Draft
What Can We Learn from Budget Institutions Details?
Hadi Salehi Esfahani
Department of Economics, University of Illinois at Urbana-Champaign
November 2000
1. Introduction
The papers in this collection offer a wealth of detailed information about budget institutions in
several countries. While such information might be available in one form or another in numerous sources,
the advantage of the present collection is that a great deal of the data has been gathered and coded in a
systematic way that makes them comparable across countries. This provides the ground for examining a
variety of hypotheses and generalizations. We discuss a number of them in this paper to assess the
validity of the framework behind the research effort and suggest possible uses of the data for analyzing
budget systems. The findings are, of course, tentative in that the number of observation is limited. But,
the findings are highly suggestive and, we hope, will encourage more data collection along the same lines
to enrich the database and prepare the ground for statistical analysis of the relationship between
institutions and fiscal performance.
Budget institutions have numerous aspects that affect fiscal performance. Ideally, one wants to
know the separate impact of each individual aspect given all other aspects to be able to assess the
optimality of each configuration. However, with limited observations and too many aspects, the goal has
to be more modest and practical. The technique adopted in our framework is to aggregate by averaging
the indicators that show the contribution of various institutional aspects to a particular function. For
example, to assess the extent of a budget system's reliance on delegation as a coordination mechanism, we
rank the details of procedures by their role in this respect and then average those ranks to come up with a
single indicator. If the hypothesis that delegation enhances discipline is correct, then one should observe a
positive relationship between this indicator and measures of discipline. The averaging can be simple or
weighted depending on whether one believes the indicators are equally important or not. Of course, one
needs to carry out some sensitivity analysis to ensure that the results are robust within a reasonable range.
Also, one can examine the role of subgroups of variables included in an aggregate index to see whether
there are components that dominate the relationships.
In the following, we use the method described above to examine the hypotheses at hand. Though
not presented here, we have also used ordinary regressions to check whether the results change when one
controls for variables such as GDP per capita. The data on economic performance that we use here all
come from the World Bank's World Development Indicators CD-ROM. In sections 2-4, we examine the
hypotheses concerning aggregate discipline, allocative efficiency, and operational efficiency in that order.
In section 5, we conclude by turning to a number of new hypotheses that can be assessed with the new
data made available by the research project.
2. Budget Institutions and Aggregate Discipline
Table 1 shows the scores for the extent of dominance of central budget agencies (CBAs), ex ante
agreements, macro programming, and spending/borrowing limits in the budget institutions of the
countries that so far have been studied with methodology proposed in this project. These indices are
aggregated over several aspects of budget institutions and show the extents to which such mechanisms are
present in the process of budget design. They do not necessarily reveal whether the mechanisms being
used are effective in bringing discipline to the budget. As discussed in the framework paper, many factors
may affect the ability of such mechanisms to work. Table 2 shows the effective scores for each
arrangement after discounting the scores of Table 1 with the weight of intervening factors. The indices
institutional variables that are likely to share the effectiveness of aggregate discipline mechanisms are
given in Table 3. As discussed in the framework paper, these indices are applied as multiplicative weights
to the institutional arrangement scores to arrive at the "effective scores." This ensures that the effective
scores are sensitive to any factor that may impede the operation of coordination mechanisms. Note that
the accountability measure itself is the average of several components, which are shown in Table 4.
The first issue that must be examined is whether the indices constructed based on the detailed
questionnaire data have any bearing on manifestations of fiscal discipline. For this purpose, it is common
in the literature to correlate the institutional indices with budget deficit or public debt as percentage of
GDP. Better institutions are expected to give rise to smaller deficits, on average. Figures 1-3 show such
relationships for the use of delegation to CBAs, ex ante agreements, and macroeconomic programming.
The corresponding diagram for the ex ante limits on spending and deficit is not shown because there are
very few countries that use them and those observations produce no evidence that such limits correlate
with good macroeconomic performance. Interestingly, this conforms to the views of many analysts that
argue that rigid constraints on public spending and deficits are likely to be violated one way or another
(Easterly, 1998). The expected relationships for the other three indices are clearly borne out by the data.
Controlling for GDP per capita (as an overall indicator of economic performance) in an ordinary
regression does not change the visual results that emerge from Figures 1-3. Of course, to strengthen this
case, more sophisticated statistical work needs to be done once a larger data set becomes available. But,
the simple correlations found here are suggestive. They also conform to the findings of other studies that
use other indices of fiscal discipline, though the indices generated here are based on more detailed
institutional assessments. Below, we will examine the extent to which the details contribute to the
findings.
What Can We Learn from Budget Institutions Details?
2
Table 1. Indices of Institutional Arrangement for Aggregate Discipline
Macro
Programming
Borrowing/
Spending Limits
0.63
0.27
0.00
0.48
0.40
0.44
0.00
1985-94
0.69
0.23
0.27
0.00
Brazil
1995-99
0.69
0.43
0.44
0.00
Egypt
1980
0.78
0.40
0.63
0.00
Egypt
1990s
0.78
0.40
0.63
0.00
Indonesia
1990-1997
0.93
1.00
0.08
0.00
Iran
1990s
0.28
0.53
0.63
0.00
Jordan
1990s
0.87
0.40
0.27
0.17
Kuwait
1993-1999
0.45
0.43
0.27
0.00
Lebanon
1990s
0.33
0.40
0.00
0.17
Morocco
Pre-1998
0.72
0.77
0.27
0.00
New Zealand
Post-1994
0.32
0.77
1.00
0.00
Tunisia
1990s
0.77
1.00
0.81
0.33
Turkey
1990s
0.48
0.20
0.27
0.00
United States
1990s
0.60
0.50
0.81
0.00
Country
Period
Algeria
1990s
0.65
Brazil
1964-84
Brazil
Dominance of CBAs Ex Ante Agreements
Budget Institutions in MENA: Theoretical Framework and Methodology
3
Table 2. Effective Scores for Aggregate Discipline Indices
Macro
Programming
Borrowing/
Weighted Overall
Spending Limits Discipline Index*
Country
Period
Algeria
1990s
0.39
0.40
0.16
0.00
0.29
Brazil
1964-84
0.17
0.17
0.16
0.00
0.15
Brazil
1985-94
0.31
0.12
0.14
0.00
0.17
Brazil
1995-99
0.38
0.26
0.24
0.00
0.27
Egypt
1980
0.43
0.22
0.31
0.00
0.29
Egypt
1990s
0.50
0.26
0.38
0.00
0.34
Indonesia
1990-1997
0.54
0.63
0.05
0.00
0.37
Iran
1990s
0.16
0.31
0.34
0.00
0.24
Jordan
1990s
0.45
0.19
0.13
0.09
0.24
Kuwait
1993-1999
0.33
0.32
0.19
0.00
0.25
Lebanon
1990s
0.16
0.21
0.00
0.08
0.12
Morocco
Pre-1998
0.43
0.44
0.14
0.00
0.30
New Zealand
Post-1994
0.29
0.71
0.92
0.00
0.58
Tunisia
1990s
0.49
0.68
0.55
0.21
0.54
Turkey
1990s
0.24
0.10
0.12
0.00
0.14
United States
1990s
0.52
0.44
0.70
0.00
0.50
Dominance of CBAs Ex Ante Agreements
* The weights are 0.1 for borrowing/spending limits and 0.3 for the rest.
