Public Finance & Economic Governance: Key Debates & Implementation Challenges

Emphasizing economic liberalization versus institution building

In the past few decades there has been a shift in international financial advice to developing countries, mainly from Western dominated financial institutions and development organizations, away from insistence on the merits of economic liberalization towards a greater emphasis on the need to build stronger financial institutions and economic governance capacities. Before debating the strengths and weaknesses of this evolving debate it is necessary to clarify a few terms. Although often used interchangeably in heated debates the terms "economic liberalization" and the "Washington Consensus" are not equivalent. Economic liberalization refers broadly to the removal of government interference in financial markets, capital markets, and lifting barriers to trade.1 The Washington Consensus is a specific policy framework forged between the International Monetary Fund (IMF), the World Bank, and the US Treasury in the early 1990s to consolidate policy recommendations for promoting development.2 The ten policy recommendations, which were often imposed on governments as "conditions" for receiving aid, emphasized downscaling of government, competitive exchange and interest rates, deregulation, rapid trade liberalization, and privatization.3 In the 1980s the IMF began to promote Structural Adjustment Programs (SAPs) which in addition to pushing market liberalization, emphasized the importance of setting macroeconomic stability as an economic governance priority in all developing countries. Macroeconomic stabilization strategies sought to prevent inflation and avoid balance of payment crisis.4

In contrast to policy guidance focused narrowly on promoting economic liberalization, stabilization and the Washington Consensus policies, institution-building efforts generally seek to strengthen governance capacities and offer a greater flexibility in adapting to the country specific context and sequencing short-term and long-term priorities. Although there is no consensus on the most effective methods to support post-conflict institution building, it generally entails improvement of efficiency and effectiveness of existing institutions, the restoration of destroyed institutions, and the enhancement of authorities' professionalism.5 While the title of this section poses economic liberalization against institutionalization, more nuanced debates focus more on the timing and sequencing of a mix of diverse economic liberalization and institution-building strategies given country-specific contexts. The following outlines the key arguments in favor and against liberalization versus institutionalization.

The rationale for liberalization

Throughout the 1990s Western dominated International Financial Institutions adopted the "Washington Consensus," and imposed its specific policies as 'conditions' for developing countries seeking aid, "in the hope and expectation that...marketization would promote sustainable economic growth, which would also help to reduce tensions."6 The Washington Consensus and other liberalization policies promoted by international financial institutions were based largely on assumptions outlined by documents such as the 'Berg Report' in 1981 and Robert Bates' Markets and States in Tropical Africa, which focused on 'internalist' explanations of the causes of the African crisis as based on the failures of African governments and elites. These reports emphasized the negative impact of state intervention to protect industries on the incentives of farmers to increase agricultural output.7 In addition, John Williamson originally wrote the "Washington Consensus," to clearly and concisely articulate the policy advice which most economists and government officials in Washington agreed would be good for developing countries based mainly on similar analysis of the impact of state interventions in Latin America until 1989.

While the Washington Consensus is often equated with 'market fundamentalism,' or belief that free markets will lead to the most efficient outcomes and the greatest economic growth, and is criticized as not supporting pro-poor growth, several of the policy recommendations originally advocated contradict this view. In a paper by Williamson called "What should the Bank think of the Washington Consensus?" published in 1999, he laments that the recommendation that after ensuring fiscal discipline the government should redirect public expenditure priorities "toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure," was not implemented widely in Latin America.8 Williamson argues that while the Washington Consensus in 1989 did argue for a decreased role of the state mainly in reaction to the statist policies prevalent in many Latin American countries at the time, this swing towards greater liberalization is exaggerated and simplified in popular rhetoric against these policies.

Critiques of liberalization

On the other hand, critics of IMF's liberalization and stabilization policies argue that these policies often aggravate inequalities, decrease the legitimacy of national governments and increase dependence on natural resources which are likely to contribute to instability in post-conflict peace process. In addition scholars argue that the imposition through conditionality of rapid economic liberalization championed by IFIs utilizing the term "Washington Consensus" in the 1990s contributed to several financial crises in the 1990s, including in East Asia, Latin America and Sub-Saharan Africa.9 While several interdependent factors contributed to the 1990s financial crises, pressure from the IMF to rapidly liberalize trade and capital flows and minimize government involvement in the economy increased financial instability by decreasing the ability of the government to protect their populations from external market shocks and volatility. These risks are exasperated in the case of countries recently emerging from violent conflict which are often characterized by weak government institutions that may be considered illegitimate, high tensions across socio-economic divisions, and high levels of militarization.

The risks of integration to global markets are even more severe for countries emerging from conflicts and some authors even argue that structural adjustment plans may increase the chances of conflict. Many countries impacted by violence are already open to global markets in ways that are detrimental to the establishment of peace. For example, many conflict countries are open to international flows of illegally-produced and internationally traded minerals and narcotics, flows of finance involved in the looting of national assets, and the use of global information technologies for organizing war economies.10 Thus the essential question is not whether to increase market integration, but how to change and sequence liberalization to transform war economies and support more equitable economic development.

Critics of the market fundamentalist policies associated with the Washington Consensus argue that it failed to take into account important issues of equity, employment, the pacing and sequencing of reforms, and how privatizations were conducted.11 In addition to the lack of conflict sensitivity and pro-poor growth strategies, the nature of the imposition of uniform policies by Western dominated institutions threatened the sovereignty of national governments to control their finances, undermined the accountability of governments to their citizens, and failed to adjust policies to unique and dynamic national contexts.12 More generally, Jose Ocampo calls attention to other problems associated with IFI policy suggestions which he views as embodying a second generation of reforms in the Washington Consensus. Specifically, he notes that IFIs adopt a very narrow definition of macroeconomic stability (which includes notably taming inflation, reducing budget deficits), whereas GDP growth - also a stabilizing force - has slowed dramatically since the adoption of such austere measures. He also points out that IFI advice on public finance issues tends to underestimate the positive role that the state can play in boosting the productive sector. Finally, he also notes that such advice tends to subordinate social aims to macroeconomic aims.13

A move toward institution building

In reaction to the failures of imposing rapid economic liberalization policies on developing countries, there is a growing movement towards developing strategies to strengthen financial institutions and supporting gradual liberalization adapted to country-specific contexts. Joseph Stiglitz, former chief economist of the World Bank known for his critique of market fundamentalism, argues that financial reforms must "be comprehensive and include a combination of more flexible macroeconomic policies, tighter financial regulation and, where necessary, restrictions on capital inflows."14 In addition, Stiglitz and other critics of the IMF's enforcement of stringent austerity measures, argue that social protections and support for strengthening financial institutions must remain at the center of financial reforms in poor developing countries.

