Developing Countries As A Poverty Alleviation Strategy Economics Essay

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The Medium Term Expenditure Framework (MTEF) is believed to integrate development priorities, budgeting procedures, and implementation outcomes into a dynamic, efficient, responsive, and results oriented process.

In this paper I will attempt to underline some of the issues relevant to the Medium Term Expenditure Framework process. It will present evaluations of the incorporation of a pre-budget exercise in national budgeting processes in different countries. It will outline a picture which seeks to reason whether the benefits of such a practice inevitably advantage the poor in developing countries.

The methodology I will use in order to reach my conclusions will be to outline the pros and cons of the MTEF, analyze the effectiveness of a pre-budget exercise, evaluate empirical works of two World Bank authors- Philippe Le Houerou and Robert Taliercio (whose research in the African region demonstrates similarities to other developing nations that may aspire to implement the MTEF). I will outline my own reasons for the proposals of pre-budget exercises.

Outline of Paper

SECTION I

Overview of the Medium Term Expenditure Framework

SECTION II

Issues in MTEF implementation

SECTION III

Learning from Experience-cases in the African states

SECTION IV

The importance of Pre-Budget Evaluations

SECTION V

My Conclusions and Recommendations

Overview of the Medium Term Expenditure Framework (MTEF)

Since there is a large positive relationship between economic growth, income distribution, and poverty, the rise in average incomes depending on equality with respect to income distribution, is shown to be favorable for the poor. [1] National governments of developing countries use a mix of fiscal and monetary policies to try and achieve these goals. But the disproportionate and large bias role of governments in developing countries have increasingly led to a focus on its fiscal powers such as tax and expenditure policies to redistribute income as a poverty alleviation tool. [2] Sector wise allocations, subsidies, public investments, and, entitlements, are given much importance as redistributive budget processes. (Khan, 2001).

The importance of equity is widely addressed in most public expenditure programs. However what is important and receives little attention are inefficiencies in the budget management systems and processes of developing country governments in ensuring that their limited resources meet the needs of the mass. It is important to understand that it is not just the end allocation which is significant, but the overall expenditure process which needs to be practical, especially in cases where there is scarcity of resources, weak capacities and many other challenges that are inherent to developing countries.

In order to alleviate this problem it is important to reform conventional budget practices by incorporating a pre-budget evaluation which takes into consideration the availability of resources, and match it to expenditure planning in a active medium-term plan of three or five years. The medium-term expenditure framework (MTEF) [3] provides this structure by matching the "bottom-up" costs of programs and policies with a "top-down" resource-ceiling (Houerou & Taliercio, 2002). These may prove mostly effective in developing countries where unproductive decision-making processes and lack of fiscal discipline are inherent in the system.

According to the World Bank the failure to link policy, planning and budgeting is one of the most important cause of poor budgeting outcomes in developing countries. (World Bank Expenditure Handbook, 1998). The implementation of a Medium Term Expenditure Framework (MTEF) is progressively being accepted as a response to this problem and has become the new universal remedy of public expenditure management and the new proposal for the cure in inadequacies of planning and budgeting systems and general performance problems of governments. (World Bank Expenditure Handbook, 1998).

The international aid community supports the Medium Term Expenditure Frameworks, and both donors and lenders, (ex. DFID, World Bank) support MTEF as the logical method around which governments should design reforms of budget support. In Public Expenditure Reviews (PERs) conducted by the World Bank in Sub Saharan Africa as well as other regions, the need for an adequate medium term framework is given maximum attention. (OPM Review, 2000).

Adding the Medium Term Expenditure Framework (MTEF) improves the value for money of public spending and reinforces fiscal discipline and considered prioritization, although identifying the essential mechanisms that are required for an MTEF to successfully function is not easy. (World Bank Expenditure Handbook, 1998). Though they have gained popularity over recent years, there are few established medium term frameworks. Out of those that exist in developing countries some successfully sustain the problems while others fall through. But some lessons can be learnt from the MTBFs in OECD countries (drawn from OPM Review, 2000), as well as from the different experiences of the MTEFs implemented in Ghana, Malawi, South Africa and Uganda:

Lessons from OECD countries suggest that strict conditions have to be fulfilled before the full benefits of medium term frameworks can be realized (IMF, 1999). Such conditions are unlikely to be fulfilled in most developing countries but even the basic acceptance of the principles of medium term budgeting may improve the practicality of sector budgets. This is an advantageous gain for developing countries where large inconsistencies between stated policies and actual resources, leads to unplanned spending cut in budget implementation. (OPM Review 2000).

