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Public finance and development: top things to read in November 2020

Written by Tom Hart

Loans and repayment schedules, Mumbai, India. Simone D. McCourtie/World Bank CC BY-NC-ND 2.0

Our public finance and development monthly round-up is back from its extended summer holidays and ready to face a long Covid-19 winter here in the United Kingdom. From what seems like a permanently crisis-ridden small island in the Atlantic, we can only admire the continued resilience of many countries with much smaller public budgets to draw upon.

We present a round-up of two halves. The first half focuses on what we have learnt this month about the economic and fiscal impact of Covid-19. Many countries are going to be facing large fiscal stresses or are already facing them already. The second half focuses on new work that suggests ways in which countries can manage spending to get more for their money.

The economic and social impacts of Covid-19

Last month’s International Monetary Fund (IMF) and World Bank Annual Meetings were the occasion for the release of keenly awaited updated economic and fiscal forecasts. The growth forecasts for 2020 were revised upwards from the last estimates in June 2020, but still predicted a -4% global contraction. This is mainly driven by upwards revisions for the large high-income countries (HICs).

By contrast, the recession for developing countries is expected to be deeper compared to previous forecasts. This is most notably for India, where the growth forecast has been massively downgraded from -6% to -10%. Its rapid lockdown, announced with just four hours’ notice in March, has also created a humanitarian disaster. In Africa, the big regional economies are among the hardest hit, with South Africa projected for -8% growth and Nigeria -4.3%. East Africa emerges relatively unscathed, with its GDP predicted to remain at its 2019 level.

The crisis is also going to have a major effect on poverty. The World Bank’s updated poverty forecasts suggest that the pandemic will push between 88 and 115 million people into extreme poverty in 2020, setting poverty reduction back by around three years. Most of this rise will come in South Asia (49-56 million more people in poverty) and sub-Saharan Africa (26-40 million more).

Fiscal responses to the crisis

It is no surprise then that the need for a robust fiscal response to this crisis is on everyone’s minds. The IMF’s latest Fiscal Monitor reports that fiscal measures announced to date, are estimated at $11.7 trillion globally, which is almost 12 percent of global GDP. The absolute and relative scale of responses differs enormously across countries as shown in the new Gates Foundation’s Goalkeepers’ report. This is reflected in both the rise and variation in fiscal deficits. From 3% in 2019 to 14% in 2020 for advanced economies, 5% (2019) to 11% (2020) for emerging market and middle-income economies, but rising to just 6% in 2020 from 4% in 2019 for low-income developing countries.

As part of the response, the IMF is arguing the case for increased public investment in infrastructure, and they also have a new book out on the topic. But a more immediate concern for many are the prospects for social spending in low- and middle-income countries (LMICs), in the face of declining revenues and only limited capacity to borrow. And there are increasing criticisms that the IMF and World Bank support for developing countries is too small, and too slow.

The urgency of debt restructuring and reduction

The heads of UNICEF and Save the Children are calling for “a fundamental review of debt sustainability, followed by coordinated action covering all creditors to restructure and, where necessary, reduce debt” that looks “beyond narrow debt indicators to our deeper responsibilities…to combat rising child poverty, malnutrition, preventable disease, and education disadvantage…” They call for an explicit link between debt reduction and spending to address these issues, similar to the arrangements under the Heavily Indebted Poor Countries initiative.

This call to urgency is welcome, but is it falling on deaf ears? For example, the IMF has released a new policy paper on privately-held sovereign debt. And although it has important lessons from recent restructurings in Ecuador and Argentina, it does not prioritise some critical issues where urgent action is needed such as linking official finance and private sector participation in restructuring to ensure fair burden sharing. Unfortunately, the situation in Zambia may soon present a test case for the failings of the current international architecture.

Managing budgetary uncertainty under Covid-19

I do not envy any government official who is being tasked with drawing up budgets for the coming fiscal year. Uncertainty is leading many finance ministries to reconsider their approach to budgeting. Here in the UK, the government has abandoned its plans for a multi-year spending settlement and is just planning for a single year. The Netherlands is attempting to stick with its spending plans which are set at the start of each parliamentary term, although political pressures are building for a more flexible approach. As one finance official puts it, “these are not flexibilities we are overly comfortable with...because we want this budgetary discipline in our government.”

Faced with uncertainty it's good to have a framework for considering your options. Harvard’s Building State Capability blog has a nice summary of strategies to deal with uncertainty and fiscal constraints. This joint ODI and IFS paper offers some fiscal stimulus choices that recognise the challenges and constraints facing lower income countries. And the IMF has also put out a wide range of papers offering advice on different aspects of fiscal policy.

The elusive links between public financial management and service delivery outcomes

Strong public financial management (PFM) systems are expected to facilitate more efficient and effective spending and improved service delivery. But recent analysis by the World Bank, using Public Expenditure and Financial Accountability (PEFA) scores and primary school completion rates, (perhaps unsurprisingly) finds no simple relationship between budget reliability and service delivery. The authors note that “sectoral impacts remain a puzzle that really merits further investigation and consideration in support for PFM reforms.”

Building on our conference last February, we will be launching a new working paper series that will explore the complex links between public finance systems and service delivery. A useful conceptualisation of how PFM can affect the volume and quality of health spending is provided in this new paper from authors at the Center for Global Development and the World Health Organization.

Getting the most from constrained education budgets

Some of the possible consequences of Covid-19 is placing downward pressure on education budgets. Ensuring that spending is focused on the most cost-effective areas will be an important priority. In the health sector, the cost-effectiveness of alternative interventions is often compared using the quality-adjusted life year (QALYs) gained or disability-adjusted life years (DALYs) averted metrics. A new World Bank paper applies a similar metric for education – learning-adjusted years of schooling (LAYS). Comparing 150 evaluations from 46 countries, it finds massive variation in cost-effectiveness between interventions, varying from three additional years of high-quality schooling (that is, schooling at quality comparable to the highest-performing education systems) per $100 spent per child to zero additional years per $100 spent per child.

The top three interventions are targeted information campaigns on the benefits of schooling, teaching at students’ appropriate learning level, and improving teaching through structured lesson plans. Could this work eventually lead to large improvements (PDF) in government’s abilities to get the most out of constrained education budgets?

Technology’s role in combatting corruption

What potential is there for technology to improve the quality of public spending? Can it reduce corruption? Opening the anti-corruption challenge at the IMF and World Bank Annual Meetings, Managing Director of the IMF Kristalina Georgia said her ‘dream is that, with the digital advancements being one of the big winners of this crisis, that we would see countries everywhere adopting e-governance as a way to put all their finance for the public to see. Transparency is the citizens best friend’.

Unsurprising then that many of the pitches included innovations that increase transparency, either by improving access to information, or by linking existing systems together and using analytics to identify red flags. And the good news on corruption from the World Banks’s recent report is that countries now have a menu of options to combat corruption and some of these are making a difference in many countries.

Long-term growth in fiscal capacity in Africa

While Covid-19 may dominate the immediate horizons of finance ministries, a new dataset on taxation for African countries covering the whole of the 20th century, provides a useful guide on how fiscal capacity have changed over the longer-term. Noteworthy findings are that fiscal capacity grew more than tenfold over the century, there was a high share of direct taxes during the colonial period and that the idea of crisis and state weakness is mostly evident during the period 1980-2000, with strong period of growth in revenue both before and after.