Budget Institutions in MENA: Theoretical Framework and Methodology
4
Table 3. Institutional Characteristics Affecting the Effectiveness of Aggregate Discipline Mechanisms
Budget
CompreAutonomy hensiveness
Ex Post
Restraints
Hard budget Constraints
Local
Governments
Public
Enterprises
Average
Tenure of
CBAs
Education of
Decisionmakers
Accountability
Country
Period
Algeria
1990s
0.83
0.55
0.55
1.00
0.45
0.75
0.75
0.36
Brazil
1964-84
0.69
0.33
0.07
0.00
0.15
1.00
1.00
0.22
Brazil
1985-94
0.49
0.36
0.32
0.25
0.15
0.50
1.00
0.53
Brazil
1995-99
0.40
0.40
0.32
0.68
0.68
1.00
1.00
0.81
Egypt
1980
0.62
0.67
0.32
1.00
0.15
1.00
0.50
0.35
Egypt
1990s
0.77
0.76
0.32
1.00
0.72
1.00
0.75
0.43
Indonesia
1990-1997
0.78
0.48
0.75
0.41
0.60
1.00
1.00
0.28
Iran
1990s
0.67
0.43
0.40
0.80
0.15
1.00
0.75
0.59
Jordan
1990s
0.67
0.64
0.28
1.00
0.60
0.50
0.25
0.43
Kuwait
1993-1999
0.71
0.73
0.95
1.00
0.44
1.00
0.75
0.44
Lebanon
1990s
0.61
0.42
0.26
0.80
0.85
0.50
0.75
0.49
Morocco
Pre-1998
0.93
0.33
0.36
1.00
1.00
1.00
0.50
0.40
New Zealand
Post-1994
0.94
0.94
0.74
1.00
0.95
1.00
1.00
0.95
Tunisia
1990s
0.73
0.74
0.60
0.98
0.45
0.75
1.00
0.40
Turkey
1990s
0.83
0.26
0.44
0.05
0.63
0.75
0.50
0.58
United States
1990s
0.60
0.92
0.85
1.00
0.85
1.00
1.00
0.96
Budget Institutions in MENA: Theoretical Framework and Methodology
5
Table 4. Components of Accountability for Fiscal Discipline Mechanisms
Explicit
Sanctions
Country
Period
Audit
Algeria
1990s
0.78
0.33
0.33
0.33
0.67
0.08
0.39
0.00
Brazil
1964-84
0.44
0.00
0.00
0.00
0.33
0.21
0.40
0.40
Brazil
1985-94
0.67
0.00
0.00
0.67
0.67
0.98
0.46
0.80
Brazil
1995-99
0.67
1.00
0.67
0.67
1.00
1.00
0.48
1.00
Egypt
1980
0.67
1.00
0.00
0.33
0.33
0.00
0.29
0.20
Egypt
1990s
0.56
1.00
0.00
0.33
0.33
0.00
0.41
0.80
Indonesia
1990-1997
0.56
0.00
0.00
0.00
0.33
0.00
0.52
0.80
Iran
1990s
0.56
1.00
0.67
0.67
0.67
0.10
0.45
0.60
Jordan
1990s
0.44
1.00
0.00
0.00
0.33
0.23
0.63
0.80
Kuwait
1993-1999
0.67
1.00
0.00
0.67
0.33
0.00
0.66
0.20
Lebanon
1990s
0.44
0.33
0.00
0.22
0.67
0.70
0.96
0.60
Morocco
Pre-1998
1.00
0.00
0.00
0.00
0.67
0.10
0.42
1.00
New Zealand
Post-1994
0.89
1.00
1.00
1.00
1.00
1.00
0.91
0.80
Tunisia
1990s
0.67
0.67
0.00
0.67
0.33
0.03
0.42
0.40
Turkey
1990s
0.67
0.67
0.00
0.56
0.33
0.98
0.46
1.00
United States
1990s
0.78
1.00
1.00
1.00
1.00
1.00
0.94
1.00
Budget Institutions in MENA: Theoretical Framework and Methodology
Information Freedom of Democracy Educational
Availability the Press
Score
Attainment
Openness of
financial
markets
Ex-post
Reconciliation
6
Figure 1. Budget Deficit and the Strength of Delegation in the Budget Process
Overall Budget Surplus as % of GDP
(Averaged over periods shown)
5.00
NZ 94-98
Iran 90s
0.00
Algeria 90s
Brazil 64-84
-5.00
Jordan 90s Indonesia 90-97
Egypt 90s
USA 90s
Brazil 95-99
Morocco 90s Tunisia 90s
Turkey 90s
Brazil 85-94
-10.00
Egypt 80s
-15.00
Lebanon 90s
-20.00
0.00
0.10
0.20
Correlation Coefficient = 0.38
0.30
0.40
0.50
0.60
Effective Index of Central Budget Agencies' Dominance
Figure 2. Budget Deficit and Ex ante Agreements
Overall Budget Surplus as % of GDP
(Averaged over periods shown)
5.00
NZ 94-98
Jordan 90s
0.00
-5.00
Brazil 64-84
Turkey 90s
-10.00
Iran 90s Algeria 90s
Egypt 90s
USA 90s
Brazil 95-99
Indonesia 90-97
Morocco 90s
Tunisia 90s
Egypt 80s
Brazil 85-94
-15.00
Lebanon 90s
-20.00
0.00
0.10
0.20
0.30
Correlation Coefficient = 0.50
0.40
0.50
0.60
0.70
0.80
Effective Index of Ex Ante Agreements
What Can We Learn from Budget Institutions Details?
