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WORLD BANK DISCUSSION PAPER NO. 382
Work in progress \W DP382for public discussion Dec. l c ' q
Public Expenditure Reformunder Adjustment Lending1,cs-s6on.s f-,,110,1 Btl Ai'pg0i1('eS'I. fi-oln fr;,UO'/(/ Baiik Experli(c
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(Continued on the inside back cover)
WORLD BANK DISCUSSION PAPER NO. 382
Public Expenditure Reformunder Adjustment LendingLessonsfrom World Bank Experiences
Jeff HutherSandra RobertsAnwar Shah
The World BankWashington, D.C
Copyright ©) 1997The Intemational Bank for Reconstructionand Development/THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.
All rights reservedManufactured in the United States of AmericaFirst printing December 1997
Discussion Papers present results of country analysis or research that are circulated to encouragediscussion and comment within the development community. The typescript of this paper therefore hasnot been prepared in accordance with the procedures appropriate to formal printed texts, and the WorldBank accepts no responsibility for errors. Some sources cited in this paper may be informal documentsthat are not readily available.
The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s)and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to mem-bers of its Board of Executive Directors or the countries they represent. The World Bank does not guaran-tee the accuracy of the data included in this publication and accepts no responsibility for any consequenceof their use. The boundaries, colors, denominations, and other information shown on any map in this vol-ume do not imply on the part of the World Bank Group any judgment on the legal status of any territoryor the endorsement or acceptance of such boundaries.
The material in this publication is copyrighted. Requests for permission to reproduce portions of itshould be sent to the Office of the Publisher at the address shown in the copyright notice above. TheWorld Bank encourages dissemination of its work and will normally give permission promptly and, whenthe reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions forclassroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive,Danvers, Massachusetts 01923, U.S.A.
ISSN: 0259-210X
Jeff Huther is a consultant with the Country Evaluations and Regional Relations division of the WorldBank's Operations Evaluations Department. Sandra Roberts is a consultant with the Country Evaluationsand Regional Relations division of the World Bank's Operations Evaluations Department. Anwar Shah isprincipal evaluation officer with the Country Evaluations and Regional Relations division of the WorldBank's Operations Evaluations Department.
Library of Congress Cataloging-in-Publication Data
Huther, Jeff, 1960-Public expenditure reform under adjustment lending: lessons from
World Bank experiences / Jeff Huther, Sandra Roberts, Anwar Shah.p. cm. - (World Bank discussion papers ; ISSN 0259-210X; no.
382)Includes bibliographical references.ISBN 0-8213-4160-X1. Expenditures, Public-Developing countries. 2. Govemrnment
spending policy-Developing countries. 3. Loans, Foreign-Developing countries. 4. Economic assistance-Developingcotutries. 5. World Bank-Developing countries. I. Roberts,Sandra, 1962- . II. Shah, Anwar. III. Title. IV. Series: WorldBank discussion papers; 382.HJ7980.H88 1997336.3'9'091724-dc2l 97-46144
CIP
Contents
Foreward .............................................................. vi
Abstract .............................................................. vii
Acknowledgment .............................................................. viii
Introduction ............................................................... 1
Expenditure Patterns before Adjustmnent ............................................................... 1
A Framework for Evaluation of Bank Supported Public Expenditure Policy Reform .............. 7
Bank Review of Adjustment Lending and Public Expenditure Reform Issues ......................... 1 1
Adjustment Lending Conditions and Implementation Record ............................................... 12
Issues Not Addressed in Adjustment Lending Conditions ...................................................... 34
Summary and Conclusions .............................................................. 37
Lessons ............................................................. 40
References ............................................................. 45-48
Appendixes:
Appendix 1: Countries Included in Tables 1-3 ........................................ ............ 49-50
Appendix 2: Countries Included in Tables 4 and 5 .................................................... 51
Appendix 3: Countries and Loans/Credits Included in Table 10 ........... ............... 52-53
Appendix 4A: Countries included in Table 11: GDP Shares ....................................... 54
Appendix 4B: Countries included in Table 11: Expenditure shares ............................ 55
LIST OF TABLES:
Table 1: Capital versus Current Expenditures (Average, 1970-79) ........................................ 1
Table 2: Central Government Expenditures as Shares of GDP (Average, 1970-79) ............... 2
Table 3: Composition of Central Government Expenditures (Average, 1970-79) ................. 3
Table 4: Health Care Before 1985 ........................................................... 3
Table 5: Public Expenditures on Education (1980-1990) ...................................................... 5
Table 6: Public Current Expenditures Per Pupil by Level of Education: A ComparativePerspective ........................................................................ 6
Table 7: Indicators on Relative Efficiency of Public and Private Provision ofEducation and Health Services in Pakistan (1993-94) ............................................. 10
Table 8: Adjustment Loans and Credits with Expenditure Conditions,by Country Income Level and Region (%); .......................................................... 12
Table 9: Distribution of Loan conditions by Major Objective (1980-94) ............................... 1 3
Table 10: Distribution of Loan Conditions by Equity Objective (1980-94) ............................ 15
Table 11: Implementation of Adjustment Lending Conditions on Public Expenditures .......... 1 6
Table 12: Average Central Government Expenditure Shares (1990-1994) ............................. 17
Table 13: Expenditure Inflexibility (Fixed Categories as Percentage of Total Revenue) . 19
Table 14: Changes in Capital and Current Expenditures Shares, Pre-and Post-Adjustment .20
Table 15: O&M Expenditures in Countries with Conditions RequiringIncreases (1990 Prices) .21
Table 16: Countries Agreeing to Civil Service Conditions .22
Table 17: Trends in Public Employment in Selected Latin American Countries .23
Table 18: Changes in Wage Expenditures Shares, Pre-and Post-Adjustment .24
Table 19: Changes in Central Government Expenditures on Education .25
Table 20: Public Expenditures on Education: Adjusting Countries .26
Table 21: Primary Enrollment Ratios in Countries with and without EducationConditions (percentage of age group enrolled) . 28
LIST OF TABLES CONTINUED
Table 22: Enrollment Ratios and the Gender Gap in Primary Education(percentage of school age population) ................................................. 30
Table 23: Changes in Central Government Expenditures on Health ............................................... 31
Table 24: Country Infant Mortality Rates (per thousand live births) .............................................. 31
Table 25: Percentage of Population with Access to Health Care ................................................. 32
Table 26: Impact of Subsidy Reduction conditions (in 1990 prices) .............................................. 33
Table 27: Performance Indicators Useful for Monitoring Progress ................................................ 41
LIST OF FIGURES:
Figure 1: Access to Safe Water (1988-93) .................................................. 4
Figure 2: Access to Sanitation Services, 1988-93 .................................................. 5
Figure 3: School Enrollment (1992) .................................................. 7
Foreword
During the past three decades the World Bank, in partnership with member countries, haspursued expenditure policy reform through its adjustment lending programs. These reformefforts have focused on reducing and restructuring capital expenditures, reducing subsidies,reforming public employment, reducing the public sector wage bill, emphasizing operationsand maintenance, and increasing on social services. This paper takes a critical look at thisexperience and draws lessons for improving the effectiveness of public expenditures.
The paper argues that future World Bank work should follow a systematic approach todeveloping guidance on public expenditure reform. Selected elements of such an approach areto determine the appropriate role in government and its agents and to specify theirpartnership with civil society and the private sector in furthering public sector mandates;clarify the goals of reform and specify performance monitoring and evaluation indictors; totarget unproductive and inequitable expenditures for elimination; to emphasize povertyalleviation; to promote equity; and to adopt general guidelines on policy environmentprerequisites and goals for external assistance.
The paper should be of interest to all those concerned with the effectiveness of externaldevelopment assistance.
Robert PicciottoDirector General, Operations Evaluation
vi
Abstract
The World Bank has helped define expenditure reform in 83 countries from 1979 to 1994through 219 operations. Reform efforts, through conditions for loans and credits, havefocused on reducing and restructuring capital expenditures, reducing subsides, reforming publicemployment, cutting the public sector wage bill, emphasizing operations and maintenance ofexisting facilities, and increasing social sector spending. This paper examines theeffectiveness of these conditions in bringing about expenditure reform.
The paper concludes that (a) Bank loan conditions had small positive effects on expenditurepatterns; (b) The loan conditions on social sector spending had a stimulative impact on socialspending; and (c) Budgetary inflexibility limited the success of loan conditions on publicexpenditures. From an analysis of public expenditures, the paper draws specific lessons onimproving the effectiveness of expenditures. These include: (i) Expenditure policy reformmust take a governance perspective and focus on the authorizing environment andoperational capacity of governments; (ii) Federalism or multi-government dimensions offiscal systems are critical to the reform of public expenditure policies; (iii) Public sectorperformance monitoring indicators should pay greater attention to outputs and outcomes;(iv) Broader guidance on reform must be adapted to country specific-situation; (v)Participatory processes and institutions (participatory democracy) rather than sophisticatedanalysis (such as cost-benefit analysis) is a key to improved public sector decision making;(vi) Flexibility in the use of funds is helpful in achieving results; (vii) General guidelines onpolicy environment pre-requisites for external assistance would be helpful in creating aculture of responsible governance; (viii) Open debate on policy issues contributes to effectivedevelopment assistance; (ix) Desirable but politically difficult reform may be feasible in timesof major fiscal crisis; and (x) Private sector participation can enhance efficiency and equityof public service provision.
vii
Acknowledgments
This is a revised version of an earlier paper titled as "Adjustment Lending and PublicSpending", prepared as a background paper for the World Bank Operations EvaluationDepartment study on fiscal Management in Adjustment Lending (Report No. 16040, October3, 1996). We are grateful to Manuel Penalver, Robin Boadway, Jayati Datta-Mitra andMelville McMillian for comments and to Yibin Xiang for research assistance. Please addressall comments to Anwar Shah, World Bank, room G6-079, 1818 H Street, N.W., Washington,DC 20433, USA.
viii
Introduction
This paper reviews Bank-assisted programs to enhance the efficiency and equity of publicservice provision. We first look at recent trends in public sector expenditures, noting the majorinefficiencies and inequities. We then evaluate the Bank's contributions to enhancing publicservices provision in developing countries. We discuss the conditions associated with the Bank'sadjustment lending, and evaluate the impact of these conditions on outcomes of interest. Whiledata limitations preclude a formal causality analysis, we highlight trends in relevant indicators.We conclude the paper by summarizing the main conclusions of this review and, whereappropriate, drawing implications for future Bank operations.
Expenditure Patterns before Adjustment Lending
The Bank began its adjustment lending program in FY79. The initial focus of adjustment loanswas to encourage countries to evaluate the composition of their expenditures between currentand capital allocations. More recently, adjustment lending has been used to encourage countriesto shift expenditures towards basic services. Tables 1 through 3 provide a picture of the averageexpenditure patterns in the 1970s in countries which later participated in the Bank's adjustmentprogram (see Appendix 1 for a detailed listing). These expenditure patterns highlight theproblems later addressed by adjustment lending through mutually agreed to conditions on pubicexpenditures.
Relative to the developed country average, a disproportionate share of public spending wasclaimed by capital projects, wages and general administration. In terms of broad expenditurecategories, governments in developing countries devoted considerable resources to capitalprojects during the 1970s. As a share of GDP, capital spending was higher in four of the fiveregions listed in Table 1 than in the developed countries. Measured as a share of totalexpenditures, capital spending exceeded the developed average in every region. This divergencearises, in part, from the seriously deficient infrastructure facilities in many developing countriesand therefore required higher capital expenditures in initial stages of development.
Table 1: Capital versus Current Expenditures (Average, 1970-79)
Percent of GDP Percent of ExpendituresCapital Current Capital Current
Africa 5.0 18.8 21.1 79.3East Asia and the 5.1 11.8 28.9 71.2PacificLatin America & the 4.0 15.0 19.9 78.9CaribbeanMiddle East & North 9.9 26.9 27.2 72.8AfricaSouth Assia 4.6 12.7 28.1 74.0Industrialized 4.1 30.2 12.4 87.1CountriesNote: The regional composition of countries is listed in Appendix IASource: IMF, Government Finance Statistics
Examining expenditure categories in more detail reveals that governments in developingcountries devoted large shares of their expenditures to the civil service (in wages and generaladministrative expenditures) and infrastructure projects, at the expense of basic services.Defense expenditures also consumed a large share of govemment funds, particularly in East Asiaand the Pacific and the Middle East and North Africa.
Table 2: Central Government Expenditures as Shares of GDP (Average, 1970-79)
Wages General Economic Defense Education HealthAdministration Affairs
Africa 7.8 6.4 6.1 1.6 3.9 1.5East Asia and 3.1 2.5 4.6 3.8 2.5 0.4the PacificLatin America 5.9 2.6 3.7 1.2 2.9 1.5& theCaribbeanMiddle East & 9.4 5.2 8.9 3.5 5.4 1.6North AfricaSouth Assia 3.8 1.8 4.5 1.4 1.5 0.8Industrialized 6.9 3.3 5.9 4.4 4.0 2.8CountriesNote: The regional composition of countries is listed in Appendix lBSource: IMF, Government Finance Statistics
Using the developed countries' average as a benchmark underscores the sizable share ofexpenditures devoted to wages in the Middle East and North Africa (MNA), and Sub-SaharanAfrica. General administration also consumed a disproportionate share of funds in MNA andSub-Saharan Africa. Higher expenditures on public sector wages and general expenditures werealso reflected in higher public employment. Public employment as a percent of totalemployment rose to more than 30% in Algeria, Egypt, Jordan, Mali, Nigeria, Senegal andZambia (data for the Middle East is 1984-90; for Africa, 1981. See Shihata, 1994 ). Within thecivil service, there are problems -- while the civil service is often overstaffed, workers areunderpaid in monetary benefits. Public sector wages are typically low and especially low forpositions requiring greater managerial or technical skills.
2
Table 3: Composition of Central Government Expenditures (Average, 1970-79)
General Economic Defense Education Health Total of whichAdministration Affairs Wages
Africa 25.4 23.6 8.8 15.1 5.8 100 31.8East Asia and 13.4 26.3 22.5 15.1 2.5 100 18.8the PacificLatin America 11.0 17.1 5.2 12.9 6.2 100 30.3& theCaribbeanMiddle East & 15.2 24.5 9.5 16.2 4.6 100 28.1North AfricaSouth Assia 10.7 31.5 10.8 7.9 4.5 100 18.9Industrialized 10.4 17.8 11.0 11.3 8.3 100 19.9CountriesNote: Expenditure categories not listed include debt charges and subsidies. The regional composition of
countries is listed in Appendix lB.Source: IMF, Government Finance Statistics
Public spending on health received a low priority in the 1970s. An important implication ofgreater attention to public sector wages and capital projects (especially in transportation) wasthat, while the public sector reach expanded, after the payment of public wages there werelimited or no resources left to deliver basic services (see Husain, 1994). Of the two socialsectors, health received lower funding (see Table 3). Detailed infornation on expenditureswithin the health sector is not available.
