2004 Public Fund Digest Vol4 No2

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The International Consortium onGovernmental Financial Management

Public Fund DigestVolume IV, No. 2, 2004


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International Consortium onGovernmental Financial Management

Working globally with governments, organizations, and individuals, the InternationalConsortium on Governmental Financial Management is dedicated to improving financialmanagement by providing opportunities for professional development and informationexchange.

To achieve the above mission, the Consortiums international activities include:

1. Providing comprehensive professional development activities in the fields ofaccounting, auditing, budgeting, information systems, cash management,debt administration, and financial management;

2. Contributing to the advancement of government financial managementprinciples and standards, and through educational events, promoting bestpractices in government financial to improve management control andaccountability to the public;

3. Disseminating and promoting to its members and to the public informationconcerning government financial management;

4. Promoting the development and application of professional standards to sup-port government financial management activities;

In addressing issues, the Consortium embraces many disciplines of governmentalfinancial management including: accounting, auditing, budgeting, debt administra-tion, information technology, tax administration and treasury management. These

areas provide the general frame of reference for the programs, activities and opera-tions of the Consortium.

The material published herein may be reproduced without the consent of theConsortium, which in fact encourages their reproduction, translation and distribu-tion. The views expressed in this publication do not necessarily reflect those of theeditor nor do they coincide with the positions taken by the Consortium.

The editor invites submission of articles, research papers, letters and reviews ofbooks and documents. Please submit articles to the editorial office indicated below.Also, requests for information on the Consortium should be addressed to:

The International Consortium on Governmental Financial Management444 North Capitol Street-Suite 234

Washington, DC 20001, USA

Telephone 202 624-5451 Fax 202 624 5473

Email: [email protected]

www.icgfm.org

Copies of the Public Fund Digest may be obtained by writing to the address above.The cost is US $10 for ICGFM members; US$15 for nonmembers.

Copyright 2004 by the International Consortium on Governmental Financial Management.


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Public Fund Digest

Vol. 4, No. 2

ISSN: 0736-7848

Published by the


Washington, D.C.August 2004


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General InformationWorking globally with governments, organizations, and individuals, the

International Consortium on Governmental Financial Management is dedicatedto improving financial management by providing opportunities for professionaldevelopment and information exchange.

Our mission includes three key elements. First, it highlights that, within theinternational community, the Consortium is uniqueit serves as an umbrella

bringing together diverse governmental entities, organizations (including uni-versities, firms, and other professional associations), and individuals. At thesame time, it welcomes a broad array of financial management practitioners

(accountants, auditors, comptrollers, information technology specialists, treasur-ers, and others) working in all levels of government (local/municipal,state/provincial, and national). Additionally the mission statement emphasizesthe organizations focus on activities to promote professional development andthe exchange of information.

Our programs provide activities and products to advance governmentalfinancial management principles and standards and promote their implementa-tion and application. Internationally, the Consortium (1) sponsors meetings, con-ferences, and training that bring together government financial managers from

around the world to share information about and experiences in governmentalfinancial management, and (2) promotes best practices and professional stan-dards in governmental financial management and disseminates informationabout them to our members and the public.

The International Consortium on Governmental Financial Managementprovides three options for membership.

1. Sustaining Members: organizations promoting professional development,training, research or technical assistance in financial management; willing toassume responsibility for and to actively participate in the affairs of theConsortium. Each Sustaining Member has a seat on the ICGFMs Board ofDirectors and receives 10 copies of all ICGFM publications to be distributedwithin their organization. (Dues: $1,000)

2. Organization Members: government entities with financial managementresponsibilities, educational institutions, firms, regional and governmentalorganizations, and other professional associations. Six organization membersserve on the ICGFMs Board of Directors and organization members receive 5copies of publications to be distributed to their members. (Dues: $250/$150*)

3. Individual Members: persons interested in, dedicated to, or working withactivities directly related to financial management and who wish to be mem-

bers in their own right. Six members of the ICGFM Board of Directors will beselected from among all individual members. Each individual member willreceive a copy of all ICGFM publications. (Dues: $100/$50*)

* A special discount is offered to developing countries, countries with economies in transition and

regional groups and organizations in such countries to encourage their participation. This discount is

available to all countries other than Australia, Canada, China, Egypt, European countries (except

transition economies) India, Iran, Israel, Japan, Kuwait, Libya, Mexico, New Zealand, Nigeria, Oman,

Saudi Arabia, United Arab Emirates, USA, Russia, and Venezuela.