The IFIs are slowly moving towards reforming their approaches to include strengthening financial institutions and capacity building. For example, the World Bank began analyzing specific challenges to institution-building in Low-Income Countries Under Stress (LICUS) that are considered to have weak security, fractured societal relations, corruption, breakdown in the rule of law, and lack of mechanisms for generating legitimate poser and authority. While this is a step in the right direction, further efforts are required to "clarify the scope and content of the Bank's institution-building agenda and strengthen the design and delivery of capacity development and governance support in LICUS to ensure better outcomes."15

The IMF has similarly modified some of its policies. For example, IMF staff members have played key roles in re-establishing monetary, financial, and fiscal systems in countries where conflicts have destroyed these structures such as in Bosnia, East Timor, Kosovo, and Afghanistan.16 However, critics such as William Easterly, a professor of Economics at New York University, remain skeptical of the reforms among the IFIs. Easterly argues that institution and capacity-building efforts are not really radical changes from the paternal nature of aid from the West. He argues that there needs to be more support for home-grown solutions and to increase accountability of aid to the poor themselves.17

While the post-conflict period poses significant challenges to reform or build anew society's institutions, if undertaken through conflict-sensitive, participatory, nationally-driven processes, the establishment of strong, more equitable financial institutions can provide an opportunity for sustainable peace and economic recovery.18

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The benefits and risks of aid to state capacity

In the last decade in particular, the role and value of aid in achieving intended results in post-conflict countries has come under increasing scrutiny. As stated by scholar Stephen Browne, "The record of aid to fragile and poorly-performing states is the real test of aid effectiveness. Rich countries can justify aid to fragile states both through altruism and self-interest. But, with some exceptions, donors have appeared at the wrong times and with the wrong attitudes, even sometimes undermining development progress."19 In the economic realm, as in the security and political, the challenge is to "make external assistance a long-term catalyst for statebuilding rather than a short-term substitute for the state."20

Making aid serve longer-term statebuilding goals is particularly important in the post-conflict environment when the state's capacity and legitimacy are often severely limited. Following conflict, states often receive a large influx of foreign aid, what scholars Boyce and O'Donnell refer to as an "aid bonanza" to restore government services and functions, where the influx of humanitarian and reconstruction aid brings large-scale resources into the country. This can sometimes have the undesired effect of "dwarfing the domestic resources mobilized by the government."21 When international aid limits or inhibits the ability or will of the state to effectively mobilize resources and manage public expenditures, the phenomenon is called "crowding out." This phenomenon is troubling, as it can serve to undermine the legitimacy of the state, and circumvents responsibility of government to citizens, thus infringing on a traditional state-society relationship.

Firstly, the ready availability of external resources can reduce incentives for the government to raise domestic revenues. The key problem with crowding out is that aid diminishes over time, and states must be able to independently manage public finances and secure domestic revenue sources.22 In addition, this influx of aid can create distortions of the true economic picture, which disturbs the ability of the state to assess its fiscal strengths and weaknesses."...Large flows of outside assistance, and the 'hands on' role of international actors in facilitating the implementation of peace settlements, can create new political and economic patterns in the host society that come to rely on a continuation of large-scale external aid and guidance. If these expectations and dependencies harden, statebuilding missions can work against their own ultimate goal of fostering self-government."23

There is also evidence that when aid is transmitted through the private sector and non-governmental organizations, the state's capacity to allocate public expenditures is undermined.24 Procurement, whereby external consultants and institutions are used to conduct state functions when governments lack the capacity to do so, can actually undermine state capacity and deter the utilization of domestic human resources.25 Boyce and O'Donnell also point out that "The potentially adverse impact of external assistance on domestic fiscal capacity is one dimension of a broader dilemma that confronts international efforts to promote statebuilding."26

Aid, especially when attached to conditionalities, may also hinder the state's ability to make their own strategic decisions, which limits the government's legitimacy in the eyes of their citizens."Just as external resources can crowd out domestic resources, so the government's quest for external legitimacy can undermine its legitimacy at home -particularly if the motivations for donor assistance differ markedly from local needs and aspirations."27 An example of this is when external military assistance is provided at the expense of national efforts to "build financially sustainable and locally accountable military and police forces."28 Additionally, when aid crowds out domestic capacities, unintentional trusteeship arrangements may arise, whereby countries are almost completely dependent on donors; ultimately, this situation counteracts the goals of sustainable development.29 A consequence of this may be the undermining of the very objectives aid seeks to rectify. Indeed, scholar-practitioner Alex de Waal has noted of relief operations in famine-related emergencies, "Intervention is the antithesis of politically progressive local accountability which is the essence of protection against famine."30 In such a scenario, accountability becomes conflated between aid agencies and government, and contestation on this basis becomes equally muddled.

Boyce and O'Donnell offer several recommendations for improving aid delivery to ensure state capacity is not undermined, and progress is made towards aid independence. These recommendations highlight will and capacity on the part of all to improve aid effectiveness and the importance of channeling aid through national budgets, while still ensuring service delivery. At the same time, state capacity must be assessed based on a number of governance and economic factors, and when state capacities are especially low, it may be more appropriate for aid to be distributed through other modalities, such as NGOs or private firms, until capacity is developed. Donors should not "abdicate responsibility for how aid channeled through the government is used."31 According to the authors, there is a role for donors to play in developing capacities, as well as the delivery of goods and services. However, there should be "a balance between service delivery and capacity building."32 In effect, there is room for strategies that increase this balance by using external resources as a way of "crowding in" state capacities to effectively manage public finances.

