Pushing on a String? Public Financial Management Reform and Institutional Transmission in Fragile States

Abstract

‘Institutions matter because they structure the incentives and constraints facing individuals. However...the same institutions work differently in different circumstances, particularly in the absence or presence of open access systems’ (North et al. 2010, p. 256).

Development agencies typically recommend that fragile states adopt a range of standardised public financial management (PFM) ‘good practices’ that reflect the forms and functions of PFM systems utilised in advanced economy settings where strong democratic institutions prevail. Rules are established that limit discretion in decision-making and systems are put in place that generate better information to government officials and the public, with the expectation that this will lead directly to improved outcomes. In fragile states, however, PFM systems work in a very different institutional context to that which is present in advanced economies. The state does not exert a monopoly over violence, the rule of law is weak or contested, and political order is maintained through systems of patronage. In this context ‘good practice’ PFM rules, laws, and practices may be only inconsistently implemented or ignored wholesale. Further, even when such laws are followed, increased transparency and information provision may have only a limited impact on outcomes because the incentives of public servants and policymakers are shaped by patrimonial relationships rather than by performance accountability or policy-based electoral pressures. In this paper I present a conceptual framework showing how the institutional transmission mechanisms linking PFM ‘good practices’ to improved outcomes are typically missing in fragile states. I illustrate the framework through application to the extreme-case fragile state of Afghanistan, where there is an apparent contradiction between strong adoption of ‘good practice’ PFM systems and deteriorating outcomes. I conclude with some implications for the future design of PFM reform efforts in fragile states.

Keywords: public financial management, fragile states, institutional transmission mechanisms

JEL Classification: H83