Assorted

Field Experiments in Economics: The Past, The Present, and The Future

The Panic of 2007

Can the West Save Africa?- Easterly

Fair Value Follies

The obvious lesson of the rejection of Paulson's plan

Real-financial sector links

Bernanke Learns Lessons From Great Depression

Emergency Economic Stabilization Act of 2008

Framing the Wall Street “bailout”

On rescues and bailouts

Dark flows

Banking on Basel: The Future of International Financial Regulation

Do Good Grades Predict Success?

Bailout Plan, Redux

Roubini Sees `Silent' Run on Banks, Urges `Triage' (podcast)

Throwing money at issues don't work

A recent working paper from the Fund- Determinants of Government Efficiency

Summary: We compile the first large cross-country panel dataset of public sector performance and efficiency, encompassing 114 countries on all income levels from 1980 to 2006, with about 1,800 country-year observations for the education sector and about 900 observations for health. We regress these indicators on potential economic, institutional, demographic, and geographic determinants. Our most resounding conclusion is that higher government expenditure relative to GDP tends to be associated with lower efficiency in the respective sector. Moreover, we find that richer countries exhibit better public sector performance and efficiency, and that institutional and demographic factors also play a significant role.

From the introduction;

The efficiency of government spending has become one of the key issues in public finance. In the advanced economies and many transition countries, higher efficiency of spending seems to be the only way to avoid that public services are squeezed out between the opposing forces of age-related expenditure and rising tax competition (Heller and Hauner, 2006). In low-income countries, increased expenditure efficiency will have to complement increased social expenditure if the Millennium Development Goals are to be reached. Emerging markets, in turn, may seem under less pressure of this kind, given their rapid growth, but it is well-known that the demand for public services tends to rapidly increase as countries become richer (the so-called Wagner effect), and higher efficiency will be the only way to avoid a large increase in the tax burden. Moreover, good government is also of more general concern, as it has been shown, for example by Easterly and Levine (1997), that it is a crucial determinant of economic growth.

Against this background, government efficiency at the aggregate level has thus become the subject of a rapidly growing literature, including key contributions by Gupta and Verhoeven (2001), Tanzi and Schuknecht (1997, 2000), and Afonso et al. (2005). These studies typically measure public sector efficiency by relating government expenditure to socio-economic indicators that are assumed to be targeted by public spending, such as education enrolment ratios or infant mortality; the results of their cross-country examinations suggest substantial efficiency differences between countries, irrespective of their income level.

It is only logical that the more recent literature has started to examine the determinants of these efficiency differences: Afonso and Aubyn (2006) examine the differences in the efficiency of education spending in the OECD and find that income levels and parents’ education explain a large part of the variation. Afonso et al. (2006) examine public sector efficiency in the new member states of the European Union and conclude that security of property rights, income level, competence of the civil service, and the population’s education level affect efficiency. Hauner (2008) examines the determinants of expenditure efficiency for Russia’s regions. His results show that higher government efficiency tends to be associated, in particular, with higher per capita income, a smaller share of federal transfers in subnational government revenue, better governance, stronger democratic control, and smaller government expenditure. Examining government performance—but not efficiency as does this paper—and using a cross-section but not a panel, La Porta et al. (1999) find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or Socialist laws, or have high proportions of Catholics or Muslims exhibit inferior performance.

Here we make two main contributions to this literature. First, we compile the first large cross-country panel dataset of government efficiency, encompassing 114 countries on all income levels from 1980 to 2006, with about 1,800 country-year observations for education and about 900 observations for health. Previous papers have either studied a more limited number of countries or only a cross-section. Second, we are the first to examine the policy and environmental determinants of efficiency not only for such a large panel, but also for a much broader universe of regressors than previous studies, similar to the undertaking of Friedman et al. (2000) for unofficial economic activity. However, due to important but—at this stage— irresolvable data shortcomings that we will discuss, we see this paper only as a first step to a better understanding of broad global trends in expenditure efficiency and its determinants.

In the first part of the empirical analysis, we compute three types of scores per policy sector for each country: (i) public sector performance (PSP) that measures only outcomes; (ii) public sector efficiency (PSE) that relates outcomes to expenditure with a simple ratio; and (iii) Data Envelopment Analysis (DEA) scores that measure efficiency relative to a frontier. As most of the literature, we focus on the health and education sectors, because no useful data on outcomes for other sectors is widely available. The results broadly suggest that public sector performance and efficiency have been trending upward over time.

In the second part of the analysis, we relate these scores econometrically to a battery of possible determinants related to economics, demographics, geography, and institutions. As multicollinearity and endogeneity loom large, we run univariate as well as multivariate regressions and alternatively use fixed and random effects and system GMM estimators.

The most resounding conclusion is that higher expenditure relative to GDP tends to be associated with lower efficiency. Strikingly, in the education sector, even the relationship between spending and performance is tenuous, in stark contrast to the health sector. This means that citizens not only tend to get a declining marginal “bang for the buck” as their governments spend more on education, but possibly no additional “bang” at all. This finding has important policy implications, given that “throwing money at issues” is so often the first political reflex, whether it comes to Millennium Development Goals or the need of advanced economies to improve education in the face of challenges from globalization and technological progress.

We also find that institutions matter, as well as demographic and geographic factors. Public sector performance in education is stronger where governments are more accountable, while public sector performance and efficiency deteriorate as corruption becomes worse. More mundane demographic and geographic factors also play a role: for example, a relatively larger youthful population reduces performance and efficiency in the education sector, while higher population density (allowing for returns to scale) improves performance.

Typical issues with MTEFs

Some of the issues with MTEF development in Cape Verde;

Some progress has been made in the preparation of the sectoral MTEFs, but this process is still in its infancy. International technical assistance and training is being provided to the MFPA and sector ministries, in order to help them develop the global and the sectoral MTEFs. Four ministries have started the elaboration o f the MTEFs: Health, Education, Agriculture, Fisheries and Environment, and Social Protection. The Ministries o f Education and Agriculture, Fisheries and Environment, and Social Protection already have a first draft. The MTEF on Health i s behind schedule and that is primarily the result o f lack o f capacity and shortage o f human resources at the sectoral level. Coordination on the MTEF exercises between DGO, DGP and the sectors has improved but needs to be strengthened. A lack o f reliable information on the revenues’ forecast and on donor financed projects, prejudices the budget preparation and slows down the implementation o f the MTEF.

The 2006 budget was linked to the PRSP and to the MTEF. The four ministries that have produced MTEFs prepared the 2006 budget in accordance with their MTEFs. This is an important improvement but is still in a very early stage. Regarding the alignment with the PRSP programs and sub-programs, they are now linked to the budget and the SIGOF functionalities allow for their management in a coherent way. The 2006 budget has been prepared in a decentralized way with line ministries, directly entering data on the SIGOF system and it has also been prepared for investment by program and sub-program. Moreover, sectors are shifting progressively to a results-based management approach.