Some important observations made toward this end include:
- Both the will and the capacity of states and international partners must be present to improve the effectiveness of aid delivery.
- Aid a commitment should be made to channel aid through national budgets, rather than NGOs and the private sector, as a way of ensuring that expenditures are connected to national priorities and as a way of increasing national capacity in public finance.
- However, this depends on a number of governance and economic factors being present. International support may be initially needed to support capacity development in development and managing resource mobilization and expenditure management strategies. When state capacities are especially low, it may be more appropriate for aid to be distributed through other modalities until capacity is developed. Donors should not abdicate responsibility for how aid channeled through the government is used, but seek to develop capacities while delivering needed goods and services - endeavoring to get the right balance.33

In the humanitarian sector, agencies and policy centers have pushed forth a number of key agendas to improve quality of aid. In the 1990s, a new aim, striving for a Do No Harm (DNH), noted, "...given what has been learned, it is not necessary or justified to act as if aid has noresponsibility for its negative-or positive-side effects on conflicts. While pursuinghumanitarian and developmental imperatives, aid workers should also know and do moreto ensure that their aid does no harm." On this basis, there has been a refocusing of standards of humanitarianism by many agencies. For instance, many aid organizations follow the sphere project code of conduct, which declares that, "All relief actions affect the prospects for long-term development, either in a positive or a negative fashion. Recognising this, we will strive to implement relief programmes which actively reduce the beneficiaries' vulnerability to future disasters and help create sustainable lifestyles. We will pay particular attention to environmental concerns in the design and management of relief programmes. We will also endeavour to minimise the negative impact of humanitarian assistance, seeking to avoid long-term beneficiary dependence upon external aid."34 While there continues to be divergences in how such standards are practically applied, this demonstrates a growing concern with the efficacy and impact of humanitarianism in such contexts.

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Who should design economic governance structures? And who should benefit?

While few would argue about the need for good governance in economic recovery, there are debates surrounding the type of measures proposed to foster good governance, and which stakeholders are best positioned to benefit from these measures - i.e. society at large, domestic or international businesses. "Discussion over governance is important because it influences not only mechanisms but also strategies, each of which in turn responds to ideological presumptions about development and to attain means greater economic democracy."35

The IMF underscores the emphasis it places on good governance when providing policy advice, financial support, and technical assistance to its 185 member countries.36 It focuses in particular on working with its members to "prevent and address corruption in areas where the Fund has a mandate and expertise, notably public resource management and financial sector soundness, to establish strong and transparent procedures and institutions."37 To this end, it also strives to strengthen countries' capacity to combat cases of corruption, including by "advising countries on appropriate anti-corruption strategies, commissions, and legislation."38 The emphasis on governance in the IMF / borrowing country relationship is illustrated by the fact that since 1997 some 60 percent of letters of intent (LOIs) by governments describing their economic policies deal with issues of "governance" and 40 percent with issues of "corruption." Specific anti-corruption measures may also be part of the conditionality of IMF-supported programs.39

The World Bank places anti-corruption at the heart of its conception of good governance, which underlies its poverty alleviation mission.40 This is because corruption is seen in the economic view as a form of regressive redistribution. World Bank governance initiatives focus on "internal organizational integrity, minimizing corruption on World Bank-funded projects, and assisting countries in improving governance and controlling corruption."41 It does this by "combining participatory action-oriented learning, capacity-building tools, and the power of data."42 International emphasis on good governance is not, however, limited to the Bretton Woods institutions. UNDP views governance and sustainable development as "indivisible" and believes that developing domestic capacity for good governance is the "primary way to eliminate poverty."43

However, strong critiques of the approach of the IFIs on governance issues are also evident in the literature. First, critics, including many Southern organizations, argue that the IFIs are static in their thinking because they fail to truly consider the perspectives and needs of the countries they serve.Joseph Stiglitz, a former World Bank economist, argues, "...We have a system that might be called global governance without global government, one in which a few institutions - the World Bank, the IMF, the WTO -and a few players -the finance ministries, closely linked to certain financial and commercial interests -dominate the scene, but in which many of those affected by their decisions are left almost voiceless."44 Jos Ocampo argues that the right of Third World citizens to choose their own governance structure should not be trodden on by IFIs.45 Alice Amsden points out that long-run economic growth in the developing world has been greater during periods when IFIs simply remained supportive of a great variety of domestically chosen economic policies (which often stressed the importance of investing in industry over international advice to the contrary).46

In a related point, critics point to the contradictions in widespread IFI support for good governance in domestic institutions, while these agencies are not run in a democratic or globally representative way."While almost all of the activities of the IMF and the World Bank today are in the developing world (certainly, all of their lending), they are led by representatives from the industrialized nations. (By custom or tacit agreement the head of the IMF is always a European, that of the World Bank an American)."47 In essence, this means that the IFIs represent the interests of the developed world and not the poor nations they serve and brings into question their stance on participatory decision-making.

Go to Economic Recovery: Economic Recovery Strategies- Debates: Participation

Additionally, the leaders of the IFIs are selected behind closed doors - a direct violation of the transparency tenant of good governance.48 "Unfortunately, the overly-eager leadership of the World Bank in framing the good governance debate, as with the UNDP and World Bank partnership to implement the Millennium Development Goals (MDGs), tends to narrow the possibilities for a critical examination of the World Bank's role in creating poverty and malgovernance through their structural adjustment programs and 'state modernization' schemes."49 A similarly cynical critique is made of donor countries more broadly: Alejandro Bendana asserts that the international community is reluctant to answer calls for increased governance within their own institutions. For instance, in February of 2009, Norway became the first OECD member country to implement domestically the Extractive Industries Transparency Initiative guidelines, which demand that companies publish what they pay and governments disclose what they receive.50

A second aspect of critics' concerns is focused on the integrity of the good governance project as a whole for addressing development challenges. Bendana argues that the understanding of good governance as the connection between economic growth and reform, including the achievement of the Millennium Development Goals (MDGs), is a paradigm leftover from the post-Cold War period and one that holds little weight in current realities, and deserves to be problematized.51 In an effort to explain deficiencies in the economic policies of the 1980s and 1990s, the international community has turned towards poor governance as the reason for failed growth - transferring blame to the state.