Table 4: Health Care Before 1985
Country Access to Health Carea Infant Mortality Rate"
Bangladesh 45 133Bulgaria 100 21Burkina Faso 70 157Gambia 90 162Ghana 64 100Guatemala 59 77Malawi 54 171Mali 20 187Mozambique 40 158Niger 48 153Pakistan 64 126Somalia 20 147Uganda 42 116Zambia 70 naZimbabwe 71 84aPercentage of population with access to health care; 1985 (except Mali: 1980)b Per thousand live births, 1979Source: World Bank (1995i)
3
Low funding levels contributed to poor health care in many developing countries. Table 4 listscountries which later received adjustment lending with health care conditions. The data indicate'wide disparities in the access to health care services (in six countries over half the populationlacked access), while infant mortality rates were often high.Limited access to safe water and sanitation services contribute to the poor health statistics,particularly in rural areas. In Sub-Saharan Africa, for example, only one-third of rural residentshave access to safe water, compared to almost three-quarters of urban residents. In East Asia,where virtually all urban residents have safe water, 40% of rural residents do not. Access tosanitation services is especially poor. Only 4% of rural residents in East Asia have sanitation,while over 60% of urban residents receive these services.
Percent of Population Figure 1: Access to Safe Water (1988-93)
10 _
80
60
40
20
SSA Arab S. Asia E. Asia SEA&Pac LAC
Source: UNDP (1 995) and World Bank (I1995i)
4
Figure 2: Access to Sanitation Services, 1988-93
100
90
80
70 -o _-~~~~ 60 - *~~~~~~~~~~~~~~~URBA~Nfl ai RURAL0a. 50 --
20
0I-
SSA Arab S.Asia EAsia SEA&Pac [AC
Source: UNDP (1995) and World Bank (1995i)
Education expenditures fluctuated during the 1980s. For example, between 1980 and 1985education expenditures dropped sharply in Sub-Saharan Africa, from 5.2% of GNP to 4.5% (seeTable 5). Declines were also experienced in South Asia, where education spending fell from4.1% of GNP in 1980 to 3.3% in 1985. Spending began to recover in both regions in the late1980s. However, spending began to fall in Europe and the former Soviet Union.
Table 5: Public Expenditures on Education (1980-1990)
Region 1980 1985 1990
% of GNP
Sub-Saharan Africa 5.2 4.5 4.7Arab States 4.5 5.9 5.7Latin America & the 4.1 4.1 4.2CaribbeanEast Asia/Oceania 2.8 3.2 3.1of which: China 2.5 2.6 2.4South Asia 4.1 3.3 3.8of which: India 2.8 3.4 3.5
North America 5.2 5.1 5.5Europe/Former USSR 5.5 5.5 5.3Note: Regional compositions of countries are listed in Appendix 2Source: UNESCO (1993a)
5
Higher spending on university education squeezed spending on primary education.Expenditure patterns among education subsectors seem to indicate a shift in favor of secondaryeducation at the expense of primary and university education. Over the period 1980-90,spending on primary education as a percent of total education spending declined in all regionsexcept South Asia. Public spending on secondary education increased in all regions exceptSouth Asia, while higher education spending increased in East Asia and the Pacific, LatinAmerica and the Caribbean, and the Middle East and North Africa, but declined in Sub-SaharanAfrica, Europe and Central Asia, and South Asia (see World Bank, 1995c, p. 57).
When examined on a per-pupil basis, education expenditures reveal a clear bias toward tertiaryeducation (see Table 6). In every region, expenditures at the university level remainsignificantly higher than expenditures for basic education. Note that this bias persists even inSub-Saharan Africa, where expenditures per pupil declined at every level during the 1980s. Thisreduction in per-pupil expenditures reflects rapid population growth over the decade as well asthe sharp reduction in education expenditures in the early 1980s. The imbalance in allocationstowards university education is underscored by a comparison of the ratio of per pupilexpenditures on university education to the same for primary and secondary education with thecomparable ratio for developed countries. Compared to developed countries, this ratio washigher in all regions with Sub-Saharan Africa being particularly out of line with the rest of theworld.
Table 6: Public Current Expenditures Per Pupil by Level of Education : A ComparativePerspective
Region Year Primary Intermediate University University /(US $) (US $) (US $) (Primary +
Intermediate)
Sub-Saharan Africa 1980 47 163 2808 13.41990 42 150 1405 7.3
Arab States 1980 na 179a 980 5.51990 na 263a 1394 5.3
Latin American and 1980 147 252 992 2.5the Caribbean
1990 256 319 1911 3.3
East Asia/Oceania 1980 22 57 752 9.51990 56 128 668 3.6
South Asia 1980 50 91 284 2.01990 78 156 593 2.5
Industrialized 1980 na 1327* 2580 1.9CountriesNote: Regional composition of countries are listed in Appendix 2a figure for pre-primary, primary and intermediateSource: UNESCO (1993a)
6
Expenditures at the secondary and tertiary levels benefit only a small proportion of thepopulation. Regional enrollment figures indicate a marked drop in the percent of school-agechildren attending secondary or higher institutions. The decline is particularly sharp in Africaand East Asia.
Figure 3: School Enrollment (1992)Percent of age gruop enrolled
10 i _o2~~ -
80 U80 - =a
40
20
0_
SSA E.AsiaPAC S. Asia Eur.CAsia MENA LAC
Note: data were not available for all regionsSource: UNESCO (1993a), World Bank (1995j)
A Framework for Evaluation of Bank Supported Public Expenditure Policy Reforms
An examination of the performance record of the Bank's structural adjustment lending programin introducing public expenditure policy reforms requires a normative framework for the role ofthe public sector in a developing country and the public expenditure policies needed in supportof such a role. Such a framework is outlined in this section. This framework focuses on the roleof government intervention to improve a country's efficiency and equity of resources andgovernance structure and associated expenditure priorities used to make those improvements(see also Boadway, Roberts and Shah, 1994). It also highlights the need for a supportive rolefrom the private sector for enhancing the effectiveness with which public sector resources areused.
Role of the public sector in a market economy
The merits of leaving economic decisions to the private sector in a market economy are wellrecognized. The decentralized nature of these decisions and the competitive setting in which theyare taken both contribute to efficiency in resource allocation. From this point of view, anecessary condition for government intervention must be some form of market failure.Government intervention is called for when the benefits of collective decision making outweighthe loss of decentralized individual decision making. Whether that will be the case in any givencircumstance will be a matter of judgment. In the event that the private sector yields aninefficient outcome, there is no guarantee that the public sector will do better. In addition, when
7
considering a government role to improve the equity of private sector outcomes, differentpersons will disagree on the extent to which redistributive goals are important and on the extentto which governments can succeed in achieving them.In developing countries, public sector interventions in the market place are extensive. Some ofthe arguments used to justify such interventions include protection of industry and vulnerablegroups, underdeveloped credit markets, critical shortages of basic necessities, systematicoverestimation of risk, and positive externalities related to education, health, and infrastructure.Such intervention is also based on the redistributive role of the public sector. Virtually allcountries try to redress income inequalities through redistributive taxes, expenditure policies,and social insurance programs. Expenditure policies for the public provision of health andeducation provide in-kind transfers and are often justified on distributive grounds.Redistribution based upon factors other than the ability to earn income is considered socialinsurance. The public sector often represents the only source for such insurance.
These interventions can also be inefficient thereby compounding the difficulties originallycaused by market failures. For example, public corporations that deliver private goods andservices often do so at much higher costs than the private sector. These corporations requireeither subsidies from the exchequer or protected markets in order to survive. Public provision ofinfrastructure and social services has frequently been accompanied by government takeover ofexisting private facilities and the denial of private sector participation in the production of theseservices. Inefficiency in public provision of social services also contributes to the inequity ofgovernment spending, as the non-availability of such services restricts access for a large segmentof the population, particularly the poor and needy.
Determining the Output Mix
Economic considerations suggest that governments invest in public goods with the highest socialreturns. The scant empirical guidance on sectoral allocation choices seems to suggest that socialreturns may be the highest for public spending on education and health. For example, a recentWorld Bank study uses econometric analyses of data for a sample of 25 countries over the period1965 to 1984, and finds that returns to public investment in education and health are greater thanthose to public investment in infrastructure and even private investment in physical capital (seeBaffes and Shah, 1993). The study also finds that the effect of military spending on growth wasnegative for most developing countries. Arora and Rayoumi (1994) estimate that a 20%reduction in military spending in net debtor countries could result in an increase of 15% in theirGDP over a decade. Further, the experience of the last 90 wars in developing countries suggeststhat in a majority of cases, the aggressors did not realize their territorial conquests but insteadsuffered serious reversals in economic fortunes. The above discussion suggests that reshapingpublic spending priorities in favor of human resource development (education, training andhealth) and away from military spending would stimulate economic growth.
The existing literature on subsectoral expenditures provides some guidance for subsectoralinvestments. By evaluating the effect of various types of education on income earning potential,this literature reaches a consensus conclusion that returns to public investment are highest inprimary education, followed by secondary and university education (see Psacharopolous, 1994and Hossain, 1995). Increasing primary enrollment for girls is a separate objective with well-documented benefits. Increased education for girls is associated not only with higher marketwages for women but also with improved child health and smaller family size (see Appleton andCollier and the references therein). Similarly in the health sector, returns are higher in basic
8
health than in tertiary health, and in preventive rather than curative medicine. Preventive careprograms such as better information on hygiene and nutrition can significantly reduce the overallcost of health care. Improvements in health care contribute to greater productivity and lessenpressures for public spending on law and order.
Equity considerations reinforce these expenditure priorities. In education, expenditures at theprimary level tend to be pro-poor, while tertiary expenditures benefit the affluent. In Costa Rica,for example, the poorest 40% of households receive 57% of the benefits from primary education;the richest 20% of households captured 43% of the benefits at the tertiary level. The pattern isrepeated in a variety of countries (see Jimenez, 1986; also references in Selden and Wasylenko,1995). Similarly, expenditures directed to primary health services are pro-poor. Data fromIndonesia underscore this point. In the late 1970s and 1980s the Indonesian governmentemphasized primary health care. Facility utilization patterns in 1978 and 1987 reveal that thepercentage of the poor who sought no treatment outside the home fell after 1978, while use ofprimary health centers increased. The overall distribution of health subsidies became moreequitable; the share captured by households in the lower 40% of expenditures increased from19% to 31%. The primary health care subsidies were more pro-poor in urban areas, where moreaffluent households chose alternative services (van de Walle and Nead, 1995).
A more fundamental approach to improving delivery of basic services is to change the system ofgovernment decision-making which determines the output mix. In those developing countriesthat have participatory democracy at the local level, decentralizing responsibility for basic healthand primary and secondary education can create a framework for more responsive servicedelivery. Local elected officials know better the needs and resources of their regions; withappropriate flexibility, they can determine cost-effective solutions to the problems of servicedelivery. Establishing national standards of access or achievement may be useful. The normsmust not eliminate local flexibility, but rather provide guidance on the allocation of operatingexpenditures and investments. The funding mechanisms established as part of a decentralizedapproach to provision of local public services can include incentives to meet these norms.Conditional non-matching grants can be used to ensure minimal service standards; open-endedmatching transfers can be used to encourage higher levels of services with benefit spill-overs,such as immunization (for more detailed discussion, see Shah 1994).
Efficiency in Input Use
The efficient allocation of intra-sectoral funds between current and capital expenditures dependson a country's existing infrastructure. Sectoral budgets must balance the need for maintainingexisting infrastructure with the need to increase the provision of public services to neglectedareas. Consequently, for countries with seriously deficient infrastructure (schools, health carefacilities, water and sewerage facilities, and roads), capital expenditures to increase the numberof these facilities is the highest priority. In cases where substantial infrastructure currentlyexists, although increasing the number of facilities would increase the provision of public goods,it may be more cost effective to devote resources to maintaining the existing infrastructure.
For example, in the social sectors, adequate supplies of teaching materials, textbooks and healthequipment must be ensured. The positive link between textbooks and student achievement isunderscored in studies in Nicaragua, the Philippines and Brazil (see Lockheed, Verspoor, et al1991). Facilities matter as well. In rural Pakistan, the gaps in primary enrollment rates andcognitive achievement across genders and regions is due largely to differences in the availability
9
of local schools (Alderman, et al, 1995). This result holds more broadly: Lockheed andVerspoor found that proximity to a primary school is the most important determinant ofattendance.
Ensuring efficient wage expenditures involves two separate issues. The first is the overall size ofthe wage-bill. Common examples of inefficient expenditures on personnel and wages includeeducational systems with many administrators but ill-equipped and poorly maintained schools;transportation systems with many drivers but few operating vehicles; and water systems withlarge managerial staffs but high system losses due to lack of maintenance. The second issue isthe problem of wage compression within the civil service. Public sector wages are typically lowand especially low for positions requiring greater managerial or technical skills. Salaries ofhigher level staff in some countries are a low multiple of the income earned by the lowestranking worker thereby rendering the public sector relatively unattractive for those whose skillsare also valued by the private sector.
Private Sector Participation
In many countries the private sector also produces goods that are typically the responsibility ofthe public sector; common examples include the private provision of health care and education.Encouraging private sector participation allows governments to extend the coverage of goodsand services produced publicly. In addition, to the extent that the private sector may be moreefficient, governments can increase the effectiveness of public resources by using the privatesector to provide goods. For example, Table 7 shows that the private sector was more cost-efficient than the public sector in the delivery of education and health services. In a deliverysystem with private sector participation, the public sector would retain its role in settingstandards for service provision and in ensuring compliance with these standards. The public rolewould be best exercised if the national government assumed responsibility for setting standardsand providing financing; intermediate level governments had an oversight role; and localgovernments assumed responsibility for provision, with private sector participation whenappropriate.
Table 7: Indicators on Relative Efficiency of Public and Private Provision of Educationand Health Services in Pakistan (1993-94)
Health
Monthly Wages Annual Number of Number of(Rupees) Recurring Exp. Out Patients per Out PatientsDoctors Nurses per Bed Doctor per Nurse
per Day per DayPrivate Hospitals 5,100 1,550 12,700 24 26Non-Profit Hospitals 3,800 na 11,600 25 21Government Hospitals 5,372 1,969 22,000 4 5
Education
Monthly Wages in Teacjers (Rupees) Student-Teacher Ratio
Primary Middle Secondary Primary Middle Secondary
Private 886 900 2,075 31 23 25Government 2,310 3,534 3,653 47 33 n.a.n.a. means not availaleSource: Hasan (1995a and 1995b)
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Bank Reviews of Adjustment Lending and Public Expenditure Reform Issues
The World Bank Research Department has, in the past, carried out reviews of the structuraladjustment lending programs (ALPs) in 1988 (RAL I), 1990 (RAL II) and 1992 (RAL III),respectively. These reviews have provided guidance on the public expenditure policy content ofthe ALPs. The first review simply noted that some success was achieved in rationalizing publicinvestment outlays through the Bank's investment reviews. Progress on reforms in financialmanagement, core agency functions and pay and employment was much slower. The secondreview (RAL II) primarily focused on the social impact of adjustment lending. It argued thatALPs had a positive impact on the poor through improvements in access to health and nutritionprograms and, more broadly, through a better targeting of public expenditures. It suggested thatin future adjustment operations, poverty alleviation should be included as a program objective. Inaddition, the programs should address easing the adjustment costs of displaced workers andprotecting the poor from expenditure cuts. The third review (RAL III) argued for greaterattention to both the level and the composition of public spending in Bank supported adjustmentprograms. It suggested reducing public sector employment and restructuring wages to increasebudget flexibility. It also suggested conditions, agreed to by the Bank and Borrower, thatemphasize non-wage operations and maintenance and focus on infrastructure bottlenecks. Itsuggested redirecting public spending towards primary health care and primary and secondaryeducation on both efficiency and poverty grounds. While acknowledging that the Bank cannotdirectly advocate changes in military expenditures, it suggested that the issue could be raisedwith the borrowing countries that allocate seriously inadequate levels of public expenditures fordevelopment. Finally, it called for a greater emphasis on collection and processing of publicexpenditure data.