7
Figure 3. Budget Deficit and the Use of Macroeconomic Programming
Overall Budget Surplus as % of GDP
(Averaged over periods shown)
5.00
NZ 94-98
Indonesia 90-97
Jordan 90s Iran 90s
0.00
Egypt 90s
Brazil 64-84 Algeria 90s
-5.00
Morocco 90s
USA 90s
Tunisia 90s
Brazil 95-99
Turkey 90s
Egypt 80s
-10.00
Brazil 85-94
-15.00
Lebanon 90s
-20.00
0.00
0.10
Correlation Coefficient = 0.41
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Effective Index of Macroeconomic Programming
Figure 4. Budget Deficit and the Overall Fiscal Discipline Index
Overall Budget Surplus as % of GDP
(Averaged over periods shown)
5.00
Jordan 90s
0.00
Brazil 64-84
Indonesia 90-97
Egypt 90s
Iran 90s
Brazil 95-99
-5.00
NZ 94-98
Algeria 90s
USA 90s
Tunisia 90s
Morocco 90s
Turkey 90s
Brazil 85-94
-10.00
Egypt 80s
-15.00
Lebanon 90s
-20.00
0.00
0.10
0.20
Correlation Coefficient = 0.53
0.30
0.40
0.50
0.60
0.70
Aggregate Fiscal Discipline Index
What Can We Learn from Budget Institutions Details?
8
Averaging the four institutional indices for fiscal discipline can strengthen the correlation. Figure
4 shows an example of such an overall indicator of fiscal discipline, which averages the indices for the
four institutional arrangements with a lower weight (0.1) applied to the effective ex ante limits index
(because of the apparent insignificance of its relationship with fiscal performance) and equal weights
(0.3) to the other three effective indices. The figure shows that the aggregate index does somewhat better
than its components. Changing the weights does not change the results in any significant way. It appears
that combinations of institutional arrangement may be needed for better performance. However, to
examine this issue further we must first address two other questions. One question is whether overall
budget deficits are a good measure of performance. The second question is to what extent coordination
mechanisms as opposed to the effectiveness characteristics drive the results.
The use of deficit-GDP ratio as an indicator of lack of discipline may be problematic because
many governments hide their deficits and then assume them as off-budget debts. For example, the near
zero deficit of budget in Iran is highly misleading because on average the government has been assuming
the equivalent of 5% of GDP as off-budget debts over the past decade (Esfahani and Taheripour, 2000).
In this sense, the debt-GDP ratio may seem to be a better indicator of discipline problems. However, it is
also common that the assumed debt is quickly monetized, often because governments that lack discipline
do not have the credibility to encourage the public to hold their debts (Esfahani and Kim, 2000). In fact,
most undisciplined countries—such as Brazil during 1985-1994—have very little outstanding debt.
Instead, they generate high inflation rates by the money that they print to take care of their liabilities. For
this reason, we also examine the correlation of our overall budget discipline index with inflation rates
across the cases studied in this project. As Figure 5 shows, the correlation between institutional
capabilities and aggregate fiscal performance rises sharply when inflation is used as an inverse proxy for
the latter. The correlations of inflation with the individual components of the aggregate discipline index
are given in the Appendix.
Would the results be any different if the effectiveness characteristics are ignored? The answer to
this question is yes. Indeed, the arrangement scores that are not weighted by effectiveness characteristics
have little correlation with inflation or budget deficit. The correlation of an overall discipline index for
these scores is also lower than what we find when effectiveness is taken into account. For example, the
absolute value of the correlation coefficient of inflation with the overall discipline index drops from 0.69
to 0.54 when effectiveness characteristics are ignored. This suggests that the effectiveness characteristics
do play a role. Indeed, the indices of budget comprehensiveness and of hard budget constraints for
state/local governments and public enterprises are strongly correlated with inflation (correlation
coefficients of 0.71, 0.78, and 0.58, respectively). The correlations for other effectiveness
characteristics identified in our framework are not as strong. The indices of budget autonomy, ex post
What Can We Learn from Budget Institutions Details?
9
restraint, and average tenure of CBA heads yield correlation coefficients of 0.42, 0.33, and 0.41. The
coefficient for the accountability index is 0.27, though its ex post reconciliation component proves an
important factor (correlation coefficients of 0.52). This exercise can, of course, be carried out for more
detailed aspects of the budget process to further identify the factors associated with macroeconomic
performance. However, we have too few degrees of freedom in the existing data set to pursue such issue
in any meaningful manner. The correlations presented here only indicate that a larger data set may
provide more specific results about what factors are important. More detailed future work can also
uncover connections among various aspects and their fit in the broader institutional setup of each country.
Let us now turn to the question whether countries that achieve fiscal stability focus on individual
coordination mechanisms or use a combination of them. To answer this question, let us start by
examining the arrangements ratings in Table 1 for countries other than the weakest performers in our
sample—Brazil, Iran, Lebanon, and Turkey. Except for Jordan that heavily relies on dominances of CBAs
and Kuwait that needs special attention, all others in the group have strength in at least two mechanisms.
Combining mechanisms seems to be a way of reinforcing them. For example, dominance of CBAs in
Algeria, Indonesia, Morocco, and Tunisia seems to be used as a way of ensuring that ex ante agreements
are maintained throughout the budget process. In New Zealand, macroeconomic programming is
effectively used to guide ex ante agreements and help them succeed. On the other hand, in the United
States, macro programs has become more successful since the mid-1990s when it has been combined with
some stronger delegation and ex ante agreements, especially in the form of line item veto for the
executive and ex ante budget resolutions that support the deficit and spending aggregates proposed by the
executive. It should be noted that different countries seem to be using different combination and there is
no overall pattern of combining discipline mechanisms (see Table 5). However, the choice of different
combinations is likely to be related to various country characteristics, which is an interesting issue to
explore once larger samples of data are available.