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7August 2004

Table of Contents

8. Reference Material

9. Timelines for Transitioning to Accrual Accounting

10. The Millennium Challenge Corporation

David Nummy

22. U.S. Agency for International Development

Frederick W. Schieck

28. Reforming Fiscal Institutions and Strengthening GovernmentAccountability: Legislative Budget Oversight in Emerging Economies

Carlos Santiso

40. The Challenges of Good Governance: A View from Bangladesh

Nurul Momen and Marzina Begum

50. Which Financial Reports In The Public Sector Should BeSubject To External Attestation?

Jesse Hughes and Wayne Cameron

60. Promoting Government Accountability: Critical Elements in

Establishing or Enhancing Audit LegislationLinda L. Weeks

68. Current Situation and Perspectives of Development forFinancial Control in the Republic of Macedonia

Mito Naumoski

74. Public Financial Management Performance MeasurementFramework Revised Consultative Draft, February 12, 2004[With Amendment Regarding Procurement]

100. Public Sector Committee Update 12


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8 Public Fund Digest

Some Reference Material([email protected])

2003 book on Reforming Government Accounting and Budgeting inEurope edited by Klaus Luder and Rowan Jones published by FachverlagModerne Wirtschaft, Frankfurt, Germany:

3 countries (Finland, Spain, & Sweden) have completed the move to fullaccrual.

1 country (UK) has essentially completed the move to full accrual except nowhole-of-government financial statements are yet in place.

2 countries (France & Switzerland) have begun the reform process

3 countries (Germany, Italy, & the Netherlands) have not yet begun thereform process

2002 summary of five African countries on Budget Transparency and

Participation in the Budget Process(www.internationalbudget.org/resources/africalaunch.htm).

Legal Transparency Participation

South Africa good moderate moderate

Ghana moderate weak weak

Kenya moderate weak weak

Nigeria weak weak weak

Zambia weak weak weak

OECD/World Bank 2003 Survey of Current Budgetary Practices for 30 OECDcountries and 30 non-OECD countries (ocde.dyndns.org)

Treasury Reference Model in 2001 by Ali Hashim (World Bank) and Bill Allan(IMF), www1.worldbank.org/publicsector/pe/trmodel.htm

IMF Code of Good Practice on Fiscal Transparency(www.imf.org/external/np/fad/trans/index.htm)

GFOA (US) Best Practices in Public Budgeting with 4 principles and 12elements (www.gfoa.org/services/nacslb/budgetmenu.htm)

UNDP Key Factors in Budget Preparation Process(magnet.undp.org/Docs/efa/CONTAC~1.htm)

World Bank Country Financial Accountability Assessment(www1.worldbank.org/publicsector/cfaa.htm)

OECD Best Practices for Budget Transparency (www.oecd.org)

Information Systems for Government Fiscal Management by Ali Hashim& Bill Allan, The World Bank, 1999

The Government Finance Statistics Manual, 2001 (IMF)

(www.imf.org/external/pubs/ft/gfs/manual/index.htm)International Federation of Accountants (www.ifac.org) where International

Public Sector Accounting Standards and studies can be downloaded for free.

International Consortium of Government Financial Managers (www.icgfm.org)for case studies published in the Public Fund Digest and announcement ofconferences.