Two recently completed major reviews of adjustment (Jayarajah and Branson, 1995 and WorldBank, 1995e) have also addressed public expenditure policy reform issues and drawn lessonsfrom this experience. Jayarajah and Branson have suggested establishing sectoral priorities forinvestment so that "white elephants" are eliminated. They further note that existing expenditureplanning, evaluation and monitoring systems and mechanisms are a major source of poor publicsector performance. They conclude that (a) less ambitious programs with fewer conditions arelikely to be more successful; (b) a greater focus by the Bank on the issue of program ownershipby the government is imperative; and (c) refined blueprints for reforms are no substitute for amuch better understanding of a countiy's implementation capacities. The World Bank,Operations Evaluation Department (OED) stresses the need to protect social expenditures duringdownsizing of the public sector. It noted that, on average, per capita social spending increasedduring adjustment. This is contrary to investment spending which continued to decline duringadjustment, creating severe infrastructural bottlenecks. Overall, public expenditurerestructurings have been quite limited and the public sector retained a pro-rich bias in servicesdelivery. The OED Report recommended strengthening conditionality to protect "core"expenditure programs. Further the Bank should continue to assist borroWers in developinginstitutional capacities in planning and budgeting and collecting data on the composition ofpublic expenditures.
The above discussion suggests that internal Bank reviews of adjustment programs showed aremarkable consistency for their concerns with the social impact of adjustment. In addition,protecting the level of social spending, especially on primary education and basic health, wasseen as a pre-requisite for avoiding any unwelcome social consequences of adjustment policies.
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Adjustment Lending Conditions and Implementation Record
Overview of Conditions
The Bank, through its adjustment lending program, has entered into agreements with borrowersto introduce reform through conditions related to public expenditures in 83 countries duringFY79-94. Countries throughout the world, and particularly in Latin America and the Caribbeanand Sub-Saharan Africa, have agreed to these conditions as components of their Bank-sponsoredstructural adjustment programs. The distribution of adjustment loans by region and income levelindicates that attention has been focused on lower-income countries in Sub-Saharan Africa andSouth Asia, lower-middle income countries in Europe and Central Asia, and upper-middleincome countries in Latin America and the Caribbean. Lower and lower-middle incomecountries as groups have received almost equal attention.
Table 8: Adjustment Loans and Credits with Expenditure Conditions,by Country Income Level and Region (%);
Income Level / Region Africa East Europe Latin Middle South TotalAsia & & America East & AsiaPacific Central & the North
Asia Caribbean AfricaLower 22 4 0 1 1 9 37Lower Middle 6 5 12 11 6 0 40Upper Middle 0 2 2 20 0 0 24
Share in Total Lending 28 11 14 32 7 9 100
Share of World Poor i6 25 1 6 5 47 100Source: World Bank (1995h)
The general goal of expenditure conditions has been stated (see World Bank, 1992a) as "adesirable pattern of expenditure shifts (which) includes, in general, an initial move away fromcapital expenditure, followed by strong efforts to contain the government wage bill, mainly byreducing the numbers employed, and to restructure social expenditures away from tertiaryservices and toward primary education and health services." In Table 9, we see that conditionsto achieve all elements of this goal were agreed to.
Capital expenditures were addressed most frequently (in 52 countries). Civil service reform,requiring reductions in public sector wages and/or employment, was the subject of conditions in42 countries. Streamlined budget processes and improved financial accounts were alsoconditions in 42 countries. These conditions reflect the importance of establishing financialaccountability in the public sector, and increasing the transparency of public spending.Education and health expenditures were subject to conditions in numerous countries. Other areaswhich received considerable attention include limiting subsidies (33 countries) and reducing therole of public enterprises (21 countries). As expected, one topic receiving limited attention inadjustment lending is military spending. Though a major source of budgetary inflexibility,military expenditures were subject to conditions only in Bank lending to Nicaragua andZimbabwe. The Bank did draw attention to military spending in El Salvador, Uganda andPakistan after discussions became feasible
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Table 9: Distribution of Loan Conditions by Major Objective (1980-94)
Objective Condition Number ofCountries
Reorienting Governments to Service DeliveryRationalize central and local planning processes 8Reform civil service (primarily public employment and wages) 42Streamline budgetary processes and improve financial accounts 42Limit public sector interventions in marketplace: public enterprises 21Enhancing relevance and accountability through participation 1Enhancing accountability through a strong judiciary 0Building partnership for progress through clarifying taxing and spendingresponsibilities of various levels of govemrnent 0Ensuring regional equity through fiscal equalization transfers 0Setting national standards with conditional block transfers to lower-levelgovernments 0
Setting Public Spending Priorities: Across SectorsGeneral 16Reduce military spending 3Monitor performance through use of intermediate/output indicators 0(see specific sectors below)
Setting Public Spending Priorities: Within SectorsCapital expenditures 52Operating expenditures , 14Current expenditures -- wages 14Current expenditures -- non-wages 12Cost recovery 4General 16
lIQfming Educational AccessAllocations to basic education 17Allocations to other education 16Monitor performance through use of intermediate/output indicators 0
Improving Access to HealthAllocations to basic health 15Allocations to other health 12Monitor performance through use of intermediate/output indicators 0
Overcoming Infrastructural DeficienciesAllocations to water and sanitation 4Allocations to roads 8Allocations to irrigation 3Allocations to infrastructure 8Operations/maintenance expenditures (see intra-sectoral allocations above)
Improving Agriculture's Contributions to DevelopmentAllocations to agriculture 18Limit public market interventions: subsidies 33
Reaching Out to the Poor and the Disadvantaged: People, Regions and SectorsPoverty alleviation 5Regional development 3Rural development 2
Enhancing Service Delivery Through Increased Private Sector ParticipationPrivatization 6Eliminate barriers to private entry and provision 0
Source: World Bank (1995h)Historical trends
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A review of the historical trend in expenditure conditions indicates that the advice on capitalexpenditures has been consistent throughout the period (1980-1994). The Bank has argued for areduction or adjustment in capital spending while generally maintaining an emphasis on priorityprojects. The Bank thus used its adjustment lending to directly address the disproportionatelylarge share of funds devoted to capital spending during the 1970s. In addition, the Bankexpanded the scope of its advice on capital and current expenditures to address emergingproblems with inadequate maintenance. Before 1985, operations and maintenance (O&M)expenditures were rarely addressed in conditions. Since that time, the Bank's advice hasincluded increases in non-wage and O&M spending.
Social sector expenditures have only recently been addressed through adjustment lendingconditions. Education spending was rarely mentioned in the 1980s, receiving greater attentionsince 1990. Health expenditures were subject to conditions somewhat earlier; the Bank hasargued for increases in health spending since 1986. Throughout its history of adjustnent lendingthe Bank has consistently argued for a reduction in subsidies, focusing on the agricultural sectorand public enterprises.
Equity concerns
The Bank has focused greater attention on equity concerns in the late 1980s. The equity analysiscovers a pool of 71 loans or credits to 43 countries with conditions on basic services to the poor.The number of operations with relevant conditions rose from 5 in 1988 to 10 in 1989, peaking at11 in 1991. In terms of objectives, the area most often addressed was access to health andeducation. Conditions on adjustment lending focused on three topics: the overall budget sharefor health and education; the share of the sectoral budgets devoted to personnel; and the intra-sectoral allocation of resources between tertiary and primary activities. The Bank has thus usedits adjustment lending to encourage the appropriate shifts in expenditures toward human resourcedevelopment in general and in particular toward the basic level activities which yield the highestreturns for both equity and efficiency.
The objectives of ensuring adequate nutrition or increasing the income and earning potential ofthe poor were each addressed through conditions on lending to 11 countries. Income supportprograms were subject to conditions in 9 countries. One issue receiving little attention was theprovision of safe water and sanitation services. The distribution of conditions by equityobjective is summarized in Table 10.
Regional orientation of conditions
A comparison of conditions in the three regions receiving the most attention, Sub-SaharanAfrica, Latin America and the Caribbean, and Europe and Central Asia, indicates differentemphases. Countries in all three regions sought to reduce expenditures on civil service wagesand staff, and on subsidies. This was generally an appropriate focus since, among regions, Sub-Saharan Africa devoted the largest share of government expenditures to wages and generaladministration in the 1970s, while LAC ranked third (see Table 3). More generally, Sub-SaharanAfrica used the broadest range of conditions, covering virtually all expenditure categories. Inaddition to the spending cuts noted above, countries used conditions to reduce capitalexpenditures, increase spending on O&M, and adjust their expenditures in the education andhealth sectors. The focus on education reflects the concern raised by the sharp drop in spendingin the early 1980s, as well as the strong bias toward tertiary activities. Far fewer topics were
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addressed in Latin America and the Caribbean where few or no conditions were used to adjustexpenditures on capital, O&M, education or health. Social sector conditions focused instead onreforms of pension systems. Similarly, in Europe and Central Asia, only focused on cuts in civilservice spending and subsidies, and increases in priority capital investments.
Table 10: Distribution of Loan Conditions by Equity Objective (1980-94)
Objective Condition Number ofCountries
-hnproveAccess to Basic Health 30and Education
inter-sectoral allocation 20increase non-wage expenditures 12reduce tertiary, increase primaryexpenditures 9fee system 4increase rural investment 2private sector I
Ensure Adequate Nutrition for the Poor 11subsidies 10food stamps 1direct government provision 1
Increase Income and Earning Potential 11government programs (employment,retraining) 7improve road access to markets 5
Reach Poor Through IncomeSupport Programs 9
support for affected workers 7social security reform 2
Improve Access to SafeWater and Sanitation 3
increase share of government budget 2fee system Iincrease rural investment 1
Source: World Bank (1995h)
General versus specific conditions
The degree of detail in structural adjustment conditions has varied widely. In some cases,countries agreed to conditions with very specific requirements while, in other cases, very generalagreements were reached. For example, Malawi used a condition in 1984 to "ensure adequatebudget allocations to key developmental departments". Gabon, on the other hand, agreed to"reduce public expenditure on salaries by 10.4%" in 1988.
A broad trend toward increasingly detailed conditions emerges if one examines the strength ofconditions agreed to between 1980 and 1994 (defining strong conditions as having at least onebinding quantitative constraint). Differences also emerge across income levels and regions: lowincome countries tend to agree to more binding conditions than higher income countries;
15
conditions tend to be stronger in Sub-Saharan Africa and Europe and Central Asia than in LatinAmerica and the Caribbean.
Overall Implementation
Implementation of conditions has generally been good, although assessments have yet to becompleted for many of the relevant operations. A review of 124 loans or credits to 69 countriesto assess implementation of specific expenditure targets reveals three points (see Table 11).First, conditions have generally been implemented: 85 percent of all conditions for whichimplementation information was available in PCRs/PARs were met fully or in part. This patternof implementation (at least 84 percent of conditions met) holds for each specific area ofconditionality other than defense expenditures: subsidies, civil service reform, operations andmaintenance, and spending on education, health and poverty. Second, a significant share ofoperations have yet to be evaluated. Nearly half the conditions on O&M and social sectorexpenditures were agreed to in recent operations which have not been subject to formal review.Finally, the number of conditions which borrowers have failed to meet is relatively small.
Table 11: Implementation of Adjustment Lending Conditions on Public Expenditures
Civil Education,Total Subsidy Service O&M Health, Defense
PovertyNo. % No. % No. % No. % No. % No. %
Total 173 100 60 100 66 100 15 100 29 100 3 100Conditions
No Data 55 32 9 15 23 35 7 47 14 48 2 67Data 118 68 51 85 43 65 8 53 15 52 1 33
Conditionson Loans 118 100 51 100 43 100 8 100 15 100 1 100with Data
Met 75 64 31 61 27 63 6 76 11 74 0 0Partially Met 25 21 13 25 9 21 1 12 2 13 0 0Not Met 18 15 7 14 7 16 1 12 2 13 1 100Note: The included loans/credits and countries are listed in Appendix 3Source: World Bank (Project Completion Reports, various)
Inmpact Analysis
The effectiveness of conditions is evaluated by observing 'which spending policies have beentargeted, and by noting trends in relevant indicators. Data limitations hinder a more formalanalysis. In particular, many of the relevant conditions have been agreed to recently, andinsufficient time has passed to deternine the full effects of the conditions. It has been argued(Summers and Pritchett, 1993) that before/after comparisons for short time periods are likely tounderestimate the effects of conditions.
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Overview of impacts on aggregate expenditures
An overview of the impact of the Bank's adjustment lending on government expenditure patternscan be drawn from Table 12. The table shows average central government expenditures for1990-94 by region, with countries which participated in the Bank's adjustment lending programseparated from those which did not. Care must be taken in interpreting the results; the countrycomposition of regions varies across categories depending on the availability of data (see Annex4 for a listing of countries). The data sets are consistent within each block of the table, but arenot the same across blocks.
Table 12: Average Central Government Expenditure Shares (1990-1994)
East Europe & Latin MiddleAfrica Asia & Central America East & South Overall
Pacific Asia & the North Africa AsiaCaribbean
Total/GDPParticipants 0.295 0.174 0.534 0.242 0.340 0.230 0.303Non-Participants 0.288 0.305 0.325 0.209 0.307 na 0.287
Capital/GDPParticipants 0.098 0.048 0.026 0.025 0.071 0.047 0.053Non-Participants 0.084 0.110 0.032 0.044 0.068 na 0.068
Current/GDPParticipants 0.189 0.118 0.464 0.231 0.263 0.158 0.237Non-Participants 0.263 0.187 0.309 0.158 0.208 na 0.225
Capital/ExpendParticipants 0.316 0.274 0.069 0.115 0.208 0.220 0.200Non-Participants 0.208 0.321 0.086 0.219 0.220 na 0.211
Current/ExpendParticipants 0.659 0.685 0.920 0.945 0.773 0.665 0.775Non-Participants 0.795 0.633 0.888 0.770 0.745 na 0.766
Education/ExpendParticipants 0.156 0.149 0.087 0.139 0.170 0.075 0.129Non-Participants 0.103 0.121 0.072 0.107 0.143 na 0.109
Health/ExpendParticipants 0.058 0.037 0.050 0.121 0.062 0.037 0.061Non-Participants 0.049 0.050 0.091 0.087 0.048 na 0.065
Defense/ExpendParticipants 0.072 0.142 0.066 0.067 0.055 0.093 0.083Non-Participants 0.193 0.124 0.136 0.058 0.200 na 0.142
Subsidies/ExpendParticipants 0.022 0.030 0.118 0.057 0.019 0.119 0.061Non-Participants 0.039 0.032 0.157 0.022 0.018 na 0.063
Wages/ExpendParticipants 0.303 0.205 0.168 0.268 0.281 0.128 0.226Non-Participants 0.294 0.200 0.121 0.312 0.398 na 0.265
Infrastruct/ExpendParticipants 0.212 0.232 0.229 0.125 0.244 0.256 0.216Non-Participants 0.232 0.295 0.193 0.191 0.172 na 0.217na means not availableNote: Appendix 4 lists countries included in each categorySource: IMF, Government Finance Statistics
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A mixed pattern emerges. Total public expenditures were a larger share of GDP for participantsthan non-participants in almost every region. Overall, participants devoted a lower share ofexpenditures to capital and wages and a higher share to education, consistent with the broadobjective of World Bank (1992a). Health expenditures were lower, however, although thedifference is slight. Though rarely addressed directly in conditions, defense expenditures werelower for participants as a whole. Expenditure shares on subsidies and infrastructure werealmost the same for participants and non-participants.