Overall the implementation of the MTEF has not been properly conducted, undermining the effectiveness of this instrument. The preparation o f the sectoral MTEFs overlapped with the preparation o f the global MTEF and the interaction between the two processes was insufficient. The global MTEF set ceilings which were not respected as truly upper limits and, as a result, the global MTEF was revised to accommodate the revised ceilings. Furthermore, PRSP and MTEF are not in line, as again the preparation started at about the same time, and thus PRSP does not emerge from the MTEF. This complicates the budget preparation and execution as there is not a clear and consistent directive. In order to use the MTEF as an instrument that defines the overall fiscal strategy, the global MTEF has to work as a top down envelope setting hard budget constraints that define line ministries spending plans. Without a hard budget constraint, derived from the global MTEF, trade-offs between sectors/ministries are not faced and policy is not disciplined by availabilities.

The foregoing suggests that the Government has yet to develop a coherent vision of how a MTEF should be developed, and the role it can play in supporting the Government’s fiscal strategy, ensuring that allocations to sectors and ministries reflect political priorities, and that projects and programs are adequately and reliably funded through the budget. It will be especially important for the Government to develop a sound MTEF based on the budget process in the years ahead, to maximize the development value of public spending, but also to put the country in a better position to manage any future external shocks, given the central role o f the fiscal policy in adjustment in Cape Verde.

The linkage between government departments and donors is strengthening. A first memorandum o f understanding was agreed upon in February 2005, and signed in April 2005 by the Budget Support Group, consisting o f the World Bank Group, the European Union and the Kingdom o f the Netherlands. A revised version is being prepared and two new donors are joining the support group: the African Development Bank and Spain. The DGP is the liaison between the various departments and donors.

How does one reinforce an MTEF?

The MTEF needs to be reinforced. Introduced in 2003/04 as part of the fiscal restructuring project financed by the European Union, it has guided the ministry of finance and line ministries in preparing a three-year budget outlook on which one-year budgets are based. Still needed, however, are a public expenditure tracking system aligning the annual budget with the PRSA and better project evaluation. The monitoring system should also cover delivery of services.

The improvements in the transparency, quality, and depth of the budgeting process for ministries and departments envisaged by the MTEF would allow for better prioritization of spending. The composition of current expenditure in Swaziland is less growth-enhancing than that in other SACU members. A review of the capital expenditure program is needed to focus on projects directly linked to more productive areas with a high social rate of return (e.g., irrigation programs). Project evaluation is critical for ensuring that public investment projects do not jeopardize debt sustainability; priority should be given to high-return, progrowth, and propoor projects where bottlenecks to be resolved by such projects have been clearly identified.

Well-functioning PEM systems and the MTEF help improve governance by ensuring that public resources are used transparently and efficiently. Greater transparency, tighter rules governing budget procedures and reporting, and preparation of medium-term expenditure plans would not only enhance the productivity and accountability of public policy, they could have a positive impact on business climate.

Empirical evidence shows that good governance is essential if spending is to be effective. The adverse impact of corruption and poor governance on economic and social outcomes is well recognized Corruption tends to be associated with poorly enforced property rights, weak rule of law, and few incentives for productive investment, all which damage economic growth.

Source: Kingdom of Swaziland: Selected Issues and Statistical Appendix

Related;
Swaziland - Public expenditure review

MEDIUM TERM BUDGET POLICY STATEMENT

Can Growth be achieved by decree and loans

The Growth Support Project for Mali aims at (1) improving the investment climate as much as possible in order to increase total factor productivity (TFP) and foster growth, with a particular focus on small and medium enterprises and on key sectors, (2) expanding the availability of the infrastructure base, and (3) promoting business innovation through financial and non financial services. There are four project components. Project Component 1 - Investment Climate and Institutional Strengthening --helps (1) implement the key recommendations that emerge from the recent investment climate assessment and improve the country's legal and regulatory framework in key areas so as better performances are reflected in the Doing Business indicators; and (2) strengthens both policymaking and operational capabilities in key sectors with a high growth contribution potential. Project Component 2 - Infrastructure Support for Growth-- seeks to improve economy-wide and sectoral total factor productivity by enhancing available infrastructure. It develops an industrial zone, improves the Bamako airport, supports the expansion of the telecommunications network, and (iv) supports infrastructure improvement for tourism and mining. Project Component 3 - Financial and Non-Financial Services for Innovation and Development-- increases term financing for micro, small and medium enterprises (MSMEs) and to provides quality business development services to MSMEs, including supply chains, so that they can innovate, develop and as to increase their output and productivity. Component 4 - Project Coordination, Monitoring and Evaluation-- ensures not only effective and coordinated implementation across various institutions involved, but also so ensure that both intermediate and final results sought are obtained

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Econ Blog of the Year

The Growth Blog

Podcast- Accounting's role in the crisis

Wallison Says `Fair Value' Accounting a Cause of Crisis

Peter Wallison, a fellow at the American Enterprise Institute, talks with Bloomberg's Tom Keene about the outlook for the proposed $700 billion bailout of financial institutions, the role accounting rules played in the credit crisis and the risks facing financial markets and the economy

Link of the Day

Three Weeks of Financial Turmoil

World Economic Outlook

According to Michael Mussa;

Economic growth has recently slowed across much of the world economy following stronger-than-expected performance during the first quarter of 2008. The net result is likely to be that on a year-over year basis, global real GDP growth for 2008 will be only slightly below the 3.8 percent forecast last April. For 2009, however, growth now looks likely to decelerate to slightly below 3.5 percent rather than accelerate to 4 percent.

Meanwhile, the broad upsurge in commodity prices of earlier this year has been largely if not completely reversed. In particular, the price for light sweet crude has fallen back from a peak of almost $150 per barrel to about $100 per barrel but is still above the $80 per barrel price of late 2007. Recent sharp declines in commodity prices will help to bring down headline inflation rates, at least for a while, although core inflation rates will likely remain uncomfortably high in a number of countries. In some emerging-market countries, where policies have remained lax, inflation will continue to be a critical problem.

Thus, looking to the rest of 2008 and to 2009, the world economy will experience mild stagflation. World real GDP growth (on the basis of the International Monetary Fund’s World Economic Outlook [WEO]) will be significantly below the 4¾ percent average annual rate achieved from 2004 through 2007 but meaningfully above the 2½ percent rate that marks the borderline of global recession.1 World consumer price inflation (measured on a 12-month basis) will fall below the recent high of over 6 percent but remain above 4 percent through 2009. Economic policies, therefore, will generally face the dual challenges of ensuring that inflation returns to acceptable rates within reasonable time horizons and of guarding against unnecessarily deep and prolonged slowdowns in output growth.

Audio of the event

The Invisible Cure: Africa, the West, and the Fight Against AIDS

Helen Estein at Google

Reading for the weekend

When Judges Make Foreign Policy

New Blog in the Block

RealTime Economic Issues Watch
A new website feature in which senior fellows of the Peterson Institute for International Economics discuss and debate their responses to global economic and financial developments as they occur each day and offer insights that others might overlook.

