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Book review of public financial management and its emerging architecture.

Anyone who picks up the new reader edited by Marco Cangiano, Teresa Curristine, and Michel Lazare looking for "The Way" in terms of structuring and conducting public financial management will be sorely disappointed. This is no "how to" book about how governments can efficiently and effectively manage the flow of funds and/or live within their means. Rather, the tome delivers the hard realities of modern public financial management (PFM). Overarching themes woven throughout include: 1) understanding context in determining any way forward; 2) the lack of any surefire or ideal method to realize "best practices," 3) the predominance of underdeveloped, inadequate and incomplete PFM architecture that exists among governments worldwide; and, 4) advancing PFM has been and remains an incremental, extremely slow process. This book is long overdue. Governments, industrialized and developing alike, have stumbled out of the Great Recession, are looking for ways to climb back to "normal" operations, and seek to avert budgets crumbling when another economic downturn inevitably strikes. At a time when there is some convergence on best practices in public financial management that are touted globally (we know what needs to be done) and technology has the potential to provide incredibly powerful methods for efficient PFM processing (cutting edge tools are available), it is a wonder that governments of all types and sizes are not doing better. The contributing scholars here offer balm to these governments that still have many high hurdles to overcome--their message is, "You are not alone, employ patience, stay focused but be flexible, and, most importantly, manage expectations (of those in and outside of government)."

At the beginning of the book, Allen Schick summarizes a lifetime of study about PFM by reflecting on decades of reforms that have occurred around the world. Immediately, he cautions that no amount of "good management" can account for policy that over obligates governments regarding the provision of life sustenance, public services and programming. He proceeds with a thorough explanation of the instruments of PFM--information, processes and rules--that are necessary to meet objectives of fiscal sustainability, effective allocation and efficient programming and service provision. The art of PFM is balancing these instruments to account for the often unintended consequences of strict adherence to any specific "best practice" or the often kneejerk reaction to past inefficiencies or malfeasance and all within a specific governance structure. Schick emphasizes that such PFM components are instituted to effect behavioral changes that can be and often are obscured by political incentive. That is, many governments are able to provide reliable, valid and timely fiscal data but that does not mean any fiscal rationality is evidenced by relevant policy makers. In terms of making PFM reforms, Schick points out that timing is everything--appropriate sequencing of any considered innovation is vital to success. As relates to fiscal rules, for example, Schick warns that a phased process in which expectations are managed consistently over time will likely yield greater success than comprehensive change engaged rigidly.

The second part of the book considers the design of PFM architecture. Chapters within this section regard the legal frameworks for PFM--the layering of constitutional provisions and laws complicates PFM and usually compromises system success. Fiscal rules may be overly restrictive (automatic triggers) or too loose (escape clauses) and thus may be rendered useless for fiscal crisis management. Greater "elasticity of adherence" that exists in "next generation" rules offers some hope for future effective PFM and coincides with Schick's tenet of flexibility when engaging any of the components of PFM that he discusses earlier. Holger van Eden, Pokar Khemani and Richard Emery, Jr. provide a chapter about the legal frameworks that can support fiscal responsibility that is as close to "how to" as the book gets. These scholars offer good lists of the linkages of best practices in PFM to fiscal responsibility laws (FRLs) as well as a comparative of FRLs in selected countries. They point out that FRLs with "reputational capital" can insert some d iscipline into political debates. However, it is too often the case that policy makers are "too ambitious and overestimate" what these laws can accomplish. They hawk the phased approach to change, discussed earlier by Schick. The next chapter on numerical fiscal rules (by Nina Budina, Tidiane Kinda, Andrea Schaechter and Anke Weber) provides entree into global experiences with numerous types of fiscal rules (revenue, debt, expenditure, and budget balance) with some focus on the European Union. These authors explain rule revisions among various countries in crisis as well as newest rules adopted by countries around the world. They call for "well specified fiscal rules" that clarify "trigger points" to advance PFM effectiveness.