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9August 2004

Timelines for Transitioning toAccrual Accounting

Cash BasisIPSAS (Part 1)

Budget/ActualComparativeStatement

Cash Basis

IPSAS (Part 2)

AP andOther CL

Long TermDebt

AR andOther CA

FixedAssets

All 20AccrualIPSASs

Net Assets/Equity

For Each Government Entity (Except GBEs) at Central, State, and Local Levels

IAS 7 on

Cash Flows

AP and

Other CL

Long Term

Debt

AR and

Other CA

Fixed

Assets

Equity AllIASs

All Pertinent IASs

For Each Government Business Entity (GBE)

For Consolidated Government Entities

(except GBEs)

For Consolidated Government Business

Enterprises (GBEs)

Consolidated

Cash Statement

(Part 1, CashBasis IPSAS)

ConsolidatedFinancial Statements

(IPSAS 6)

Consolidated

Statement on Cash

Flows (IAS 7)

Consolidated

Financial Statements

(IAS 27)

For Whole-of-Government Financial Statements

Consolidated Central GovernmentConsolidated State Governments

Consolidated Local GovernmentsConsolidated GBEs

Consolidated Whole-of-Government FinancialStatements (IPSAS 6)


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The Millennium Challenge CorporationRemarks by David Nummy

International Consortium on Government Financial Management

20 April 2004

Lessons in Development

For the last 10 years, I have worked in the US Treasury Departments techni-cal assistance program responsible for managing all projects related to publicexpenditure management. Our counterparts are typically Ministries of Financein transitioning countries.

I want to relate a story that all of you at this conference will uniquelyunderstand which I think helps to explain why the MCC is positioned to be

very successful.

The very first country I engaged with ten years ago was a relatively newcountry coming out of difficult times. One of my first meetings was with theMinister of Finance and I asked him to explain briefly how government rev-enues were managed. He explained that each morning at 9am, he called theGovernor of the Central Bank to learn how much revenue had been depositedthe day before, he conferred with his cabinet colleagues and made a decision onhow to spend yesterdays receipts. The process started anew the next morning.That was the sum of both budget formulation and budget execution.

Needless to say, I concluded that the government could benefit fromassistance and the Treasury Department began an engagement to help themimprove government finances. Over time, I learned some very valuable lessonsobserving this particular country.

Our program, along with other donors, explained the need to have an open,transparent, accountable and comprehensive budget process that providedmeaningful information to its citizens. Being overburdened by the problems ofthe day, little commitment to change was made, not out of resistance but

because it wasnt a priority.

This particular country has a very large and successful Diaspora, includingone individual with one of the worlds larger fortunes. This individual was par-ticularly generous toward his homeland and offered to provide a substantialamount of money to address some of the most urgent needs of its people. Heinformed the government that he would consider providing funding directlythrough government mechanisms but did not have faith that the existing finan-cial management process could appropriately track his funds and provide infor-mation about impact and results. He chose to establish a foundation but left outthe possibility of directly supporting government programs.

Almost immediately, Ministry of Finance officials laid out a program to

modernize and reform their budget and financial management processes. Myfirst lesson...incentives are powerful.

In deciding what course they wanted to take in financial managementreform, they began to look at the experience of their peer countries, theythought a great deal about their own needs, the experience and strengths oftheir employees, and the pace at which it made sense for them to proceed. Theirprogram was far more effective than any which had previously been suggested.


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My next lesson...when governments have developed their own reform course, itis frequently more successful than when imposed from outside.

Being a poor and inexperienced country, they needed technical expertise andfinancial resources. They turned to our program and to other donors and, work-ing all together, the collective assets of determination, experience, and finance

resulted in rapid and meaningful change.Today, that country has one of the best financial management informationsystems among its peers and it has made the transition in budgeting from whatI call, what we spend money on to why we spend money, instituting a pro-gram-based budget process that is carefully establishing performance indicators.Another lesson...when donors are able to work as partners with their counter-

part countries, their contributions are symbiotic.

This reform has impacted every aspect of resource allocation and the overallefficiency and effectiveness of all public monies has dramatically changed, notleast of which is due to the attention being paid to results. Economic growth has

taken off and peoples lives are demonstrably better. Yet another lesson is onethat you have discussed at this conference...policy driven by the effectivemeasurement of results has real impact on people.

