June 6, 2012Doug Hadden
Impact of Public Financial Management on Sustainability
Developing Nations are an economic DEW line
Doug Hadden, VP Products
Many participants at the Financial Management Institute of Canada Public Sector Management Workshop ”Sustainability in the Public Sector – Securing the Future” in Fredericton New Brunswick last week were intrigued with my presentation: What can we learn about Sustainability from Developing Nation Governments? We had some interesting discussions that I will be blogging about:
- Impact of Public Financial Management on sustainability
- ICT4D – Information and Communications Technology for Development
- Capacity building
- Sustainable planning
- Holistic approaches to Public Financial Management [and What if Canada had a PEFA assessment? Part1:PI-1 to PI-14 Part2: PI-15 to PI-28]
- Sustainable citizen engagement
Financial and environmental sustainability
Sustainability has become a “meme” – a pervasive cross-cutting concept. It’s crept into our vocabulary: a standard bullet point for any government initiative or criticism of the initiative. (I’m waiting for the following question in the House of Commons: “Mr. Speaker, the Right Honourable Prime Minister’s haircut is clearly unsustainable. When will the barber resign?”)
The notion of “sustainability” gets lost in the noise in Canada. It’s visceral in Developing Nations.
The critical calculus in developing countries is that environmental sustainability and financial sustainability are fully linked: climate change, sustainable environmental development, and sustainable financial development. For example, the financial and environmental effects of eliminating the printing of business cards for civil servants in Canada may go unnoticed (unless you live close to a pulp mill).
Public Financial Management sustainability
In Canada and other developed countries, we often think of financial sustainability in government programs. We examine whether the program can be financed in the long run – and whether recurrent operating costs for capital projects can be covered. Developing countries have the additional challenge of sustaining reform. Many programs are designed for modernization. It’s not good enough to sustain programs at a desired level of service. Service levels must progressively and continuously improve over time.
Good public financial management and stewardship of public resources improves financial sustainability. It’s a “virtuous circle” because financial sustainable programs lead to good credit ratings that provide fiscal space so that governments can more easily manage financial and environmental crisis.
Fallacy of the developing country narrative
The media proliferates a stereotype of developing countries: endemic corruption, chronic mismanagement and unceasing poverty. It’s not usual to read “stories” from very reputable journalists who are editorially conditioned to the narrative – at the expense of facts. For one thing, poverty is falling in developing countries. And, PFM systems are coming to the rescue in many countries despite the press skepticism.
Impact of Public Financial Management
Despite advances, there are estimated to be over 1 billion hungry people in the world and millions are surviving at incomes of less than $1.25 a day.
Public Financial Management is an important characteristic for government effectiveness. Governments with better World Governance Indicators: Government Effectiveness have citizens who enjoy higher per capita incomes. Notice that the income scale is exponential.
The “New Normal”
The notion of the “new normal” was coined by Dr. Mohamed El-Erian to describe the post-financial crisis global situation. One characteristic: developing nations, thanks to previous crisis, were better able to deal with the global meltdown than many OECD countries. Some of these countries are now known as PIGS.
Another “new normal” characteristic: developing countries and emerging economies will generate more economic activity than developed countries within the next 5 years.
Another “new normal” characteristic is migration from developed countries to former colonies.
Many OECD countries were unprepared for the financial crisis. And, these countries did not have sufficient fiscal space to adjust to the situation. Countries with poorer credit ratings and lower human development index were more resilient. Therefore, there must be some things that they are doing well.
My theory is that PFM tools and practices enable resilience and that problems generate more visible effects in developing countries. It’s an economic Distance Early Warning (DEW) LIne for Canada. For example, Canadians complain about rising gasoline prices. Yet, these prices do not affect food security in Canada to the point where millions could starve.
Developing countries have “early warning” for potential crisis. Governments use good practices to deal identify economic effects and plan for natural disasters.
That’s why we learn from developing countries to improve PFM in Canada. These countries often see the crisis before developed countries. And, these countries have adopted good practices to deal with these problems.