In Africa, participants allocated a larger share of government expenditures to capital, educationand health; while participants and non-participants allocated roughly the same share of funds towages. Participants also allocated fewer funds to subsidies and defense expenditures. Thesedata indicate mixed success in the region. The relative cutback in wage expenditures is small.However, the Bank's emphasis on subsidy reductions appears to have had an impact, as well asthe focus on increased expenditures on education and health.
In Latin America and the Caribbean, participants had higher expenditures than non-participantsin all categories except capital, wages and infrastructure. This is a positive outcome in terms ofcapital, education, health, and wages, but less desirable in terms of higher expenditures onsubsidies or defense. The regional data for Europe and Central Asia indicate several desirablepatterns for participants--higher expenditures on education and lower expenditures on subsidiesand defense--although wage expenditures are also higher for participants. These regional datarepresent a very small sample, however, and must be interpreted with care.
Constraints on public expenditures
The mixed performance of participants can be traced in part to budgetary inflexibility. Severallarge expenditure categories cannot be adjusted quickly, including statutory transfers to lowerlevels of government, defense funding and debt charges. Table 13 shows that in countries suchas Brazil, India, and Zaire, over 90% of expenditures remained inflexible during the last decade.Adjustment lending programs appear to have had little effect on budget inflexibility, resulting inlimited opportunities to reshape spending priorities. Among regions, South Asia had the leastbudget flexibility (69% of expenditures were fixed on average during 1986-94), followed byAfrica (41% fixed).
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Table 13: Expenditure Inflexibility (Fixed Categories as Percentage of Total Revenue)
Region/Country 1977-1985 1986-1994Industrial Countries 39 39Latin America 29 37South Asia 54 69Eastern Asia and Pacific 37 34Sub-Saharan Africa 27 41East Europe & Central Asia 35 20
Most inflexible countriesDemocratic Republic of Congo 39 122Brazil 37 99India 81 91Bahrain 78 81Note: Figures reflect simple period averages of the results for each year calculated:(Defense expenditure + interest payments + transfers to other levels of govermment) / (total revenue &grants -grants -entrepreneurial & property income)
Source: IMF, Government Finance Statistics
Conditions in Selected Expenditure Categories
Capital and current expenditures
The Bank tailored its advice on capital and current expenditures to reflect the level of initialcapital in the borrowing country. In countries with high capital expenditures, it was recognizedthat continued investment in large capital projects may not meet the basic needs of thepopulation. In a number of cases the Bank advised a general reduction in capital expenditures. Inother cases, the Bank advised borrowers to seek Bank guidance before undertaking large capitalprojects. Increased emphasis was placed on maintenance expenditures, to halt the deteriorationof existing infrastructure, and to prolong the useful life of past capital investments. IncreasedO&M expenditures conditions were agreed to in many countries (Chad C1945; CAR C2162; LaoC2037; Papua New Guinea L3218; Philippines L2787; Somalia C2030; Tanzania Cl 133; TogoC1599; Uganda C2087; Zambia C2214). In some cases appropriate levels of O&M weretargeted before a country funded additional capital projects. In many cases, conditions simplyestablished funding priorities or clarified the decision-making process.
The Bank recognized that, in countries where large portions of the population lack access topublic services, capital investments in basic facilities may very well be the most efficient use ofpublic resources. In four cases the Bank advised an increase in capital spending (Gabon L2933;Niger C258 1; Papua New Guinea L3218; Senegal L193 1).
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Table 14: Changes in Capital and Current Expenditure Shares, Pre- and Post-Adjustment
Share Before Share After ChangeCountry Adjustment Capital Current Capital Current
PeriodBolivia 1987-92 9.8 90.2 22.5 77.5 +Brazil 1984 8.2 91.8 5.1 94.9Chad 1989 65.1 34.9 58.3 41.7Chile 1986-88 8.4 91.6 12.1 87.9 +Colombia 1985 21.8 78.2 18.2 81.8Costa Rica 1985-89 14.6 85.4 10.8 89.2Indonesia 1987-91 44.8 55.2 50.1 49.9 +Panama 1984-87 14.5 85.5 2.1 97.9Rwanda 1991 32.8 67.2 25.9 74.1Senegal 1981 8.2 91.8 20.9 79.1 +Togo 1983-85 28.1 71.9 33.7 66.3 +Tunisia 1987-89 28.9 71.1 21.1 78.8Turkey 1980 26.4 73.6 29.8 70.1 +
1988 18.2 81.8 14.9 85.1Uruguay 1984-89 7.3 92.7 6.1 93.8Zambia 1984-86 12.1 87.9 30.4 69.6 +Zimbabwe 1983 6.3 93.7 7.3 92.7 +Source: IMF, Government Finance Statistics
The impact of conditions on capital expenditures was mixed. A notable success is Senegal,where capital expenditures as a share of government spending increased sizably, consistent withthe expenditure conditions. Reducing capital expenditure in favor of current activities did notalways succeed. Chad, Togo and Zambia, for example, all agreed to increase O&M spending.Only in Chad did the share of funds to capital projects decrease (O&M increases are noted inTable 15). It is interesting to note that capital spending decreased in five of the seven LACcountries listed in Table 14. This adjustment occurred despite limited attention to capital orO&M spending in that region through conditionality.
Conditions to increase O&M spending have generally been successful. Of the six countrieslisted, only the Dominican Republic failed to increased its expenditures (although the nominalGuinea figures should be interpreted with caution). It should be noted, however, that shiftingfunds to current expenditures may generate very low returns in practice if those resources areused for excessive employment or inappropriate supplies. Continued attention to the state of theinfrastructure in borrower countries is warranted.
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Table 15: O&M Expenditures in Countries with Conditions Requiring Increases(1990 Prices)
Country Years of Units 1986 1987 1988 1989 1990 1991 1992 1993Condition
Chad' 1989 Bill Francs 6.1 6.4 7.8 11.7 14.2 18.6Dominican 1987 Mil Pesos 1,152 1,127 1,026 977 736RepublicGuineab 1990 Bill Francs 62 81 95 86Indonesiab 1991 Bill Rupees 2,798 2,573 2,698 2,891 2,852 3,368 3,610 3,470Papua New 1990 Mil Kina 299 276 284 264 283 352 332 432GuineaaPhilippines 1987 Bill Pesos 28 26 24 30 30 31 27aDeflated by CPI, all others by GDP DeflatorbNominalSource: International Monetary Fund (1994) and World Bank (1995h)
Civil service reform
Civil service reform was addressed through a variety of conditions. In many cases reductions inpublic employment or public sector wages or both were agreed to. Conditions also addressed,although much less frequently, issues pertaining to the monetization of benefits, equalization ofpay discrepancies, simplification of the salary structure and decompression of wages.
The most common civil service conditions were reductions, freezes, or limits on the increases inwages and/or staff size (Comoros C2270; Guinea Bissau C1798; Gabon L2933; The GambiaC1730; Guinea C1926; Honduras L3257; Lao C2304; Niger C2581; Papua New Guinea L3218;Sierra Leone C1501, C2352, C2546; Sao Tome C1825; Senegal C1802, C2090; Tunisia L2781).Initially attention was focused on public sector wages. Conditions to reduce wage-bills to dealwith the excessive allocation of government funds to payrolls have appeared since 1980. TheBank's advice in this area was not monolithic -- incentive issues in the wage structure alsoreceived attention. In several instances public sector wages, the Bank advised that public sectorwages be raised after they had fallen to very low levels. Examples include Bangladesh (1984),Tanzania (1986), Ghana (1987), India (1990) and Uganda (1994). In some cases salaries were tobe increased by lowering employment (Argentina L3394; Mali C2188, C2580; Uganda C1474,C2314; C2608); other countries agreed to adjust public sector salaries to compensate for realwage declines (Ethiopia C2526; Uruguay L3081). In Ghana, civil service issues were addressedin a series of adjustment operations (Ghana L1393, L1777, C2005, C2236, C2345). Among thereforms advised was an increase in salaries for senior staff to directly focus on reducing wagecompression in the public sector.
The Bank offered a similarly broad range of advice on staff reductions. In Benin and the CAR,voluntary departures were to be enforced by abolishing family, housing and travel benefits(Benin C2023, C2283; CAR C1 732, C1916). After 1985, conditions appeared which focused ongovernment-provided retraining for public sector staff when public employment was cut. Inseveral countries broad programs were designed to retrain or re-deploy displaced public sectorworkers (Hungary L2700); or to provide severance pay or other assistance to redundantemployees (Mauritania C2166; Zambia C2405, C2577).
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Table 16: Countries Agreeing to Civil Service Conditions
Condition CountriesReduce Public Employment Honduras, Nicaragua, Niger, Turkey, Zaire
Change Compensation Terms Bangladesh, Hungary, India, Mauritania, Tanzania,Tunisia, Zambia
Reduce Public Employment and Change Argentina, Benin, Central African Republic,Compensation Terms Comoros, Costa Rica, Cote d'lvoire, Ethiopia,
Gabon, The Gambia, Ghana, Guinea, GuineaBissau, Kenya, Laos, Mali, Papua New Guinea,Peru, Sao Tome, Senegal, Sierra Leone, Uganda,Uruguay
Source: World Bank (1 995h)
A broad issue not addressed in conditions on the civil service concerns the realignment of thepublic sector role. A closer examination of public activities may have suggested deeper cuts inareas where the public sector was involved in a private sector role, or in roles detrimental to theeffectiveness of the public sector, while strengthening public roles in justice, basic education andhealth. Further, conditions did not address appropriate roles of various levels of government andthe implications for public employment and wages at various levels. Broadening the scope ofconditions may have the potential to significantly enhance the effectiveness of the public sector.
Impact on public employment and wages
Recent data on public employment in developing countries is available only for a handful ofdeveloping countries (see Table 17). These data suggest an almost flat trend in publicemployment as a percentage of the population or labor force during the 1980s. Most countriesparticipating in Bank-assisted structural adjustment programs did meet conditions onretrenchment of public service and containment of public wages. For example, Ghana, duringthe period 1981-90, eliminated 48,610 positions including 11,000 ghost workers. Uganda,during the same period, removed 20,000 ghost employees from its payrolls (see World Bank,1994, pp.122-123). In some cases retrenchment was short lived. For example, in Guineareductions carried out during the initial two years of the program were reversed later. In 1991,about 5000 civil servants were hired as "temporary personnel" which still remain on the payrollin 1995. Senegal also reversed course during 1988-91 after an initial period of retrenchmentduring 1986-88.
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Table 17: Trends in Public Employment in Selected Latin American Countries
Public Employment Public Employment(Percentage of Population) (Percentage of Labor Force)
1985 1990 1985 1990Argentina 6.2 6.4 17.2 17.9Chile 2.5 na 8.0 n.a.Uruguay 8.3 8.7 21.7 22.1Venezuela 6.5 6.5 21.3 18.6Trinidad and Tobago 11.7 10.6 29.5 27.0Ecuador 3.1 3.3 n.a. n.a.Note: May not include military personnel. Trinidad and Tobago data for 1987 and 1991. Ecuador data are for 1985
and 1991Source: Population and labor force data: World Bank (1995j) and World Bank (1995I). Trinidad and Tobago:Trinidad and Tobago: Policy Agenda for Sustained Development, Report No. 0417-TR, The World Bank (June 23,1992).Chile: El Empleo Publico Frente a la Crisis, Adriana Marshall. Argentina: Argentina: Public Finance ReviewFrom Insolvency to Growth; IBRD, Feb. 1993. Uruguay: Uruguay Employment and Wages; IBRD Internal ReportNo. 9608-UR, May 1991. Venezuela: CORDIPLAN D.P.E.P.P. en Base a Datos de OCEPRE y Encuesta de Hogaresde OCEI.
Data to evaluate the impact of conditions on public sector wages are limited. A mixed pictureemerges from an analysis of wage expenditures by central governments in six countries whichagreed to wage conditions (see the top portion of Table 18). Wages fell as a share of totalexpenditures in four of the countries, although the decline in Hungary was minimal. Uruguayshowed the largest overall reduction, with wages falling from 28.8% of total expenditures in theearly 1980s to 18.0% after the 1989 adjustment operation. However, wages increased in CostaRica and Guinea. The comparison set of adjusting countries which did not have conditions onwages (see the bottom portion of Table 18) yields a similarly mixed pattern. For example,Bolivia increased the expenditure share of wages after the 1987 adjustment, but reduced wageexpenditures sharply after the 1992 operation. Mexico had the opposite experience, with wagesfalling in the 1983 adjustment but rising sharply after 1989. Of the remaining seven countrieswithout wage conditions, wage shares increased in five. Overall, the mixed message underscoresthe stability of wages as an expenditure category. Nonetheless, conditions appear to have helpedreduce wage expenditures.
Education and health
In education and health, the intersectoral allocation of funds received the most attention. Thedegree of flexibility for the recipient government varied. For example, Trinidad (L3152) simplyreviewed its public expenditure programs as a condition of its borrowing. In two countries,conditions focused on the budget process itself. For example, Bulgaria (L3397) was advised todevelop a 'core' budget concept to protect essential public services. Most common wereconditions on the social sector share of the budget. In 24 operations in 17 countries, conditionsstipulated that the budget share should be agreed upon with the Bank, maintained or increased.Half of the loans and credits included only general statements. For example, in FY89 TheGambia (C2032) agreed to increase the health and education share of the recurrent budget; inFY92 Bangladesh (C2361) agreed to make "satisfactory funding increases" in its health andeducation budgets. Detailed conditions were included in the remaining twelve Bank operations.These specific conditions left little discretion to the recipient government. For example, Maliagreed, in FY89 (C2054), to allocate no less than one-quarter of the government's recurrent
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budget to education. In FY92, Malawi (C2396) agreed to specific floors on its expenditures.Education had to receive at least 15.5 percent of the 1993/94 budget.
Table 18: Changes in Wage Expenditure Shares, Pre- and Post-Adjustment
(percent of total expenditure)Country Adjustment Period Share Before Share After ChangeWage ConditionsCosta Rica 1985-89 37.9 41.0 +Guinea 1990 16.9 22.1 +Hungary 1986-88 7.0 6.9Togo 1983-85 29.5 24.3 -Uruguay 1984 28.8 23.5
1989 21.7 18.0Zimbabwe 1983 28.8 24.6
No Wage ConditionsBolivia 1987 35.7 40.9 +
1992 39.2 29.4Brazil 1984 7.5 5.5Chad 1989 23.4 25.7 +Chile 1986-88 20.2 18.2Colombia 1985 18.7 18.8 +Mauritius 1981-87 30.3 35.3 +Mexico 1983 23.1 17.5
1989 13.5 26.9 +Morocco 1984-89 32.7 36.5 +Panama 1984-87 28.2 47.2 +Source: IMF, Government Finance Statistics
The size of the wage-bill in health and education was the second most frequently addressed issuein the social sectors. In fourteen operations, twelve countries agreed to increase expenditures onnon-wage inputs such as teaching materials and health supplies. The Bank's advice wasconsistent with the literature stressing the need for adequate supplies and materials to ensureeffective service delivery (see Lockheed, Verspoor, et al, 1991). In these conditions, there hasbeen a clear trend toward increasing specificity. Of these operations, seventy percent of the oneswhich occurred in the 1990s included specific conditions, some quite detailed. A FY90 credit toGuinea (C2155) specified minimum levels of expenditures on materials per pupil, for example,while a FY92 credit to Kenya (C2295) included ceilings on the number of primary and secondaryteachers. General conditions typically sought to reduce the share of personnel expenditures.