The First Presidential Debate

NYT Check Point's the first debate;

Earmarks:
Senator John McCain plunged into the debate with a strong attack based on one of his signature issues, the requests by members of Congress for funding for pet projects that would benefit their home districts or states, also known as earmarks.

Mr. McCain charged that Mr. Obama “has asked for $932 million of earmark pork-barrel spending, nearly a million dollars for every day that he’s been in the United States Senate.” Parts of that statement are true, but others are not, and other remarks Mr. McCain made about the subject Friday night were also incorrect.

According to the calculations of fiscal watchdog groups, Mr. Obama has indeed requested that amount of funding since entering the Senate in 2005. But some of the same groups make a distinction between “pork-barrel” projects that they deem inherently wasteful, such as the now-famous “Bridge to Nowhere” in Alaska, and those projects that may have a useful purpose but which are obtained through legislative guile.

In addition, Mr. McCain erred when he said that earmarks have “tripled in the last five years.” Earmarks tripled in size over the decade between 1996 and 2005. But since then, they have actually declined, from nearly 14,000 projects worth $18.9 billion in fiscal 2005 to just over 11,500 projects valued at $16.5 billion for the fiscal year ending next week.

Finally, earmarks are, as Mr. Obama indicated, a tiny part of the federal government’s overall budget and deficit. For fiscal year 2008, President Bush asked Congress to authorize $2.9 trillion in spending, which meant a total deficit of about $240 billion. That means that even if all earmarks were eliminated, it would reduce the federal deficit for the year by less than seven percent.

Fannie and Freddie:
Senator John McCain said tonight that he “warned about Fannie Mae and Freddie Mac,” echoing some of his recent comments in which he portrayed himself as sounding the alarm about the impending financial crisis.

Mr. McCain was referring to his decision in 2006 to sign on as a co-sponsor of a Senate bill that would have overhauled regulations governing Fannie Mae and Freddie Mac. But the legislation was introduced more than 16 months earlier, and the debate over the issue had been going on for some time. He also only added his name to the measure after an oversight agency issued a long report condemning practices at Fannie Mae.

Tax Hikes:
Senator John McCain charged that Senator Obama voted “to increase taxes on people who make as low as $42,000 a year.”

Mr. Obama interjected, “That’s not true, John. That’ s not true.” Mr. McCain’s claim has been called “simply false” by the nonpartisan FactCheck.org.

It is based on Mr. Obama’s vote for Senate Democrats’ nonbinding budget resolution for fiscal 2009 that assumed all of President Bush’s 2001 tax cuts would expire as scheduled in 2010. But Mr. Obama has promised that he would retain all Bush tax cuts for families making less than $250,000 a year. Mr. Obama has proposed other tax breaks for the middle class as well. The nonpartisan Tax Policy Center has concluded that 95 percent of families with children would get a tax break under Mr. Obama’s plan, significantly more than under Mr. McCain.

Here's the transcript

IMF Fact of the Day

The Fund devotes about a quarter of its budget to capacity building. It extends beyond the mere provision of technical assistance and includes work on standards and codes, financial sector assessment, and training of officials.

-The Role of the Fund in Low-Income Countries - Background Paper

Learn from the Master

I’m someone who admires President Clinton very much. Like all of us, he is not a perfect man. But I guess I was struck again and again with the 1993 budget deal, with what happened in Mexico with the way he worked to contain the Asian financial crisis. But on all sorts of things, he did the politically convenient thing. But when it was really important, I never saw him hesitate to do what he thought was the right thing. Probably the single moment I will remember with the greatest clarity was the night Secretary Rubin was sworn in as Secretary of the Treasury by Chance. We walked in and we told him that after Bob’s swearing in, we walked in and we told him that Mexico was going to default within 48 hours if the United States did not make an appropriate commitment. He asked how large a commitment. Bob turned to me. I said $25 billion. One of his aides said you mean, $25 million. Bob said, no. He means $25 billion. There was a certain silence in the room. Another very senior person on the White House staff remarked – remember, this is January 1995, so it’s two months after the President had lost badly the 1994 election. One of his most senior people remarked that if we send this $25 billion to Mexico and it doesn’t come back, there is no way you are going to be reelected. The president didn’t hesitate. He said – I’m going to clean up slightly what he said but the essence of it was – this is serious, this is why we’re here. We are going to do our best to make the right decisions. If we make the wrong decisions and we lose an election, that is how the process ought to work. So I just want to know two things. First, is there a substantial chance that something very serious will happen if we don’t do this? We said yes. Then he said, I realize there are no guarantees, there are no certainties, but is there a reasonable chance that is we are prepared to make a commitment that we will contain the situation. We said yes. He said, well, it’s pretty obvious what we should do. That launched us on something that had a fair number of ups and downs. If I look back at the calendar of those events and look at graphs of the market, it was basically pretty clear that the thing was going to work within about two-and-a-half months. But if I take my subjective experience of those two-and-a-half months, and I think about it, it feels more like two years. That was probably the single most dramatic of the episodes that I was involved in.

-Larry Summers

Photo of the Day- Cheese Lottery

A cheesemaker took a round of cheese out of storage to pile it in lots during the annual "Chaesteilet" in the Justi Valley in Bernese Oberland, Switzerland. Each September during the "Chaesteilet," landowners and their families gather on the Spycher mountain where the cheese stores are located. The cheeses made during the summer on the Alps are taken from storage and piled in lots. After an address by the head cheesemaker, each member is allocated his share of the different aged cheese by lottery.

Assorted

The Real Problems of Economics

Responding to Greg Mankiw

Equity Warrants and Asymmetric Information

Some Rough Bailout Arithmetic

Loan interview of the 21st century

The Big Switch

Nicholas Carr's Colbert interview

Another explanation of Paulson Plan

Assorted Podcasts

Columbia's Calomiris Favors Preferred Stock to Aid Banks

Tilman Says Firms That `Evolve and Adapt' Will Survive Crisis

The Good and the Bad of the Bailout Plan

Rodrik of Harvard Business School?

Head of Research at Oxfam reviews Fixing Failed States;

In a manner analogous to the ‘growth diagnostics’ of the Harvard Business School, the authors argue that ‘the state-building agenda entails easing constraints on state institutions… Rather than adhering to a model that stipulates a priori both the institutions and the mechanisms for their creation, this approach encourages piecemeal, context-specific innovations.’ This ‘institutions diagnostics’ approach necessarily entails a lot of trial and error – a job for searchers, not planners, in William Easterly’s useful schema .

Robin Hanson's Contrarian world view

Food isn't about Nutrition
Clothes aren't about Comfort
Bedrooms aren't about Sleep
Marriage isn't about Romance
Talk isn't about Info
Laughter isn't about Jokes
Charity isn't about Helping
Church isn't about God
Art isn't about Insight
Medicine isn't about Health
Consulting isn't about Advice
School isn't about Learning
Research isn't about Progress
Politics isn't about Policy

Scary Headlines of the Day

Government Seizes WaMu and Sells Some Assets;

Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators on Thursday night, in what is by far the largest bank failure in American history.