Note that according to Table 1, the weak performers do not score very high on any combination
of mechanisms and in the cases of Lebanon, Turkey, and Brazil 1964-1984, show little strength even in
any single mechanism. Kuwait also has this feature, though it has been a very stable country.
Unfortunately, the results for Kuwait are preliminary and may be missing the strength of informal rules.
[There may also be weaknesses in our assessment methodology that need to be rectified.] In any event,
the pattern observed among the weak performers reinforces the message that reliance on more than one
coordination mechanism (or a very high strength in one) is associated with good fiscal performance.
What Can We Learn from Budget Institutions Details?
10
Figure 5. Inflation and the Overall Fiscal Discipline Index
8.00
Correlation Coefficient = 0.69
Log of CPI Inflation
(Averaged over periods shown)
7.00
Brazil 85-94
6.00
5.00
Turkey 90s
Brazil 64-84
4.00
Iran 90s Brazil 95-99
Algeria 90s
Lebanon 90s
3.00
Indonesia 90-97
Egypt 80s
2.00
Jordan 90s
1.00
Egypt 90s
Tunisia 90s
Morocco 90s
Kuwait 90s
USA 90s
0.00
0.00
0.10
0.20
0.30
0.40
0.50
NZ 94-98
0.60
0.70
Aggregate Fiscal Discipline Index
Table 5. Correlation Among the Institutional Arrangements for Fiscal Discipline
Period
Dominance of
CBAs
Ex Ante
Agreements
Macro
Programming
Borrowing/
Spending Limits
Dominance of
CBAs
1.000
0.259
-0.152
0.162
Ex Ante
Agreements
0.259
1.000
0.223
0.324
Macroeconomic
Programming
-0.152
0.223
1.000
0.051
Borrowing/
Spending Limits
0.162
0.324
0.051
1.000
What Can We Learn from Budget Institutions Details?
11
3. Reaching Allocative Efficiency
How well are the countries in our sample equipped to reach allocative efficiency in their budget
systems? Tables 6-9 summarize the scores that our case studies have found in this respect for the
institutions in the countries under study. A striking finding displayed by the data in Table 6 is that most
countries are badly lacking in some aspect of institutional arrangements needed for the attainment of
allocative efficiency. Tables 7-9 further show that most of these countries are also deficient in
characteristics that can help them identify better allocations with whatever institutional capability they
have. These observations raise two key questions. First, do the arrangements that our framework
identifies as necessary for allocative efficiency really matter for fiscal outcomes? Second, do countries
that perform well in terms of fiscal discipline sacrifice a great deal of allocative efficiency? The second
question arises because it is conceivable that fiscal discipline may be reached at the cost of allocative
efficiency by exogenous limits on spending or by delegating the design of the details as well as the
aggregates of the budget to an office with concentrated power. But, is this the price that must be paid for
macroeconomic success?
Answering the first question faces a difficulty because it is not easy to come up with measure of
optimality of allocation of public resources for each country. However, the shares of public health and
education expenditures in GDP may offer some proxies. This is the case because except for New Zealand
and possibly the US, public health and education services in our sample countries have a great deal of
room for improvement, in terms of both quality and quantity. Since poor health and lack of education
mean significant missed opportunities for enhancing income and welfare, it is reasonable to assume that
higher expenditures in these areas indicate better allocation of public resources.
What Can We Learn from Budget Institutions Details?
12
Table 6. Indices of Institutional Arrangements for Allocative Efficiency
Participation of Line Flexibility of
Agencies
Line Ministries
Country
Period
Prioritization
Algeria
1990s
0.33
0.30
0.39
0.14
Brazil
1964-84
0.50
0.02
0.25
0.00
Brazil
1985-94
0.17
0.04
0.25
0.29
Brazil
1995-99
0.50
0.04
0.25
0.29
Egypt
1980
0.50
0.11
0.17
0.29
Egypt
1990s
0.50
0.11
0.17
0.29
Indonesia
1990-1997
0.67
0.02
0.00
0.43
Iran
1990s
0.67
0.40
0.25
0.57
Jordan
1990s
0.44
0.24
0.58
0.29
Kuwait
1993-1999
0.61
0.67
0.00
0.29
Lebanon
1990s
0.50
0.33
0.22
0.29
Morocco
Pre-1998
0.50
0.00
0.36
0.43
New Zealand
Post-1994
1.00
1.00
0.67
0.57
Tunisia
1990s
0.89
0.19
0.11
0.43
Turkey
1990s
0.17
0.00
0.00
0.14
United States
1990s
1.00
0.67
0.50
0.57
Budget Institutions in MENA: Theoretical Framework and Methodology
Breadth of Consultations
13
Table 7. Effective Scores for Allocative Efficiency Indices
Participation of Line Flexibility of
Agencies
Line Ministries
Breadth of
Consultations
Average Overall
Discipline Index
0.21
0.08
0.17
0.01
0.08
0.00
0.07
0.07
0.02
0.12
0.11
0.08
1995-99
0.23
0.02
0.13
0.13
0.13
Egypt
1980
0.16
0.07
0.03
0.09
0.09
Egypt
1990s
0.25
0.08
0.06
0.14
0.13
Indonesia
1990-1997
0.30
0.01
0.00
0.19
0.13
Iran
1990s
0.32
0.23
0.12
0.28
0.24
Jordan
1990s
0.16
0.15
0.13
0.10
0.14
Kuwait
1993-1999
0.33
0.47
0.00
0.16
0.24
Lebanon
1990s
0.25
0.20
0.10
0.14
0.17
Morocco
Pre-1998
0.21
0.00
0.12
0.18
0.13
New Zealand
Post-1994
0.97
0.97
0.65
0.55
0.79
Tunisia
1990s
0.47
0.15
0.04
0.23
0.22
