Book Review: Democratic Deficit? What We Can (and Cannot) Expect from Performance-Budgeting Reform

Book Review: Democratic Deficit? What We Can (and Cannot) Expect from Performance-Budgeting Reform

In the past, performance budgeting was presented as a kind of panacea, a reform so obviously righteous in its ambitions that there could be little reason to refuse to implement it.

That way of thinking is no longer au courant, and a more modest consensus has emerged, encapsulated in Donald Moynihan and Ivor Beazley’s 2016 review of performance budgeting in the OECD. Likewise, when the International Budget Partnership looked at program-based budgeting in our 2018 review of low- and middle-income countries, we also arrived at more modest expectations for the benefits of performance information in budgets.

And yet…the dream lives on.

In their intriguing new book, Alfred Tat-Kei Ho, Maarten de Jong and Zaozao Zhao align themselves with this trend toward humility, while also offering glimpses of surprising possibilities when we set ambitious but realistic expectations.

A litany of failures?

This book covers a lot of territory, both in terms of geography and time. It rather rapidly reviews decades of progress (or the lack thereof) in many contexts, from Afghanistan to the United States. At times, the text can feel repetitive, since nearly every country suffers from similar challenges: low capacity to implement a reform that everyone thought (again!) would be simpler than it turned out to be, an oversupply of performance information that is also of dubious quality and remains unused, and so on.

Consider this description of challenges in the Philippines: “There was a lack of understanding by key officials…Performance measurement was inadequate…the Budget Commission had failed to sustain the initial rigor of the reform through training….the legislature continued to require the parallel submission of a line-item budget.”

This is particularly depressing because it is a description of the results of the first Philippines performance-based (PB) reform—in the 1950s. It is not clear that things are much better six decades later. Reviewing more recent reforms, the Philippines chapter notes: “Any performance budget system is only effective if it is understood and used by those who make budget decisions and implement government programs, and by those who hold the government to account, but there is limited evidence” of this.

Even in rich countries, the book documents familiar performance-related challenges. In Australia, a focus on “vertical” performance management undermined ministerial collaboration, and pay-for-performance reforms demotivated the public service corps. In the Netherlands, outcome-focused performance indicators could not be connected effectively to budgets, while input information, which officials and legislators considered crucial for overall budget management, disappeared from the budget presentation. In 2007, the minister of finance argued that the system was prone to “numerical fetishism”; in other words, not everything that was important could be measured.

Unlikely stars

This is not to say that the book is all gloom and doom. In fact, the authors find something positive to say about nearly every experience with performance budgeting, no matter how dismal. Sometimes, this amounts to little more than a modest increase in transparency or encouraging public officers to focus more on the results of spending. But as they rightly argue, such modest advances should not be dismissed in the chaotic world of public administration reform.

The authors also identify some exciting, emerging practices in surprising places. For example, the Chinese cases they cite showcase the rise of independent, third-party review of performance, particularly at the local level. This practice also has emerged in Mexico. The basic premise is that independent contractors can provide an objective assessment of performance that may be used by finance ministries to review agency performance and decisions about future funding.

Local officials in China also have designed performance evaluations to assess citizen perspectives through surveys and town hall meetings, and they have published budget information on electronic billboards in train stations and other public venues. While the overall political context in China might limit the effectiveness of such transparency and citizen engagement, the case study suggests that the desire to avoid public embarrassment has subtly altered the incentives facing government agencies toward performance. This indicates that, even in rather unlikely environments, PB can change the budget conversation and enhance stakeholder accountability.

In Tunisia, PB has been part of the overall political reform agenda since the so-called “Arab Spring,” with the goal of enhancing public and parliamentary scrutiny of the budget. The authors write that both a professional civil service and “continuous demand for more transparency and accountability by civil society have provided PB reform with renewed legitimation and kept it on the political agenda.” Members of civil society have used performance information to push for improved government practice—another example of the value of PB in promoting accountability in a somewhat unlikely context.

A role for citizens and legislators?

Nevertheless, the role of citizens and legislators remains a basic and unresolved tension in the book. On the one hand, the authors stress the “management” role of PB, arguing that it is generally not successful in altering the political aspects of the budget process, and does not normally change the behavior of legislators or involve the wider public. On the other hand, as suggested by the China and Tunisia examples, as well as some of the other cases cited (for example, the Netherlands and Kenya) and even other writings by these same authors (see Ho 2018), there seem to be quite critical roles for the public and legislatures in PB reforms.

Ultimately, if PB is designed to change the conversation about the budget to focus on the goals of spending, it cannot be centered on a technical management reform alone. The goals of spending are political, and if we are not bringing citizens and legislators along, then something is missing. Ironically, it is the Chinese and Tunisian examples that seem to have the most to tell us about addressing the democratic deficit in performance reform. Surprises like this one are what make this book worth reading.