The introduction of medium term framework brings improvements in the predictability of organizational funding. This has been achieved in South Africa, despite resistance from agencies where funding was reduced. By designating protected sectors (health, education, roads) in Uganda, it has minimized uncertainty to lower concern areas.

Improved predictability relies on reducing the gap between estimates and actual revenues. This reduces the need to cut expenditures during the budget year. (OPM Review, 2000).

Improvements in the costing of policies and programs require a fuller information base and cannot be delivered without the active involvement of sector ministries. Successful budget reforms depend on introducing and sustaining appropriate incentives for these ministries to support the changes. (OPM Review 2000).

This paper will look at the issues in MTEF implementation, particularly how such an expenditure policy can be translated into an effective instrument for poverty alleviation. These issues limit the successful adoption and implementation of a pre-budget evaluation. It will then lay out a framework for understanding the importance of an MTEF pre-budget evaluation which elaborates on the functions, capabilities, and grounds for such a fiscal instrument. It will explain why, in most developing countries, there is a need to restructure expenditure planning in this way in contrast to the traditional annual budget cycles. It will then draw from the experiences of countries that have incorporated such processes, and presents some empirical evidence that, in developing nations, the patterns of benefit from pre-budget evaluation progressively favor the poor.

Issues in implementation

Though intangible strength of the medium-term expenditure framework is broadly acknowledged there are concerns about the issues involved in implementing it in the practical area. Weak institutional capacities and inefficient policy planning (which are inherent in developing countries) hamper the operation of programs which aid the flow of benefits to the most disadvantaged sections in developing countries. (World Bank Expenditure Handbook, 1998). For example in Africa the implementation of MTEF reforms are hindered by factors such as: weak foundations of budget and public expenditure management; donor demands for comprehensive reforms which outpace the country's implementation capacities; institutional support to complement budget reforms are weak; line ministries have little time, information, and incentive to submit to reforms dictated by the finance ministry; and finally fiscal reforms are often focused only on technical issues and exclude political and institutional considerations. (World Bank Expenditure Handbook, 1998). By addressing these issues it is possible to evaluate possibilities for budget reforms and understand why political interests are not only important but also a key role player for successful implementation of the MTEF as a development and poverty alleviation tool.

The MTEF pre-budget evaluation successfully matches the needs to availability, which might result in more efficient allocation of resources. Its execution can benefit from matching the aspirations of donors and governments with the capacities of the budget and other institutional capabilities of the country in question. This keeps expectations in check while identifying areas that need improvement. (Dorji, 2007). It also strengthens the idea that the MTEF alone cannot deliver efficient and effective public expenditure management, but that "it is only a complement to and not a substitute for basic budget management" (Houerou & Taliercio, 2002). It needs the support of other institutional mechanisms.

These are important considerations in budgetary reforms, so that implementation is introduced either horizontally by "piloting", i.e. gradually widening its scope across sectors from high-priorities such as health, education, and welfare (Houerou & Taliercio 2002, p. 26) to low-priorities such as subsidies, tax-breaks, and luxury goods imports; or, vertically by "phasing" across MTEF levels - aggregate, sectoral, service delivery on a government-wide basis. (Houerou & Taliercio 2002, Medium Term Expenditure). Houerou and Taliercio (2002) emphasize that implementation can also be carried out using both pilots and phase-ins by "operating in a limited number of sectors (horizontally) and levels (vertically)." (Houerou & Taliercio 2002) The decision to implement MTEF reform as a pilot, phase-in, or a mixed approach based on a match of donor demands and host country's capacities and basic public expenditure management conditions, is an important basis for an effective and efficient budget process that yields tangible gains. This is imperative for the successful adoption of fiscal reforms in developing countries. (Dorji, 2007).

Even well-specified and productive fiscal processes are not always successfully adopted. Even if a reform process demonstrates the capacity to trickle resources to appropriate redistributive priorities and debt-servicing plans, there is little political and bureaucratic will to support these reforms, and therefore make MTEF reforms ineffective and forceless. Political and bureaucratic incentives of central and sectoral ministries to participate in budget reform and implementation need to be addressed. (Dorji 2007). In developing countries elected officials are likely to promise more than they can deliver during their pre-election campaigns. Developing a budget envelope may be undesirable to many politicians because it constricts their discretion. The MTEF seeks to fiscally discipline and prioritize the country's long-term development goals within its limited means. A failure address this may lead most politicians with short-term objectives to veto it. The bureaucratic incentives for both central and sectoral ministries need to be specifically addressed if they are to contribute indisputably to the process. [4] If the costs and benefits of MTEF reforms are not accurately estimated both non-priority and priority sectors disregard the credibility of the reform's promised benefits. (Dorji, 2007).