Since my first encounter with this particular country, I have been involvedwith over thirty countries either in transition from one economic system toanother, various stages of development or in a post-conflict situation. The les-sons Ive referenced have been reinforced time and again. But perhaps the mostimportant lesson of all that Ive gained from my experience is thatpoliciesmatter. No amount of technical expertise, financial resources, or good

intentions will impact the lives of people suffering from poverty if they arenot accompanied by the kind of public policies that promote growth andprovide opportunity to every citizen.

The Millennium Challenge Corporation

When I had the opportunity to become a part of the Millennium ChallengeCorporation, I knew immediately that it was an organization I wanted to bepart of because the MCC is built around some fundamental principles includingincentives, country driven development programs, working as a partner, being

accountable for results, and, most importantly, the idea that policies matter.The MCC was proposed by the President two years ago coincident with the

Summit on Financing for Development held in Monterrey, Mexico, and enactedinto law in January of this year. I would like to briefly explain how these coreprinciples permeate all aspects of the MCCs design and operations.

Incentives

One of the brilliant aspects of the law creating the MCC is that it mandatesthat a countrys eligibility to benefit from the MCC is determined by their

actions and the impact of their policies. The President and Congress have insu-lated the MCC from being impacted by the political imperatives of the day.

In our first year, only countries that can borrow from the InternationalDevelopment Association (IDA) with per capita incomes of $1415 arecandidates to participate. That results in a list of 75 countries. Twelve of thoseare prohibited by other provisions of law from receiving US assistance, leaving63 candidate countries.


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To further increase the incentive provided by MCC assistance, we expect thatthe MCC will be one of the most substantial donors in those countries withwhom we eventually conclude an agreement. In addition, our assistance com-mitments will be multi-year in nature. We expect them to cover a period of threeto five years in duration.

Our appropriated funding for this fiscal year is $1 billion. The request in theFY 2005 budget is $2.5 billion and is projected to be $5 billion in FY 2006. Thiswill represent in increase of 50 percent in US development assistance. In short,an MCC partnership will be substantial, real, and will have a significant impactin the recipient country.

Country Driven Programs

Once countries are selected by the Board, it does not mean that they willautomatically receive MCC assistance. These countries will be invited to make a

comprehensive proposal outlining a program to be funded or partially fundedby the MCC.

The MCC will expect the country itself to have developed the key elementsof its proposal, the core element being their determination of the primary obsta-cles blocking economic growth and poverty reduction.

The MCC will expect a compact proposal to have been developed using aconsultative process, which includes citizens and civil society, to develop itsCompact program and will expect it to include measurement benchmarks thatcan be used to evaluate progress.

A Philosophy of Partnership

If negotiated to a successful conclusion, the MCC will sign an agreementwith an eligible country called a Compact, much like a partnership agreement.One of the primary principles of our organizational culture will be to refrainfrom identifying problems or imposing solutions but, rather, to work togetherwith countries in making our relationships successful.

It is our mandate and our intent to work in partnership with other US, multi-lateral, and bilateral donors. While an independent Federal corporation, our

Board of Directors is chaired by the Secretary of State and includes the Secretaryof the Treasury, the US Trade Representative, and the Administrator of USAID.Their presence will assure that we are reflecting the most important policypriorities of partner agencies in the US Government within the MCC context.

Measurable Results

In the next few days, we will post on our web site a set of Compact ProposalGuidelines to inform eligible countries on the elements that we will look for intheir proposals. As mentioned above, the most important elements will be an

identification of the obstacles to economic growth and poverty reduction, goalsand outcomes they believe will overcome those obstacles, and indicators thatwill serve as a benchmark and a measure of progress in achieving Compactgoals.

I believe one of the unique aspects of MCC is that assistance discussions willinitially be centered on measurable outcomes, a strategy to change economicgrowth and poverty reduction, and, only later on specific projects and imple-mentation. If you have a chance to read the guidelines, when posted, I think


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youll find a business-like approach to a partnership agreement that reflects allthe principles that Ive outlined.