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The role of tariffs in development and economic recovery

Protectionism may be understood as a policy agenda that governments use to maximize revenue collection and domestic subsidies to limit foreign imports.52 Protection is often defended by three major descriptive arguments:53 1) that protectionist policies promote domestic employment growth and private sector growth; 2) that free trade in the long-term can crowd out domestic firms, leaving the country completely dependent on a foreign product; therefore a country's protectionist policies should be reciprocal to those of other countries; and, 3) protectionism allows developing countries to retain a degree of power in negotiating trade policies with larger, wealthier, and more powerful countries. As such, the most commonly cited theoretical argument for tariffs is that they buy time for local industries to mature, grow, and learn to compete against international counterparts.

A large part of the reasoning behind the infant industry protection argument is the contention that productive knowledge is at least in part tacit - that is, unable to be codified, converted into information, and transmitted. If knowledge were perfectly transmissible across borders, then the fact of one nation's firms being out-performed by those of another would be because the country is not playing to its comparative advantage (e.g., cheap labor), and governments have the responsibility to allow the "true" market wage to prevail. However, if knowledge does not flow freely, then firms need time to develop and husband their own store of industrial know-how. Thus Jospeh Stiglitz, one of the proponents of the role of information asymmetries in markets, argues that Western countries and the IFIs promote tariff reductions and the minimization of protectionist measures for their own economic benefit, or "taxation without representation."54

Tariff reduction has been a classical component of economic liberalization packages in developing countries. Yet critics of neoliberal economics argue that such reductions in tariffs are harmful to economic growth, and are of greater benefit to Western companies and governments than they are to developing and post-conflict states. In perfectly competitive markets, tariffs clearly undermine the liberal ideal of free trade and a global economy. To support these goals of liberalized trade and to combat the negative effects of high tariffs, the IFIs have moved toward the full support of VATs as a revenue-generating replacement. The IFIs counter the common observation that trade liberalization destroys domestic jobs with the argument that when trade liberalization "is done in the right way and at the right pace, so that new jobs are created as inefficient jobs are destroyed, there can be significant efficiency gains."55

In 2004, expert Yash Tandon wrote about the relationship between the Common Market for Eastern and Southern Africa (COMESA), comprised of 16 African countries, and the European Union (EU), in developing an Economic Partnership Agreement (EPA), called Cotonou.56 At the time, the COMESA countries were reluctant to enter into an EPA with the EU, because by design, the EU would reap many more benefits than the African countries. The COMESA countries argued that Europe has historically manipulated trade agreements to maximize economic benefits for European countries.Tandon underscored: "Even neo-liberal economists, (generally proven wrong in their support for structural adjustment programmes and trade liberalization) would have to admit that reciprocal trade among asymmetrical partners works to the detriment of the weaker partner."57 Given a weaker bargaining position however, Cotonou was not negotiated by developing states.

Although protectionism is intended to benefit the domestic economy, "domestic protectionism always has a domestic cost."58 In practice, tariff reductions can undermine the capacity of the public sphere, because these revenue cuts reduce significant government revenues.59 This is particular true given the weak institutional capacity of post-conflict societies. In some senses, balancing tariffs requires finding equilibrium between excessive liberalization and exorbitantly high rates. On one end of the spectrum, "if the initial tariff rate is prohibitively high, then tariff reductions necessarily increase revenue by reducing the incentive to evade taxes. Alternatively, if the initial tariff rate is below the revenue-maximizing rate, then the direct effect of a tariff reduction is loss of revenue."60

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Debt relief, forgiveness and cancellation

In the past decade, the international community, with the encouragement of the Global South, has moved towards strategies for decreasing the debt owed by poor countries to bilateral and multilateral donors. However, there is still considerable debate on several issues. First, there are varying conceptualizations over terms governing the types and levels of debt relief ("relief," "forgiveness" and "cancellation") that carry different weights, meanings and support from different stakeholders. Second, the motivation behind these methods is important in understanding all sides of the debate - an issue that largely differs between donors, governments and more radical Southern scholars and organizations.

Countries considered in need of debt relief range from 67 (according to the UK) to 100 (according to estimates coming from Southern analysts and institutions). Whereas the UK estimate is assessed in terms of meeting basic development targets such as the Millennium Development Goals (MDGs), the latter includes countries where debt is considered "illegitimate" - that is, where it was given to dictators such as Marcos in the Philippines, Mobutu in the Democratic Republic of the Congo, and Suharto in Indonesia, and was not utilized for the public good - and where debt repayment requirements still undermine social progress.61

Key terms: relief, forgiveness and cancellations

The term "debt relief" is used by the UN, IMF, World Bank, and within the HIPC (Heavily Indebted Poor Countries) framework.62Debt relief is also referred to as "debt reduction" when only a portion of the debt is cancelled.63

In addition to the term "debt relief," the international community also refers to "debt forgiveness." Debt forgiveness can range from partial forgiveness of debt to total forgiveness, which would be in line with debt cancellation.64 However, the term "debt forgiveness" infers that the donors are doing the indebted countries a favor, while many Southern non-governmental organizations (NGOs) would argue that it is a moral imperative for donors to cancel debt. Interest rate concessions can be tantamount to partial debt forgiveness, since the debt burden is often measure in terms of net present value, and will thus be considered lower under concessional rates.