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation’s largest savings and loan to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing institution.

Credit Enters a Lockdown;

“The situation is like that movie trailer where a guy with a deep, scary voice says, ‘In a world where credit markets are frozen, where banks refuse to lend to each other at any price, only one man, with one plan can save us,’ “ said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington.

Quote of the Day

A Central Banker should stand up to fear-mongering. Even when it comes from a Treasury Secretary.

-An Open Letter to Ben Bernanke

Paulson plan explained

Sub-prime's impact in emerging markets

The sub prime crisis : implications for emerging markets

Summary: This paper discusses some of the key characteristics of the U.S. subprime mortgage boom and bust, contrasts them with characteristics of emerging mortgage markets, and makes recommendations for emerging market policy makers. The crisis has raised questions in the minds of many as to the wisdom of extending mortgage lending to low and moderate income households. It is important to note, however, that prior to the growth of subprime lending in the 1990s, U.S. mortgage markets already reached low and moderate-income households without taking large risks or suffering large losses. In contrast, in most emerging markets, mortgage finance is a luxury good, restricted to upper income households. As policy makers in emerging market seek to move lenders down market, they should adopt policies that include a variety of financing methods and should allow for rental or purchase as a function of the financial capacity of the household. Securitization remains a useful tool when developed in the context of well-aligned incentives and oversight. It is possible to extend mortgage lending down market without repeating the mistakes of the subprime boom and bust.

Reports Watch

World Investment Report 2008- special focus on the role of transnational corporations in infrastructure development.

Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World

Right to health - MDGs in Latin America and the Caribbean

World Malaria Report 2008

ILO rising food prices report

Housing for All

Economic Development in Africa 2008

Trade and Development Report 2008

Millennium Development Report 2008

Reforming energy subsidies: opportunities to contribute to the climate change agenda

Economic Survey of Latin America 2007-2008

Public Sector Reform: What Works and Why?

Webcast of a recent discussion on IEG report on public sector reform;

On July 17th, 2008, the World Bank presented a panel discussion on a new report from the IEG entitled Public Sector Reform, What Works and Why? The event was moderated by Sanjay Vani, Lead Financial Management Specialist (OPCFM), who introduced the report and related its importance. Steven Webb, and Lead Author of the IEG report, addressed the group by explaining its objectives and his hopes that the report would stimulate discussion and new ideas for the future. Additionally, Webb stated that while they could not cover every aspect of the public sector, they did focus on four key areas including: public expenditure and financial management, civil service and administration, tax administration, corruption and transparency.

Clay Wescott, Author of the Public Finance Management background paper, then addressed public expenditure and financial management issues within the report. Wescott divided the report into two sections, the first being key debates between scholars and practitioners on public financial management and procurement. Second, he discussed the World Bank’s support to procurement and financial management. Finally, Wescott addressed issues he felt the paper failed to acknowledge, but were important for the future. Webb then spoke again, speaking to Wescott’s comments and additional issues on how to evaluate and understand progress within public sector reform.

James Brumbry, Lead Public Sector Specialist (PRMPS), covered four specific areas within the report. His comments touched on comparisons between public financial management and civil service reform, the operation of partnerships between the bank and countries and sequencing and transitions, the gap between promise and performance. Next, Devesh Mishra, Regional Procurement Manager (ECA), cited examples, challenges, and solutions in his discussion on procurement. Finally, Vani, addressed the reports findings, his concerns and then opened up the floor for discussion. Questions and discussion centered on sub-service delivery, report recommendations and procurement options including outsourcing.

Assorted Podcasts

Malvey Says Financial `Risk Storm' Has Not Subsided

Morgan's Roach Says Bailout Plan Will Help Stop Panic

Rogoff Says U.S. May Spend $1.5 Trillion to End Crisis

Professor Meltzer Sees Fed Setting `Terrible Precedents'

New York Mellon's Woolfolk Says U.S. Dollar Has Bottomed

Interesting Idea

MyC4.com- 'web-based platform that allows you to look up a list of African entrepreneurs who need funding for their projects (described briefly on the site) and to offer them loans'

via Dani Rodrik

Netherlands Antilles- a New Fiscal Framework

Proposed fiscal reforms of Netherlands Antilles;

Background: The promise of fiscal discipline and debt relief, under the agreement to dissolve the Netherlands Antilles, has boosted investor confidence and growth. Implementation of the dissolution agreement has begun, although the actual constitutional changes are now scheduled for January 2010. The new fiscal framework (a balanced budget, debt limits and supervision) is already in place in the BES islands (Bonaire, St. Eustatius, and Saba) and due to start in 2009 in Curaçao and St. Maarten. The authorities are pushing ahead with welcome reform proposals to improve: tax policy, labor markets, public enterprise finances, pensions, and healthcare.

Challenges: The immediate challenge is complete the transition phase expeditiously by finalizing important details, including the terms of debt relief. An ongoing challenge will be economic management in the absence of key macroeconomic policy tools—structural reforms will be crucial for improving competitiveness and maintaining external viability. The authorities will also need to address the strain on public finances from entitlement costs, and the impact of debt relief-related liquidity on financial sector balance sheets...

Debt cancellation of about 80 percent of total public debt as of December 31, 2005 by the Netherlands. Details of the coverage, schedule, and modality of debt relief remain to be finalized, and the actual operations have been delayed. Debt relief will be conditional on the establishment of a fiscal framework, applicable to the local government of each island, and including:
• The introduction of medium-term budgeting;
• The establishment of a fiscal supervisor (chaired by a Dutch appointee) to supervise borrowing decisions, ensure that the fiscal rule (see below) is fully implemented, and advise responsible ministers.
• A balanced current budget rule, with borrowing restricted to within-year cash management needs. Deviations will be allowed only in case of a disaster, with disaster relief subject to the approval of the fiscal supervisor.
• Borrowing caps for capital expenditure, limiting annual interest payments to five percent of the average total revenue of the preceding three years, with loans for investments to be approved by the fiscal supervisor only if budget implementation is in line with the fiscal rule.

Would Fiscal Policy defense work?

IMF's John Lipsky at UCLA Economic Forecasting Conference;

Fiscal policy provides a second line of defense. It has played a role in the United States already and automatic stabilizers are appropriately providing support elsewhere in other advanced economies. In many emerging economies, fiscal policy will have to play a supportive role to monetary policy in helping to bring down inflation.

Fiscal policy is broadly appropriate across the advanced economies, but room for maneuver is limited given the need for medium-term fiscal consolidation in many of these countries. However, support for the financial sector inevitably will involve budgetary costs that must be taken into account in considering policy alternatives.

In emerging economies where inflation remains a problem, fiscal policy should play a more supportive role in restraining demand growth and easing inflation pressures. In particular, greater restraint on spending growth would be helpful as a complement to tighter monetary policy.

