Alberto MeloAlberto Melo

Inter-American Development Inter-American Development BankBank

TWO SUCCESSFUL TWO SUCCESSFUL EXPERIENCES IN EXPERIENCES IN

HARMONIZATION: HARMONIZATION:

THE PUBLIC EXPENDITURE THE PUBLIC EXPENDITURE REVIEWS OF PERU AND REVIEWS OF PERU AND

ECUADORECUADORPresentation at the World Bank’s Presentation at the World Bank’s

Workshop on Country Analytic WorkWorkshop on Country Analytic Work

Washington, DC, June24, 2005 Washington, DC, June24, 2005

PRESENTATION’S OUTLINE:

I.I. Public Expenditure Reviews Public Expenditure Reviews (PERs) as a diagnostic tool. (PERs) as a diagnostic tool.

II.II. Peru’s 2001-2002 PER and Peru’s 2001-2002 PER and Ecuador’s 2003-2004 PER as Ecuador’s 2003-2004 PER as experiences in harmonization of experiences in harmonization of analytical work. analytical work.

III.III. Next steps: How to deepen Next steps: How to deepen harmonization in economic and harmonization in economic and sector work by MDBs and donors.sector work by MDBs and donors.

PART I:PART I:

PUBLIC EXPENDITURE REVIEWS PUBLIC EXPENDITURE REVIEWS

AS A DIAGNOSTIC TOOLAS A DIAGNOSTIC TOOL

THE NATURE OF PUBLIC THE NATURE OF PUBLIC EXPENDITURE REVIEWSEXPENDITURE REVIEWS

A PER is a comprehensive A PER is a comprehensive analysis of public spending in a analysis of public spending in a given country.given country.

The purpose is assisting the The purpose is assisting the country in reforming public country in reforming public expenditure managementexpenditure management. .

THE NATURE OF PUBLIC THE NATURE OF PUBLIC EXPENDITURE REVIEWSEXPENDITURE REVIEWS

I. PERs frame the discussion of public spending I. PERs frame the discussion of public spending in the context of an assessment of the in the context of an assessment of the country’s overall macroeconomic situation.country’s overall macroeconomic situation.

II. The diagnosis seeks to characterize the three II. The diagnosis seeks to characterize the three main components of the Public Expenditure main components of the Public Expenditure Management System, namely:Management System, namely:

• Fiscal policy management.Fiscal policy management.

• The budget system and practices from the The budget system and practices from the standpoint of the rationality of resource standpoint of the rationality of resource allocation, andallocation, and

• The operational efficiency of expenditureThe operational efficiency of expenditure..

THE NATURE OF PUBLIC THE NATURE OF PUBLIC EXPENDITURE REVIEWSEXPENDITURE REVIEWS

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

MAIN ISSUES DEALT WITH BY PERU’S 2001-2002 PUBLIC EXPENDITURE REVIEW (I)

I.I. Peru’s fiscal challenges and Peru’s fiscal challenges and vulnerabilities.vulnerabilities.

II.II. How to reorient the budget How to reorient the budget towards pro-poor expenditure? towards pro-poor expenditure?

III.III. How to improve the efficiency of How to improve the efficiency of public expenditure?public expenditure?

IV.IV. The promises and risks of The promises and risks of decentralization. decentralization.

V.V. How to upgrade the civil service?How to upgrade the civil service?

VI.VI. How to improve governance and How to improve governance and reduce corruption? reduce corruption?

VII.VII.The fine-tuning of fiscal and The fine-tuning of fiscal and environmental policies towards environmental policies towards the mining sector.the mining sector.

MAIN ISSUES DEALT WITH BY PERU’S 2001-

2002 PUBLIC EXPENDITURE REVIEW

(II)

MAIN ISSUES DEALT WITH BY ECUADOR’S 2003-2004

PUBLIC EXPENDITURE REVIEW (I)I.I. The structural constraints on fiscal The structural constraints on fiscal

policy derived both from the nature of policy derived both from the nature of the economy as a small, open and oil-the economy as a small, open and oil-dependent system and from the dependent system and from the character of the prevailing political-character of the prevailing political-

economy regime.economy regime. II.II. The role of fiscal policy in a dollarized The role of fiscal policy in a dollarized

economy.economy.

