Category Archives: Open Budget Survey 2010

Making budgets more transparent in oil rich states

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In the OBI working paper series that we have been posting about recently, Michael Ross of UCLA returns to the question of the resource curse (click here for his paper). He looks specifically at how a country’s mineral wealth affects the transparency of the government’s budget. He finds that the budget transparency of countries with oil and those with other mineral riches is not impacted on in the same way. Just like Wehner and de Renzio, his research suggests that the solution to the puzzle of what drives budget transparency in resource rich countries, lies in domestic factors.

The difference between oil and non-oil states

Much like Wehner and de Renzio, Ross finds that among democracies, a country’s mineral wealth does not have much effect on the transparency of the government budget. Among autocracies though, greater oil wealth correlates with less fiscal transparency. So oil wealth makes the budgets of undemocratic countries less transparent. But contrary to what one might have expected, Ross finds that non-fuel mineral wealth makes government budgets more transparent.

The paper also demonstrates that oil has an effect on budget transparency that goes above and beyond its more general effect on democratic accountability. So there appears to be a version of the resource curse aimed at budget transparency specifically.

Why, you might ask?

Its not EITI

Based on the available data, Ross does not find convincing evidence that the different levels of budget transparency in countries dependent on oil and those dependent on other kinds of mineral wealth, can be explained by membership in the Extractive Industries Transparency Initiative (EITI). He argues that if EITI pressures were responsible for the exceptional transparency of some mineral-producing autocracies, one would expect that most highly transparent mineral autocracies would be EITI members. However in Ross’s analysis, of the five authoritarian mineral producers that are relatively transparent (South Africa, Russia, Botswana, Namibia and Zambia) – only one (Zambia) is a member of EITI. In fact, the mineral-producing autocracies that are EITI members (Zambia and Kazakhstan) have lower OBI scores than the mineral-producing autocracies than are not members, although the differences are not statistically significant.

It’s not foreign investment either

Ross also doesn’t find evidence that the transparency anomaly can be explained by dependency on foreign investment. Oil rich countries derive much more revenue from their extractive industries than countries rich in other minerals derive from theirs. The argument would go that non-oil countries would be more transparent because they are more dependent on foreign investment. But Ross doesn’t find any link between foreign investment inflows and budget transparency.

The clue lies in who extracts

Unsurprisingly Ross concludes that learning more about the different levels of budget transparency in oil and mineral dependent countries should be a priority for future research. He finds a promising clue to this puzzle in the fact that in most autocracies the state manages oil extraction itself through national oil companies, making it easier to cloak revenue. The extraction of other minerals is more often managed by the private sector. This still doesn’t explain why the regular budgets of oil states would also be less transparent. But the lower revenue derived by non-oil states may make them more dependent on domestic revenue such as taxes and service charges. The research of Mick Moore on taxation and democracy suggests that dependence on the consent of citizens to pay tax may compel governments to be more transparent with the management of public resources.

What does all this mean?

One of the important implications of Ross’s findings for the policy and advocacy community is that domestic politics, and therefore national level advocacy, matter a great deal. Like Wehner and de Renzio, Ross finds that the way in which extractives are managed at country level is the key variable for their impact on budget transparency. In fact, it may matter more than the need to attract foreign investment, and more than international advocacy campaigns. Of course this does not make international advocacy for transparency irrelevant. It just means that international advocacy efforts should be based on a better understanding of domestic contexts, and have a complementary focus on country level advocacy.

A political path to budget transparency? Transparency, elections and political competition

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In our previous post we reported on research showing that budget transparency reduces the cost of debt to governments. In another paper in the Open Budget Initiative working paper series, Joachin Wehner (London School of Economics) and Paolo de Renzio (International Budget Partnership) cite empirical research showing that budget transparency also reduces budget deficits and corruption. Given the persuasiveness of the case for budget transparency, it is surprising that more research hasn’t been done on its determinants. Wehner and De Renzio try to plug this gap by looking at the effects of free and fair elections and political competition on budget transparency. Overall, their findings suggest that these domestic political factors play a crucial role in determining the level of budget transparency. Continue reading →

State Capitalism makes government budgets less transparent

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Last week’s Economist tries to take down ‘state capitalism’, which it describes as an economic growth model where enterprises are ‘backed by the state but behaving like a private-sector multinational.’ This ‘backing’ takes many forms, from state-owned enterprises to significant government share-holding in private firms, to aggressive industrial policy measures such as tax breaks and loan guarantees.