One key element of interest to you, will be a fiscal accountability plan for theCompact program which we will evaluate using all the MCC principles I touchon today including accountability, results, and transparency. We will also look at

factors such as whether vendors can be paid in a timely fashion. As wevelearned in our own government, when we cant pay our bills on time, we hurtthe private sector. In many of these countries, the government is one of thelargest customers in the economy and they set a standard for good businesspractices.

Policies Matter

As Ive already mentioned, the MCC is founded on the belief that policychange is the most important ingredient of development. Our mandate and our

actions will be guided by that belief. We will and should be measured on ourown success by our ability to motivate governments to adopt the kind of poli-cies that we know result in positive change in peoples lives. While those poli-cies are many and diverse, we characterize them in three broad categories: gov-erning justly, investing in people, and encouraging economic freedom.

Summary

I find it a great privilege to be able to be part of this new approach to assis-tance. When I was asked why I was interested in working for the MCC, I

responded that, first, it had a mission that I could believe in and that it embod-ied all the lessons I had learned working for ten years with governments want-ing to improve their countries and the lives of their citizens.

Paul Applegarth, the nominee to be our CEO, has put it quite succinctly andto the point, the MCC is an effort to be something new and different andgood. I want to thank the ICGFM for giving me the opportunity to be heretoday and introduce you to the MCC.

Millennium Challenge CorporationReducing Poverty Through Growth

PRESS RELEASE (May 6, 2004)

The Millennium Challenge Corporation Names MCA Eligible Countries

Washington, DCToday, the Board of Directors of the Millennium ChallengeCorporation (MCC) selected the 16 countries eligible to apply for MillenniumChallenge Account (MCA) assistance in FY04. MCC, a newly created govern-ment corporation designed to work with some of the poorest countries in theworld, is based on the principle that aid is most effective when it reinforces

sound political, economic, and social policies that promote economic growth.This is a historic day for the Millennium Challenge Corporation, said

Secretary of State, Cohn L. Powell, Chair of the MCC Board. The Presidentsvision has come to pass, and todays decision by the Board of Directors is amajor step in implementing the vision of the MCC.

The selected countries include: Armenia, Benin, Bolivia, Cape Verde, Georgia,Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Mozambique,


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Nicaragua, Senegal, Sri Lanka and Vanuatu. In making its determinations, theBoard considered both the past and current policy performance of the candidatecountries in the areas of governing justly, investing in their own people andpromoting economic freedom. The Board also considered trends that indicatedpolicy improvement or slippage.

Our missionencouraging and rewarding good policies that producesustainable economic growthholds profound implications for freedom andsecurity across the globe, MCC CEO Paul Applegarth said today. Todaysdecision demonstrates the clear commitment of the U.S. to reducing povertyand human suffering.

The Board also approved a Threshold Country program, which will bedirected toward a limited number of candidate countries that have not met therequirements for MCA eligibility but demonstrate a significant commitment tomeeting the requirements for eligibility. The Threshold Country program willprovide an added incentive to countries that are committed to reform, and will

be used to assist such countries in making further progress towards becomingeligible for MCA assistance in future years. MCC expects to work closely withUSAID in this effort.

The United States is committed to the MCC as an innovative approach todelivering foreign aid. Congress has appropriated $1 billion for the MCC forthis fiscal year, and President Bush has requested $2.5 billion for FY05.

Abstract of Remarks by President George W. Bush at Ceremony

Celebrating Countries Selected for the Millennium ChallengeAccount (May 10, 2004)

Two years ago, I announced a new and hopeful approach in Americas aid todeveloping nations. Under this approach, America has pledged to increasedevelopment assistance by 50 percent over three years. To make sure that gov-ernments make the right choices for their people, we link new aid to clear stan-dards of economic, political, and social reform. We invited governments indeveloping nations to meet those standards so that they may truly serve theirpeople.

America formed the Millennium Challenge Corporation to oversee this newprogram. Last week, the first group of Millennium Challenge Account nationswas selected. I congratulate representatives with us today from Armenia, Benin,Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali,Mongolia, Mozambique, Nicaragua, Senegal, Sri Lanka, and Vanuatu. You havechosen the path of reform, and your people and your nations are better off as aresult of the decisions your governments have made.