III. The diagnosis of the current fiscal III. The diagnosis of the current fiscal trends.trends.

IV. The conditions for fiscal and debt IV. The conditions for fiscal and debt

sustainability.sustainability.

MAIN ISSUES DEALT WITH BY ECUADOR’S 2003-2004

PUBLIC EXPENDITURE REVIEW (II)V. The existing fiscal rules, including the V. The existing fiscal rules, including the

rules governing Ecuador’s rules governing Ecuador’s Stabilization, Social and Productive Stabilization, Social and Productive Investment, and Debt Reduction Fund Investment, and Debt Reduction Fund

(FEIREP).(FEIREP). VI. The issue as to how to create VI. The issue as to how to create

additional fiscal space for pro-poor additional fiscal space for pro-poor expenditure.expenditure.

VII. The general features of the public VII. The general features of the public

expenditure managementexpenditure management system.system.

VIII. Public expenditure in education and VIII. Public expenditure in education and the issue of the high rates of teacher the issue of the high rates of teacher absenteeismabsenteeism..

MAIN ISSUES DEALT WITH BY ECUADOR’S 2003-2004

PUBLIC EXPENDITURE REVIEW (III)

IX. IX. Public expenditure in health. Public expenditure in health.

X. Public expenditure in water and X. Public expenditure in water and sanitation, electricity and sanitation, electricity and telecommunications .telecommunications .

XI. The situation of the oil industry. XI. The situation of the oil industry.

OUPUTS OF PERU’S PUBLIC EXPENDITURE REVIEW

THE MAIN OUTPUT WAS THE PER THE MAIN OUTPUT WAS THE PER REPORT, WHICH WAS PUBLISHED REPORT, WHICH WAS PUBLISHED

IN TWO BOOKS:IN TWO BOOKS: In English: World Bank and Inter-In English: World Bank and Inter-

American Development Bank. American Development Bank. Peru: Peru: Restoring Fiscal Discipline for Poverty Restoring Fiscal Discipline for Poverty Reduction. A Public Expenditure ReviewReduction. A Public Expenditure Review. . Washington, 2003.Washington, 2003.

In Spanish: José R. López-Cálix y Alberto In Spanish: José R. López-Cálix y Alberto Melo. Melo. A más disciplina fiscal, menos A más disciplina fiscal, menos pobreza. Revisión del gasto público en pobreza. Revisión del gasto público en PerúPerú. Banco Interamericano de . Banco Interamericano de Desarrollo y Banco Mundial, Desarrollo y Banco Mundial, Washington, DC, 2004.Washington, DC, 2004.

First time that a PER-based book First time that a PER-based book appears in Spanishappears in Spanish

OUPUTS OF ECUADOR’S PUBLIC EXPENDITURE REVIEW

THE MAIN OUTPUT WAS THE PER THE MAIN OUTPUT WAS THE PER REPORT THAT IS NOW PUBLISHED REPORT THAT IS NOW PUBLISHED

IN ENGLISH:IN ENGLISH:

The World Bank and The Inter-American The World Bank and The Inter-American Development Bank. Development Bank. Creating Fiscal Creating Fiscal Space for Poverty Reduction in Ecuador: Space for Poverty Reduction in Ecuador: A Fiscal Management and Public A Fiscal Management and Public Expenditure ReviewExpenditure Review. Washington, 2005.. Washington, 2005.

AND WILL SOON BE PUBLISHED IN AND WILL SOON BE PUBLISHED IN SPANISH.SPANISH.

PART II:PART II:

THE PERU 2002-2003 AND THE PERU 2002-2003 AND

THE ECUADOR 2003-2004 PUBLIC EXPENDITURE THE ECUADOR 2003-2004 PUBLIC EXPENDITURE

REVIEWSREVIEWS

AS EXPERIENCES IN HARMONIZATIONAS EXPERIENCES IN HARMONIZATION

DIMENSIONS ALONG WHICH HARMONIZATION WAS

PRACTICED

The definition of the PER’s content The definition of the PER’s content and scope.and scope.

Joint planning of the research Joint planning of the research work.work.

Joint conduct of the relationship Joint conduct of the relationship with the national government.with the national government.

Joint use of the available Joint use of the available diagnostic toolsdiagnostic tools

Joint dissemination of resultsJoint dissemination of results. .