Nine countries, in twelve operations, agreed to conditions shifting in health or educationresources from tertiary to primary activities. The Bank's advice has clearly been consistent withthe available empirical evidence which indicates that expenditures at the primary level are pro-poor, while tertiary benefits flow to the more affluent (Jimenez, 1986 and Selden andWasylenko, 1995). Of the nine operations in the 1990s, all but one included specific conditions.For example, Burkina Faso agreed to cap its expenditures on secondary and higher educationscholarships at CFAF 5.87 in a FY94 credit (C2590). India provides an example of specificconditions on both primary and tertiary expenditures. In a FY93 credit (C2448), the governmentagreed to hold higher education allocations constant while trebling the states' allocations for
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primary education. In total, India agreed to add an additional $880 million to its five-yearallocation to primary education.
It may also be noted that while the Bank has argued for greater emphasis on primary education,during the period 1963 to 1992, 20 percent of its education lending went to primary educationcompared to 30 percent for higher education. This pattern remained unchanged during the morerecent period from 1988 to 1992 (see Ridker, 1994).
Impact on education expenditures
To evaluate the effectiveness of conditions on social sector spending, we first examine changesin the share of public expenditures on education. Data in this area are limited since 60 percent ofthe conditions related to social sector expenditures occurred after 1990. The regional statisticspresented in Table 12 indicate that participants devoted a higher share of expenditures toeducation in every region (South Asia is excluded due to lack of comparable data). Data forspecific countries where conditions were agreed to on education spending (Table 19) indicate thevarying experiences underlying the regional averages. Central government expenditures oneducation increased in Bulgaria, Indonesia and Zambia, but declined in Burkina Faso, Cameroonand India. It should be noted that since education is a state responsibility in India the reducedcentral government expenditures probably reflect cutbacks in tertiary funding.
Table 19: Changes in Central Government Expenditures on Education
(percentage of total expenditure)Country Fiscal Year of Condition Share Before Share AfterBulgaria 1992 3.1 3.4Burkina Faso 1991 17.9 17.3Cameroona 1989 2.9 2.7India 1993 2.2 1.9Indonesia 1989, 1991 9.0 9.8Zambia 1991 10.2 13.4Notes: During Adjustment period is the fiscal year listed. Pre- and Post-Adjustment periods are three years.Exceptions are as follows. Bulgaria: Post-Adjustment period is 1993-94. Burkina Faso: Post-Adjustment period is1992 only. Cameroon: Post-Adjustment Period is 1993 only. India: Post-Adjustment period is 1994 only.Indonesia: During Adjustment period is 1989-1991; Post-Adjustment period is 1992-93. Zambia: Post-AdjustmentPeriod for GDP Share is 1992-93.a Education expenditure are shown as a ration to GDP.Source: IMF, Government Finance Statistics.
A more comprehensive picture appears when one examines expenditures by all levels ofgovernment. Table 20 presents a broad picture of the pattern of education spending in adjustingcountries during the 1980s. Many of the countries did not have conditions directly on educationexpenditures. The data reinforce the conclusion that social sector spending does not necessarilysuffer when an adjustment program is adopted. Of the 55 countries listed, 65% showed apositive average annual growth rate in education spending between 1980 and 1990.
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Table 20: Public Expenditures on Education: Adjusting Countries
Fiscal Year of Percent of Percent of Average AnnualEducation GNP Total Growth Rate (%)f
Condition ExpenditureCountry 1980 1990 1980 1990 1980-90
AfricaAlgeria N 7.8 9.1 24.3 27.0 5.1Burkina Faso Y (1991,1994) 2.2 2.3 19.8 17.5 3.9Burundi N 3.0 3.5 17.5 16.7 4.9Cameroon Y (1989) 3.2 3.4 20.3 19.6 2.6Central African N 3.8 2.8 20.9 na -2.2RepublicCongo N 7.0 5.6 23.6 14.4 1.4Egypt N 5.7 6.7 9.4 na 6.3Ethiopia N 3.3 4.8 10.4 9.4 4.9Gabon N 2.7 5.7 na na 8.3Gambia Y (1989) 3.3 3.8 8.7 11.0 -0.4Ghana Y (1987, 89, 90) 3.1 3.3 17.1 24.3 7.6Kenya Y(1989, 1991) 6.8 6.8 18.1 16.7 5.0Malawi Y (1981, 84, 92) 3.4 3.4 8.4 10.3 3.9Mali Y (1989, 1991) 3.8 3.2 30.8 17.3 -0.4Mauritania N 5.0 4.7 na 22.0 -1.9Mauritius N 5.3 3.7 11.6 11.8 2.8Morocco N 6.1 5.5 18.5 26.1 1.8Mozambique Y (1994) 3.8 6.3 12.1 12.0 -0.1Rwanda N 2.7 4.2 21.6 25.4 2.7Senegal Y (1990) 4.5 3.7 23.5 24.1 0.6SierraLeone Y(1992, 1994) 3.8 1.4 11.8 na -12.1Togo Y(1988, 1991) 5.6 5.7 19.4 24.7 0.7Tunisia N 5.4 6.1 16.4 14.3 5.0Uganda Y (1990) 1.2 2.9 11.3 22.5 10.9Zaire N 2.6 0.9 24.2 6.4 -10.6Zambia Y (1991, 1994) 4.5 2.9 7.6 8.7 -6.8Zimbabwe Y (1993) 6.6 10.6 13.7 na 8.1
Latin America& theCarribeanCosta Rica N 7.8 4.6 22.2 20.8 -2.4Bolivia N 4.4 3.0 25.3 20.1 -3.3Brazil N 3.6 4.6 na na 3.9Chile N 4.6 3.7 11.9 na -2.6Colombia N 1.9 2.9 14.3 21.4 5.0Ecuador N 5.6 2.8 33.3 19.1 -5.3El Salvador N 3.9 1.8 17.1 na -7.1Guatemala Y (1993) 1.9 1.4 11.9 11.8 5.6Guyana N 9.7 4.7 14.0 na -7.6Honduras N 3.2 4.6 14.2 15.9 5.6Jamaica N 7.0 6.1 13.1 12.9 -1.0Mexico N 4.7 4.1 na na -2.5Panama N 4.9 5.5 19.0 na 1.7Trinidad Y(1990) 4.0 4.1 11.5 11.6 -1.4
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Uruguay N 2.3 3.1 10.0 15.9 4.3Venezuela N 4.4 4.1 14.7 18.8 -1.2
AsiaBangladesh Y (1992) 1.5 2.0 7.8 10.3 8.6China N 2.5 2.3 9.3 12.4 8.4India Y (1993) 2.8 3.5 10.0 11.2 6.9Korea, Rep. of N 3.7 3.6 23.7 22.4 9.5Pakistan Y (1994) 2.0 3.4 5.0 n.a. 12.4Philippines N 1.7 2.9 9.1 10.1 5.8Sri Lanka N 2.7 2.7 7.7 8.1 5.3Thailand N 3.4 3.8 20.6 20.0 6.7
EuropeBulgaria Y (1992) 4.5 5.4 n.a. n.a. 4.0Former Czech. N 4.0 4.6 n.a. 8.2 2.6Hungary N 4.7 6.1 5.2 7.8 3.0Romania N 3.3 3.1 6.7 7.3 -0.7a Average annual growth rates are based on estimated total public expenditure in constant prices (deflatedusing the implicit GDP deflator) and computed by fitting trend lines to the logarithmic values of theexpenditure data for each year of the period.Source: UNESCO (1993a)
A final point made clear in Table 20 is the need to continue to draw attention to educationexpenditures. Between 1980 and 1990, there were no conditions on education spending in any ofthe 16 Latin American and Caribbean countries listed. During the 1980s, ten of these countriesexperienced negative growth in education expenditures. While Guatemala and Trinidad didagree to conditions on education spending in the early 1990s, other countries in the region whichreduced education spending sharply may also warrant attention.
In several countries the positive effect of conditions on education expenditures are apparent.Cameroon, Ghana, Kenya, Malawi and Uganda all agreed to conditions on education spendingover the decade, and experienced positive average annual growth rates. The Gambia, Mali,Mozambique, Sierra Leone, Zambia and Trinidad all agreed to conditions on education spendingeither late in the 1980s or in the early 1990s, after experiencing negative growth in expendituresbetween 1980 and 1990.
More detailed country data reinforces both the success in shifting funds across broad expenditurecategories, and the need to continue to focus attention on education spending. The Gambiaagreed to increase education expenditures in 1989. The share of government funds allocated toeducation rose from 8.8% in 1988 to 11.0% in 1990 and 12.9% in 1991. Similarly, theGovernment of Togo agreed to budget allocations for education in a FY88 credit. Educationexpenditures increased from 19.7% of the budget in 1987 to 24.7% in 1989. Success can beshort-lived, however, as in Cameroon. A FY89 adjustment loan included a condition to include amulti-year investment program for education in the budget framework. Governmentexpenditures on education increased from 16.1% in 1988 to 19.6% by 1990. However,expenditures dropped to 16.9% in 1991.
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Only one example is available of the reallocation of funds from administrative payrolls toteaching supplies and materials. The Gambia agreed to increase the share of recurrentexpenditures allocated to materials and supplies for the 1989/90 budget. The impact was limited:teaching materials as a share of current expenditures fell from 4.8% in 1985 to 3.8% in 1990; itincreased slightly to 3.9% in 1991.
Education outcomes
The ultimate goal of education expenditure conditions is an improvement in educationaloutcomes. Relevant data on primary enrollment rates are only available for nine countries. Table21 lists the fiscal year of the adjustment loan or credit in which conditions on educationexpenditures were agreed to, and provides total primary enrollment figures for the preceding andfollowing years. It must be emphasized that the full effects of the conditionality may not beevident, due to the short time period which has elapsed since the adjustment lending.
Table 21: Primary Enrollment Ratios in Countries with and without Education Conditions(percentage of age group enrolled)
Country Fiscal Year 1985 1986 1987 1988 1989 1990 1991 1992 Outcomeof Conditions
EducationBenin 1989 66 67 58 61 66 +Burkina Faso 1991 32 34 35 37 37 31Gambia 1989 65 62 64 65 66 69 +Ghana 1987, 1989 76 72 70 73 74 77 74 +, -Guinea 1990 34 34 34 37 37 42 +Mali 1989 23 23 23 24 25 +Nigeria 1990 68 73 75 73 76 +Senegal 1990 58 58 58 59 59 58 0Trinidad 1990 99 97 96 96 95Average 57 58 57 59 59
No EducationConditionBurundi 60 69 70 71 72 70Central African 63 65 65 68RepublicMauritania 51 52 51 49 50 55Tamzania 69 66 69 69 69 69Zaire 77 76 55 70 72Alverage 64 66 64 63 65 66Source: World Bank (I1995j)
The data indicate that primary enrollment rates increased in six countries immediately aftereducation sector conditions were agreed to. Thus conditions which focused attention on theeducation sector have been associated with higher primary enrollment rates in several countries.The positive outcome is not universal, however. In Burkina Faso and Trinidad, enrollmentdeclined. In Senegal, enrollment figures showed no immediate change but declined two years
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after the credit. In Ghana the positive outcome of the 1989 credit also dissipated; enrollmentfigures fell in 1991. Malawi (not included in Table 21) provides a clear example of thesometimes limited results of conditions on spending. Adjustment lending in both 1981 and 1984included conditions on education expenditures. Nonetheless, total primary enrollment declinedsteadily over the period, falling from 65% in 1981 to 59% in 1985. Levels above 65% were notreached until 1989.
These results can be compared to enrollment rates in a set of countries in which no conditions oneducation were agreed to. The sample consists of five low-income countries from Sub-SaharanAfrica since most of the countries with education conditions are from this group. This smallsample indicates that enrollment rates have also improved in countries without Bank lendingconditions. In Burundi and the CAR, the increase was uninterrupted in the late 1980s, while inMauritania enrollments rose after a brief downturn. In Tanzania and Zaire, however, primaryenrollments were stagnant or declining in the late 1980s. The data again indicate the need tofocus attention on the provision of basic education.
Primary versus tertiary education
Almost all of the nine loans or credits in which countries agreed to shift funds from tertiaryeducation to primary activities were made to Sub-Saharan Africa after 1990. A detailed analysisof the impact of conditions on tertiary expenditures is not possible since the loans or credits areso recent. The issue received increased attention in two countries. Ghana agreed to implement acost-savings plan at the university level in 1987. The share of current government expendituresat the tertiary level declined, falling from 12.5 percent in 1984 to 12.1 percent in 1989 and 11percent in 1990. The reductions translated into increases at the primary level. The share ofcurrent expenditures on primary education increased from 24.5 percent in 1984 to 32 percent in1989, but fell to 29.2 percent in 1990. The downward trend in 1990 is another indication thateducation spending must receive continued attention. India raised the share of plannedinvestment allocated to primary education while reducing the tertiary share (UNESCO, 1993a).The Bank amplified this trend by advising additional increases in primary level expenditures inthe Eighth Plan.
Education for girls
The issue of increased basic education for girls has received little direct attention in expenditureconditions. In countries where conditions were placed on other aspects of education spending,the gender gap persists (see
Table 22). Enrollment figures for girls show a mixed pattern. In half the sample enrollment ratesfor girls increased between 1985 and 1990. However, rates were unchanged in The Gambia,Mali and Pakistan; and female enrollment rates declined slightly in Cote d'Ivoire, Kenya, andTrinidad. These data suggest that girls may gain greater access to basic education withoutexplicit conditions. However, the persistence of the gender gap, and the precipitous decline ingirls' enrollment observed in Mozambique and Nigeria indicate that greater Bank attention iswarranted to eliminate the gender gap quickly and to prevent further erosions in the education ofgirls.
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Table 22: Enrollment Ratios and the Gender Gap in Primary Education
(percentage of school age population)1985 1990
Countrya Female Male Gender Female Male GenderGap Gap
Bangladesh 50 70 20 73 84 11Burkina Faso 21 36 15 28 45 17Chad 24 63 39 37 82 45Cote d'Ivoire 62 88 26 59 83 24Gambia 52 84 32 52 77 25Guinea 23 47 24 24 50 26India 80 110 30 84 111 27Kenya 96 102 6 93 97 4Malawi 52 68 16 62 74 12Mali 17 30 13 17 30 13Mozambique 75 97 22 52 75 23Niger 18 33 15 21 37 16Nigeria 84 106 22 76 97 21Pakistan 30 56 26 30 57 27Senegal 46 67 21 50 68 18Trinidad 97 95 -2 96 96 0Note: Gender gap refers to the difference between male and female enrollnent ratios.a Countries with conditions on education spending, but not specifically on the education of girls.Source: World Bank (1995i)
Changes in literacy
Illiteracy rates proviide a long-run assessment of the outcome of Bank conditions on access tobasic education. While these rates adjust slowly and may not reflect educational changes forsome time, the data make one point very clear. Illiteracy is declining, in general and for females,in all countries.