Direct intervention is the third line of defense. It has become obvious that direct fiscal intervention is going to be needed in the United States and elsewhere in order to attain the goals of removing distressed assets from financial institutions' balance sheets, and in recapitalizing the financial system where appropriate.

In this context, we welcomed the decisive actions taken by the U.S. authorities to shore up the GSEs, providing crucial support for the U.S. housing market, the banking system, and the broader economy. Over the longer term, a deep restructuring of the GSEs remains essential to restore market discipline, minimize fiscal costs, and limit systemic risks for the future. Ultimately the conflict of private ownership and public policy objectives within the GSEs' former business model needs to be resolved.

The challenge of removing distressed assets from financial institutions' balance sheets currently is front and center, with the US authorities' TARP proposal currently being examined by Congress. The discussions of the TARP have underscored the myriad difficult judgments that have to be made in order to make such a program a success. It is possible that similar challenges will be faced by other advanced economy authorities in the coming months. Earlier this year, the IMF proposed a solution based on long-term swaps of mortgage securities for government bonds. The advantage of such an approach is that it provides near-term relief for bank balance sheets, while ultimately leaving the underlying credit risk with the banks, rather than the taxpayers. In any case, the current discussions also have underscored the importance that moral hazard issues play in direct fiscal intervention in resolving financial sector crises.

More broadly, efforts aimed at alleviating systemic risks, including notably the provision of support to key financial institutions, will require sound judgment. For example, the current market strains to some degree reflect solvency risks. underscoring the need for a systematic and comprehensive approach to deal with distressed assets of failed institutions and in the financial sector more broadly.

In these circumstances, the key is to strike the right balance between safeguarding present financial stability and limiting future moral hazard. This task is by no means an easy one, but the consequences—either in the short- or longer-term—would be severe if the pendulum swings too far in either direction.

Dr. Shanta is back

World Bank's new Africa blog-Africa Can End Poverty

Photo of the Day

Source: NYT

Commodity Price Booms and Fiscal Policy Options in Australia

From Australia: 2008 Article IV Consultation - Staff Report;

Fiscal policy, focused on medium-term sustainability, delivered a sequence of surpluses that eliminated Commonwealth net debt. This leaves Australia with an enviable fiscal position by international standards. The new Labor government aims to maintain a conservative fiscal strategy by focusing on three objectives:
• achieving budget surpluses, on average, over the medium term;
• keeping tax as a share of GDP, on average, below the 2007/08 level (currently estimated at 24.7 percent); and
• improving the government’s net financial worth over the medium term.

In the near term, the authorities stressed that the latest budget places priority on helping to fight inflation and reprioritizing spending to build capacity. The 2008/09 budget slows the pace of growth of Commonwealth government expenditure and forecasts an increase in the underlying cash surplus to 1.8 percent of GDP. This stance is slightly contractionary, with the staff’s estimate of the structural balance increasing by ¼ percent of GDP, broadly in line with the change in the underlying cash surplus (Figure 11). The budget saves about half of the revenue surprise from the jump in the terms of trade and higher nominal GDP.5 The remainder of the revenue surprise helps fund personal income tax cuts targeted at lower income earners. Some other tax increases and expenditure cuts finance new initiatives for health, education, climate change, and housing. Beyond 2008/09, spending is projected to pick up and the underlying cash surplus is expected to fall slightly over the next four years.

The surpluses for 2007/08 and 2008/09 will be saved in three new funds for infrastructure, health, and education to finance capital spending. About 3 percent of GDP will be contributed to the funds, depending on the final budget outcomes and spending from the funds is included in the budget. The funds are a means to constrain spending revenue from the commodity boom in the near term, by saving for infrastructure spending over the medium to long term.

The staff advised that further fiscal restraint may be needed. The staff encouraged the authorities to identify areas where additional spending cuts can be implemented and to save any positive revenue surprises to assist monetary policy, until it is clear that inflation will decline. Given the uncertainty about how much of the increase in commodity prices will be permanent, saving the additional revenue in the near term may avoid sharp changes in taxes and spending in the future. Moreover, state governments are expected to run deficits and increase infrastructure spending, offsetting restraint at the Commonwealth level.

The authorities stated that if inflation pressures persist they would take the necessary action to support monetary policy. They noted that the next budget would offer another chance to constrain spending and direct it toward areas that are more productive, such as education, health, and infrastructure. They also emphasized that they are committed
to saving any further positive revenue surprises in 2008/09. If there is a positive revenue surprise in the 2009/2010 Budget and inflation remains high, the authorities indicated that they would maintain tight controls on spending.

To the extent that the improvement in the budget balance is structural, associated with permanently higher commodity prices, there should be scope to reduce taxes or increase spending over the medium term. Staff analysis suggests that a combination of lower labor and capital income taxes, along with increased public investment, will generate the largest economic gains.6 The gains from other options such as lower consumption taxes or higher public consumption are not as large. Despite the expected structural improvement in the medium term, significant long-term fiscal challenges remain, particularly in the area of healthcare spending, and early adjustments will be key to preserving fiscal sustainability.

The authorities noted that there would be scope to reform taxation and increase spending in priority areas, if the recent gains in commodity export prices prove to be permanent. The budget projections assume some easing in commodity prices over the medium term from the record levels forecast for 2008/09. Nevertheless, in recent years the authorities have been surprised by revenue on the upside, and commodity prices may not ease as expected. The authorities made it clear that any changes in taxes and spending would be consistent with the new government’s medium-term fiscal objectives, thereby further strengthening the fiscal position.

New Zealand Economist of the Year

The NZIER Economics Award for 2008 has been awarded to Dr John Gibson;

One such topic is that of savings. Contrasting beliefs that New Zealand has a household savings crisis, that inadequate retirement incomes would result from a rapidly aging population, that weak savings records have caused New Zealand to lag behind other developed countries, and that raising levels of savings would deepen domestic capital markets and boost economic growth, have made savings one of the most contentious recent political economic issues in this country. Through research and communication, the recipient of the Award has challenged these beliefs. In doing so, he has significantly advanced the understanding of academics, advisers, the public and students, of savings behaviour, the levels and composition of private wealth, and the adequacy of expected retirement incomes of New Zealand households.

The recipient of the Award has also undertaken substantial research on the education, labour market positions, and wealth of disadvantaged groups in New Zealand. His work on inequalities in income and wealth between Maori and Pakeha, and between migrants and locally born people, on training and job security for ethnic minorities, on Maori educational attainment, and on returns to schooling for Maori, sheds important light on the socio-economic positions of Maori and Pacific peoples.

A hallmark of the recipient’s work has been a willingness to generate new survey data, tirelessly and innovatively, where he has thought this necessary in order to answer empirical questions for which the existing data were inadequate.

This approach to his work has brought about a third major contribution from the recipient. Students at all levels, but particularly graduate research students, and academic colleagues, have learnt from him how vital it is, in economics just as in other fields, to concentrate on meaningful questions, to gather reliable and apposite empirical data, to analyse those data critically and rigorously, and then to disseminate those analyses through channels that will advance understanding of the issues, and inform debate on them. His students, in adopting that approach, are excellently equipped to contribute to New Zealand, and to other societies, in economics and in related fields.