Southern organizations tend to use the term "debt cancellation," instead of forgiveness. Cancellation is defined by the Organisation for Economic Co-operation and Development (OECD) as "an agreement between the debtor and the creditor that an outstanding debt no longer needs to be repaid."65

"Debt Relief": HIPC and the international community

The HIPC Initiative aims to be a comprehensive approach to debt reduction for heavily indebted poor countries pursuing IFIsupported adjustment and reform programs.66Under HIPC major international leaders agreed to provide debt relief to the most heavily indebted countries.67 "The purpose of PRGF (Poverty Reduction and Growth Facility)-HIPC is to provide some debt relief - that is, to cancel part of the debts - for poor countries that have no hope of paying back their foreign debt and for whom debt payments are draining their economy."68

As of March 2008, debt reduction packages have been approved for 33 countries, 27 of them in Africa, providing US$49 billion (net present value terms as of the decision point) in debt-service relief over time.69 Additionally, eight more countries are potentially eligible for HIPC Initiative assistance.70 Countries qualify for debt reduction upon the submission of the full PRSP, demonstrating their commitment and capacity to effectively use resources, but only after one additional year of "good macroeconomic performance."71 Problematically, the HIPC initiative does not provide an actual picture of the debt situation for most poor countries, because it does not address debt owed to non-Paris Club creditors (The Paris Club refers to an informal group that provide financial services, and is comprised of 19 members all from advanced industrial economies)."Thus, the actual debt situation of the HIPC countries is worse than is apparent and is even more deteriorated by the intra-HIPC debts."72 Finally, the HIPC Initiative does not provide relief from debt for many poor countries that are outside of HIPC, meaning that their situations will worsen under heavy indebtedness.73

Formerly the UN Special Representative on Structural Adjustment and Debt, Fantu Cheru argues that there is poor understanding of the actual needs of countries for reducing poverty and increasing human development, and that "current donor practices for supporting poverty reduction strategies are cumbersome, involving extensive conditionality, burdensome information requests, and uncoordinated missions."74In general, they put too much emphasis on macroeconomic considerations, fiscal reform and privatization measures, "without thinking about the impact of these policies on poverty reduction nor about the context."75 The cost of debt relief under HIPC is therefore high, where recommended policies made by external actors have been proven to worsen poverty.76

Cheru recommends that "the HIPC debt relief be delinked from the PRSP process, that the only condition imposed on countries receiving debt relief be that they establish an independent entity to channel freed resources towards social development, that the World Bank and IMF not have the exclusive role as overseers of poverty reduction programmes but that other United Nations agencies be included as well, that new rounds of talks aimed at finding a solution to the debt burden of many poor countries be organized, the Poverty Reduction and Growth Facility (PRGF) be abolished, and that a serious dialogue be undertaken on how to integrate macroeconomic policy issues with broader social development goals."77 It is also important debt relief is not also accompanied by a reduction in aid, which would further stall poverty reduction. In fact, some would argue that HIPC is only the first step in long-term poverty reduction and independence from foreign aid.

Debt relief is sometimes considered a form of aid (and is often counted as part of a states total overseas development assistance package) - one that is viewed as increasingly important for poor developing countries. As articulated in one UNU discussion paper: "From the perspectives of donors, funds allocated to debt relief are attributed to the aid budget. From the perspective of developing countries, debt relief reduces debt-servicing costs."78 While debt relief is intended to have a poverty-reducing effect, relief in itself will not affect poverty. Rather, the way in which freed funds are used will determine whether and how poverty is reduced.79 In addition, governments may not be able to use "freed" funds for public investment where the actual money doesn't exist - an unfortunate reality in many impoverished countries and particularly in post-conflict settings.

There is increasing support for using conditionality to positively influence the management of funds released by debt relief for use in public investment.80 This is in opposition to the practice of using conditionality as a means of punishment by withdrawing aid or as strong arming countries into adhering to IFI and donor methodologies. In other words, international donors could exact conditionalities for debt relief that require a certain percentage of the government's budget to be spent on social services, such as health and education, which would encourage public investment. However, as previously discussed, this may not be realistic for many heavily indebted countries that do not have resources and/or lack the capacity to independently mobilize resources.

Debating debt relief

There is significant argument around the outcomes of debt relief. Some argue that such relief is essential, in that "Many poor countries must devote huge portions of their national budgets to paying back foreign creditors - often for loans that were made to or for dictators, wasteful military spending or boondoggle projects."81 Conversely, donors counter that total debt cancellation would require them to reduce their overall aid flows, which would ultimately harm poor countries, and further raise concerns that such programs would lead to irresponsible governance practices and misallocation of funds. Yet others note that, "The impact on the North would not be that significant, as the actual amounts of money relative to the economies of the developed world are small."82 Thus, these critics believe debt cancellation need not have a significant impact on aid flows.

Sameer Dossani, Director of 50 Years is Enough, the US Network for Global Economic Justice, argues, "For countries in the Global South, however, this is a question of life and death. Why should countries that have no social infrastructure and therefore that are in desperate need of money for hospitals, schools and roads spend up to 60 percent of their national budgets repaying loans?"83 Although the HIPC Initiative is decreasing the debt owed by some countries, as discussed above, many argue that this is an ineffective way of managing debt. "...The debt relief afforded by PRGF/HIPC is very modest, and will leave most poor countries paying nearly as much as they currently do. Under the plan, many countries find that while the absolute amount of their debt may decline, only about 15 countries will see the amounts they actually pay affected meaningfully."84

NGOs like Jubilee 2000, Africa Action and Tokyo International Conference on African Development believe the HIPC agreement is not sufficient and serves as a way of controlling the governments of poor countries.85 "Donor policies continue to impact negatively upon the sovereignty of national governments and undermine democratic institutions and structures by CSOs, from participating in the debate and monitoring of the international financial and technical co-operation."86

Jubilee South, a network of debt campaigns, social movements, people's organizations, communities, NGOs and political formations in over 50 countries, has along with the wider Jubilee 2000 movement, led the international campaign against debt.87 They "call for the repudiation of unjust and illegitimate debt for undermining popular sovereignty and for holding the people and countries of the South captive to the chains of poverty and 'underdevelopment.'"88 Additionally, Jubilee South argues for "restitution of and reparations for the massive ecological, moral, social, financial and historical debt of which we -the peoples of the South -are the creditors: a debt accumulated during the long history of colonization and that continues to accrue through the continued plunder and exploitation of our resources, and our people."89

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Sequencing and prioritization

The failure to link policy, planning and budgeting is considered the single most important cause of poor budgeting outcomes in developing countries.90 It is thus likely that in post-conflict settings facing a panoply of competing urgent priorities, ensuring effective linkages between these areas confronts even greater challenges. Highlighting the interdependence linked to outcomes, public expenditure management (PEM) recognizes that budget outcomes are "not likely to be optimal if the public sector is poorly structured and managed, or if the incentives and information given to policy makers and program managers impel them to act in ways that produce perverse results."91 To ensure effective integration of these processes, all should be linked into one primary national strategic policy framework.