To conclude, the available empirical evidence suggests that conditions have had a positiveinfluence on education expenditures in some countries. While primary enrollment rates areincreasing and illiteracy declining, however, problems persist. Education finding will need toreceive sustained attention. Despite a concentration of loans to Sub-Saharan Africa withconditions on education, the region lagged all others in primary school enrollment in 1992.
Impact on health expenditures
The limited country-specific empirical evidence suggests that conditions did exert a positiveinfluence on central government health expenditures. The share of health expenditures in totalspending increased after adjustment in 5 of the 6 countries listed in Table 23. In most cases, theshare of expenditures on health also increased during the adjustment, indicating an ability tocushion the health sector from spending downturns.
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Table 23: Changes in Central Government Expenditures on Health
Country Fiscal Year Share Before Share AfterShare of Total Expenditure
Bulgaria 1992 2.1 3.1Burkina Faso 1991 6.4 6.9Cameroona 1989 0.8 0.7Indonesia 1989-1991 1.7 2.6Uruguay 1989 4.5 5.0Zambia 1991 7.3 9.8Note: The adjustment period is the fiscal year listed. Pre- and post-adjustment periods are three years, except asfollows. Bulgaria post-adjustment period: 1993-94. Burkina Faso post-adjustment period: 1992 only. Cameroonpost-adjustment period: 1993 only. Indonesia post-adjustment period: 1992-93. Zambia post-adjustment period forGDP share: 1992-93.a Ratio of health expenditures to GDP.Source: IMF, Government Finance Statistics.
Health outcomes
A useful indicator of changes in health care is the infant mortality rate, which adjusts quickly.Data for 18 countries before and after conditions on health care expenditures were agreed toshow that infant mortality declined in all but one case (see Table 24). The same general trend isapparent for a set of countries with no health expenditure conditions although mortality ratesdropped by slightly less. As with the education data, it must be emphasized that this survey is nota formal analysis of causality between conditions and outcomes. However, the data suggest thatthe Bank's emphasis on health care is associated with reduced incidence of infant mortality.
Table 24: Country Infant Mortality Rates (per thousand live births)
Health Expenditures No Health Expenditures ConditionsConditionsCountry Fiscal Year 1987 1993 Change Country 1987 1993 ChangeBangladesh 1992 119 106 -13 Burundi I11 101 -10Benin 1989, 1991 90 85 -5 Central African Republic 107 101 -6Bulgaria 1992 14 14 0 Mauritania 110 99 -11Burkina 1991 138 129 -9 Tanzania 89 84 -5Cameroon 1989 74 61 - 13 Democratic Republic of 99 92 -7
CongoCote d'Ivoire 1992 97 91 - 6Gambia 1989 143 130 -7Ghana 1987,1989 90 79 -11Indonesia 1989,1991 75 56 - 19Kenya 1991 63 61 -2Malawi 1992 151 142 -9Mali 1991 169 157 -12Morocco 1992 82 66 - 16Somalia 1989 132 120 - 8Togo 1988,1991 94 83 -9Trinidad 1990 24 18 -6Uganda 1990 120 114 -6Zambia 1991 109 103 -6Average 99 90 -9 Average 103 95 -8Source: World Bank (1995i)
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For three countries, data are available which indicate an increase in the percentage of thepopulation with access to health care after conditions were agreed to on health expenditures. InMalawi, however, the improvement occurred several years after the Bank operation. Thisobservation underscores the difficulty of attributing improvements in health care directly toconditions associated with adjustment lending.
Table 25: Percentage of Population with Access to Health Care
Country Fiscal Year 1981 1985 1988 1991 OutcomeBenin 1989 ... ... 32 50 +Ghana 1987, 1989 ... 64 65 76 +Malawi 1981 40 54 80 ... +Source: World Bank (1995i)
Chargingfor services
Four countries agreed to conditions to introduce, test or review a fee system for education orhealth. In Malawi (C 1427), the fee system was introduced as part of a broader expenditurestrategy. The government agreed to reduce, by 20 percent over a five-year period, contributionsto tertiary education while student contributions increased; at the same time priority was placedon maintaining adequate recurrent outlays for education. A narrower focus was taken in Kenya(C2049). User charges were to be introduced in health, education and other public services tofund an increasing share of recurrent expenditures. The Bank's attention to user fees isappropriate since they have the potential to improve service delivery. Cost recovery in highereducation and tertiary health care can allow governments to reallocate funds toward primaryeducation and basic health. The literature emphasizes the importance of the design of the feestructure. Ideally, basic education or primary health care would impose little or no direct cost,while tertiary services charged income-adjusted fees. This type of system would generaterevenue and increase access to basic services. As these examples illustrate, consistent attentionhas not been paid to the design of fee systems.
Subsidies
Countries seeking adjustment loans have frequently agreed to reductions in subsidies, both toconsumers or producers, implicit and explicit. Subsidy conditions commonly have addressed theagricultural sector and public enterprises. This is due, in part, to the recognition of theenvironmental damage caused by excessive fertilizer use and, in part, to the long history ofgovernment support of agriculture and public enterprises. Several countries agreed to reducefertilizer subsidies (Bangladesh C1471, C1655; Indonesia L3267; Mexico L2918; SenegalC 1802). Reductions in public enterprise subsidies were agreed to many countries (Burkina FasoC2281; Burundi C2024, C2376; CAR C1732; The Gambia C2032; Guyana C2168; Jamaical,3174; Lao C2037; Mexico L2918, L3309; Mozambique C2628; Nicaragua C2302; SierraLeone C2352; Senegal C1802, C2090; Turkey L2321; Venezuela L3223). Mexico (L3309) andHonduras (L3257) agreed to eliminate guaranteed prices for commodities or agriculturalproducts. The implicit subsidization of interest rates (through preferential credit) was eliminatedin four countries i(Poland L3247, Tunisia L2962, Turkey, Democratic Republic of Congo).However, new subsidies still appear occasionally. Niger introduced a subsidy for the essential
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staples market (C2581), while Senegal introduced a 10% export subsidy in 1981 whileeliminating all agricultural subsidies except fertilizer (L193 1).
Energy subsidies received scant attention in conditions on adjustment lending. Such subsidescreate direct costs to developing countries on the order of $270-330 billion U.S. Subsidies oncooking oils can be justified on distributional grounds but subsidies on transportation fuels aregenerally regressive as well as environmentally damaging (see Larsen and Shah, 1995). Whileaddressed only infrequently in adjustment operations, energy subsidies receive considerableattention in investment loans.
Impact on subsidies
The limited data on subsidy reductions indicate that though expenditures on subsidies were oftenreduced in response to conditions, the reductions are often not sustained (Table 26). Evaluatingthe sustainability of subsidy reductions is difficult because subsidies can vary significantly. Forexample, high inflation affects some subsidies (annual subsidies to public enterprises) more thanothers (such as price guarantees).
Table 26: Impact of Subsidy Reduction Conditions
(in 1990 prices)Country Years of Units 1986 1987 1988 1989 1990 1991 1992 1993
ConditionBrazil 1984 Thousands 208 122 120 212 76 229 151
ReaisBulgariaa 1991 Billions 6.3 6.4 6.1 6.8 3.4 8.8
LevaHungary 1988,90,91 Billions 347 n.a. 322 149
ForintRomania 1992 Billions 56 41 72
LeiSierra Leone 1992 Billions 2.4 2.8
LeonesSri Lanka' 1990 Billions 3.91 2.66 3.18 4.84 3.68 3.67 2.46 2.43
RupeesTunisia 1988, 90 Millions 54 53 152 111 79 66 71
Dinars" Nominalb Deflated by CPI, all others by GDP DeflatorSources: International Monetary Fund (1994) and World Bank (1995h).
Rural development
Two countries (Cote d'Ivoire and Guatemala) agreed to conditions requiring the development ofinvestment plans for rural service delivery to address the unequal access to education and healthin urban and rural regions. Sustained attention to this issue may be necessary. In Cote d'Ivoire,for example, the operation requiring a plan for rural social sector investment was followed twoyears later by another that froze the construction of new health and education facilities(presumably also in rural areas) so that targets for the overall investment budget could be met.
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Ensuring adequate nutrition for the poor
Conditions for promoting nutrition directly has been relatively sparse. Direct governmentprovision of food received extensive attention in El Salvador; in Madagascar it was to beeliminated. Coupon programs were addressed only once: food stamps for tortillas wereintroduced in a FY88 loan to Mexico. More commonly, conditions to reduce subsidies on foodand consumer staples were agreed to. Exceptions can be found, however. In FY94 a credit toNiger included the condition that staples be provided at subsidized prices.
Cutting broad subsidies can address both efficiency and equity issues. Eliminating programswhich subsidize goods consumed by all income levels can eliminate significant benefit leakages.However, resources will only reach needy households if they are distributed through carefullydesigned programs. Macedonia provides a rare example in which conditions took the next stepin improving targeting to reach the needy: a general price subsidy was replaced with a targetedbread subsidy. Attention to program design was lacking in most conditions. The importance ofdetermining eligibility and the need to weigh the costs and benefits of screening requires agreater emphasis in future programs (for a detailed discussion of the issues involved, see van de'Walle and Nead, 1995).
Increasing the income and earning potential of the poor
Many conditions on income or earning potential emphasize direct government involvement inthe labor market. In seven countries, governments were advised to provide employment or tofund retraining programs. In five countries, governments established funds or severance policiesto provide support to workers affected by the adjustment. These latter programs benefited civilservants or workers in the formal private sector. The chronically unemployed or individuals withlimited ties to the formal sector may not be helped.
Expanding coverage in income support programs has typically not been addressed throughconditions. India, Poland and Uruguay agreed to increase the level of funding (or benefits) forunemployment programs or old age and family assistance but coverage was not expanded.Similarly, in cases where conditions sought to reform social security, expanded coverage to thevery poor was not addressed. Only Chile agreed to increase the coverage, as well as the benefits,of its unemployment program.
Safe water and sanitation
The problem of safe water and sanitation services was addressed in only three countries: Coted'Ivoire (L3240, FY90), Malawi (L2026, FY81) and Zambia (C2577, FY94). Cote d'Ivoire andMalawi agreed to increase capital investments in the water supply; Zambia agreed to increase theresources devoted to sanitation services. Investment lending has been the primary tool used toaddress these deficiencies.
Issues Not Addressed in Adjustment Lending Conditions
In this section we broaden our analysis. We evaluate the general form of adjustment lendingconditions. We also discuss a number of measures which were not addressed by conditions, butwhich have the potential to improve the efficiency and equity of public spending.
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Outputs and Outcomes
In most expenditu categories, conditions have targeted expenditure and public sectoremployment levels These types of targets may occasionally invite accounting responses(accounting changes and departmental shifting of resources) rather than improvements in thedelivery of public - ices. Below we outline examples where conditions on outputs would havehelped improve the effectiveness of adjustment lending.
Education and health
The Bank, and donors in general, have focused on the role of health and education services asnecessary conditions for economic development. Donor efforts have sought to improve indirectmeasures of public sector efficiency (such as the number of teachers or allocations to non-wageO&M) rather than direct measures of public service delivery (such as literacy and mortalityrates). A more effective form of the Bank's advice would be to focus on improvements inoutcomes and provide guidance on possible options to achieve desired results. In education, forexample, conditions could include increasing primary enrollment rates in the short-run or areduction in illiteracy rates in the long-term. In health, conditions could include falling infantmortality rates in the short-run and greater longevity in the long-term. These targets wouldcreate the incentive needed for the government to reallocate funds across activities.
Safe water
Ancillary activities which could improve sanitation or health need further encouragement.Activities such as educational programs to teach poor or rural households about safe practiceshave proven effective and should not be overlooked. In Bangladesh, for example, a projectaimed at increasing the use of safe water combined distribution of hand pumps and latrines withhygiene classes. Significant health improvements resulted (see World Bank, 1990a).
Nutrition
Alternative means to improve nutrition have not been explored. Conditions have not dealt withthe problems of improving the private supply network, or encouraging the design of educationprograms to develop nutritious eating habits. To reach the objective of greater nutrition for thepoor, the Bank needs to expand the scope of its advice. Program design should be emphasized,rather than simply broad subsidy cuts. Education programs and technical assistance to theprivate sector are options which could be explored.
Civil service reform
A major difficulty with the Bank-sponsored reductions in public employment was that these didnot address issues relating to the realignment of the public sector role. A closer examination ofpublic activities would have suggested deeper cuts in areas where the public sector was involvedin a private sector role, or in roles detrimental to an effective public sector, such as nationalplanning; while strengthening public roles in justice, basic education and health. Further,conditions did not address the appropriate roles of various levels of government, which hasimplications for public employment and wages at various levels. Thus while conditions were
35
well-intentioned, they may not have contributed significantly to enhanced effectiveness of thepublic sector.
Subsidy reductions
Despite the potential short-run efficiency gains of conditions which reduce subsidies, conditionshave primarily been agreed to by smaller countries. Sri Lanka, for example, agreed to "eliminateand not reinstate subsidies for rice, wheat-flour, fertilizer and transport." India, the Bank's thirdlargest borrower, has not agreed to conditions to reduce or eliminate any subsidies. The adoptionof world-wide standards for subsidy reductions would help strengthen the negotiating position ofthe Bank and encourage a larger set of developing countries to undertake fundamental reforms.
Private Sector Participation
The private sector may be willing to assist the public sector in the provision of some publicservices and thereby assist in expanding access to such services. In general, conditions couldencourage such private sector participation especially when a country's public sector is notreaching important segments of the population such as rural residents. The value of encouragingprivate sector participation is greater coverage of public services and, in at least some cases,more efficient use of public resources (see Table 7 for evidence from Pakistan on the relativeefficiency of the private sector). The supportive role of the private sector in retraining foremployment has not received adequate attention. This would be important for integrating thepoor into the private labor market.
Governance Issues
The existing institutions of governance in many developing countries do not allow the matchingof public services with citizen preferences. Frequently, this is because the political andbureaucratic systems favor narrow special interests over the common interests of citizens atlarge. Political and/or bureaucratic power in some countries may be vested in certain groups,such as feudal lords favored by the colonial rule. Such vestiges of power may block theincorporation of citizen preferences into public decision making. Lack of transparency in publicsector decision making processes and corruption compound this problem. The lack oftransparency, accountability, and the rule of law encourages the creation of cob-web bureaucraticprocesses and lowers bureaucratic incentives for efficiency. These bureaucratic processes alsofoster the development of public institutions for the civil service, such as educational institutionsor resorts; or public sector involvement in producing private goods and services, such as textilesand sugar; while paying little attention to basic education, health and infrastructure services.