There are preventive measures to political influences and bureaucratic non-cooperation, and one proposal is to prepare the MTEF which includes extensive consultative processes. If results are viewed to be fruitful and legitimate, lawmaking bodies and public pressure may dissuade political executives from disregarding [5] commitments of the MTEF based on their own bias. For bureaucratic agencies, positive incentives such as flexibility and autonomy in determining their own spending priorities within their resources will enhance their participation.

Therefore, paying attention to issues of sequencing and incentives in the implementation of budget reforms is a key step towards creating a broad consensus that fiscal tools such as the MTEF augment the effectiveness of budget systems in efficient delivery of public goods and services to the poor.

Learning from Experience

Philippe Houerou and Robert Taliercio (2002) analyzes the effects in the Africa region for the World Bank on fiscal reforms. Their study includes nine countries, among which two (South Africa and Uganda) have incorporated comprehensive MTEF reforms; three (Kenya, Tanzania, and Ghana) are in the intermediate stages; and four (Mozambique, Malawi, Rwanda, and Guinea) are in the basic stages of implementation. [6] 

Phub W. Dorji critically assesses this study and states that there are some limitations in that, the assessment is limited by the lack of data produced in these countries. [7] Also the quantitative analysis of MTEF reforms is restricted to only three cases - South Africa, Uganda and Tanzania, who were included only because of the availability of data. This gives a problem of selection bias. Dorji also emphasizes on the problem that the qualitative analyses of the first five countries are based strictly on donor documents such as World Bank memos and perspectives of country-economists. The progress of reforms in these countries is biased and incomplete. [8] He also says, the lack of data means that only a subset of outcome indicators (macro-economic/fiscal balance, resource allocation, budgetary predictability) is analyzed. (evidenced in Houerou & Taliercio. 2002, p.17). The evidence of efficiency in the use of public funds after MTEF reforms, is not presented by the authors.

Despite these limitations important conclusions can be drawn from the works of Houerou and Taliercio to support the theory that MTEF reforms are catalysts for enhancing commitments and spending on priorities that are required by the poor in developing countries. Resource allocation in Africa (specifically government expenditure on priorities such as health, education, and welfare in the pre-MTEF versus post-MTEF period), serves as an example. (Houerou & Taliercio. 2002, p.17)

One of the key objectives of MTEF reforms is fiscal discipline. Dorji (2007) emphasizes that the system would regulate the activities of domestic spending agencies and actors, and country activities in the international spectrum. In Houerou and Taliercio's study, a country's fiscal deficit is used as the proxy indicator for fiscal discipline and the authors did not find any empirical evidence to support the assumption that fiscal reforms are correlated with improved national fiscal discipline. Uganda, South Africa, Ghana and Tanzania record little/no reductions in fiscal deficits over the period 1985 to 2000 during which the MTEF was implemented. [9] The authors emphasize that their analysis does not take into account various causal factors (e.g. macro-economic shocks, fluctuations in debt payment etc.), which Dorji (2007) argues, weaken the explanatory power of variables. In terms of the fiscal behavior of elected officials, the study does find some biased evidence that MTEFs lead to more accountability. For example in Kenya, South Africa and Tanzania, where MTEF formulation is based on public hearings, civil society representation, and other consultative meeting processes, it has led to budget appropriations based more on "professional criteria than on political calculations" (Houerou & Taliercio, 2002). This positive result for accountability is a valuable reinforcement to fiscal reforms, Dorji (2007) concludes.

Houerou and Taliercio's (2007) study provides little evidence to support the proposition that MTEF reforms lead to budget predictability. Houerou and Taliercio use the "absolute difference between the approved budget and executed budget expressed as a percentage of the approved budget in any given year to analyze this outcome." (Houerou & Taliercio, 2007). In the cases of Uganda and Tanzania, there is no significant relationship between fiscal reforms and budget predictability even for priority sectors. (Houerou&Taliercio, 2007) There is a large gap between budget formulation and execution in these countries. This is detrimental to the credibility of the reform because it may lead the priority sectors, to disregard and reject the benefits suggested by the MTEF. (Dorji, 2007). Since these results only hold for a limited number of years, it is difficult to clearly associate the results of MTEF reforms with its objectives of macro-economic stability, political accountability, budget predictability, and the overall effectiveness of the MTEF process.

