Budget Transparency Matters

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Budget Transparency Matters

In our cautionary piece on what has gone wrong in Mozambique, we discussed the Open Budget Survey, and how poorly Mozambique had fared in terms of budget transparency.  We think it is worthwhile to actually delve into the valuable work that the International Budget Partnership (IBP) does.

The IBP – What they do, and why budgets are important

IBP began in India to bring increased budget transparency to one of India’s largest states (Gujarat).  Since then, it has established partnerships with numerous NGOs and has had an increasing number of countries participate in its Open Budget Survey (OBS), the most recent in 2015, having 102 countries participate.

Some of the tangible impacts of this work, are best illustrated by IBP themselves:

In India, the National Campaign for Dalit Human Rights exposed how the government diverted $150 million from programs for the poor and marginalized to the 2010 Commonwealth Games. To date, 75 percent of these funds have been returned to their original purpose. (Talk about “returns on investment;” NCDHR’s total annual operating budgeting is about $326,000.)

In Mexico, Fundar used budget research to spearhead a successful effort to reduce the share of a $20 billion agricultural subsidy program that goes to the largest farmers and increase the share that goes to smaller, poorer farmers.

In the Philippines, the Concerned Citizens of Abra for Good Government monitors how hundreds of government projects are implemented and, in doing so, uncovered a famous case of government/contractor corruption.

In South Africa, the Treatment Action Campaign and the Center for Economic Governance and Aids in Africa have extensively monitored the planning, funding, and implementation of the nation’s HIV/AIDs programs, helping to greatly boost that country’s sometimes reluctant efforts in this vital area.

In Argentina, the Civil Association for Equality and Justice used budget monitoring and litigation to determine that Buenos Aires was systematically under-spending on education for the poor, helping to convince the city to make a major commitment to provide spaces for those excluded from school attendance.

We would highly encourage you to peruse their website.  It has an immense amount of useful information for anyone who wishes to learn and/or invest in Frontier Markets.  Budgets are something which most investor do not pay enough attention to.  Other than headlines and budget/deficit summaries, very few actually look at line-by-line assessments or transparency that government provide.  Luckily, in most developed countries there are positions similar to auditor-generals or third-party assessments that provide a modicum of comfort.  In developing countries these institutions either don’t exist or are suspect in terms of their independence of the governing authority.  In these instances, a third-party assessment such as what Open Budget Survey provides, is incredibly valuable.

What does the Open Budget Survey Look at?

The OBS looks at three main areas, transparency, participation, and oversight.  Countries must answer 109 detailed questions, which are then assessed by anonymous reviewers who are free to ask multiple follow-up questions.  These questions are then provided a score, and then a total score is provided for each country out of 100.  In general, a score above 80 indicates that a country has extensive achievement in all three areas, between 60 and 80 indicates a sufficient level of achievement, 40 – 60 indicates limited achievement, 20 – 40 indicates minimal and 0 to 20 indicates scant or no achievement at all. The overall scores for each country surveyed is provided below.

OBS Score

Transparency

The key measure of achievement in transparency is the degree to which detailed budget documents are available to the public and are prepared at all.  Of the 102 countries included in the 2015 OBS, 17 countries provided scant or no information, 17 countries provided minimal budget information, 44 provided limited information, 19 countries provided substantial information, and 5 countries provided extensive information.

A number of countries have improved markedly over the last five years.  Francophone countries in West Africa have benefitted from membership in the West African Monetary Union, which has forced countries to adopt higher standards.  This extra-governmental support is critical in ensuring that government are able to develop the processes for producing and publishing budgetary information.  Even more critical is ensuring that this information is consistently and reliably produced.  Many countries make an effort for a year or two and then these efforts fall by the wayside because of a change in government or other more pressing priorities.  Another noteworthy country which has improved significantly is Tunisia, scoring only an 11 in 2011 and over 40 in 2015.  The Arab Spring has only been a success in Tunisia, and part of that success is reflected in a more transparent budget.

Public Participation

A key component of a robust open budget is ensuring that there is some mechanisms in place that allow for public participation and input in the budgeting process and that governments are held accountable for the budgets that they present and purport to adhere to.  Public hearings, elections, and consultation for major initiatives are all examples of ways that a country can establish itself are having strong public participation in budgeting process.

The Philippines has made significant ground in improving its public process.  They have introduced Grassroots Participatory Budgeting, which is a bottom-up approach led by the national government.  They have created Local Poverty Reduction Action Teams which are composed of an equal number of government and nongovernmental representatives.  They conduct consultations to determine which public goods and social services are needed by local residents.

Oversight

The legislature or some sort of institution, such as a supreme audit institution are key in providing the needed oversight to ensure that funds are spent in accordance with national priorities.  Having a civilian, independent watchdog allows for the citizens in a country to receive feedback on how well its government has fared, or how much certain initiatives have actually cost versus government guidance.  This is the area that countries are particularly weak at.

Of the 102 countries surveyed, 36 countries had adequate oversight, 21 had limited oversight and 45 countries had weak to nonexistent oversight for their budgetary process.

Key Learnings

The OBS is the only survey of its kind that provides independent assessment of a countries budget transparency.  Improving or declining trends in this survey can be meaningful indications of where a country is headed.  There is a lack of data and history to determine correlations, but on an anecdotal basis we are certain that improving budgetary quality is an effect of a country with an improving, growing economy.

While it is generally true that wealthier countries have a higher degree of oversight, participation, and transparency, but there are also countries which are surprisingly open an transparent, when this wouldn’t be expected.  As examples, Brazil, Romania, Peru, Georgia, Mexico, Malawi, and Uganda score higher in this survey than Spain, Slovakia, and Hungary.  OBS has also found a persistent negative correlation between hydrocarbon revenue and how well countries score.  This is intuitive, the more revenue from one source, the more potential for corruption, slush funds, and mismanagement of finances.

Pay attention to the scoring on this survey, see how countries fare, see how they are changing, and it would not be a bad idea to invest in countries that have improved over time.  Frontier Markets are more sensitive to governments, particularly as it relates to infrastructure spending which enables growth like few other items.

As always, if you have any questions, please let us know.

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