THE IMF WAS AN IMPORTANT PARTNER IN BOTH HARMONIZATION

EXPERIENCES

1. In the PERU PER, the IMF contributed with analytical inputs in the areas of tax reform, public debt tax reform, public debt management and sustainability, management and sustainability, and the review of Peru’s Fiscal and the review of Peru’s Fiscal Prudence and Transparency Law.Prudence and Transparency Law.

2. In both the PERU PER and the ECUADOR PER, the IMF contributed to the oganization of dissemination events.

THE GOVERNMENTS’ APPROPRIATION OF THE PERs’ ANALYSES AND CONCLUSIONS:

THE CASE OF PERU (I)

PER’s analyses and conclusions were PER’s analyses and conclusions were used by the Government of Peru as used by the Government of Peru as inputs in the discussions that led toinputs in the discussions that led to::

1.1. The revamping of the Prudence and The revamping of the Prudence and Fiscal Transparency Law.Fiscal Transparency Law.

2.2. The tax reforms of 2003-2004.The tax reforms of 2003-2004.

3.3. The deepening and widening of the The deepening and widening of the policy of providing budget policy of providing budget protection for key social programs.protection for key social programs.

4.4. The definition of the conceptual and The definition of the conceptual and legal bases for decentralization. legal bases for decentralization.

5.5. The further development of Peru’s The further development of Peru’s Integrated Financial Management Integrated Financial Management System (SIAF).System (SIAF).

6.6. Measures to improve the targeting Measures to improve the targeting of social expenditures. of social expenditures.

7.7. The adoption of a royalty regime for The adoption of a royalty regime for mining.mining.

THE GOVERNMENTS’ APPROPRIATION OF THE PERs’ ANALYSES AND CONCLUSIONS:

THE CASE OF PERU (II)

OTHER BENEFITS FOR THE COUNTRIES FROM THIS

HARMONIZATION EXPERIENCE (I) Use of diagnostic tools was aimed at Use of diagnostic tools was aimed at

building institutional capacity (fiscal building institutional capacity (fiscal institutions, budget protection for social institutions, budget protection for social programs, strengthening of SIAF, etc.). programs, strengthening of SIAF, etc.).

Coverage of issues was wider than would Coverage of issues was wider than would have been otherwise.have been otherwise.

The joint realization of the PER The joint realization of the PER contributed to: (i) stronger coordination contributed to: (i) stronger coordination between the banks and the government between the banks and the government and (ii) closer coordination between the and (ii) closer coordination between the World Bank and the IDB.World Bank and the IDB.

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

OTHER BENEFITS FOR THE COUNTRIES FROM THIS HARMONIZATION

EXPERIENCE (II)

THE PER ALSO STRENGTHENED THE TWO BANKS’ COUNTRY WORK

In the case of PERU, the PER’s analyses and In the case of PERU, the PER’s analyses and conclusions were used in the elaboration of conclusions were used in the elaboration of the World Bank’s Country Strategy for Peru the World Bank’s Country Strategy for Peru and in the preparation of the following and in the preparation of the following projects by projects by bothboth Banks Banks::1.1. The WB’s series of four Programmatic Social The WB’s series of four Programmatic Social

Reform Loans.Reform Loans.

2.2. IDB’s Modernization and Descentralization IDB’s Modernization and Descentralization Program.Program.

3.3. IDB’s Fiscal Reform Program.IDB’s Fiscal Reform Program.

4.4. The WB’s series of Programmatic The WB’s series of Programmatic Decentralization and Competitiveness Structural Decentralization and Competitiveness Structural Adjustment Loans.Adjustment Loans.

5.5. The IDB Policy-Based Loan to Support the Reform The IDB Policy-Based Loan to Support the Reform of Poverty Reduction and Human Capital of Poverty Reduction and Human Capital Development Programs.Development Programs.

OTHER BENEFITS FOR THE BANKS

Duplication of efforts was avoided. Duplication of efforts was avoided. Adoption by the Government of Adoption by the Government of

Banks’ policy recommendations was Banks’ policy recommendations was facilitated.facilitated.

Scope and coverage of dissemination Scope and coverage of dissemination was wider than would have been was wider than would have been otherwise.otherwise.