However, there are positive findings in terms of resource allocation where Houerou and Taliercio find that such budgetary reforms are associated with the reallocation of resources to government priorities. In the countries which have instituted MTEF reforms, there is a positive tendency towards pro-poor commitments and spending, as indicated by a comparison of the overall health, education, social services, and welfare expenditures in Uganda and South Africa before and after reforms. [10] (Houerou & Taliercio, 2007).

The real annual change in sectoral spending in Uganda shows that MTEF reform outcomes are most prominent for pro-poor priorities such as education and health. In education, there was an increase in real annual change from -0.06 percent in 1994/95 to 0.36 percent in 1995/96, 0.15 percent in 1996/97, and 0.23 percent in 1997/98. Houerou and Taliercio note that education sector spending grew from 19.8% of total expenditures in 1994/95 to 26.9% in 1997/98. In terms of health, the allocations increase, but remain inconsistent from year to year. [11] This is also true for expenditure in other pro-poor programs such as social services and agriculture. (Houerou & Taliercio, 2007).

South Africa has managed to associate MTEF reforms with increased sectoral spending for pro-poor priorities better than Uganda. It shows that government spending is steadily reallocated from non-priority sectors to priority sectors. Education receives the largest government commitment and spending. Other priorities such as health, welfare, and justice increase their share of total expenditures slightly from 1997 to 1998. (Houerou & Taliercio, 2007). In terms of reallocation of resources, there are marginal decreases in South Africa's defense spending as a percentage of total expenditures as well as a percentage of total MTEF expenditures. (Houerou & Taliercio, 2007). This would explain the affordability of increases in spending for the priority sectors.

The proposal of a Pre-budget exercise

When the expenditure policies of governments fail to deliver services or redistribute income to the poor, it is important to check how the government spends its money. [12] The budget serves as a critical link to understanding if the inadequacies arise from the unsustainability of programs because policy-makers and politicians promised more than they could deliver. In other words there is a mismatch between bottom-up needs and top-down resource availability, and funds are misallocated between varying phases and needs of a program resulting from a lack of rational multi-year program of policies and budgets. [13] 

The medium-term expenditure framework complements the standard budget process because it takes into account the policy and planning stages with the budgeting and allocation stages and provides a platform for balancing priority-driven expenditure programs with scarce resources over a medium-term of either three or five years. [14] 

A typical budgeting practice in most developing countries is performed on an annual basis. This is restrictive in itself as it implies that a plan period such as macro-economic realities, expected future revenues, and the long-term requirements of programs and government spending policies, are not thoroughly accounted for across fiscal years. The MTEF is a rolling pre-budget exercise because the first year's estimates become the foundation for the following year's budget, after accounting for economic changes and policies. This allows a greater role of monitoring and smoother integration of policies and budgets across fiscal years.

Another advantage of the MTEF is that after a government has developed its medium-term growth strategy, the respective finance ministries11 determine and forecast its revenue inflows over the next three or five years. Preliminary budget implications are issued to the various spending agencies and the review of the country's financial position is then considered as a resource ceiling to the government and its agencies as a basis for estimating and balancing their sectoral spending.

This balancing of agency spending within a manageable resource ceiling, so that revenues and costs even out, is an important strength of this fiscal exercise. As a result it provides greater macro-economic balance, improved sectoral allocations, greater budget predictability for agencies, and more efficient use of public money.

It is often the case that poor countries are characterized by weak institutional capacities and a lack of democracy. Sectors which should be keenly looked at in such poor countries such as health, education, and welfare are often subject to inefficient and insufficient resources. The national budget experiences increases in expenditure in other sectors such as payroll and contracts. This indicates corruption which is so inherent in the structure of institutions in developing countries.

In the traditional budget system the prioritization and allocation of resources remains largely, a political affair. The MTEF is a practical mechanism for bringing about fiscal discipline and for n protecting budgetary commitments to the poor in society from the issues of changing governments and politicians.