Go to Economic Recovery: Public Finance- Activities: Strategic Frameworks

In a broader context, there are many points of view on how public finance should be included and prioritized on the peacebuilding agenda. "One view holds that the politics of peace and the economics of the public purse should not be allowed to interfere with each other: they should be pursued along parallel tracks." Others argue that priority should be given to economic policies solely within the conflict and peace environment. A third argument on sequencing says, "...The political and security dimensions of peace processes ought to be realigned to reflect the realities of public finance."92

In more concrete strategic terms, scholar Tony Addison asserts that reform should start as early as possible in the reconstruction phase, if not before then, arguing. "...while some economic reforms (and some political reforms) might be delayed until after politicians have secured peace and national unity through reconstruction efforts, it is unrealistic (and undesirable) to view the transition from conflict to recovery as separated into a distinct phase of reconstruction followed by a phase of reform." Compartmentalization of reconstruction and reform can lead to narrow-based recovery, whereby growth may benefit the elite, while ignoring the needs of the poorest people.93 In other words, reform of the public finance sector should happen alongside reconstruction.

It is important in establishing the legitimacy of the state and reducing the impact of conflict and poverty that the government restore (or build for what may, in effect, be the first time ever) its ability to mobilize and expend resources effectively and equitably. In this respect, early public expenditure reform is critical to sustaining peace and can even alleviate tensions between groups. "A fairer allocation of public spending (and taxation) across regions and ethnic groups can begin to redress some of the deep social inequalities that often characterize the pre-war pattern of public infrastructure and services - inequalities that may have fed grievances and conflict itself."94

Despite broad recognition that early reform of the financial sector is ideal, there are different perspectives on whether reforms should come before capacity building in post conflict settings.

In guiding the building of fiscal institutions in post-conflict settings, the IMF's Fiscal Affairs Department (FAD) suggests four guiding objectives, while prioritizing reform. They highlight, as a first step, for governments to review existing legislation, with a view to simplifying tax laws and administrative procedures, or establishing new ones if existing laws and procedures are viewed as inadequate. The suggested next step involves strengthening the central fiscal authority (CFA), or setting up one up if none existed.95 This supports the view that donors cannot just aim to build any kind of government capacity, but rather, there is a need to build institutions that are capable of performing government functions with underlying good economic governance structures.96

James Boyce and Madalene O'Donnell, on the other hand, make a strong case for fiscal capacity building as a priority where peacebuilding is concerned."First, governments must be able to ensure sustainable funding for new democratic institutions and social programs that ease tensions and redress grievances. Second, fiscal capacities are needed in order to build a legitimate state...Legitimacy comes from a government delivery of services that people need and want...There is a two-way relationship between the revenue and expenditure sides of fiscal capacity: governments need revenue in order to provide services, but they must provide services in order for people to be willing to pay taxes. Third, in some cases there is a need to curtail extralegal taxation by warlords and armed groups, so as to enhance security.97 To achieve these ideals, the international community often works to build the capacity of institutions and people to support the state's public finance roles.98

The international community has recently promoted capacity development for good governance, and better public financial management through the poverty reduction strategies papers (PRSPs), which seek to link development goals, institutional capacity and the national budget. However, a lack of institutional capacity is, in reality, a problem in the (PRS) process itself, whereby donors are accused of pursuing their own concerns on their own timetable, without sufficient consideration of the host government's priorities or capacities. In response to this issue, there is wide recognition that donors and national governments should have strongly coordinated strategies for the design, sequencing and implementation of post-conflict public finance issues.

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Attracting skilled workers to the public sector (and/or retrenchment)

Low pay in the public sector in post-conflict settings99 prevents states from attracting and retaining much-needed staff with appropriate skills, reduces morale, and encourages corruption. Lacking staff capacity, in turn, is one cause of weak budgeting and planning structures.

Go to Democracy and Good Governance: Public Administration, Local Governance and Participation

Retrenchment, that is the reduction of public spending, is considered one response to this problem. Eritrea, for example, reduced its public workforce by one-third shortly after independence, one of Africa's largest retrenchments, and doubled the pay of the remaining employees."100 At the same time, this can be considered problematic in terms of undermining security, with high levels of unemployment in a post-conflict setting, as conditions of increased poverty and marginalization may cause tensions.

Go to Economic Recovery: Employment and Empowerment

Retrenchment that inevitably accompanies civil service reform is politically sensitive. As Expert Tony Addison has observed, if it is conducted on a large-scale and rapidly, retrenchment can have major social costs by depressing the urban labor market. The policy dilemma, he argues "is acute in conflict-affected countries since improving state capacity is an especially urgent priority - leading to pressure for rapid change and retrenchment." The social costs, however, of retrenchment can be unduly large, as public sector jobs, immediately following conflict, account for 75 percent of formal employment.101 Additionally, jobs become even scarcer as demobilization increases the supply of job-seekers, and large and sudden public-sector retrenchments may threaten peace by making it harder for ex-soldiers to reintegrate. "Therefore, achieving a fast recovery in community livelihoods and private-sector employment - to avoid a destabilizing spike in unemployment - is especially important in the early years of peace. And more concessional aid to finance civil service reform can ease the political dilemmas of post-war governments."102

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Addressing "patronage" systems following conflict

A particularly important form of corruption in the sphere of economic governance is that of patronage, which refers to "the practice of using state resources to provide jobs and services for political clienteles."103 Such practice, while not always explicitly legal, often falls into a grey area of exchange.104 However, these practices often mean misallocation of revenues and resources, and difficulty in turning over leadership in economic governance.