From his acceptance speech;

Looking back, I also had the good fortune to work for the Agriculture Department in Papua New Guinea in the time between my Masters and PhD. Not only did I meet my wife there, I also managed to raise the ire of the Secretary of Agriculture, who was a former politician who ultimately became the PNG ambassador to the UN.

He took issue with research I had done showing that it was far better for Papua New Guinea to trade for rice using tree crops than to try to produce rice in some self-sufficiency effort. After cancelling my contract he went to the unusual lengths of taking out a full page advertisement in the national newspaper to say that all advice that I had given was a load of rubbish. Occasionally I think that Dr Cullen implies as much when he is dismissing my research on household savings with Grant and Trinh, but he has never gone to quite these lengths.

One silver lining of this was that the main private sector sponsor of research, a group not unlike the Business Roundtable, figured that I must be saying something sensible to warrant such venom. So they promptly hired me for two summers of work on food policy in PNG which lead to my working for a year and a half for the World Bank during my PhD, leading a nationwide survey of household living standards. Not many PhD students get million dollar research projects so I was again very lucky.

The second silver lining from this experience was that it provided a lesson that we typically don’t get in graduate school. Economics when applied publicly to currently policy problems is not always welcomed by either the incumbent elites or some of the vested interests. Such groups might occasionally resort to the odd media pot shot at the economist willing to publicise the implications of their research.

It is on that theme that I want to turn from the past to the future. It is my impression that as a society we are not getting full value from our university-based economists, in helping to inform public debate on topical matters. There are several reasons for this and at least some of them reflect factors that a group like tonight’s audience can help to overcome. So I want to bring these to your attention.

GFS data quality in Dominica

Statistical capacity problems affect the timely production of quality government finance statistics. In particular, the data are subject to frequent revisions stemming in part from omissions and misclassifications. Data on central government operations are incomplete and must be supplemented with additional information from external sources. For instance, some operations are undertaken outside the consolidated fund. These include certain investment spending, loan and grant receipts, and on-lending and transfers to public enterprises. As a result, capital expenditure data, recorded by the Treasury, must be supplemented with additional donor financing information, particularly because the public sector investment program (PSIP) data are not timely. Delays in the reporting of the PSIP data reportedly stem from reporting delays from the line ministries.

Several ongoing initiatives to strengthen expenditure management, should help minimize the extent of this problem. There is an ongoing effort to automate the expenditure execution process. A new automation technology installed in all line ministries in 2005 should allow all local purchase orders (LPOs) to be electronically generated and tracked. Commitments are charged against a specific budget allocation once the LPOs are generated. All ministries and suppliers of goods and services are compelled to use the new system. Only limited financing data are available. Although progress has been made in improving the measurement of the government's debt, there are concerns that there is still some under-recording of government commitments.

The authorities do not provide consolidated nonfinancial public sector data. Data for the rest of the public sector—Dominica Social Security and the public enterprises—must be obtained directly from each entity during Fund Article IV consultation missions.

No government finance data are reported to STA for publication in the International Financial Statistics (IFS) or the Government Finance Statistics (GFS) Yearbook.

via Dominica: 2008 Article IV Consultation - Staff Report

Podcast of the Day

Karol Boudreaux on Wildlife, Property, and Poverty in Africa

An Anti-corruption Ministry?

An interview with Paraguayan President Fernando Lugo;

Transparency Watch: How do you plan to institutionalise the fight against corruption?

Fernando Lugo: First, as a basis, by auditing and establishing permanent controls by and within each of the government’s departments. Additionally, through the creation – which will be finalised at the appropriate time – of a National Anti-corruption Ministry, which will set the political and technical norms to elevate such a battle to the most institutionalised level possible.

via PSD Blog

An MTEF to Manage Aid Flows

IMF recommends Dominica;

The mission recommended moving gradually to a medium-term expenditure framework (MTEF) to help manage the effects of recent aid inflows. In recent years, the government has taken steps to diversify its trade and economic cooperation linkages, especially with China and Venezuela, which has resulted in increased (but uncertain) aid flows (Box 5). This includes assistance under the PetroCaribe and Bolivarian Alternative for the America’s (ALBA) agreement with Venezuela. An MTEF would give greater predictability to government expenditure, reduce economic volatility, and help prevent an appreciation in the REER associated with aid-financed spending beyond the economy’s absorptive capacity. The mission also recommended improving the framework for executing and monitoring grant-financed projects. This would be aided by early approval of the pending Finance Administration Act, which would enhance recording and accountability in government finances. Regarding financing under the PetroCaribe and ALBA agreements, staff and the authorities agreed that such financing should be consistent with the overall public expenditure and debt strategy, and preserve the passthrough of changes in international oil prices. The authorities indicated that they propose to save the bulk of the concessional financing for fuel consumption under the PetroCaribe initiative. They plan to set up an investment fund, possibly at the ECCB, and restrict their spending on social projects from this source to the net return derived from the investment fund. Arrangements are also being made to incorporate the government owned petroleum trading company and ensure that its activities are clearly reflected in the government accounts.

Related;
Hype and Reality: "The" Medium-term Expenditure Framework in Developing Countries

More of the Poverty Trap story

The World Bank has just raised the bean count of global poverty to 1.4 billion people, from just under a billion. It had previously overestimated the level of Chinese and Indian per capita incomes, so the count now shows that the number of poor Chinese and Indians far exceeds the number of poor Africans. But this is misleading because Chinese and Indian incomes are rising far faster and more surely than African incomes. The big difference between a poor Asian household and an equally poor African one is hope, not necessarily for the present generation of adults but for their children.

Hope makes a difference in people’s ability to tolerate poverty; parents are willing to sacrifice as long as their children have a future. Our top priority should be to provide credible hope where it has been lacking. The African countries in the bottom billion have missed out on the prolonged period of global growth that the rest of the world has experienced. The United Nations’ goal should not be to help the poor in fast-growing and middle-income countries; it should do its utmost to help the bottom billion to catch up. Anti-poverty efforts should be focused on the 60 or so countries — most of them in Africa — that are both poor and persistently slow-growing.

A further weakness with the Millennium Development Goals is that they are devoid of strategy; their only remedy is more aid. I am not hostile to aid. I think we should increase it, though given the looming recession in Europe and North America, I doubt we will. But other policies on governance, agriculture, security and trade could be used to potent effect

-Paul Collier, A Measure of Hope

Sub-prime crisis looking cool

A Year of Heavy Losses- a visualisation of the losses on Wall Street.

What is the Real Fiscal Challenge?

Busting the Budget: Healthcare Costs or Entitlement Programs

On Monday, September 15th, six experts in fiscal policy and healthcare policy debated the nature of the nation’s pending fiscal crisis at the National Press Club. Moderated by TaxVox editor Howard Gleckman, the event featured Henry Aaron and Alice Rivlin of the Brookings Institution, Julie Barnes and Maya MacGuineas of the New America Foundation, Robert Greenstein of the Center for Budget and Policy Priorities, and Eugene Steuerle of the Peterson Foundation.

