Alberto Melo Inter-American Development Bank

1. TWO SUCCESSFUL EXPERIENCES IN HARMONIZATION: THE PUBLIC EXPENDITURE REVIEWS OF PERU AND ECUADOR Presentation at the World Bank’s Workshop on Country Analytic Work Washington, DC, June24, 2005 Alberto Melo Inter-American Development Bank

2. PRESENTATION’S OUTLINE: Public Expenditure Reviews (PERs) as a diagnostic tool. Peru’s 2001-2002 PER and Ecuador’s 2003-2004 PER as experiences in harmonization of analytical work. Next steps: How to deepen harmonization in economic and sector work by MDBs and donors.

3. PART I: PUBLIC EXPENDITURE REVIEWS AS A DIAGNOSTIC TOOL

4. THE NATURE OF PUBLIC EXPENDITURE REVIEWS • A PER is a comprehensive analysis of public spending in a given country. • The purpose is assisting the country in reforming public expenditure management.

5. THE NATURE OF PUBLIC EXPENDITURE REVIEWS I. PERs frame the discussion of public spending in the context of an assessment of the country’s overall macroeconomic situation. II. The diagnosis seeks to characterize the three main components of the Public Expenditure Management System, namely: • Fiscal policy management. • The budget system and practices from the standpoint of the rationality of resource allocation, and • The operational efficiency of expenditure.

6. THE NATURE OF PUBLIC EXPENDITURE REVIEWS • The results from the diagnosis are then used to make recommendations on fiscal policy, budget reform, spending priorities, and other pressing public sector issues of the day.

7. MAIN ISSUES DEALT WITH BY PERU’S 2001-2002 PUBLIC EXPENDITURE REVIEW (I) Peru’s fiscal challenges and vulnerabilities. How to reorient the budget towards pro-poor expenditure? How to improve the efficiency of public expenditure? The promises and risks of decentralization.

8. MAIN ISSUES DEALT WITH BY PERU’S 2001-2002 PUBLIC EXPENDITURE REVIEW (II) How to upgrade the civil service? How to improve governance and reduce corruption? The fine-tuning of fiscal and environmental policies towards the mining sector.

9. MAIN ISSUES DEALT WITH BY ECUADOR’S 2003-2004 PUBLIC EXPENDITURE REVIEW (I) The structural constraints on fiscal policy derived both from the nature of the economy as a small, open and oil-dependent system and from the character of the prevailing political-economy regime. The role of fiscal policy in a dollarized economy. III. The diagnosis of the current fiscal trends. IV. The conditions for fiscal and debt sustainability.

10. MAIN ISSUES DEALT WITH BY ECUADOR’S 2003-2004 PUBLIC EXPENDITURE REVIEW (II) V. The existing fiscal rules, including the rules governing Ecuador’s Stabilization, Social and Productive Investment, and Debt Reduction Fund (FEIREP). VI. The issue as to how to create additional fiscal space for pro-poor expenditure. VII. The general features of the public expenditure managementsystem. VIII. Public expenditure in education and the issue of the high rates of teacher absenteeism.

11. MAIN ISSUES DEALT WITH BY ECUADOR’S 2003-2004 PUBLIC EXPENDITURE REVIEW (III) IX. Public expenditure in health. X. Public expenditure in water and sanitation, electricity and telecommunications . XI. The situation of the oil industry.

12. OUPUTS OF PERU’S PUBLIC EXPENDITURE REVIEW THE MAIN OUTPUT WAS THE PER REPORT, WHICH WAS PUBLISHED IN TWO BOOKS: • In English: World Bank and Inter-American Development Bank. Peru: Restoring Fiscal Discipline for Poverty Reduction. A Public Expenditure Review. Washington, 2003. • In Spanish: José R. López-Cálix y Alberto Melo. A más disciplina fiscal, menos pobreza. Revisión del gasto público en Perú. Banco Interamericano de Desarrollo y Banco Mundial, Washington, DC, 2004. • First time that a PER-based book appears in Spanish

13. OUPUTS OF ECUADOR’S PUBLIC EXPENDITURE REVIEW THE MAIN OUTPUT WAS THE PER REPORT THAT IS NOW PUBLISHED IN ENGLISH: • The World Bank and The Inter-American Development Bank. Creating Fiscal Space for Poverty Reduction in Ecuador: A Fiscal Management and Public Expenditure Review. Washington, 2005. • AND WILL SOON BE PUBLISHED IN SPANISH.

14. PART II: THE PERU 2002-2003 AND THE ECUADOR 2003-2004 PUBLIC EXPENDITURE REVIEWS AS EXPERIENCES IN HARMONIZATION

15. DIMENSIONS ALONG WHICH HARMONIZATION WAS PRACTICED • The definition of the PER’s content and scope. • Joint planning of the research work. • Joint conduct of the relationship with the national government. • Joint use of the available diagnostic tools • Joint dissemination of results.