I want to thank the Secretary of State (Colin Powell) for leading this effort.He is the chairman of the board of the new corporation. I appreciate other board

members who are with us-- Secretary John Snow, the Secretary of the Treasury;Ambassador Bob Zoellick, the United States Trade Representative; AndrewNatsios, the Administrator of the US Agency for International Development;and Paul Applegarth, who is the CEO of the Millennium ChallengeCorporation.

I want to welcome the ambassadors and representatives from the 16Millennium Challenge Account nations. We are glad youre here.Congratulations.


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In many nations, poverty remains chronic and desperate. Half the worldspeople still live on less than $2 a day. This divide between wealth and poverty,

between opportunity and misery, is far more than a challenge to our compas-sion. Persistent poverty and oppression can spread despair across an entirenation, and they can turn nations of great potential into the recruiting groundsof terrorists. The powerful combination of trade and open markets and good

government is historys proven method to defeat poverty on a large scale, tovastly improve health and education, to build a modern infrastructure whilesafeguarding the environment, and to spread the habits of liberty and enter-prise.

The Millennium Challenge Account encourages all nations to embrace politi-cal and economic reform. The United States has pledged to increase its coredevelopment assistance by half, adding $5 billion annually by 2006. To be eligi-

ble for this new money, nations must root out corruption, respect human rights,and adhere to the rule of law. They must invest in their people by improving

their health care systems and their schools. They must unleash the energy andcreativity necessary for economic growth by opening up their markets, remov-ing barriers to entrepreneurship, and reducing excessive bureaucracy and regu-lation.

The 16 nations represented here today have done all this and more. Each hasworked hard to be here today, and their efforts are already yielding results. Forexample, Madagascar is aggressively fighting corruption. The Ministry of

Justice has suspended a dozen magistrates on suspicion of corrupt activity. Thegovernment is also implementing an ambitious program of judicial reform.Senegal, Africas longest-standing democracy, has also enacted new anti-corrup-

tion laws, and is implementing new measures to fight money laundering.Honduras has made the improvement of education and health services a toppriority. Its immunization rate of 96 percent is among the highest of all eligiblecountries.

The new government of Georgia has doubled its investment in health careand raised teacher salaries by two-thirds. Mozambique has curbed governmentspending and lowered tariffs. These, and other reforms, have resulted in dou-

ble-digit growth rates over the last decade. Since launching its program of eco-nomic reform in 2002, Sri Lanka has reduced its budget deficit by a third, andcut inflation by half. Other nations represented here can point with pride tosimilar examples of progress.

Yet funding is not guaranteed for any selected country. To be awarded agrant, nations must develop proposals explaining how they will further addressthe needs of their people, and increase economic growthproposals that setclear goals and measurable benchmarks.

The countries selected today represent a small fraction of those struggling toemerge from poverty and establish reform. I urge all nations of the world to fol-low the progressive standards of governing justly, investing in people andencouraging economic freedom.

Reform can bring more aid from America, and it will also bring more invest-ment and more trade, lessening the need for aid over time. Reform will berepaid many times over in the relief of poverty, and rising national wealth andstability for their countries.

The 16 chosen in this round are showing the way, are showing what is possi-ble, are serving as a bright light in the developing world. You have taken thefirst courageous steps toward greater independence and greater wealth, andgreater hopes for the people you serve.


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I want to thank you all for being here. I congratulate you on your work. Andmay God bless your countries and the people in the countries. Thank you forcoming.

Report on Countries That Are Candidates for Millennium

Challenge Account Eligibility in FY 2005 and Countries ThatWould Be Candidates but for Legal Prohibitions.

SUMMARY: Section 608(d) of the Millennium Challenge Act of 2003 requiresthe Millennium Challenge Corporation to publish a report that identifies coun-tries that are candidate countries for Millennium Challenge Account assis-tance during FY 2005. The report is set forth in full below.