PART III:PART III:

DEEPENING HARMONIZATION DEEPENING HARMONIZATION

IN ECONOMIC AND SECTOR WORKIN ECONOMIC AND SECTOR WORK

WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND

SECTOR WORK? (I)

There is still a long way to go on the road There is still a long way to go on the road towards harmonization of multilaterals’ and towards harmonization of multilaterals’ and bilaterals’ economic and sector work.bilaterals’ economic and sector work.

A modest and simple step can bring about A modest and simple step can bring about a quantum leap in harmonization. a quantum leap in harmonization.

The step I propose: the The step I propose: the creation in each creation in each country of a mechanism for collective country of a mechanism for collective discussion of all the donors’ annual discussion of all the donors’ annual economic and sector work economic and sector work plansplans for the for the

particular country.particular country.

WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND

SECTOR WORK? (II)

The mechanism I propose is to hold an The mechanism I propose is to hold an annual technical meeting of the country’s annual technical meeting of the country’s authorities and the multilaterals and donor authorities and the multilaterals and donor organizations where those plans are organizations where those plans are

presented for deliberation.presented for deliberation. Each multilateral organization and bilateral Each multilateral organization and bilateral

donor participating in the exchange of donor participating in the exchange of ideas would provide the rationale behind its ideas would provide the rationale behind its economic and sector work plan.economic and sector work plan.

Meetings will be open to all donors and will Meetings will be open to all donors and will be chaired by a Government be chaired by a Government representative.representative.

WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND

SECTOR WORK? (III) In a typical LAC country setting, the roster In a typical LAC country setting, the roster

of participating institutions would include of participating institutions would include the WB, IMF, the agencies of the UN the WB, IMF, the agencies of the UN System, the IDB, the European Union, System, the IDB, the European Union, USAID, JBIC, DFID, GTZ, other bilateral USAID, JBIC, DFID, GTZ, other bilateral donors, and the country-relevant sub-donors, and the country-relevant sub-regional organizations such as CAN, CAF, regional organizations such as CAN, CAF, Fonplata, BCIE, CDB, and other donors. Fonplata, BCIE, CDB, and other donors.

The country annual meetings will be “roll-The country annual meetings will be “roll-up-sleeves” work events and not up-sleeves” work events and not ceremonial gatherings.ceremonial gatherings.

WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND

SECTOR WORK? (IV) The main purpose of the meetings would The main purpose of the meetings would

be to open an exchange of ideas on the be to open an exchange of ideas on the pertinence and appropriateness of each pertinence and appropriateness of each participant’s analytical work participant’s analytical work plansplans with the with the aim of harmonizing, improving and refining aim of harmonizing, improving and refining those plans. those plans.

The obvious premise of those intellectual The obvious premise of those intellectual and technical exchanges is the respect for and technical exchanges is the respect for the autonomy of the participants both on the autonomy of the participants both on the governments’ side and on the donors’ the governments’ side and on the donors’ side to define their own analytical work side to define their own analytical work plans and carry them out. plans and carry them out.

WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND

SECTOR WORK? (V)The proposed annual meeting is bound The proposed annual meeting is bound to generate a number of byproducts to generate a number of byproducts that may strengthen harmonization. In that may strengthen harmonization. In particular, institutions attending the particular, institutions attending the meetings may decide to reach meetings may decide to reach agreements on: agreements on: 1.1. Carrying out joint economic and sector Carrying out joint economic and sector work.work.

2.2. Sharing terms of reference for upcoming Sharing terms of reference for upcoming economic and sector workeconomic and sector work..

3.3. Sharing diagnostic tools and data bases.Sharing diagnostic tools and data bases.

4.4. Sharing draft research reports.Sharing draft research reports.

5.5. Reciprocal peer reviewing of economic Reciprocal peer reviewing of economic and sector work.and sector work.

Alberto MeloAlberto Melo

Inter-American Development Inter-American Development BankBank

TWO SUCCESSFUL TWO SUCCESSFUL EXPERIENCES IN EXPERIENCES IN

HARMONIZATION: HARMONIZATION:

THE PUBLIC EXPENDITURE THE PUBLIC EXPENDITURE REVIEWS OF PERU AND REVIEWS OF PERU AND

ECUADORECUADORPresentation at the World Bank’s Presentation at the World Bank’s

Workshop on Country Analytic WorkWorkshop on Country Analytic Work

Washington, DC, June24, 2005 Washington, DC, June24, 2005