Fiscal Federalism Dimensions
Most countries of the world are organized into a multi-tier structure. For public sectorefficiency, it is important to clarify the taxing and spending responsibilities of various levels ofgovernments and their respective roles in areas of shared responsibility. In developing countries,ambiguity in such roles leads to duplication and overlap, as well as the total lack of provision ofcertain basic services (see Shah, 1994 and Boadway, Roberts and Shah, 1994). Furtherrnore,higher level governments often encroach upon lower level govemment roles. In a multi-tierstructure, it is usually not possible to perfectly match revenue means of various levels with theirexpenditure needs. Therefore transfers assume an important role in ensuring regional fiscal
36
equity, bridging fiscal gaps, ensuring minimum standards, fulfilling the redistributive function ofthe national government, and preserving an internal common market. In developing countries,inappropriately designed higher-level transfers contribute to fiscal mismanagement. A strikingexample of this is deficit grants in China, India, Pakistan and Sri Lanka, which led to higher andhigher sub-national deficits during the late 1980s. A typical developing country also has manyspecific-purpose grants for which objectives are either not specified or specified vaguely. Forexample, Brazil in 1988 had 5000 convenios with unspecified or vaguely specified objectives(see Shah, 1991). These issues have not been addressed in the adjustment lending programs.
Summary and Conclusions
Before the initiation of adjustment lending, public spending patterns in developing countriesfavored: capital spending over operation and maintenance of existing facilities; public sectorwages over non-wage expenditures; university education over primary education and tertiaryhealth over basic health. This spending pattern led to an expanded public sector but limitedaccess to basic services. The World Bank, through its adjustment lending programs, initiatedefforts to examine more closely public spending priorities in developing countries forconsistency with their development needs. While a rigorous assessment of these initiativescannot be carried out due to a lack of data, nevertheless, reasonably informed judgments basedon a review of this experience warrant the following tentative conclusions.
The Approach and the Implementation Record
Expenditure policy reform formed the basis of lending conditionality in 219 operations in 83countries over the period FY79-FY94. A review of capital expenditures received the mostattention followed by a reform of public employment and wages and elimination of subsidies tostate enterprises and on agricultural commodities. In more recent years, the Bank lending hasplaced an increased emphasis on the importance of spending on social sectors. Theimplementation record of adjustment lending conditions has been quite impressive: a majority ofborrowers fully implemented loan conditions pertaining to public expenditure policy reform.
Impact of Adjustment Lending Conditions on Expenditure Patterns and Outcomes
In view of the short time period elapsed, the full effects of conditions would be understated bythe available data. Nevertheless, a broad direction of the impact of conditions can be discernedfrom available data in the following areas.
Improving access and quality in education
In a majority of countries agreeing to education spending conditions for which data are available,education spending has shown positive growth in real terms since 1980. Non-participatingcountries also conform to this trend. In view of the insufficient time period elapsed, it is not yetpossible to form a judgment on the stability of education spending patterns or the re-orientationof priorities in favor of basic education. The conditions which focused attention on theeducation sector have also been associated with higher primary school enrollment rates in severalcountries. Illiteracy is also declining in all countries whether participating in Bank programs ornot. The issue of enhanced education access for girls received little direct attention in conditions.Nevertheless, in a majority of countries undertaking structural reforms, female enrollment in
37
primary education increased although the gender gap continued to persist. Greater Bankattention to the education of girls, as witnessed in recent years, is expected to reduce the gendergap in coming years. Introducing cost recovery in education (and health ) also met with limitedsuccess. This area requires further attention by the Bank as fee systems can be designed toinduce higher cost recovery as well as improve equity. This can be accomplished by seeking tointroduce cost recovery for higher education but providing tuition waivers and scholarships/loansfor the needy. Basic education and primary health care advance equity objectives and may beprovided on an almost free basis. In conclusion, access to education and the quality of educationappears to have improved in a majority of developing countries regardless of their participationin the Bank adjustment programs. Further Bank attention is needed to sustain this trend.
Improving access to health care
The available empirical evidence suggests that conditions had a positive influence on centralgovern-ment expenditures on health care and on access to health care in borrowing countries.This is also borne out by the data on infant mortality rates which show a noticeable improvementin most countries. It should be noted, however, that improvements in these indicators were alsoobserved in non-participating countries. Improving access to safe water and sanitation andensuring adequate nutrition for the poor did not receive significant attention in adjustmentlending. However, the Bank paid considerable attention to these issues in its investment lending.In spite of Bank efforts, rural access to water and sanitation services is very poor in the majorityof countries. This can significantly increase the prevalence of disease. For example, unsafesurface water used by rural residents in Bangladesh was a contributing factor in the prevalence ofdiarrheal disease, which accounted for 29% of all deaths of young children (World Bank 1990a).Addressing this problem will require concerted efforts to direct resources toward rural areas.
Public employment and wages
Countries agreeing to adjustment lending conditions sought to reduce public employment, publicsector wages or both in selected countries. A handful of countries also sought to simplify anddecompress pay structure. Most of the conditions on the retrenchment of public service wereimplemented. The sustainability of these changes, however, remains to be seen. Public sectorwages as a share of GDP also experienced a decline in a majority of borrowing countries.However, a similar pattern of wage decline is also observed in non-participating countries. Thebroad issue of realigning the public sector role and adjusting employment levels accordingly wasnot addressed in conditions on adjustment lending.
Subsidies
The main focus of subsidy conditions was on subsidies to public enterprises and agriculturalinputs and products. Significant progress was made in reducing these subsidies but sustainabilityof these measures remains to be seen. Only scant attention was paid to energy subsidies - an areawhere there is a significant potential for raising revenues for the public sector as well asenhancing efficiency of resource allocation. The emphasis on eliminating broad price subsidies isirmportant but insufficient to ensure that benefits reach the needy. Program design must beemphasized. Self-selection can be encouraged by restricting subsidies to the type or quality ofitems consumed by the poor. Recipients of cash transfers or coupon programs must be carefully
38
chosen. Decisions on the level of screening must weigh the informational and administrativecosts against the benefits of reduced leakage to the non-poor.
Capital versus. operating expenditures
Adjustment lending conditions sought to ensure that adequate resources were set aside for theupkeep of existing facilities, especially road networks. The record in shifting public spendingtowards operations and maintenance is mixed. This is potentially a very difficult area for policyadvice. In some countries, increased capital expenditures may be needed to ensure greateraccess to basic services. It is also possible that increased operating expenditures may notprolong the useful life of investments, if funds are spent on inappropriate supplies or unnecessaryexpansion of public employment.
Budgetary inflexibility
The mixed performance in implementation of conditions can be traced in part to budgetaryinflexibility faced by a large number of developing countries. Several large expenditurecategories, such as statutory fiscal transfers to lower levels of government, defense and debtcharges, cannot be adjusted in the short run or at best adjusted with great difficulty over aprotracted period. Adjustment lending met with limited success in improving budgetaryflexibility.
Concluding Remarks
The analysis presented earlier suggests that World Bank made an important beginning infurthering public expenditure policy reform in developing countries through its adjustmentlending. Yet the task in achieving universal access to basic services in developing countriesremains quite monumental. This task requires the Bank to have a dialogue with its membercountries on public expenditure reform issues on a continuing basis. This policy dialogue wouldbe better informed if both the Bank and client countries not only focused on public spendingpriorities but also paid greater attention to monitoring performance using indicators tied tosectoral objectives (see Table 27). For example, in education other than monitoring expendituresfor various levels of education, attention must also be focused on improvements in inputsallocation and outputs associated with these expenditures. It would therefore be useful to monitorenrollments, student-teacher ratios, graduation rates and drop out rates in the short run andachievement scores, literacy rates and supply of skilled professionals in the long run. The Bankhas already begun to pay attention to output indicators of public services and in FY95/96developed guidance on performance indicators for various sectors. These indicators are expectedto be useful in monitoring the progress of future lending operations.
The Bank-Borrower dialogue also could benefit with greater attention to private sectorparticipation issues. In developing countries, inefficient use of available limited resourcescontributes to the uneven access to public services. Encouraging greater participation underpublic sector oversight by the private sector and non-governmental community groups inproducing and distributing public services can expand the availability of public services. Forexample, Chile achieved dramatic success in improving access to basic education by providingfunds to both public and private schools based upon the number of pupils enrolled.
39
Lessons
Expenditure policy reform must take a governaince perspective. Piecemeal reformsfocused on symptoms of public sector inefficiency are unlikely to succeed. Instead thereform should focus on causes of public sector inefficiencies. In developing countries theseinefficiencies are traceable to fundamental issues in governance including lack ofparticipatory mechanisms and institutions for public decision making, weak legalinstitutions, ambiguities regarding the role of the state and its various agents and lack ofpolitical and judicial accountability of the public sector. For civil service reform, acomprehensive program to address governance issues is a pre-requisite for success. Theprogram must define appropriate roles of the public and private sectors and of various levelsof government, and establish rule of law, accountability, openness and transparency. Acomprehensive, governance-oriented reform program must also reassert the frequentlyoverlooked "service" role of the civil service. Governments need to be persuaded to moveaway from a culture of "command and control" and to orient themselves to a "servicedelivery" outlook. Piecemeal efforts are unlikely to succeed.
* Federalism or multi-government dimensions of fiscal systems are critical to the reform ofpublic expenditure policies in developing countries. Spending and taxing responsibilitiesof the various levels of government must be clearly delineated and a transparent andobjective system of intergovernmental transfers must be instituted. Attempts must be madeto match the revenue means as closely as possible to the expenditure needs of variousgovernments. Ideally the governments with the responsibility of spending must also havethe ability to raise revenues to discharge their expenditure responsibilities. Transfers withperverse incentives for fiscal mismanagement must be avoided. For example, theexperience of India, Pakistan, China and Sri Lanka shows that deficit grants lead to stillhigher deficits.
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Table 27: Performance Indicators Useful for Monitoring Progress
Performance IndicatorsLoan Intermediate Indicators Final Indicators
Bank Objectives ConditionsImprove Increase in By age, sex and urban/rural By age, sex andquantity and social urban/ruralquality of spending Education: by level: primary, secondary,education and college/university; public and private Education:health services facilities by type and staff (teaching, literacy rates,
non-teaching totals and per reference age achievement scores,population); enrollments, teacher-student supply of skilledratios, graduation rates, dropout rates professionals
Health: basic, tertiary, preventive, and Health:curative; public and private facilities by infant mortalitytype and urban/rural, staff (medical, rates,nursing, paramedics and non-medical fertility rates,totals and per capita), rates by income, maternal mortalitygender and urban/rural access to clean rateswater, access to sanitation incidences of
disease,birth rates,death rateslife expectancy
Inprove public Reduce Define the appropriate role of the public Comparativesector efficiency public sector and its various agents (national, review of service
employment intermediate, local). Implications: standards and costs* strengthen support for public
Reduce services (such as education, healthpublic sector and infrastructure) and withdrawwages from private sector roles (public
enterprises) and from roles thatLimnit inhibit markets without advancingsubsidies to equity (e.g. subsidies). Shift inpublic sector spending to levels of governmententerprises and agencies with appropriate
responsibility* support private sector participation
in production of public services
Performance monitoring should pay greater attention to outputs and outcomes.Performance monitoring by output indicators may serve as useful accompaniment to loanconditions on the levels of spending in furthering objectives in development effectiveness.Conditions on the levels of spending rather than performance standards, while helpful,create the possibility that the fungibility of funds will sustain ineffective policies withoutfundamental reform. If conditions on adjustment loans were related to standards and accessto public services, lending would encourage efficiency and greater equity in publicprovision. Reorienting conditions toward outputs offers several clear advantages. It allowsthe recipient government flexibility to adapt to changing conditions. It encourages a search
41
for least-cost solutions. It focuses attention directly on the ultimate objective: increasedaccess to basic services and greater efficiency in service delivery.
* Broader guidance on reform must be adapted to country-speciflc situation. For example,the well-intentioned message to reduce capital spending in favor of operations andmaintenance has sometimes been interpreted as protecting public sector wages but scalingback on all other (capital, non-wage etc.) expenditures. Thus infrastructure deficiencies areexacerbated while the operation and maintenance of existing facilities also suffer. Whileconsiderable caution must be exercised in undertaking large capital projects, in mostdeveloping countries, infrastructure deficiencies stymie private sector development.Improved infrastructure should remain a significant priority, as long as adequate funds areavailable to maintain existing and new facilities.
* Participatory processes and institutions (participatory democracy) rather thansophisticated analysis (such as cost-benefit analysis) is a key to improved public sectordecision making. The opportunities for sophisticated cost-benefit analysis (or similarexercises) are limited by poor data in most developing countries. In addition, analyticaltechniques can be manipulated to promote projects favored by small but powerful interestgroups. A potentially more productive approach to improved public sector decisions is toencourage wider participation in the decision-making process.
* Motivate donor agency staff and country administrators by allowing flexibility in use offunds in achieving results. Donor agency staff should have the flexibility to reallocatefunds if the project is not showing expected results and the country administrators shouldhave the flexibility in adopting the approach they see fit to achieve commonly agreedresults. Thus the focus should shift from a rigid input control environment to anenvironment which allows flexibility in approaches but demands results. This would implythat a donor's dialogue with its borrowers would shift from micro-management(procurements, inspections, financial audits) to a focus on feasible policies, outputs, andoutcomes.
* General guidelines on policy environment pre-requisites for external assistance would behelpful in creating a culture of responsible governance. In this regard, the Washingtonconsensus may be revisited to develop practical guidelines for borrowers, along the linedeveloped by the European Community for its members. For example, EC members arerequired to limit their deficit and debt to below 3% and 60% of GDP, respectively.Members also guarantee that their central banks will not backstop national and sub-nationalgovernment debts.
* Open debate on policy issues contributes to effective development assistance. Thedevelopment assistance dialogue must be conducted openly, with information disseminatedwidely beyond the civil service. Greater public awareness will contribute to a widerconsensus on policy choices. An open process with broad consensus will help sustaindifficult reforms and prevent backsliding by bureaucrats and politicians.
* Desirable but politically difficult reform may be feasible in times of major fiscal crisis.Fundamental reform depends on the willingness of country administrators to incur highpolitical costs. In times of severe budget constraints, the political cost of complying withconditions mandating difficult reforms may be lower. For example, fiscal constraints in a
42
country seeking Bank assistance may make it possible to reduce politically-sensitiveexpenditures such as military spending, energy subsidies or public sector wage bill.
* Private sector participation can enhance efficiency and equity ofpublic service provision.A lack of resources and the inefficient use of existing resources contribute to deficientpublic services with uneven access. Private sector and community group involvement inproducing and distributing public services, subject to public sector oversight, can helpremedy this situation. For example, Chile achieved dramatic success in improving access tobasic education by providing financing to both public and private schools based on thenumber of pupils enrolled.
Education, Health, Water and Sanitation Services
* The development community should shift its attention from micro-management ofexpenditures on social sectors toward an emphasis on outputs. Without exception,adjustment lending conditions focused on inputs such as expenditures, teaching staff, andmaterials. The most common expenditure condition agreed to was an increased budget sharefor health or education. Devoting more resources to inequitable spending patterns wouldsatisfy this condition. Supplementary conditions on outputs such as literacy would create anincentive for the recipient government to reallocate funds toward basic services.
* Special attention is needed to improve rural service delivery, particularly for safe waterand sanitation. Rural access to water and sanitation services is very poor in the majority ofcountries. This can significantly increase the prevalence of disease. Addressing thisproblem will require concerted efforts to direct resources toward rural areas. Infrastructuremust be built and maintained, while ancillary activities such as educational programs shouldnot be overlooked.