The Economist claims a number of weaknesses in the state capitalism model, such as slower growth and inefficient use of capital and human resources. In addition to these economic orthodoxies, this model poses another set of problems: it makes government finances less transparent. Continue reading →

How we will promote aid and budget transparency in Busan

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prepared by Paolo de Renzio, Senior Research Fellow at the International Budget Partnership

Open Budget Surveys have repeatedly found that countries that are heavily dependent on foreign aid to finance their budgets tend to have less transparent budget processes, . This might be due to various country characteristics, such as low incomes or weak democratic institutions. But donor behaviour also plays a part, as argued in a recent IBP Briefing Note. The brief highlights the importance of the relationship between donors’ provision of information on aid flows and recipient country governments’ disclosure of budget information to their citizens. In fact, aid transparency and budget transparency are inextricably linked. Budgets in partner countries cannot be made fully transparent without improved aid transparency. Only if donors provide partner countries with sufficient information, compatible with partner country budget systems and schedules, can timely, accurate and comprehensive budget information be made available to citizens of countries receiving aid. This point is also highlighted in the the Dar es Salaam Declaration on Budget Transparency, Accountability and Participation, signed last week by nearly 100 civil society groups.

At the Fourth High-Level Forum on Aid Effectiveness, which will take place in a few days in Busan, South Korea, the transparency theme will have a prominent place. The latest draft of the Busan Outcome Document (the declaration that participating governments will sign at the end of the Forum) covers transparency issues in a number of ways. First, transparency and accountability are recognized as ‘shared principles’ that form the foundation of development cooperation, alongside ownership, results and inclusive partnerships. Second, a whole paragraph (para 22) is devoted to aid transparency commitments, in which donor agencies undertake to make publicly available more information on aid flows, and to implement a common standard for its publication, building among other things on the efforts of the International Aid Transparency Initiative. Third, donors and recipient countries commit to building more transparent public financial management systems and to improving fiscal transparency.

All of these commitments were the outcome of some difficult negotiations, facing resistance from a number of donor governments, including China, Japan and France. Provided they make it through the final discussions, they are very welcome, and represent a significant step forward in recognizing the importance of transparency and accountability as key ingredients of both aid and development effectiveness. The explicit link between aid transparency and budget transparency, however, is not recognized. Luckily, this link will be the focus of a plenary session, which IBP has helped organize and which is supported by a smaller number of like-minded actors, including the governments of Sweden, the US, Rwanda and South Africa, the Collaborative Africa Budget Reform Initiative (CABRI), the World Bank and CSOs like Transparency International and Publish What You Fund. In this session, more ambitious targets and commitments around aid and budget transparency will be discussed, and hopefully agreed.

One of the most important aspects of the discussions at Busan will be to agree on the future international architecture for development cooperation, with a view to overcome the limitations of the OECD/DAC Working Party on Aid Effectiveness, which for too long has been seen as too exclusive a body that does not reflect the role of emerging donors and the need for a more equal partnership between donor and recipient governments. The current draft of the Busan Outcome Document talks about the establishment of a Global Partnership for Effective Development Cooperation. Ideally, this body should include a specific mechanism for ensuring the transparency-related commitments are monitored and enforced. Such mechanism would also gain from a multi-stakeholder nature, following the example of the Global Initiative for Fiscal Transparency (GIFT), which brings together governments, international organizations and civil society groups in a joint effort to promote fiscal transparency across the world.

The International Budget Partnership will be represented at the Busan Forum, and will report back on what happened.

Watch this space!

Easterly’s utopian solution to the wastage of development aid

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The wastage of  health funding

William Easterly argues that donors should not give more development aid while so much of it is being wasted. The most recent example is the WHO report that tells us that 20-40% of health funding is wasted. Easterly questions the WHO’s calls for more health donations, asking “How do you make an impassioned plea for spending more money when we’re wasting so much?” To be sure this is not just through the sort of corruption that corpulent white businessmen moan about over drinks in Washington, London and Paris. The WHO reports that some countries pay almost double what they should for drugs and that at much of the medical equipment donated to developing countries is useless. But I digress. The point that Easterly and many others make is that donors should not send more money through the system until the leaks are fixed. And it makes good common sense. My Mom or any other non-economist would agree. Continue reading →