Turkey
1990s
0.06
0.00
0.00
0.05
0.03
United States
1990s
0.80
0.52
0.45
0.46
0.55
Country
Period
Prioritization
Algeria
1990s
0.20
0.20
Brazil
1964-84
0.20
Brazil
1985-94
Brazil
Budget Institutions in MENA: Theoretical Framework and Methodology
14
Table 8. Institutional Characteristics Affecting the Effectiveness of Allocative Efficiency Mechanisms
Country
Period
Autonomous
Budget
Segments
Algeria
1990s
0.83
0.55
0.63
0.50
0.75
0.41
Brazil
1964-84
0.69
0.33
0.58
0.25
0.75
0.19
Brazil
1985-94
0.49
0.36
0.23
0.25
1.00
0.41
Brazil
1995-99
0.40
0.40
0.37
0.25
1.00
0.62
Egypt
1980
0.62
0.67
0.60
0.05
0.50
0.19
Egypt
1990s
0.77
0.76
0.60
0.25
0.75
0.21
Indonesia
1990-1997
0.78
0.48
0.60
0.25
1.00
0.15
Iran
1990s
0.67
0.43
0.42
0.25
1.00
0.43
Jordan
1990s
0.67
0.64
0.50
0.05
0.75
0.31
Kuwait
1993-1999
0.71
0.73
0.62
0.25
0.75
0.45
Lebanon
1990s
0.61
0.42
0.63
0.25
0.75
0.49
Morocco
Pre-1998
0.93
0.33
0.54
0.25
0.50
0.28
New Zealand
Post-1994
0.94
0.94
1.00
1.00
1.00
0.93
Tunisia
1990s
0.73
0.74
0.65
0.25
1.00
0.26
Turkey
1990s
0.83
0.26
0.68
0.05
0.75
0.30
United States
1990s
0.60
0.92
0.66
0.75
1.00
0.95
Comprehensiveness
of Budget
Unity of
Budget
Program
Evaluation
Budget Institutions in MENA: Theoretical Framework and Methodology
Education Level of
Line Ministry
Decision-makers Accountability
15
Table 9. Components of Accountability for Allocative Efficiency Mechanisms
Country
Period
Ex-post
Reconciliation
Explicit
Sanctions
Information
Availability
Freedom of the
press
Democracy
Score
Educational
Attainment
Algeria
1990s
0.33
0.50
0.50
0.67
0.08
0.39
Brazil
1964-84
0.00
0.00
0.19
0.33
0.21
0.40
Brazil
1985-94
0.00
0.00
0.38
0.67
0.98
0.46
Brazil
1995-99
0.67
0.00
0.56
1.00
1.00
0.48
Egypt
1980
0.33
0.00
0.19
0.33
0.00
0.29
Egypt
1990s
0.33
0.00
0.19
0.33
0.00
0.41
Indonesia
1990-1997
0.00
0.00
0.06
0.33
0.00
0.52
Iran
1990s
0.33
0.25
0.75
0.67
0.10
0.45
Jordan
1990s
0.33
0.25
0.06
0.33
0.23
0.63
Kuwait
1993-1999
0.67
0.50
0.56
0.33
0.00
0.66
Lebanon
1990s
0.33
0.00
0.25
0.67
0.70
0.96
Morocco
Pre-1998
0.33
0.00
0.19
0.67
0.10
0.42
New Zealand
Post-1994
0.67
1.00
1.00
1.00
1.00
0.91
Tunisia
1990s
0.33
0.25
0.19
0.33
0.03
0.42
Turkey
1990s
0.00
0.00
0.06
0.33
0.98
0.46
United States
1990s
1.00
0.75
1.00
1.00
1.00
0.94
Budget Institutions in MENA: Theoretical Framework and Methodology
16
Figures 6 and 7 show the relationships between the effective allocative efficiency indices derived
from our research project and the shares of public expenditure on health and education in GDP. These
diagrams support the notion that the index developed in our framework is positively associated with
increased health and education expenditures. Note that in Figures 6 and 7, New Zealand and the US
appear as outliers. Eliminating these countries from the picture weakens the relationships, but still yields
positive and significant correlation coefficients. This helps quell concerns that that those two data point
may be driving the result.
Turning to the second question, in Figure 8 we map the overall index of allocative efficiency
against the overall fiscal discipline index to see whether they have a negative or a positive relationship
with each other. For this purpose, we use the indices for the arrangements before applying the
effectiveness weights. We do this for two reasons. First, the effectiveness factors are closely correlated
across both sets of institutional arrangements and naturally yield a positive association. Therefore, to the
extent that such factors determine fiscal performance, there is no trade off between allocation and
discipline. Second, we are interested in the trade offs that may exist in arranging the decision-making in
the budget process, given the effectiveness of the environment for those arrangements. Hence, our focus
is on the arrangements themselves. One can, of course, ask the deeper question about the ways in which
effectiveness characteristics shape the interactions among coordination and allocation functions in the
budget process. However, answering that question requires more data and has to be delegated to future
research.
The diagram in Figure 8 indicates a positive association between discipline and allocation
mechanisms across countries, and even in single countries such as Brazil where we have multiple
observations over time. This finding suggests that although there may be a tradeoff at a given point in
time, there are ways of moving toward both ends. The budget system can be designed with mechanisms
that restrain the aggregates, while encouraging broad participation and effective information processing in
the design of the details. New Zealand is the best example of such an endeavor. The United States has
also moved in that direction, especially in the 1990s when the strong allocative institutions in the
Congress were combined with successful discipline mechanisms. But, countries such as Tunisia have also
managed to gain strength in both respects, using the information within the bureaucracy with relative
efficiency when they are not attracting public participation to any significant degree.
What Can We Learn from Budget Institutions Details?