Henry Aaron warned that long-term deficit projections would be unsustainable, but argued that two questions must be answered: what causes these deficits and what should the solution be? Although the answers need not be the same, Aaron explained that healthcare cost growth is both the primary driver, and should be the primary solution. He offered 5 conclusions:

* Projected deficits are large and unsustainable.
* Spending cuts and Social Security reform can help reduce them a little bit, and should be undertaken.
* Healthcare spending, and the taxes needed to pay for them, should continue to grow faster than GDP.
* Healthcare cost growth can be slowed considerably, greatly reducing the projected deficit.
* The problem of future deficits is not an entitlement problem, but a problem of large and growing costs in the overall healthcare system.

Alice Rivlin then suggested that the panelists were in fact debating the wrong question. Rather than arguing over whether closing the fiscal gap should focus on entitlements reform or healthcare reform or tax reform, they should recognize that all three are important. Rivlin explained the there are really two problems driving entitlement growth – demographics and healthcare cost growth. Because of demographics, Social Security costs will rise rapidly over the next two decades and then begin to level off. Medicare and Medicaid, on the other hand, will rise steadily indefinitely. This means that Social Security is important in the short-term, while healthcare entitlements drive the deficit further into the future. Rivlin suggested five main solutions to the looming fiscal crisis:

* Encourage people to work longer by both reforming Social Security and changing rules and incentives in private pensions.
* Encourage more efficient distribution of medical care, using Medicare and Medicaid to lead payment system reform.
* Move toward universal healthcare coverage with spending controls.
* Shift healthcare expenses to the private sector where possible.
* Reform the tax code to make it more equitable and efficient so that it can bring in the needed revenue without being overly burdensome to the economy.

Quote of the Day

In this age of globalization, government matters more than ever. Smart, fiscally strong governments are the ones best able to empower their people to compete and win.

-Thomas Friedman

Recently from ADB

Political and Economic Update (Nepal)

Longer-term growth and development prospects hinge on the establishment of lasting peace and political stability as well as preserving macroeconomic stability and continuity of key economic reforms. Although the new Government has yet to announce a detailed policy and development agenda, the Common Minimum Program agreed between the coalition partners suggests that they will not deviate significantly from the strategic thrusts of the current Three- Year Interim Plan. The Plan seeks to reduce poverty and widening inequality through reconstruction, rehabilitation, and reintegration, pro-poor and broad-based economic growth, good governance and effective service delivery, social and infrastructure development, and an inclusive development process. However, the new Government is likely to come under pressure to deal with sensitive issues such as integration of former combatants and high oil and food prices in ways that could jeopardize fiscal sustainability and macroeconomic stability. There is also a risk that private investment could decline if the new Government fails to improve the enabling environment through concrete policy measures.

Dealing with the Proliferation of Bilateral Trade Agreements: Consolidation, Multilateralization, Harmonization, or Dilution? (No. 123) (Regional)

Inflation in Developing Asia: Demand-Pull or Cost-Push? (No. 121) (Regional)

What Constrains Indian Manufacturing? (No. 119) (India)

Governance Reform Program (First Phase) (Mongolia)

Program Agreement for Assam Governance and Public Resource Management Sector Development Program

Proposed Loan and Technical Assistance Grant: Assam Governance and Public Resource Management Sector Development Program (Subprogram II) (India)

Preparing the Strengthening Higher Education Project (Financed by the Japan Special Fund) (Lao People's Democratic Republic)

Eligibility of State-owned Road Enterprises for Participation in ADB-financed Projects (Uzbekistan, Republic of)

Assorted

Treasury’s Financial-Bailout Proposal to Congress

Bold ideas for solving America’s financial mess

Diamond and Kashyap on the Recent Financial Upheavals

The end of central bank independence, a continuing saga

Where did we go wrong?

Some Observations on the Ongoing Crisis: Causes and Opportunity Cost Again

Modern Financial Systemic Risk: A Primer

Chief Financial Plumber

Can Pakistan live within its means?

The government decided on Friday to eliminate subsidies on oil and gas and to phase out the subsidy on electricity by June 2009 under a plan to stabilise the economy.

Announcing an economic package at a press conference, Finance Minister Naveed Qamar said it was aimed at bringing about macroeconomic stability, narrowing down the fiscal and current account deficits and minimising pressures on foreign exchange reserves.

The finance minister, who was accompanied by State Bank Governor Dr Shamshad Akhtar, said Pakistan would not seek any new assistance from IMF, but international financial institutions and donors could monitor implementation of the package.

“We are not going into an IMF programme,” he said, adding that the “home-grown” package had been worked out in consultation with different stakeholders, including the World Bank, IMF and ADB.

”I can safely announce today... we have eliminated the entire fuel subsidy and there is no additional subsidy today that is going out of the budget to subsidise fuel,” Mr Qamar added.

He said the subsidy on gas had also been withdrawn and the actual cost of gas would now be passed on to consumers.

He admitted that the passing on of subsidies to consumers would add to people’s hardship, but said the government had to stabilise macro-economic indicators which had deteriorated because of the policies of the previous government. He said the government was trying to be close to the fiscal deficit of around 4.7 per cent.

The finance minister said that various measures had been proposed to minimise government spending, but did not elaborate. However, he said the government was looking at PSDP allocations.

”We can only spend what we have in the kitty and suggest a drastic cut in the development sector,” he added.

Admitting that excessive borrowings from the SBP had led to inflation, Mr Qamar said the government had decided to launch non-bank borrowing schemes, including PIBs and commercial papers, in order to curb inflation.

-All fuel subsidies withdrawn

Related;
IMF might bail Pakistan out

Indonesia: Progress in Fiscal Institution Building

Recommended reading- Indonesia: Selected Issues, chapter IV;

Progress has been made in strengthening technical capacity at the central government level. Within the Ministry of Finance (MoF), the Fiscal Policy Office (FPO) is now fully operational with a mandate for macro-fiscal projections and analysis, including assessments of fiscal risks. The FPO now prepares fiscal risk statements that are included in the annual budget documents—making Indonesia one of the pioneers in fiscal risk analysis among emerging market economies. Operational management of debt-related risks is undertaken by the Directorate General (DG) for Debt Management, which is responsible for both domestic and external debt management.

Despite some progress, parliament’s technical capacity for fiscal policy analysis is still limited. Parliament’s (DPR) budget committee plays an important role in the budget approval processes, though with excessive emphasis on details which are usually seen as being within the province of the executive (such as close scrutiny of macroeconomic assumptions and detailed review of expenditure items—as opposed to scrutiny at a more aggregated level found in other countries). In contrast with this wide ranging mandate, the DPR had limited qualified technical staff and few with specializations. Some improvement in these areas has been achieved through: (1) increasing the number of technical staff; and (2) greater specialization of staff through the establishment of specific parliament commissions (e.g., the economic commission). These commissions are now able to provide some analytical and technical support to members of parliament, though the DPR’s effectiveness in budget scrutiny and oversight is still inadequate. Intense involvement of the DPR at the pre-budget presentation stages remains (6–7 months before the new fiscal year), but there is only limited focus on medium-term budget issues and on the results of policies embedded in the annual budget. The 2003 State Finances Act calls for an unusually early date for approval by parliament of the annual budget law (2 months before the new fiscal year); nonetheless, DPR committees continue to be involved in budget approval after the annual budget law has been adopted in plenary session. The DPR’s follow-up on the external audits of the Supreme Audit Institution (BKP) remains weak.