Yet, these costs are not always perceived as negative. Rather, they must be "weighed against the benefits of the political cohesion that patronage can buy."105Especially where government has the capacity to exert control and extract revenues from patronage networks, such practices can even be seen as useful for economic development and statebuilding.For these reason, patronage may be more important in war-torn countries than in settings where political contests can be resolved peacefully.106The challenge, then, is not only to "strike a balance between the costs and benefits but also to devise strategies that ease the trade-offs posed by patronage-based political systems."107

Patronage often emerges as a particularly salient issue where there is little capacity to reign in resource exchange in these networks. Especially in states where neo-liberalism has limited the functional capacity of central authority, it may prove difficult to extract revenues from localized patronage networks operating outside the auspices of the state. Patronage can also exist in the form of aid, in what is termed "Western patronage." George Ayittey, a prominent African economist, identifies Somalia as a prime example of so-called Western patronage. He argues that cheap food aid destroyed Somali mechanisms for coping with natural disasters and shocks to the food system.108

Patronage systems can be difficult to break, as those that have benefited from these systems may be reluctant to give up power and financial profitability.

1. Joseph Stiglitz, Globalization and Its Discontents (New York: W.W. Norton and Company, Inc., 2003), 59.
2. Joseph Stiglitz, Making Globalization Work (New York: W.W. Norton and Company, Inc., 2006), 17.
3. John Williamson, A Short History of the Washington Consensus (Barcelona: Fundacion CIDOB, 2004), 3.
4. Roland Paris, At War's End: Building Peace After Civil Conflict (Cambridge: Cambridge University Press, 2004), 25-30.
5. "Statebuilding- Institution Building," The Conflict Management Toolkit, Johns Hopkins University School for Advanced International Studies (SAIS).
6. Paris, At War's End: Building Peace After Civil Conflict, 5.
7. Giovanni Arrighi, "The African Crisis," in The New Left Review, 15, May-June 2002.
8. John Williamson, "What Should the Bank Think of the Washington Consensus?" Peterson Institute for International Economics, July 1999.
9. See critiques of "market fundamentalism" by economists such as Giovanni Arrighi, William Easterly, George Soros, and Joseph E. Stiglitz.
10. Tony Addison, The Global Economy, Conflict Prevention, and Post-Conflict Recovery, (Helsinki: United Nations University (UNU) and World Institute for Development Economics Research (WIDER), November 8, 2004).
11. Stiglitz, Making Globalization Work, 17.
12. James K. Boyce and Madalene O'Donnell, "Peace and the Public Purse: An Introduction," in Peace and the Public Purse: Economic Policies for Postwar Statebuilding," ed. James K. Boyce and Madalene O'Donnell (Boulder: Lynne Rienner Publishers, Inc., 2007), 10-11.
13. Jos Antonio Ocampo, "Beyond the Washington Consensus: What do We Mean?" Journal of Post Keynesian Economics vol. 27 no. 2 (2005): 293-314.
14. Joseph Stiglitz, "Lessons of the Asia Crisis,"50 Years is Enough: US Network for Global Economic Justice.
15. Independent Evaluation Group (IEG), Engaging with Fragile States: World Bank Support to Low-Income Countries Under Stress (LICUS), (Washington DC: World Bank Group, 2007), xi.
16. Madalene O'Donnell, Literature Review: Post-conflict Public Finance (New York: Center on International Cooperation, 2007).
17. William Easterly, The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good, (London: Penguin Books, 2006).
18. United Nations Department of Economic and Social Affairs (UNDESA), "Expert Group Meeting on Conflict Prevention, Peacebuilding and Development," (New York: UNDESA, November 15, 2004).
19. Stephen Browne, "Aid to Fragile States: Do Donors Help or Hinder?" Discussion Paper No. 2007/01 (Helsinki: UNU and WIDER, May 2007), 1.
20. Boyce and O'Donnell, "Peace and the Public Purse: An Introduction," 11.
21. Ibid, 10.
22. Ibid, 6.
23. Roland Paris and Timothy D. Sisk, Managing Contradictions: The Inherent Dilemmas of Postwar Statebuilding (International Peace Academy: Research Partnership on Postwar Statebuilding, November 2007) 6, 10.
24. Boyce and O'Donnell, "Peace and the Public Purse," 10.
25. Carlos Lopes and Thomas Theisohn, Ownership, Leadership and Transformation: Can We Do Better for Capacity Development? (New York: United Nations Development Programme (UNDP) and Earthscan Publishers Ltd., 2003), 111.
26. Boyce and O'Donnell, "Peace and the Public Purse," 10.
27. Ibid.
28. Ibid., 10-11.
29. Paris and Sisk, "Managing Contradictions," 6.
30. Alex de Waal. Famine Crimes: Politics and the Disaster Relief Industry in Africa. (Bloomington, Indiana: Indiana University Press, 1998), 179.
31. Boyce and O'Donnell, "Peace and the Public Purse: An Introduction," 11.
32. Ibid.
33. Ibid., 11-12.
34. The Sphere Project, "Code of Conduct."
35. Alejandro Bendana, "'Good Governance' and the MDGs: Contradictory or Complementary?" Focus on the Global South, October 12, 2004.
36. International Monetary Fund (IMF), "The IMF and Good Governance: A Factsheet," IMF, May 2008.
37. Ibid.
38. Ibid.
39. Ibid.
40. World Bank, "Governance and Anti-Corruption," World Bank.
41. Ibid.
42. Ibid.
43. UNDP, "Governance for Sustainable Human Development: A UNDP Policy Document," UNDP.
44. Stiglitz, Globalization and Its Discontents, 22.
45. Ocampo, "Beyond the Washington Consensus: What do We Mean?" 293-314.
46. Alice Amsden, Escape from Empire: The Developing World's Journey Through Heaven and Hell (Cambridge: MIT Press, 2007).
47. Stiglitz, Globalization and Its Discontents, 19.
48. Ibid.
49. Bendana, "'Good Governance' and the MDGs."
