentives for stakeholders advancing mobile telephony are much better aligned. Governments can leverage an already-existent relationship between wireless service providers and the increasing number of citizens who can now afford it. And major mobile phone manufacturers have already begun catering to the large customer base in developing countries. It’s something of a win-win situation.

Granted, just as there are in advanced industrial countries, there are “cultural barriers” within government that might make the widespread advancement of mobile technologies all the more difficult. The argument, not unlike theories of globalization and the state, is premised on the notion that citizens ‘taking things into their own hands’ (literally, in the case of mobile phones) undermines the writ of government. But the fact remains that the genie is out of the bottle, and the faster it can be favourably co-opted (see ‘Jhang Model of Governance’ above), the better. According to a recent whitepaper, 80% of the world’s population is covered by GSM technology, and more than 2 billion people currently have access to mobile phones. With 1 million new subscribers every day, this number is set to reach 4 billion by the end of 2010. The math is compelling. Rather than fearing that government authority will be undermined, governments must realize that mobile technology provides new avenues to increase citizen participation and satisfaction. And as more and more citizens realize that government is not just a service for an elite few (as it once may have been), their stake in it increases.

 At FreeBalance, we take pride in developing government resource planning solutions that advance the fundamental principles of good governance and sustainable development. The quest for more efficient and cost-effective ways to increase citizen participation in government is well within our mandate. While we try to discover new ways to advance economic growth and development through mobile technology, we welcome comments and suggestions that might help us along the way.

This is section 3.1.4 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site

Mobile phones have become the tool of choice in many countries. Wireless device adoption continues to grow. Computers are downsizing to netbooks. Smart phones are becoming smarter. Many experts see mobile technology closing the digital divide. In fact, wireless technology is helping countries leap frog by avoiding the expense of wired connections.

Implication

GRP software vendors need to adapt to the wireless reality through the support of simple communications methods, such as SMS, to enable notification and approvals on inexpensive mobile phones. Smart phones will enable richer applications, but competition among multiple platforms means that it is too early for widespread adoption in emerging countries. Nevertheless, GRP software vendors need to support open interface standards so that government data can be mashed up in commercial applications.

Economic Value Add

The mobile phone is ubiquitous. It was once thought that these devices were luxuries, supporting little value add. Yet, consider the plight of a teacher in rural Africa. The teacher may takes hours out of her time to go to the nearest educational depot to get supplies she ordered – only to find that they have not arrived. The cost of a single SMS message to alert her that items have been received saves time. It enables her to spend more time teaching and less time travelling.

FreeBalance and wireless government

Wireless is enabled. The FreeBalance Accountability Suite support SMS and e-mail integration. We provide a mobile application that enables notifications, alerts and approvals. The Suite supports open standards to enable exposing government data for mashup applications. The infrastructure was designed to support different presentation layers to enable smart phone support.