Report: This report to Congress is provided in accordance with section 608(a)of the Millennium Challenge Act of 2003, codified at 22 U.S.C. 7701 and 7707(a)(the Act). The Act authorizes the provision of Millennium Challenge Account

(MCA) assistance to countries that enter into compacts with the United Statesto support policies and programs that advance the prospects of such countriesachieving lasting economic growth and poverty reduction. The Act requires theMillennium Challenge Corporation to take a number of steps in determining thecountries that, based on their demonstrated commitment to just and democraticgovernance, economic freedom and investing in their people, will be eligible forMCA assistance during Fiscal Year 2005. These steps include the submission ofreports to the congressional committees specified in the Act and the publicationof notices in the Federal Register that identify:

1. The countries that are candidate countries for MCA assistance during FiscalYear 2005 based on their per-capita income levels and their eligibility toreceive assistance under U.S. law and countries that would be candidatecountries but for legal prohibitions on assistance (section 608(a) of the Act);

2. The criteria and methodology that the Board of Directors of the MillenniumChallenge Corporation (the Board) will use to measure and evaluate therelative policy performance of the candidate countries consistent with therequirements of section 607 of the Act in order to select eligible countriesfrom among the candidate countries (section 608(b) of the Act); and

3. The list of countries determined by the Board to be eligible countries for

Fiscal Year 2005, including which of the eligible countries the Board will seekto enter into MCA compacts (section 608(d) of the Act).

This notice is the first of the three required notices listed above.

Candidate Countries for FY 2005

The Act requires the identification of all countries that are candidates forMCA assistance in FY 2005 and the identification of all countries that would becandidate countries but for legal prohibitions on assistance. Section 606(a) of theAct provides that, during FY 2005, countries shall be candidates for the MCA ifthey:

1. Have a per capita income equal to or less than the historical ceiling of theInternational Development Association for the fiscal year involved (or $1465for FY 2005); and

2. Are not subject to legal provisions that prohibit them from receiving UnitedStates economic assistance under part I of the Foreign Assistance Act of 1961,as amended.


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Pursuant to section 606(c) of the Act, the Board of Directors of theMillennium Challenge Corporation has identified the following countries ascandidate countries under the Act for FY 2005. In so doing, the Board has antici-pated that prohibitions against assistance that applied to countries during FY2004 will again apply during FY 2005, even though the Foreign Operations,Export Financing and Related Appropriations Act for FY 2005 has not yet been

enacted and certain findings under other statutes have not yet been made. Asnoted below, the Millennium Challenge Corporation will provide any requiredupdates on subsequent changes in applicable legislation or other circumstancesthat would affect the status of countries as candidate countries for FY 2005.

1Iraq is identified as a candidate country on a provisional basis. Iraq is sub-ject to section 620(t) of the Foreign Assistance Act of 1961, as amended, which

prohibits assistance to countries with which the United States severed diplomat-ic relations, unless diplomatic relations have been resumed and an agreementfor the furnishing of assistance has subsequently been entered into. While theUnited States has resumed diplomatic relations with Iraq, an assistance agree-ment, which would satisfy section 620(t), has not yet been completed. If suchan agreement has not been entered into by the date on which the MCC Boarddetermines eligible countries pursuant to section 607 of the Act, Iraq will not betreated as a candidate country as of that date.