Book review: A new take on macroeconomics

Book review: A new take on macroeconomics

Professor Robert Skidelsky’s 2019 book, “Money and Government: the Past and Future of Economics” (Penguin), is both radical and conservative. It is radical in that it runs against the grain of the economic orthodoxy of the last several decades. It is conservative in that it endeavors to restore economics to the older tradition of “political economy” (in the true sense of that much-abused term) and the fundamental insights of thinkers “whose greatness, for all their differences, lay in the fact that they were more than economists.” This might sound radical too, but Skidelsky’s list of such thinkers is comprised exclusively of household names like Smith, Mill, Hayek and Keynes.

Although it is written in Skidelsky’s accessible style, this complex book will not command a mass audience—even though its messages deserve it. Like many good books, its strength is less in its novelty, then in its powerful re-framing of existing ideas into a persuasive argument.

The book’s title is apt: Skidelsky wants to restore the importance of money and government to our understanding of the economy. In his view, these concepts were the great casualties of the monetarist (and supply-side) revolution, extending from the 1970s until the 2008 crash (and, in many circles, until today). In simplistic terms, monetarism is the idea, most closely associated with the economist Milton Friedman, that control of the money supply is the main tool by which the government should manage the economy.

It is easy enough to grasp the need to revitalize the argument for the role of government. The pre-crash era saw states fail to tame stagflation, government become “the problem” and markets unleashed from regulation on a scale without parallel since before World War I. Clearly, government is in need of some rehabilitation in economic theory.

Demand more from government

But money? The need to rehabilitate the role of money might not seem immediately obvious. How could the role of money have been underplayed in a theory known as “monetarism,” which has as its central conceit the belief that mismanagement of the money supply is the main driver of inflation and economic dislocation?

Skidelsky’s argument is that monetarism’s narrow focus on money negates its independent role as a store of value.  What monetarism ignores is the central Keynesian insight that money is a hedge against uncertainty, and that under pervasive uncertainty, money will be saved rather than invested, weakening the economy and leading to under-employment.  The key here is to understand where money comes from.  Governments do not create money, argues Skidelsky. Rather, banks do through the production of credit. And what drives credit is demand.

So, the right model of the economy is one that emphasizes the demand for money, rather than its supply.  Monetarism focuses on the wrong side of the equation. “Supply-side” economics suffers from a similar problem: an over-emphasis on the supply of inputs, including labor and commodities, that drive the economy, without due attention to the demand for goods and services. This does not mean ignoring the supply side, of course; supply constraints also matter.

If demand and spending are the central problems—as perceived by Keynes when analyzing the Great Depression—then monetary policy, which focuses on the supply of funds, cannot solve them. We have to understand why demand is weak. And demand is weak in the current era, argues Skidelsky (to brutally shorten a long argument), because of inequality and the debilitation of the state.

Richer people control more and more of global wealth, but they do not spend this wealth in ways that generate broad demand. This was papered over in the lead-up to the crash: Poorer people depended on the rise of credit to cushion stagnant wages, but debt is ultimately unsustainable without wage growth or redistribution of wealth.

If people cannot or will not spend their money, then the state must step in. It can do this through deficit financing or a balanced budget, in which taxes are increased to offset higher spending. What matters is to push the economy to use available resources rather than allowing them to lie idle. Under conditions of uncertainty, the unique role of the state is to support demand, not to focus on the money supply.

Toward a new macroeconomics

Unsurprisingly, Skidelsky rejects fiscal austerity. He also favors more state investment, partly through a self-financing public investment bank. Most radically, he rejects central bank autonomy to set interest rates, which he believes should emerge from a political bargain that balances the goals of maximizing output and managing inflation.

Other aspects of Skidelsky’s macroeconomics are relatively uncontroversial: For example, he says governments should adopt a counter-cyclical fiscal policy. In other words, they should maintain a balanced budget for recurrent expenditures, while using debt to finance capital investment at a rate roughly equivalent to growth in output. Debt levels matter less than whether the ratio of debt-to-GDP remains more or less constant. This policy is in line with current thinking that stable debt-to-GDP ratios create the perceived fiscal space to respond to fiscal crises.

An open question is whether these macroeconomic prescriptions are applicable to emerging markets.  Given that mismanagement of state corporations is rife in many emerging markets, the advice to take more spending off-budget to independent public investment banks needs careful consideration, as does the idea that monetary policy should be further politicized. Emerging markets with weak currencies and tighter constraints on access to financing are not able to be as cavalier as rich countries about deficits and debt.

Nevertheless, a macroeconomic philosophy that emphasizes building and sustaining demand through equitable fiscal policies is relevant everywhere. Skidelsky’s economic history is as good a guide as one could hope for when trying to understand what we know, and don’t, about macroeconomics a decade after the financial crisis.