50. Extractive Industries Transparency Initiative (EITI), "Norway Accepted as an EITI Candidate Country,"EITI.
51. Bendana, "'Good Governance' and the MDGs."
52. Stephen Spruiell, "Protectionism- Tariffs, Subsidies, and Trade Policy," Mercy Corps- Global Envision (August 30, 2006).
53. Ibid.
54. Stiglitz, Globalization and Its Discontents, 20.
55. Ibid., 53.
56. Yash Tandon, "The ESA-EU EPA Negotiations and the Role of COMESA," SEATINI Bulletin, vol. 7, no. 09, June 15, 2004.
57. Ibid.
58. Spruiell, "Protectionism- Tariffs, Subsidies, and Trade Policy."
59. Communication with James K. Boyce, by email October 28, 2008.
60. Barsha Khattry and J. Mohan Rao. "Fiscal Faux Pas? An Analysis of the Revenue Implications of Trade Liberalization," World Development, vol. 30 no. 8 (2002), 1432.
61. Michael Camarda, "Aid and the Cycle of Debt," Politic, September 7, 2007; Lonce Ndikumana and James K. Boyce, "Congo's Odious Debt: External Borrowing and Capital Flight in Zaire," Development and Change, vol. 29 no. 2 (1998).
62. Oliver Morrissey, "Making Debt Relief Conditionality Pro-poor," Discussion Paper No. 2002/04 (Helsinki: UNU and WIDER, 2002), 2. See also: IMF, "Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative," IMF (March 2009).
63. IMF, "Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative."
64. Organisation for Economic Co-operation and Development (OECD), "Glossary of Statistical Terms: Debt Forgiveness- BPM," OECD.
65. OECD, "Glossary of Statistical Terms: Debt Cancellation," OECD.
66. IMF, "Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative."
67. Yolanda Rivera, "UICIFD Briefing No. 1: Debt Forgiveness," The University of Iowa for International Finance and Development (January 20, 2006).
68. 50 Years is Enough, "International Monetary Fund (IMF)/World Bank "Debt Relief" for Poor and Indebted Countries is a Sham," US Network for Global Economic Justice.
69. IMF, "Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative."
70. Ibid.
71. Fantu Cheru, "Building and Supporting PRSPs in Africa: What Has Worked Well So Far? What Needs Changing?" Third World Quarterly, vol. 27, no. 2 (2006): 356.
72. Ibid.
73. Jubilee Debt Campaign, The Multilateral Debt Relief Iniative: The Good, The Bad and The Ugly, (London: Jubilee Debt Campaign, June 2006), 1.
74. Cheru, "Building and Supporting PRSPs in Africa," 357, 370.
75. Fantu Cheru, "The Highly Indebted Poor Countries (HIPC) Initiative: A Human Rights Assessment of the Poverty Reduction Strategy Paper (PRSP)," United Nations Economic and Social Council, E/CN.4/2001/56, (January 18, 2001), 3.
76. 50 Years is Enough, "International Monetary Fund (IMF)/World Bank "Debt Relief" for Poor and Indebted Countries is a Sham."
77. Cheru, "The Highly Indebted Poor Countries (HIPC) Initiative," 4.
78. Oliver Morrissey, "Making Debt Relief Conditionality Pro-poor," Discussion Paper No. 2002/04 (Helsinki: UNU and WIDER, 2002), 2.
79. Ibid.
80. Peter Uvin, Human Rights and Development (Bloomfield, Connecticut: Kumarian Press, Inc., 2004).
81. 50 Years is Enough, "International Monetary Fund (IMF)/World Bank "Debt Relief" for Poor and Indebted Countries is a Sham."
82. Camarda, "Aid and the Cycle of Debt."
83. Ibid.
84. 50 Years is Enough, "International Monetary Fund (IMF)/World Bank "Debt Relief" for Poor and Indebted Countries is a Sham."
85. Rivera, "UICIFD Briefing No. 1: Debt Forgiveness."
86. Vitalice Meja, "Statement to the General Assembly CSO Hearings at the UN," African Forum and Network on Debt and Development (AFRODAD), June 19, 2008.
87. Jubilee South, "About us."
88. Ibid.
89. Ibid.
90. Oxford Policy Management, "Medium Term Expenditure Frameworks- Panacea or Dangerous Distraction?," OPM Review, Paper 2, May 2000.
91. Allen Schick, A Contemporary Approach to Public Expenditure Management (Washington DC: The World Bank Institute, 1998), 1.
92. Boyce, James K. and O'Donnell, Madalene. "Peace and the Public Purse: An Introduction," in Peace and the Public Purse: Economic Policies for Postwar Statebuilding," edited by James K. Boyce and Madalene O'Donnell, 1-14. (Boulder: Lynne Rienner Publishers, Inc., 2007), 2.
93. Tony Addison, From Conflict to Recovery in Africa (Oxford: Oxford University Press, 2003), 10.
94. Ibid.
95. IMF Fiscal Affairs Department, Rebuilding Fiscal Institutions in Post-Conflict Countries (Washington DC: IMF, 2004), 4.
96. Australian Agency for International Development (AusAID), "Economic Governance and the Asian Crisis: An Evaluation of the Australian Aid Program's Response," AusAID, Quality Assurance Series, No. 30, (April 2003), viii.
97. Boyce and O'Donnell, "Peace and the Public Purse: An Introduction," 6.
98. John M. Cohen, "Capacity Building in the Public Sector: A Focused Framework for Analysis and Action," International Review of Administrative Sciences, vol. 61, no. 3 (1995): 407.
99. For example, the average state wage in Guinea-Bissau is less than half that of a hotel waiter (Addison, From Conflict to Recovery in Africa, 243). In post-conflict Liberia, civil servants make about US$20 per month, while "national staff" working with NGOs or international organizations with similar skills might make between US$200 - $600 per month.
100. Addison, From Conflict to Recovery in Africa, 243.
101. Ibid.
102. Ibid.
103. Nicolas van de Walle. "'Meet the New Boss, Same as the Old Boss'? The Evolution of Political Clientelism in Africa," in Patrons, Clients and Policies: Patterns of Democratic Accountability and Political Competition, eds. Herbert Kitschelt and Steven I. Wilkinson (New York: Cambridge University Press, 2007), 53.
104. Ibid.
105. Ibid.
106. Ibid.
107. Ibid.
108. George B.N. Ayittey, "Why Africa is Poor," in Sustainable Development: Promoting Progress or Perpetuating Poverty?, ed. Julian Morris (London: Profile Books, August 2002).

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