Progress has been made in improving the quality of government accounts, but is still incomplete. The adoption of government cash management regulations in July 2007 was an important step in improving the transparency of government banking arrangements. The regulations strengthen the Minister of Finance’s powers to consolidate government bank accounts. On this basis, the MoF conducted a census of government bank accounts operated by ministries and budget users outside treasury control. The ensuing ministry-by-ministry analysis of accounts revealed that over 20,000 government accounts existed. Some of these off-budget bank accounts have either been closed or integrated with the treasury. This was a sizeable step towards establishing an operational treasury single account (TSA). However, there are still a few impediments to the establishment of a TSA. In particular, government deposits held at Bank Indonesia (BI) are poorly remunerated, which impedes the development of active cash management (since the opportunity cost of idle government deposits is small). Transparency also improved following the incorporation of the regional development and investment accounts into financial reports and budget documents. Progress in integrating the operation of other extrabudgetary funds in the budget has been limited

The disclosure of fiscal information to the public has improved significantly.
Several recent amendments to ministerial decrees should help improve fiscal data quality and transparency. In particular, the chart of accounts now requires that the budget, in-year fiscal reports, and annual financial statements use the same terminology, which should simplify budget monitoring. The publication of a comprehensive fiscal risk statement accompanying the annual budget document significantly improves the transparency of fiscal policies and associated risks. In this context, improved reporting of information by SOEs should enable the FPO’s risk management unit to better assess risks for selected key SOEs. The reporting of information on central government debt is now comprehensive and timely, and key contingent liabilities are also disclosed in the annual fiscal risk statement (including those related to public-private partnerships). However, little progress has been made on reporting general government debt (though local government debt remains negligible), and debt accumulated by public enterprises.

Early progress has been achieved in strengthening internal and external audit bodies and in fighting corruption among public officials. The BPK mandate has been strengthened by the adoption of a 2006 law (and associated decrees in 2007). BPK staff headcount has been significantly increased (currently 6,000 staff covering 28 provinces) and training has been improved in both the IG and BPK, though needs remain significant. However, both the MoF’s IG and BPK are experiencing difficulties in accessing taxpayers data needed to investigate potential misconduct of tax officials owing to taxpayers privacy concerns, even though the law provides both institutions such access. Memorandum of understandings between the MoF and the internal and external auditors to address this issue are under discussion. Finally, the role of the Financial and Development Supervisory Agency (BPKP) as an internal audit body has not been reviewed—BPKP is part of the president’s office and has jurisdiction on central government finances. However, it shares internal audit responsibilities related to ministries with the IG, with an unclear distinction between their mandates.

Quality of Fiscal Data in Libya

The fiscal information system remains fragmented and inconsistent with international standards, since it was designed for administrative reporting under the government finance law, rather than for purposes of providing timely statistical information for economic planning and analysis. However, there has been significant improvement in this area. Monthly and quarterly data for key components of revenue and expenditure are being reported to staff on a regular basis.

To improve the fiscal data, the 2005 STA mission recommended: (i) adopting centralized management of all budgetary central government accounts at the ministry of finance; (ii) expanding coverage of central government accounts by including extrabudgetary and local government operations; (iii) developing GFS metadata on concepts, scope, classifications, basis of recording, data sources, and statistical techniques for posting on the GDDS website; (iv) adopting the Fund’s 2001 Government Finance Statistics Manual (GFSM) as a coherent methodological framework for the production and dissemination of monthly, quarterly, and annual fiscal data. This would promote the recording of all assets and liabilities on accrual basis and at market values. To this end, STA has trained two CBL staff, one in 2007 and one in 2008.

Source: Socialist People's Libyan Arab Jamahiriya: 2008 Article IV Consultation-Staff Report

Jerry Seinfeld and Bill Gates Ad

Have a great weekend!

New Zealand the model

Willem Buiter talks about the New Zealand model of public financial management;

It is a near-universal rule of time management that the urgent but not necessarily terribly important takes precedence over the important but not terribly urgent. Economic policy making is no exception to this rule. I was therefore pleasantly surprised to read in the papers that Peter Orszag, Director of the Congressional Budget Office (CBO) said on September 9 that “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget”. The CBO is the (non-partisan) federal agency within the legislative branch of the US government that acts as a congressional budget watchdog and among whose responsibilities is the projection of the budgetary consequences of proposed legislation.

Why does it matter that the revenues, outlays, assets and liabilities of Fannie and Freddie be put into/onto the budget and balance sheet of the US Treasury? It won’t help or hinder the resolution of the current financial crisis. What is does, is strike a blow for accountability for the use of public funds. It enhances the quality of the information available to the Congress and to the public at large about the federal government’s financial exposure (including its contingent exposures) and about future expected or planned sources and uses of funds. Without high-quality information and without transparency, there can be no accountability for the use of tax payers’ money. Peter Orszag therefore struck a blow for good governance, for better government and for checks and balances....

The only government in the world that gets close to providing all the relevant information to have a go at constructing its comprehensive balance sheet is the government of New Zealand. Since 1989, the Public Finance Act 1989 (PFA) requires the New Zealand government to pursue its policy objectives in accordance with the following principles of responsible fiscal management:

* Maintaining debt at a prudent level by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenue.
* Achieving and maintaining net worth at levels which provide a buffer against factors which may adversely impact on net worth in the future.
* Managing prudently the fiscal risks facing the Government, and;
* Pursuing policies which are consistent with a reasonable degree of predictability about the level and stability of taxes for future years.

That’s rather waffly, but the implementation of these principles is anything but. The PFA requires the government to present, in each financial year, two reports outlining Government’s fiscal policy: the Budget Policy Statement (BPS) and the Fiscal Strategy Report (FSR). The BPS has a short run focus setting out policy goals that will guide the Government’s Budget decisions and priorities. The FSR is presented with the Budget and must state the Government’s long term objectives for fiscal policy over a period of at least 10 years and the Government’s short term intentions for fiscal policy over a period of three years. The FSR must also provide projections of fiscal variables to show progress towards meeting the long term objectives (Progress Outlooks).

In addition, the Treasury is required to publish, at least every four years, a Statement of the Long Term Fiscal Position. This has a horizon of at least 40 years and identifies how demographic and other changes may impact the fiscal position.

Added to this are serious attempts to value such contingent liabilities as guarantees, and to calculate the fair value of such contingent political commitments as social security retirement benefits.