Tightening finances put reform under pressure

David Menyah

Recent progress towards better standards of governance could be jeopardised in today’s climate of austerity following the global financial crisis. In some cases, centrally-imposed budget cuts could seriously undermine vital service delivery although, in others, the very sense of crisis may make long-overdue reforms easier to undertake

In recent years, especially in the aftermath of the recent financial crisis, there has been an ongoing debate on the future of governance and the relation between governments, markets and civil society. Now, in the light of increasing financial austerity, the actual capacity of governments and their civil servants to regulate and provide public services is being questioned.

Governance can be broadly defined as the traditions and institutions by which authority in a country is exercised. It thus encompasses a wide spectrum of issues including: the process by which governments are selected, monitored and replaced; the capacity of governments to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them. As expressed through factors like reliability, predictability and accountability, good governance is seen as a key factor in ensuring global and national prosperity and in achieving universal development goals.

Few would dispute that there is a direct relationship between good governance, stable governments and better social and economic outcomes. For their credibility, governments and their public services need to exhibit, build and enhance their capacities for sound policy development, meticulous design and conscientious implementation of programmes and efficient service delivery. Achieving such goals within the public service requires a strong, well-trained, and motivated cadre of professionals capable of the competent and ethical management of resources and programmes in a manner that is open, transparent, accountable, equitable and responsive to people’s needs. They also need to be able to facilitate the achievement of national targets for economic development and societal well-being.

Public management reforms have been a key factor in improving capacities to address any perceived lack of public confidence in government and increasing demands for better and more responsive services. The need for reforms over the past two decades have been facilitated by drivers of change that include: increasing environmental pressures (both international and domestic); changes in public and community expectations; shifts in political influences in public service management; and an increasing demand for accountability. These drivers of change provide the impetus for public services to adopt strategic reforms and management practices.

The link between the quality of governance and the economic development of countries is widely recognised in today’s discourses on development, and the exhortation for good governance to achieve economic development is widespread. However, even among those who agree that there is a relationship between the two, there is a contentious debate as to the nature of the relationship. Although it is said that good governance is essential for growth, the precise connection is unclear. However, current economic thinking is that good governance pervades nearly every aspect of public administration.

International multilateral institutions have been at the forefront of the call to order regarding good governance, especially in developing countries. The World Bank, through its Worldwide Governance Indicators Project, has been promoting and highlighting its necessity for economic development. Likewise, the International Monetary Fund (IMF) spelt out the relationship between good governance and economic development in its declaration on Partnership for Sustainable Global Growth. It identified “promoting good governance in all its aspects, including ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption as an essential element of a framework within which economies can prosper”. As the IMF is primarily concerned with macroeconomic stability, external viability, and orderly economic growth, it has limited its involvement to economic aspects, although it admits that good governance also encompasses a whole range of social, political and economic activities. Clearly, economic performance is influenced and sometimes determined by political and administrative governance.

Of course, the management of the public finances is an area where governance is of paramount importance. Fiscal consolidation or bringing down budget deficits to reasonable levels is vital for a country and government to avoid inflation, find resources for developmental needs and social welfare expenditure on a priority basis. Fiscal discipline that reduces the fiscal deficit to lower levels is vital to attain higher rates of economic growth. Bringing down the fiscal deficit requires good governance. On the expenditure side it is vital that wasteful spending is minimised. It is abundantly clear that there is a crossover in the tools and mechanisms appropriated to implement good governance measures and for those used to foster austerity as a result of financial crises.

Two ways in which good governance is expressed today are transparency and accountability. Transparency means that decisions are taken and enforced in an open manner that follows rules and regulations. For this to be realised, information must be freely available and accessible to those who would be affected by such decisions. An important facet of transparency is that enough information is provided in easily understandable forms and in public media. Accountability cannot be enforced without transparency and the rule of law.

It would be wrong to think that good governance is the responsibility solely of governments. Accountability is a key requirement at all levels of economic activity. Not only governmental institutions but private and civil society organisations must be accountable to the public and to their institutional stakeholders. An organisation or an institution should be answerable to those who will be affected by its decisions or actions.