16. THE IMF WAS AN IMPORTANT PARTNER IN BOTH HARMONIZATION EXPERIENCES • In the PERU PER, theIMF contributed with analytical inputs in the areas oftax reform, public debt management and sustainability, and the review of Peru’s Fiscal Prudence and Transparency Law. • In both the PERU PER and the ECUADOR PER, the IMF contributed to the oganization of dissemination events.

17. THE GOVERNMENTS’ APPROPRIATION OF THE PERs’ ANALYSES AND CONCLUSIONS: THE CASE OF PERU (I) PER’s analyses and conclusions were used by the Government of Peru as inputs in the discussions that led to: The revamping of the Prudence and Fiscal Transparency Law. The tax reforms of 2003-2004. The deepening and widening of the policy of providing budget protection for key social programs.

18. THE GOVERNMENTS’ APPROPRIATION OF THE PERs’ ANALYSES AND CONCLUSIONS: THE CASE OF PERU (II) The definition of the conceptual and legal bases for decentralization. The further development of Peru’s Integrated Financial Management System (SIAF). Measures to improve the targeting of social expenditures. The adoption of a royalty regime for mining.

19. OTHER BENEFITS FOR THE COUNTRIES FROM THIS HARMONIZATION EXPERIENCE (I) • Use of diagnostic tools was aimed at building institutional capacity (fiscal institutions, budget protection for social programs, strengthening of SIAF, etc.). • Coverage of issues was wider than would have been otherwise. • The joint realization of the PER contributed to: (i) stronger coordination between the banks and the government and (ii) closer coordination between the World Bank and the IDB.

20. OTHER BENEFITS FOR THE COUNTRIES FROM THIS HARMONIZATION EXPERIENCE (II) • A substantial portion of the research work was carried out by Peruvian consultants, thus contributing to strengthening national analytic capacity.

21. THE PER ALSO STRENGTHENED THE TWO BANKS’ COUNTRY WORK In the case of PERU, the PER’s analyses and conclusions were used in the elaboration of the World Bank’s Country Strategy for Peru and in the preparation of the following projects by both Banks: The WB’s series of four Programmatic Social Reform Loans. IDB’s Modernization and Descentralization Program. IDB’s Fiscal Reform Program. The WB’s series of Programmatic Decentralization and Competitiveness Structural Adjustment Loans. The IDB Policy-Based Loan to Support the Reform of Poverty Reduction and Human Capital Development Programs.

22. OTHER BENEFITS FOR THE BANKS • Duplication of efforts was avoided. • Adoption by the Government of Banks’ policy recommendations was facilitated. • Scope and coverage of dissemination was wider than would have been otherwise.

23. PART III: DEEPENING HARMONIZATION IN ECONOMIC AND SECTOR WORK

24. WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND SECTOR WORK? (I) • There is still a long way to go on the road towards harmonization of multilaterals’ and bilaterals’ economic and sector work. • A modest and simple step can bring about a quantum leap in harmonization. • The step I propose: the creation in each country of a mechanism for collective discussion of all the donors’ annual economic and sector work plans for the particular country.

25. WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND SECTOR WORK? (II) • The mechanism I propose is to hold an annual technical meeting of the country’s authorities and the multilaterals and donor organizations where those plans are presented for deliberation. • Each multilateral organization and bilateral donor participating in the exchange of ideas would provide the rationale behind its economic and sector work plan. • Meetings will be open to all donors and will be chaired by a Government representative.

26. WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND SECTOR WORK? (III) • In a typical LAC country setting, the roster of participating institutions would include the WB, IMF, the agencies of the UN System, the IDB, the European Union, USAID, JBIC, DFID, GTZ, other bilateral donors, and the country-relevant sub-regional organizations such as CAN, CAF, Fonplata, BCIE, CDB, and other donors. • The country annual meetings will be “roll-up-sleeves” work events and not ceremonial gatherings.

27. WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND SECTOR WORK? (IV) • The main purpose of the meetings would be to open an exchange of ideas on the pertinence and appropriateness of each participant’s analytical work plans with the aim of harmonizing, improving and refining those plans. • The obvious premise of those intellectual and technical exchanges is the respect for the autonomy of the participants both on the governments’ side and on the donors’ side to define their own analytical work plans and carry them out.

28. WHAT IS THE NEXT STEP IN HARMONIZING ECONOMIC AND SECTOR WORK?(V) The proposed annual meeting is bound to generate a number of byproducts that may strengthen harmonization. In particular, institutions attending the meetings may decide to reach agreements on: Carrying out joint economic and sector work. Sharing terms of reference for upcoming economic and sector work. Sharing diagnostic tools and data bases. Sharing draft research reports. Reciprocal peer reviewing of economic and sector work.

29. TWO SUCCESSFUL EXPERIENCES IN HARMONIZATION: THE PUBLIC EXPENDITURE REVIEWS OF PERU AND ECUADOR Presentation at the World Bank’s Workshop on Country Analytic Work Washington, DC, June24, 2005 Alberto Melo Inter-American Development Bank