Chapter four regards medium term budget frameworks (MTBF) in OECD countries. Jason Harris, Richard Hughes, Gosta Ljungman and Carla Sateriale discuss how MTBF advances planning and especially, prioritization, necessary components of effective fiscal sustainability. Still, the effective MTBF is dependent upon the credibility of its PFM and the information produced within it. Essentially, the authors warn of GIGO here. In the next chapter, Nina Budian and Murray Petrie write about the assessment and control of fiscal risk. They define types and sources of risk, outlining the fiscal risk management cycle and explaining the role and influence of professional standards setting bodies in nudging governments to assess and combat risk factors (such as pension obligations). Though risk may be partially accounted for through budget stabilization funds and the like, Budian and Petrie explain that assessing, quantifying and disclosing risk is vital to improving awareness about the fiscal trajectory of a government. This allows for determining plans, (hopefully) a stepped process for mitigating risk that can contribute to greater transparency and possibly improved public trust in government.

Richard Hemming and Philip Joyce continue with a comparison of fiscal councils and their role in and potential for advancing fiscal responsibility. These scholars distinguish Sweden's fiscal policy council (FPC) (novice) with the United States' Congressional Budget Office (CBO) (seasoned). They find both to be well functioning and independent, though the larger CBO provides more technical and analytical support to Congress given its much broader mandate for analytics, and its larger, full time staff versus FPC's smaller office that uses part time consultants. Hemming and Joyce argue that the role of such councils, like rules, is to help policy makers and voters do their job better, and not do it for them. The most useful role of such councils related to fiscal management is as an objective voice considerate of unbiased analysis.

Mythbusters Teresa Curristine and Suzanne Flynn consider public performance and its measurement in chapter seven. The authors explain numerous misconceptions about performance measurement, its applicability to budgeting and financial management, and its possibilities for influencing government results. Their assessment about performance information (PI) magnifies much of what Schick discusses earlier. PI is a reform that adds value to budgetary and fiscal management deliberations but is not and should not be the sole basis for budgeting decisions. PI systems in governments are ubiquitous yet ever evolving; efficient and effective systems need not flood the process with measures. Such data can be used to better inform, even help with expenditure efficiency, but the use of PI takes great patience and discipline throughout the budgeting process. Curristine and Flynn review data from a recent OECD survey about the use of PI for budgeting and management, noting its usefulness for both, though for management is stronger.

Part III includes four chapters that assess modernizing components of PFM infrastructure--fiscal reporting, cash and debt management, public investment and accrual budgeting. Guilhem Blondy, Julie Cooper, Timothy Irwin, Kriss Kauffmann and Abdul Khan introduce this part by explaining fiscal reporting and its relationship in a PFM system. They do a good job of outlining the account and statistic divisions of governments and their great variability of structures. Even with international financial reporting standards, a wide disparity of financial reporting exists. Table 8.5 offers a look at just nine countries with very different account coverage schemes. These scholars distinguish between the influences of the International Monetary Fund (IMF) and the International Public Sector Accounting Standards (IPSAS) when discussing improvements in reporting because of advanced technologies and given the foci explained in previous chapters on risk assessment and government results. They highlight the modern push to enhance financial reporting by concentrating as much on forward looking assessments of revenues, debt, expenditures and balance as on past financial performance. They also call for complementing traditional financial reporting with budget and program performance reporting, geographic assessments and "the state of the environment" reporting.

The next chapter has John Gardner and Brian Olden arguing for better integration of cash and debt management to provide critical support to governments in periods of economic crisis. This chapter highlights how technology has advanced flow of funds into and out of governments and supports the use of simulation and high level analytics for better prediction and monitoring of funds. Further into the chapter, the scholars harp on the importance of greater credit risk assessment (previously discussed). They also alert to the very real modern problem of human capital as applied in this case, "Building human capacity is a considerable problem given that risk management specialists are attractive to the private sector, and skill shortages in the public sector plague virtually all countries" (p. 293). The chapter continues with an assessment of challenges for effective cash and debt management, especially for developing countries--much of this relates to inadequacies in planning, lax discipline, and (often) conflicting goals of lenders/donors with the home government over project selection and reporting compliance. Again, the book's theme is harped on: there is no one best way to structure cash and debt management; context dictates the preeminent approach for a specific government.

Israel Fainboim, Duncan Last and Eivind Tandberg delve into public investment in chapter ten. They describe current public investment management and consider how the practice should evolve in the future. They distinguish between the lumpiness of public investment compared with repetitive and continual budgeting for operations. The many problems with public investment are sorted through, especially the disjointed components of what is planned for, what is possible (fiscal capacity), and what is accounted for along the way (inevitable glitches). The perennial problems with public investment are familiar--overly ambitious plans are coupled with unrealistic projections of capacity that leads to unsustainable projects (in scheduled production as well as costs). Later on, the authors provide a candid look at how optimism bias in projects can be addressed. They call for better integration of public investment planning (capital budgeting) with a MTBF to discern the fiscal space necessary for efficient production. These scholars also call for performance budgeting and accrual accounting linkages with infrastructure development. A final part of the chapter reviews financing for infrastructure, specifically the use of public private partnerships and how risk is spread across stakeholders in these partnerships.