Moving forward, it is evident that good governance will be an important determinant of the pace and character of economic development in the next decade and beyond. The establishment of the rule of law, the protection of property rights, safeguarding human and fundamental rights, the implementation of justice, the eradication of waste, prudence in public expenditure and minimising bribery and corruption must prevail for the economy to grow to its full potential. Without good governance economic growth will be stifled. Concomitantly, it is widely accepted that financial crises and resultant austerity measures do impact the ability to ensure and enhance good governance or otherwise.

The connection between good governance as exemplified by public management reforms and episodes of financial crisis and austerity is clearly a complex and variable one. If we look back at the history of both OECD and African countries over the past 30 years, we can find several episodes of financial crisis, austerity and many waves of public management reforms, but the two are not necessarily closely connected. Sometimes, however, major reforms originate in crises, as did New Zealand’s reforms of 198490 and many African countries that were required by the World Bank and IMF to implement Structural Adjustment Programmes in the 1980s and 1990s. At other times, financial crises are managed with straight cutbacks, but no fundamental system reforms. Indeed, in the recent phase most of the government measures announced, especially in developed countries, have been of this type.

Financial austerity is a two-edged sword as far as management reform is concerned. On the one hand, it makes it more difficult, because good governance and management reforms cannot be bathed in new money, and objectors cannot be bought off with generous compensation or comfortable alternative jobs. There is also widespread concern among public sector managers that centrally-imposed budget cuts are going to result in significant headcount reductions, as well as damage staff health and morale. With most public services operating at full capacity with little or no room for efficiency savings, blanket cuts to public sector budgets will leave them unable to deliver frontline services and satisfy their customers’ needs.

On the other hand, a sense of crisis can make it easier to consider radical options and more fundamental changes than would otherwise be considered feasible. Increased financial pressure triggered by financial crises and austerity measures can bring opportunities for the public sector to improve working practices and develop more creative solutions for service delivery. Austerity measures can also provide an opportunity to improve teamwork and communication, deal with inefficiency, make important decisions and root out poor performers. Thus austerity and crises can drive innovation, productivity and performance.

Despite concern about the impact of cuts, public sector managers can often meet the challenge that awaits them, confident they can achieve major savings through greater innovation and more effective performance management. But, rather than having their budgets sliced from afar, managers need the freedom and support to deliver radical changes to service delivery. The question is whether government, senior management and policy makers will enable them to do so.

We may all be at sea in the same storm, but we are travelling in different kinds of vessel. In some countries, governance reforms can be formulated much more quickly than in others as the complexity of political and legal processes varies

There is a risk of over-generalisation in assessing the governance-financial crisis nexus and thus it is important to disaggregate the relationship by region and country. Obviously, the ways in which it plays out in developed countries will be different from developing countries. In Sub-Saharan Africa, for example, many countries are dependent on foreign finance inflows and are even more dependent on commodity-based export growth. This has left them particularly exposed to shocks and some economists have warned that, although Africa is the least globally-integrated region, it could actually be the worst hit.

Despite the metaphorical rhetoric that governments must all swim together as they attempt to overcome crises, endure austerity and ensure good governance, we are actually not all in the same boat. We may all be at sea in the same storm, but we are travelling in different kinds of vessel. In some countries, governance reforms can be formulated and implemented much more quickly than in others. The complexities of the political, organisational and legal process differ considerably between countries like India, Ghana and the UK. As do the depth and precise nature of the crises.

The prominence of the banking, housing and debt service sectors varies extensively between economies and so, once one gets down to any level of detail, both the extent of the challenge and the capacity for certain types of reform will be different from country to country. In the face of each country’s crises, both the government and the wider society now have to confront the challenge of conducting detailed diagnosis, prognosis and assessment of governance reform capacity.

About the author:

David Menyah is Programmes Development Manager of the Commonwealth Association for Public Administration and Management


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