17
Figure 6. Public Expenditure on Health and the Overall Allocative Efficiency Index
Public Health Expenditure as % of GDP
(Averaged over periods shown)
7.00
6.00
USA 90s
NZ 94-98
5.00
4.00
Algeria 90s Kuwait 90s
Jordan 90s
3.00 Turkey 90s Brazil 95-99
Brazil 85-94
2.00
Tunisia 90s
Lebanon 90s
Egypt 90s Iran 90s
Egypt 80s
Morocco 90s
1.00
Correlation Coefficient = 0.82
(0.25 without NZ and USA)
Indonesia 90-97
0.00
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Overall Insitutional Allocative Efficiency Index
Figure 7. Current Public Expenditure on Education and the Overall Allocative Efficiency Index
Public Health Expenditure as % of GDP
(Averaged over periods shown)
7
NZ 94-98
6
Kuwait 90s
Jordan 90s
Morocco 90s
5
Egypt 80s
4
3
2
Tunisia 90s
Brazil 95-99
Brazil 85-94
Turkey 90s
Algeria 90s
USA 90s
Egypt 90s
Iran 90s
Brazil 64-84
Lebanon 90s
1
Correlation Coefficient = 0.48
(0.35 without NZ and USA)
Indonesia 90-97
0
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Overall Insitutional Allocative Efficiency Index
What Can We Learn from Budget Institutions Details?
18
Figure 8. Fiscal Discipline vs. Allocative Efficiency
Overall Allocative Efficiency Arrangement Index
(Exclusing Effectiveness Charateristics)
0.90
NZ 94-98
0.80
USA 90s
0.70
0.60
Iran 90s
0.50
Kuwait 90s
Jordan 90s
0.40
Brazil 95-99
0.20
Egypt 90s
Egypt
80s
Brazil 64-84
Brazil 85-94
0.10
Tunisia 90s
Morocco 90s
Lebanon 90s Algeria 90s
0.30
Indonesia 90-97
Turkey 90s
0.00
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Overall Fiscal Discipline Arrangement Index
(Exclusing Effectiveness Charateristics)
Overall Operational Efficiency Arrangement Index
(Exclusing Effectiveness Charateristics)
Figure 9. Fiscal Discipline vs. Operational Efficiency
0.90
NZ 94-98
0.80
Brazil 64-84
0.70
Brazil 85-94
0.60
Brazil 95-99
Kuwait 90s
Lebanon 90s
0.50
USA 90s
Jordan 90s
Indonesia 90-97
Tunisia 90s
Morocco 90s
Algeria 90s
Iran 90s
0.40
Egypt 80s
Egypt 90s
Turkey 90s
0.30
0.20
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Overall Fiscal Discipline Arrangement Index
(Exclusing Effectiveness Charateristics)
What Can We Learn from Budget Institutions Details?
19
4. Institutions of Operational Efficiency
According to our framework, the two main institutional arrangements for reaching operational
efficiency are merit-based recruitment and promotion of the staff and autonomy of line agencies in
carrying out their tasks. Both arrangements revolve around performance measurement, one concerning the
performance of agencies and the other the performance of individual members of the bureaucracy. If one
can design mechanisms to assess performance with reasonable accuracy, incentives for efficient operation
can be strengthened by linking part of manager and staff compensation to performance. This would
further reduce the need for input monitoring, which requires resources and ties the hands of the managers
and discourages innovation. Although performance measurement is not an easy task in itself, many
countries have been experimenting with various designs and have made substantial progress in shifting
from input controls onto performance incentives. Among the countries in our sample, New Zealand and to
some extent the US have implemented comprehensive incentive systems and appear to be successful.
Among other countries, there are cases such as Algeria, Brazil, and Tunisia where there some basic
arrangements are in place and government jobs are sufficiently rewarding to attract capable professionals.
However, even these countries are still far from effective performance measurement. The remaining
countries do show much strength in these respects and are hardly offering attractive jobs to build
competence in their administrations.
To examine whether our institutional index for operational efficiency corresponds to the
performance of government administration, we follow Rauch and Evans in correlating the ICRG
corruption and bureaucratic quality indicators generated by Political Risk Services (2000). Figures 10 and
11 show the results. New Zealand and the US are turns outliers again and help strengthen the correlations
between our operational efficiency index and ICRG indicators. However, even in the absence of those
two cases the correlations are detectable, which confirms the general relevance of the factors embedded in
the operational efficiency index. These observations are further confirmed by examples and evidence
documented in case studies of countries with weak bureaucratic capabilities.
Finally, it is interesting to repeat the question about possible tradeoffs or complementarities
between fiscal discipline and operational capabilities. As Figure 9 shows, there is a positive correlation
between the overall indicators for the two institutional aspects. This is interesting because building a
bureaucracy of good quality is costly and requires expenditure of resources in the form of higher salaries,
more extensive training and support funds, better equipment, etc. These higher costs, of course, can
become investments that eventually reduce the cost of operating the government. But, to ensure that the
process does not unravel by giving rise to macroeconomic instability, building operational efficiency must
go together with better fiscal discipline so that deficits remain contained.
What Can We Learn from Budget Institutions Details?