Accrual budgeting is examined by Abdul Khan in chapter 11. He defines accrual budgeting to include foresight regarding the flow of funds across a certain time period when "economic events are expected to occur, not necessarily in the year in which related cash is expected to be received or paid" (p. 340). Khan illustrates that the definition of accrual budgeting is nuanced by comparing definitions across five countries (all distinctive). Khan also explains that accrual budgeting is not necessarily separate from cash budgeting and can be linked in a traditional appropriations process. Like Curristine and Flynn regarding PI, Khan busts a few myths about accrual budgeting. Still, he presses the real challenges for employing accrual budgeting effectively by governments--its complexity, susceptibility to manipulation, and investment requirements are true hurdles to full implementation. The drumbeat continues with his recommendation for a phased approach to the introduction and management of accrual budgeting within a PFM system.

The last three chapters contribute greatly to the uniqueness of this book-providing some focused attention on how modern PFM as described thus far (mostly in industrialized countries) can be accommodated in developing ones. Special challenges for emerging market and poor countries include often fractured governance structures, overly ambitious laws, poor fiscal capacity, high donor (external) involvement, and complex bureaucracies. Annalisa Fedelino and Paul Smoke attempt to link PFM and decentralization reforms in developing countries, focusing on the conflicting objectives of these types of reforms. That is, decentralization may be conducted to provide greater fiscal support and independence to subnational governments that have little capacity, structures or frameworks for managing funds. Plug into the equation various external donors/funders and the threat of malfeasance and instability grows. This chapter provides examples of experiences in Indonesia, Kosovo and Uganda, each country realizing some success with one reform or the other. Still, the authors continue with the theme of patience when developing PFM architecture, engaging significant research and thought for change, and managing a phased approach that accounts for the fact that in this case, one step forward with PFM may mean no step forward or even a step or two backward for decentralization.

Teresa Daban Sanchez and Jean-Luc Helis carry forward these thoughts in their chapter on PFM in countries rich from "gifts of nature" or countries that derive most of their revenues from resources extracted from the earth such as minerals and oil. These countries fall prey to typical problems of weak rule of law, little transparency, lax accountability, not to mention the ever looming problem of revenue volatility associated with such resources. While for most resource rich but poor countries it seems an insurmountable task to improve the management of these assets, the authors present several cases in which "the resource curse" has been somewhat reversed or even overturned. Effective reforms have occurred in phases, require substantial planning that must be integrated with a medium term budget framework, and necessitate extreme discipline to adhere to such plans.

Richard Allen rounds out this section and the book by providing some historical context to the budget institutions in developing countries and their reforms. His figure 14.1 illustrates the political economy environment of budgetary institutions and presents the complexity of processes ever changing. Within countries, progress in specific areas of PFM architecture may occur over time, while other areas falter. That is, it is hard to maintain focus, consistent championing and the discipline necessary (in developing countries, especially) to advance all of the components of an effective PFM system. Because of this, Allen discusses a "platform approach" to reform in these countries as reasonable.

This book is novel in its comprehensiveness, covering PFM "soup to nuts". It is unusual in threading throughout it a theme of caution in considering and executing PFM reform. The intermingling of political will and rules and an accounting for time and context require a phased or staged approach to any PFM reform, in industrialized and developing countries alike. Importantly, this book emphasizes that PFM architecture can influence human behavior to better achieve the objectives noted by Schick of fiscal sustainability, effective allocation and efficient programming and service provision. However, PFM architecture is layered on top of, if not embedded within, certain political and economic contexts that already influence human behaviors. Advancing PFM architecture in such circumstances requires the curiosity of a scientist, the creativity of an artist and the patience of both.

Katherine G. Willoughby Department of Public Management and Policy, Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA, USA

(1) Review of Marco Cangiano, Teresa Curristine, and Michel Lazare, editors. Public Financial Management and Its Emerging Architecture. Washington, D.C.: International Monetary Fund, 2013, pp. 456.
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Author:Willoughby, Katherine G.
Publication:Public Finance and Management
Article Type:Book review
Date:Mar 22, 2015
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