The cost of institutional weaknesses is also obvious in the international commitments of developing countries. The need for investment in capital projects to drive long-term growth, generally lead most developing countries to look towards funding from external multilateral and bilateral sources. [15] But, the limitations of their fiscal plans and processes, call to question the efficiency with which these monies are directed to development efforts and, also, the borrowers' credibility in servicing these debts. It is not by chance that forty-one of the poorest countries in the world are also the most highly indebted. [16] The MTEF is, therefore, not only a pre-budget fiscal tool to demarcate and allocate scarce resources to strategic priorities without infringing on the government and its agencies' spending priorities, but also a safeguard against compromising the country's international credit-worthiness. These are some of the primary reasons why a pre-budget MTEF exercise is valuable as a complementary segment to the traditional budget process in developing countries. It separates strategic commitments to poverty alleviation from the electoral concerns of weak political and bureaucratic institutions by managing resources and expenditures; controlling unsustainable and erratic borrowing; and fixing targets on broad indicators of fiscal performance such as primary deficit, resource mobilization, and total investment expenditure. In procedural terms, it also puts national budget processes on a planned and sustainable path towards utilizing public monies effectively in delivering services to the poor in the long term.

Conclusion and Recommendations

From the limited quantitative evidence from Houerou and Taliercio's analysis of MTEF reforms in Africa suggests that budgetary reforms are somewhat correlated with some levels of sectoral reallocation to top priority sectors such as education, health, welfare, and social services. This does not mean that all government expenditure is allocated to priorities, or that the suggestions of the MTEF are actually used in practice. There are trade-offs which could be unique to individual cases and country specific. For example, in the three countries that have implemented the MTEF comprehensively, Uganda prioritizes and allocates to the education sector; South Africa to health and justice; and Tanzania to social services. Further research using a wider sample of countries over a longer span of time will give more information on the significance of relationships between budget reforms and priority sector spending.

With this limited information of the World Bank authors we can conclude that the encouraging spending trends in the areas of health, education, welfare, and social services, which have generally been positively correlated with economic growth and poverty alleviation in most developing countries confirms that pre-budget exercises such as the MTEF progressively positively effect expenditures on pro-poor programs, and in turn the poor. MTEFs should not merely be emulated by developing countries, but it needs to be evaluated and applied according to country needs, political environment, sectoral strengths/weaknesses. If used and implemented keeping its strengths, weaknesses and limitations in mind, the MTEFs can be used as a long term poverty alleviation strategy.

It may also be useful to focus on local resource allocation decisions and make sure that they match up with the national priorities set out in the MTEF. MTEFs can act as the comprehensive strategy binding together global agreements, national intersectoral budgeting and highly localized investments, which may be an easier goal to fulfill.

It is also important to promote women's economic empowerment by strengthening and advocating for gender-sensitive budgets and economic policies, capacity building through skills development for women, mainstreaming gender equity in development process and the institutionalizing gender equity in the government structures as a way of ensuring sustainability of project results and benefits. Gender inequality is an inherent characteristic of developing countries, and it is important to create gender-equalizing long term budget structures so that public expenditures ensure that every member of society receives equal benefits and are not discriminated against. It would be useful to allocate a segment of this in the pre-budget exercises.

When working on government policy matters, it is necessary to adopt multiple approaches to achieve results. There is need to pursue alternative avenues to push through policies instead of brooding over the same once the government becomes adamant. This is true for the National Gender and Development Policy. Although the policy was formulated in consultation with several NGOs in 1985 and has undergone various reviews the latest being in 1998, it was not approved until early June 2000. The Centre had enlisted approval and implementation of the policy as part of the women's minimum agenda on PRSP and MTEF.

From the foregoing, it is apparent that influencing government policies has monumental challenges. Much has been achieved but a lot more needs to be done to get womne organizations. In particular, consultations with NGOs and women leaders at both community and national levels provided an enriching experience for the PRSP and MTEF exercise. The constraints faced will provide a strong foundation for the second phase as more elaborate corrective measures are put in place to mainstream gender equity in the new PRSP and MTEF budgetary process for the next three years. The measures will ensure increased participation by individual and women's organizations at all levels, capacity building for government officers, development of tools of analysis and lobbying and advocacy for policy change.

It is also important to monitor and follow-up implementation of recommendations once presented to relevant authorities for consideration to avoid last-minute disappointment upon discovering one's agenda to be missing ultimately. Through consultations regularly with MTEF secretariat and sector heads this can be achieved.

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