20
Table 10. Indices of Institutional Arrangements and Effective Scores for Operational Efficiency
Indices of the Presence of Institutional
Arrangements
Effective Scores of Institutional
Arrangements
Merit-based
Autonomy of
Merit-based
Autonomy of Overall (Average)
Recruitment/Promotion Line Agencies Recruitment/Promotion Line Agencies Effective Scores
Country
Period
Algeria
1990s
0.44
0.58
0.28
0.39
0.34
Brazil
1964-84
0.82
0.55
0.53
0.30
0.41
Brazil
1985-94
0.75
0.55
0.43
0.29
0.36
Brazil
1995-99
0.75
0.55
0.57
0.46
0.52
Egypt
1980
0.28
0.47
0.12
0.25
0.18
Egypt
1990s
0.24
0.47
0.11
0.27
0.19
Indonesia
1990-1997
0.62
0.85
0.16
0.41
0.16
Iran
1990s
0.49
0.45
0.21
0.28
0.24
Jordan
1990s
0.48
0.57
0.27
0.31
0.29
Kuwait
1993-1999
0.33
0.76
0.24
0.49
0.36
Lebanon
1990s
0.44
0.57
0.31
0.36
0.34
Morocco
Pre-1998
0.70
0.39
0.33
0.25
0.29
New Zealand
Post-1994
0.82
0.89
0.80
0.87
0.84
Tunisia
1990s
0.63
0.76
0.39
0.42
0.39
Turkey
1990s
0.38
0.42
0.12
0.23
0.17
United States
1990s
0.69
0.68
0.57
0.66
0.57
Budget Institutions in MENA: Theoretical Framework and Methodology
21
Table 11. Institutional Characteristics Affecting the Effectiveness of Operational Efficiency Mechanisms
Country
Period
Educational
Attainment
Predictability of Average tenure of line Competitiveness Resource
resource flow
agency managers
of salaries
availability Accountability
Algeria
1990s
0.39
0.66
1.00
0.92
0.69
0.48
Brazil
1964-84
0.40
0.55
1.00
1.00
0.60
0.27
Brazil
1985-94
0.46
0.29
1.00
1.00
0.52
0.54
Brazil
1995-99
0.48
0.88
1.00
1.00
0.77
0.68
Egypt
1980
0.29
0.60
1.00
0.42
0.60
0.25
Egypt
1990s
0.41
0.71
1.00
0.33
0.77
0.23
Indonesia
1990-1997
0.52
0.51
1.00
0.10
0.42
0.23
Iran
1990s
0.45
0.59
1.00
0.28
0.92
0.37
Jordan
1990s
0.63
0.51
1.00
0.50
0.77
0.29
Kuwait
1993-1999
0.66
0.79
1.00
0.67
1.00
0.29
Lebanon
1990s
0.96
0.66
1.00
0.58
0.77
0.38
Morocco
Pre-1998
0.42
0.79
1.00
0.33
0.83
0.32
New Zealand
Post-1994
0.91
0.99
1.00
1.00
1.00
0.95
Tunisia
1990s
0.42
0.77
0.75
0.75
0.60
0.29
Turkey
1990s
0.46
0.51
0.75
0.15
0.60
0.43
United States
1990s
0.94
0.95
1.00
0.67
1.00
0.94
Budget Institutions in MENA: Theoretical Framework and Methodology
22
Table 12. Components of Accountability for Operational Efficiency Mechanisms
Country
Period
Audit
Procurement
Competitiveness
Algeria
1990s
0.25
0.30
0.67
0.60
0.67
0.08
0.25
Brazil
1964-84
0.25
0.23
0.33
0.10
0.33
0.21
0.25
Brazil
1985-94
0.50
0.20
0.33
0.40
0.67
0.98
0.50
Brazil
1995-99
0.75
0.48
0.33
0.50
1.00
1.00
0.75
Egypt
1980
0.25
0.05
0.33
0.10
0.33
0.00
0.25
Egypt
1990s
0.25
0.05
0.33
0.10
0.33
0.00
0.25
Indonesia
1990-1997
0.25
0.17
0.33
0.00
0.33
0.00
0.25
Iran
1990s
0.25
0.25
0.33
0.40
0.67
0.10
0.25
Jordan
1990s
0.25
0.22
0.33
0.20
0.33
0.23
0.25
Kuwait
1993-1999
0.50
0.00
0.33
0.20
0.33
0.00
0.50
Lebanon
1990s
0.50
0.17
0.00
0.20
0.67
0.70
0.50
Morocco
Pre-1998
0.50
0.00
0.00
0.00
0.67
0.10
0.50
New Zealand
Post-1994
1.00
0.78
1.00
1.00
1.00
1.00
1.00
Tunisia
1990s
0.25
0.40
0.33
0.00
0.33
0.03
0.25
Turkey
1990s
0.50
0.00
0.33
0.20
0.33
0.98
0.50
United States
1990s
1.00
0.83
1.00
1.00
1.00
1.00
1.00
Performance
Measurement
Explicit
Sanctions
Information
Availability
Freedom of
the Press
Democracy
Score
Budget Institutions in MENA: Theoretical Framework and Methodology
23
Figures 10. Bureaucratic Quality and Overall Operational Efficiency Index
6.00
USA 90s
ICRG Bureaucratic Quality Index
(Averaged over the Periods Shown)
5.50
NZ 94-98
5.00
4.50
Brazil 85-94 Brazil 64-84
4.00
Brazil 95-99
Jordan 90s
Turkey 90s
3.50
Egypt 90s Iran 90s Morocco 90s
Tunisia 90s
Egypt 80s
Algeria 90s Kuwait 90s
3.00
2.50
Indonesia 90-97
2.00
Correlation Coefficient = 0.75
(0.35 without NZ and USA)
Lebanon 90s
1.50
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Overall Operational Efficiency Index
Figures 11. Corruption and Overall Operational Index
ICRG Corruption Index
(Averaged over the Periods Shown)
6.00
NZ 94-98
5.50
5.00
USA 90s
4.50
Brazil 85-94
Jordan 90s
Brazil 64-84
Iran 90s
4.00
3.50
Turkey 90s
3.00
2.50
Egypt 90s
Indonesia 90-97
2.00
1.50
0.00
Algeria 90s
Tunisia 90s
Morocco 90s
Kuwait 90s
Brazil 95-99
Lebanon 90s
Egypt 80s
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Overall Operational Efficiency Index
Budget Institutions in MENA: Theoretical Framework and Methodology
24
5. New Issues and Hypotheses
The evidence presented in the above pages makes a case for the relevance of the data and the
indices compiled by the country case studies for understanding budget institutions. The patterns described
by this data set confirm many of the hypotheses formulated in our framework or put forward in the
literature. Many other ideas can also be examined with the new data being collected. Here we examine a
question that has not received much attention in the literature but seems to be quite important.
The issue is that many countries, especially developing ones tend to give a relatively free hand to
central budget agencies or some other entity to cut expenditures ex post. Governments and many policy
analysts seem to take this practice as a reasonable or necessary way of dealing with revenue shortfalls and
emergency expenditure needs. The purpose is to avoid running high deficit and borrowing in such
situations. Of course, this is a problem mainly for credit-constrained countries that are concerned about
the rise in the cost of borrowing as their deficits rise, which may force them into inflationary money
creation. To see whether this concern is relevant or not and whether the ex post discretion solves the
problem, one examine two relationships. First, we correlate inflation with our measure of ex post restraint,
shows the extent to which discretion of central budget agencies is curbed at the implementation of stage
of the budget process. If ex post restraint is helpful, it should lower inflation once we control for other
aspects of budget institutions. However, a simple regression of inflation on aggregate budget discipline
and the ex post restraint index based on our sample shows that index does not contribute to stability. If we
drop the cases of Kuwait, New Zealand, and the United States, which are not credit constrained, the
coefficient of ex post restraint in the regression becomes even positive, though quite insignificant. This
result, though cursory, suggests that ex post discretion may not be adding much to macro stability.