* The development assistance community should emphasize norms of access in itsinvestment programs. National standards can foster consensus on the goal of investmentprograms and provide a yardstick to evaluate country performance. Countries should begiven greater flexibility to choose among policy options and devise the details of investmentprograms.
* Continued Bank attention can lead to the design offee systems which induce greater costrecovery as well as improve equity. Consistent attention has not been paid to the design offee systems. The Bank has the opportunity to focus attention on these issues as itencourages the introduction of fees for cost recovery. A system where basic education orprimary health care imposed little or no direct cost, while tertiary services charged income-adjusted fees, would generate revenue and increase access to basic services.
* Private and not-for-profit service providers must be encouraged. Non-governmentalproviders are a resource which must be tapped, particularly where needs are great andgovernment resources limited. Barriers to entry should be removed and incentives forparticipation increased.
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Adequate Nutrition
* Programs must be designed to provide benefits to the poor. The Bank's emphasis oneliminating broad price subsidies is important but does not guarantee that benefits will reachthe needy. Program design must be emphasized. Self-selection can be encouraged byrestricting subsidies to the type or quality of items consumed by the poor. Recipients of cashtransfers or coupon programs must be carefully chosen. Decisions on the level of screeningmust weigh the informational and administrative costs against the benefits of reducedleakage to the non-poor.
Income and Earning Potential
* The poorest of the poor should be protected in efforts to mitigate the social cost ofadjustment. Bank-sponsored income support programs have focused on civil servants orother formnal sector workers adversely affected by adjustment. To reach the objective ofproviding support to the very poor, care must be taken to ensure that they are also among thebeneficiaries of government programs. Careful attention to program design and coveragewill be necessary to ensure that the poorest of the poor are not forgotten in efforts to mitigatethe social cost of adjustment.
o The private sector should play a signiflcant role in retraining displaced workers. Privatesector involvement ensures that retrained workers acquire skills valued by potentialemployers. An emphasis on government retraining programs is at variance with the long-run objective of integrating workers into the private labor market.
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Appendix 1. Countries Included in Tables 1 - 3
1A. The following regional classification is used in Table 1.
Africa comprises Cameroon, Chad, Madagascar, Mauritius, Rwanda, Zaire, Zambia andZimbabwe.
East Asia and Pacific comprises Indonesia, the Republic of Korea, and Thailand.
Latin America and the Caribbean comprises Argentina, Brazil, Chile, Colombia, CostaRica, Mexico, Nicaragua, Panama, Peru, Uruguay, and Venezuela.
Middle East and North Africa comprises Egypt, Morocco and Tunisia.
South Asia comprises India, Nepal, Pakistan and Sri Lanka.
Industrialized Countries comprises Austria, Belgium, Cyprus, Denmark, Finland,Greece, Iceland, Ireland, Israel, Japan, Kuwait, Luxembourg, Malta, Netherlands,Norway, Portugal, Singapore and Sweden.
Note: In the Percent of Expenditures columns, Industrialized Countries also includesCanada and Italy; Africa also includes Burkina Faso.
lB. The following regional classification is used in Tables 2 and 3.
For economic affairs, education. and health expenditures:
Africa comprises Cameroon, Madagascar, Mauritius, Democratic Republic of Congoand Zambia.
East Asia and Pacific comprises Indonesia, Korea, and Thailand.
Latin America and the Caribbean comprises Argentina, Brazil, Chile, Costa Rica,Mexico, Nicaragua, Panama and Uruguay.
Middle East and North Africa comprises Egypt, Morocco and Tunisia.
South Asia comprises India, Nepal and Sri Lanka.
Industrialized Countries comprises Austria, Cyprus, Denmark, Finland, Greece, Iceland,Israel, Kuwait, Luxembourg, Malta, Netherlands, Norway, Singapore and Sweden.
Note: In Table 3, Africa includes Burkina Faso; Industrialized Countries includesCanada.
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For other expenditure categories, the regional classifications differ as follows:
Defense and General Administration: Africa excludes Zambia.
Wage: In Tables 2 and 3, Industrialized Countries includes Belgium and Portugal;Latin America and the Caribbean includes Colombia and Venezuela; South Asiaexcludes Nepal; Africa includes Gabon, Rwanda and Zimbabwe.
In Table 3, Industrialized Countries also includes Ireland and Italy; Latin America andthe Caribbean excludes Argentina.
50
Appendix 2. Countries Included in Tables 4 and 5
The following regional classification is used in the tables drawn from the World EducationReport (1993).
Sub-Saharan Africa comprises Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon,Cape Verde, Central African Republic, Chad, Comoros, Congo Brazzaville, C6te d'Ivoire,Djibouti, Equatorial Guinea, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya,Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia,Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, Somalia,Sudan, Swaziland, Togo, Uganda, United Republic of Tanzania, Zaire, Zambia and Zimbabwe.
Arab States comprises Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, LibyanArab Jamahiriya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Somalia, Sudan, SyrianArab Republic, Tunisia, United Arab Emirates and Yemen.
Latin America and the Caribbean comprises Antigua and Barbuda, Argentina, Bahamas,Barbados, Belize, Bolivia, Brazil, British Virgin Islands, Chile, Colombia, Costa Rica, Cuba,Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti,Honduras, Jamaica, Mexico, Netherlands Antilles, Nicaragua, Panama, Paraguay, Peru, SaintChristopher and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Suriname, Trinidad andTobago, Uruguay, and Venezuela.
Eastern Asia and Oceania comprises Brunei Darussalam, Cambodia, China, Democratic People'sRepublic of Korea, Fiji, Hong Kong, Indonesia, Kiribati, Lao People's Democratic Republic,Malaysia, Mongolia, Myanmar, Papua New Guinea, Philippines, Republic of Korea, Samoa,Singapore, Thailand, Tonga, Tuvalu and Vietnam.
Southern Asia comprises Afghanistan, Bangladesh, Bhutan, India, Islamic Republic of Iran,Maldives, Nepal, Pakistan and Sri Lanka.
Europe and the former USSR comprises Albania, Austria, Belgium, Bulgaria, formerCzechoslovakia, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,Luxembourg, Malta, Monaco, Netherlands, Norway, Poland, Portugal, Romania, San Marino,Spain, Sweden, Switzerland, United Kingdom and the countries of the former USSR: Armenia,Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Republic ofMoldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.
Industrialized countries comprises Europe and the former USSR and Australia, Canada, Israel,Japan, New Zealand, South Africa, and the United States of America.
51
Appendix 3. Countries and Loans/Credits Included in Table 10
Country FY Loan Country FY Loanor orCredit Credit
Algeria 91 L3352 Ghana 89 C2005Argentina 92 L3394 90 C2140Bangladesh 82 C1194 92 C2345
84 C1471 Guatemala 93 L353386 C1655 Guinea 86 C165992 C2361 88 C1926
Benin 89 C2023 90 C215591 C2283 Guyana 90 C2168
Brazil 84 L2348 Honduras 91 L3257Bulgaria 92 L3397 Hungary 86 L2700Burkina 91 C2281 88 L2965
92 C2381 90 L322894 C2590 91 L3347
Burundi 88 C1919 India 93 C244889 C2024 Indonesia 87 L278092 C2376 89 L3080
Cameroon 89 L3089 91 L326794 C2576 Jamaica 90 L3174
Central African 87 C1732 Kenya 89 C2049Republic
88 C1916 92 C229590 C2162 Korea, Rep. of 82 L2071
Chad 94 C2589 Laos, PDR 89 C2037Chile 86 L2625 92 C2304
88 L2892 Macedonia 94 L3703Comoros 91 C2270 Madagascar 86 C1691Congo Brazzaville 88 L2866 Malawi 81 L2026
94 C2635 84 C1427CostaRica 85 L2518 86 C1644
89 L3005 Mali 89 C205493 L3594 91 C2188
Cote d'Ivoire 82 L2058 94 C258084 L2332 Mauritania 87 C181286 L2711 Mexico 88 L291892 L3428 91 L3309
Czechoslovakia 91 L3374 Morocco 87 L2820Dominica 87 C1817 92 L3463Egypt 92 L3353 Mozambique 88 C1841Ethiopia 93 C2526 89 C2021Guinea Bissau 87 C1798 92 C2384
89 C2019 94 C2628Gabon 88 L2933 Nicaragua 92 C2302Gambia 87 C1730 Nepal 87 C1769
89 C2032 Niger 94 C2581Ghana 87 C1777 Nigeria 90 C2139
52
Country FY LoanorCredit
Pakistan 81 C106682 L2166
Papua 90 L3218New GuineaPeru 92 L3452
93 L3595Philippines 87 L2787Poland 91 L3247Romania 92 L3481Sierra Leone 84 C1501
92 C235294 C2546
Sao Tome 87 C1825Senegal 81 L1931
86 C165687 C180290 C2090
Slovak Republic 94 L3666Slovenia 94 L3636Somalia 89 C2030Sri Lanka 90 C2128Togo 85 C1599
91 C219491 C2211
Tunisia 87 L278188 L296292 L3424
Turkey 82 L215883 L232184 L2441
Uganda 84 C147494 C2608
Uruguay 89 L3081Venezuela 90 L3223Democratic 87 C1831Republicof CongoZambia 92 C2405Zimbabwe 92 L3434
53
Appendix 4A. Countries included in Table 11: GDP Shares
Region Participants Non-ParticipantsAfrica Cameroon Ethiopia
Chad Lesotho aGabon NamibiaGambia, The Democratic
Republic ofCongo
GuineaMadagascarMauritiusMoroccoRwandaZimbabwe
East Asia & Pacific Republic of Korea BhutanIndonesia MalaysiaThailand Mongolia
MyanmarTonga
Europe & Central Turkey Czech RepublicAsia
Hungary Czech & slovakRepublix
Bulgaria EstoniaLatviaLithuaniaRomania
Latin America & Bolivia Dominican Republicthe Carribean
Brazil ParaguayChile St. Kitts and NevisCosta Rica St. LuciaMexico VenezuelaNicaraguaPanamaUruguay
Middle East & Tunisia BahrainNorth Africa
Egypt, Arab RepublicIran, Islamic RepublicSyrian Arab Republic
South Asia IndiaNepalPakistanSri Lanka
Not included in total expenditures/GDP
54
4B. Countries included in Table 11: Expenditure Shares
Region Participants Non-ParticipantsAfrica Cameroon Ethiopia '
Chad a,b,c,f LesothoGabon "'b,cf Namibia 1,2,3.5,6
Gambia, The Zaire dGuinea a,b,c,f
Madagascar dMauritiusMoroccodRwanda a,b,c,d,f
Zimbabwe bcdf
East Asia & Pacific Republic of Korea BhutanIndonesia d Malaysia dThailand Mongolia
Myanmar Le
Tonga c'die
Europe & Central Asia Turkey d CroatiaHungary Czech RepublicBulgaria Czech & slovak Republic
EstoniaLatvia dLithuania 1,23,4,5,6
RomaniaYugoslavia f
Latin America & the Carribean Bolivia Dominican Republic dBrazil Netherlands AntillesChile ParaguayCosta Rica St. Kitts and Nevis ab,cfMexicod St. Lucia 1,23,4,5,6
Nicaragua d Venezuela 'b.c,d6f
Panama dUruguay
Middle East & North Africa Tunisia BahraindEgypt, Arab Republic dIran, Islamic Republic dSyrian Arab Republic d,e
YemenSouth Asia India
Nepal d,e
Pakistan a,b,c,d,e,f
Sri LankaNotes: - Not included in education share
b Not included in health shareC Not included in defense shared Not included in subsidies share' Not included in wages sharef Not included in infrastructure share
55
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Recent World Bank Discussion Papers (continued)
No. 346 Structural Aspects of Manufacturing in Sub-Saharan Africa: Findingsfrom a Seven Country Enterprise Survey.Tyler Biggs and Pradeep Srivastava
No. 347 Health Reform in Africa: Lessonsfrom Sierra Leone. Bruce Siegel, David Peters, and Sheku Kamara
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No. 349 Surveillance of Agricultural Price and Trade Policy in Latin America during Major Policy Reforms. Alberto Valdes
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No. 352 China's Urban Transport Development Strategy: Proceedings of a Symposium in Beijing, November 8-10, 1995.Edited by Stephen Stares and Liu Zhi
No. 353 Telecommunications Policiesfor Sub-Saharan Africa. Mohammad A. Mustafa, Bruce Laidlaw, and Mark Brand
No. 354 Saving across the World: Puzzles and Policies. Klaus Schmidt-Hebbel and Luis Serven
No. 355 Agriculture and German Reunification. Ulrich E. Koester and Karen M. Brooks
No. 356 Evaluating Health Projects: Lessonsfrom the Literature. Susan Stout, Alison Evans, Janet Nassim, and Laura Raney,with substantial contributions from Rudolpho Bulatao, Varun Gauri, and Timothy Johnston
No. 357 Innovations and Risk Taking: The Engine of Reform in Local Government in Latin America and the Caribbean.Tim Campbell
No. 358 China's Non-Bank Financial Institutions:Trust and Investment Companies. Anjali Kumar, Nicholas Lardy, WilliamAlbrecht, Terry Chuppe, Susan Selwyn, Paula Perttunen, and Tao Zhang
No. 359 The Demandfor Oil Products in Developing Countries. Dermot Gately and Shane S. Streifel
No. 360 Preventing Banking Sector Distress and Crises in Latin America: Proceedings of a Conference held inWashington. D.C., April 15-16, 1996. Edited by Suman K. Bery and Valeriano F. Garcia
No. 361 China: Power Sector Regulation in a Socialist Market Economy. Edited by Shao Shiwei, Lu Zhengyong, NorreddineBerrah, Bernard Tenenbaum, and Zhao Jianping
No. 362 The Regulation of Non-Bank Financial Institutions: The United States, the European Union, and Other Countries.Edited by Anjali Kumar with contributions by Terry Chuppe and Paula Perttunen
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No. 364 Intensified Systems of Farming in the Tropics and Subtropics. J.A. Nicholas Wallis
No. 365 Innovations in Health Care Financing: Proceedings of a World Bank Conference, March 10-11, 1997. Edited by GeorgeJ. Schieber
No. 366 Poverty Reduction and Human Development in the Caribbean: A Cross-Country Study. Judy L. Baker
No. 367 Easing Barriers to Movement of Plant Varietiesfor Agricultural Development. Edited by David Gisselquist andJitendra Srivastava
No. 368 Sri Lanka's Tea Industry: Succeeding in the Global Market. Ridwan Ali, Yusuf A. Choudhry, and Douglas W. Lister
No. 369 A Commercial Bank's Microfinance Program: The Case of Hatton National Bank in Sri Lanka. Joselito S. Gallardo,Bikki K. Randhawa, and Orlando J. Sacay
No. 370 Sri Lanka's Rubber Industry: Succeeding in the Global Market. Ridwan Ali, Yusuf A. Choudhry, and Douglas W.Lister
No. 371 Land Reform in Ukraine: The First Five Years. Csaba Csaki and Zvi Lerman
No. 373 A Poverty Profile of Cambodia. Nicholas Prescott and Menno Pradhan
No. 374 Macroeconomic Reform in China: Laying the Foundationfor a Socialist Economy. Jiwei Lou
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No. 378 Empowering Small Enterprises in Zimbabwe. Kapil Kapoor, Doris Mugwara, and Isaac Chidavaenzi
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