Do countries use ex post discretion as a means of coping with fiscal shocks? The answer to this
question can be observed in Figure 12, where we graph our measure of ex post restraint against the
standard deviation of government revenues. If all countries are included, there is no obvious correlation.
However, when Kuwait, New Zealand, and the United States are excluded, other observations lie around
a downward sloping curve that offers an affirmative answer to the question.
The presence of Kuwait among outliers is an interesting issue. To explain the difference between
Kuwait and the other developing countries in the sample, it is important to note that unlike those
countries, Kuwait has solved its credit constraint problem by investing part of its oil revenues in a diverse
international portfolio whose returns are inversely correlated with the price of oil. This has successfully
stabilized its fiscal conditions so that it has weathered oil price fluctuations and even a devastating war
with relative ease on the fiscal side. In this sense, year-to-year fluctuations in revenue are not a concern to
require ex post discretion over the budget. As a result, budget allocations become committed from the
start and agencies know their available resources for the coming year with great certainty.
Budget Institutions in MENA: Theoretical Framework and Methodology
25
Figures 12. Revenue Uncertainty and Ex Post Commitment to Budget Allocations
1.00
Kuwait 90s
0.90
USA 90s
Ex Post Restraint Index
0.80
NZ 94-98
0.70
Indonesia 90-97
Tunisia 90s
0.60
Trendline excluding Kuwait, NZ, USA
Algeria 90s
Turkey 90s
0.50
Iran 90s
0.40
Morocco 90s
0.30
Jordan 90s
Brazil 95-99
Brazil 85-94
Egypt 80s
Egypt 90s
Lebanon 90s
0.20
Brazil 64-84
0.10
0.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Standard Deviation of Revenue Growth
(Averages of All Available Data over 1970-1998)
Despite the solution that the experience of Kuwait offers for many countries, policymakers and
even analysts have treated the ex post discretion as an acceptable practice that helps keep the fiscal
situation safely under control. But, this view ignores other possible solutions for this problem and the
high costs that lack of ex post restraint imposes on the fiscal system. As we have argued in the framework
paper, failure of ex post restraints creates incentives for the policymakers to overestimate revenues and
raise expenditure ceilings in the budget law, so that they can have discretion during implementation. Line
ministries and parliamentaterians may not object to such estimates because higher ceilings keep the
opportunities open for them to lobby for the release of larger funds later during the year. This undermines
a key purpose of budgeting, which is to assure line agencies that, except under extra-ordinary conditions,
they can focus on performing their assigned tasks with the funds appropriated for them, without any need
to continuously worry about the funds and spend their resources to lobby for their release. This factor also
adversely affects the autonomy of agencies in conducting their activities and is likely to impede
operational efficiency. Another problem posed by the absence of more realistic ex post limits on
allocation is that during the year a variety of political pressures mount to raise expenditures close to their
ceilings, while revenues are almost sure to fall short of estimate due to the original upward bias. Such
costs are by no means trivial and given the possibilities for avoiding them, a critical re-examination of the
approach to ex post discretion seems to be well warranted.
Budget Institutions in MENA: Theoretical Framework and Methodology
26
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NY. Compiled by IRIS Center, University of Maryland, College Park, MD.
Rauch, James E., and Peter B. Evans. 2000. "Bureaucratic Structure and Bureaucratic Performance in
Less Developed Countries." Journal of Public Economics, 75.1: 49-71.
Budget Institutions in MENA: Theoretical Framework and Methodology
27
Figure 1A. Inflation and the Strength of Delegation in the Budget Process
8.00
Log of CPI Inflation
(Averaged over periods shown)
7.00
Brazil 65-94
6.00
5.00
Brazil 64-84
Turkey 90s
4.00
Iran 90s
3.00
Brazil 95-99
Algeria 90s
Indonesia 90-97
Lebanon 90s
Egypt 80s
2.00
Jordan 90s
Kuwait 90s
NZ 94-98
1.00
0.00
0.00
0.10
0.20
0.30
Egypt 90s
Tunisia 90s
Morocco 90s
USA 90s
0.40
0.50
0.60
Effective Index of Central Budget Agencies' Dominance
Figure 2A. Inflation and Ex ante Agreements
8.00
Log of CPI Inflation
(Averaged over periods shown)
7.00
Brazil 65-94
6.00
5.00
4.00
Brazil 64-84
Turkey 90s
Lebanon 90s
3.00
Egypt 80s
2.00
Brazil 95-99
Algeria 90s
Tunisia 90s
Kuwait 90s
1.00
0.00
0.00
Morocco 90s
Egypt 90s
Jordan 90s
Indonesia 90-97
Iran 90s
USA 90s
0.10
0.20
0.30
0.40
0.50
NZ 94-98
0.60
0.70
0.80
Effective Index of Ex Ante Agreements
Budget Institutions in MENA: Theoretical Framework and Methodology
28
Figure 3A. Inflation and the Use of Macroeconomic Programming
8.00
Log of CPI Inflation
(Averaged over periods shown)
7.00
Brazil 65-94
6.00
5.00
Turkey 90s
Brazil 64-84
4.00
Indonesia 90-97
Brazil 95-99 Algeria 90s
Iran 90s
3.00
Lebanon 90s
2.00
Egypt 90s
Jordan 90s
Morocco 90s
Tunisia 90s
Kuwait 90s
1.00
0.00
-0.20
Egypt 80s
USA 90s
0.00
0.20
0.40
0.60
NZ 94-98
0.80
1.00
Effective Index of Macroeconomic Programming
Budget Institutions in MENA: Theoretical Framework and Methodology
29