1. Afghanistan

2. Angola

3. Armenia

4. Azerbaijan

5. Bangladesh

6. Benin

7. Bhutan

8. Bolivia

9. Burkina Faso

10. Cameroon

11. Chad

12. China13. Comoros

14. Congo, Dem. Rep

15. Congo, Rep.(Brazzaville)

16. Djibouti

17. Egypt, Arab Rep. of

18. Equatorial Guinea

19. Eritrea20. Ethiopia

21. Gambia

22. Georgia

23. Ghana

24. Guinea

25. Guyana

26. Haiti

27. Honduras

28. India

29. Indonesia

30. Iraq1

31. Kenya

32. Kiribati

33. Kyrgyz Republic

34. Lao PDR

35. Lesotho36. Madagascar

37. Malawi

38. Mali

39. Mauritania

40. Moldova

41. Mongolia

42. Morocco

43. Mozambique44. Nepal

45. Nicaragua

46. Niger

47. Nigeria

48. Pakistan

49. Papua New Guinea

50. Paraguay

51. Philippines

52. Rwanda

53. Sao Tome andPrincipe

54. Senegal

55. Sierra Leone

56. Solomon Islands

57. Sri Lanka

58. Swaziland

59. Tajikistan

60. Tanzania

61. Timor-East

62. Togo

63. Turkmenistan

64. Tuvalu

65. Uganda

66. Ukraine67. Vanuatu

68. Vietnam

69. Yemen, Rep.

70. Zambia


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Albania, Bosnia and Herzegovina, Cape Verde, and Tonga were candidatecountries for FY 2004 but are not candidate countries for FY 2005, due toincreases in their levels of per capita income above the historical ceiling of theInternational Development Association. In addition, Serbia & Montenegro,which would have been a candidate country for FY 2004 but for legal prohibi-tions that apply to Serbia, is not a candidate country for FY 2005 due to an

increase in its per capita income above the International DevelopmentAssociation historical ceiling.

Countries That Would Be Candidate Countries but for Statutory ProvisionsThat Prohibit Assistance

Countries that would be considered candidate countries during FY 2005 butare subject to legal provisions which prohibit them from receiving U.S. econom-ic assistance under part I of the Foreign Assistance Act of 1961, as amended (theForeign Assistance Act) are listed below. As noted above, this list is based onlegal prohibitions against economic assistance that apply during FY 2004 that

are anticipated to apply again during FY 2005.1. Burma. Section 570 of the FY 1997 Foreign Operations Act prohibits assistance

to the government with certain narrow exceptions. In addition, Burma hasbeen identified as a major drug-transit or major illicit drug producing coun-try for 2004 (Presidential Determination No. 2003-38, dated 9/15/03) anddesignated as having failed demonstrably to adhere to its internationalobligations and take the measures required by section 89(a)(1) of the ForeignAssistance Act, thus making Burma ineligible for assistance. Burma is listedas a Tier III country under the Trafficking Victims Protection Act for not com-plying with minimum standards for eliminating trafficking and not makingsignificant efforts to comply (Presidential Determination No. 2003-35,9/9/03).

2. Burundi is subject to section 508 of the Foreign Operations, Export Financing,and Related Programs Appropriations Act, 2004 (FY 2004 AppropriationsAct), which prohibits assistance to the government of a country whose dulyelected head of government has been deposed by a military coup.

3. Cambodia is subject to section 561(b) of the FY 2004 Appropriations Act,which prohibits assistance to the central government of Cambodia, exceptin specified circumstances.

4. Central African Republic is subject to section 508 of the FY 2004Appropriations Act.

5. Cote dIvoire is subject section 508 of the FY 2004 Appropriations Act.

6. Cuba. Section 507 of the FY 2004 Appropriations Act prohibits direct assis-tance to Cuba. The Cuban Liberty and Democratic Solidarity Act of 1996,Pub. L. 104-114 requires the President to take all necessary steps to ensurethat no funds or other assistance is provided to the Cuban government.

7. Guinea-Bissau is subject to section 508 of the FY 2004 Appropriations Act.

8. Liberia is subject to section 620(q) of the Foreign Assistance Act and section512 of the FY 2004 Appropriations Act, both of which prohibit assistanceunder part I of the Foreign Assistance Act based on past due indebtedness tothe United States.

9. Somalia is subject to section 620(q) of the Foreign Assistance Act and section512 of the FY 2004 Appropriations Act.


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10. Sudan is subject to: section 620(q) of the Foreign Assistance Act and section512 of the FY 2004 Appropriations Act. Sudan also is subject to section 508 ofthe FY 2004 Appropriations Act and section 620A of the Foreign AssistanceAct.

11. Syrian Arab Republic. Section 507 of the FY 2004 Appropriations Act pro-

hibits direct assistance to Syria.12. Uzbekistan is subject to section 568 of the FY 2004 Appropriations Act,which requires that funds appropriated for assistance to the centralGovernment of Uzbekistan may be made available only if the Secretary ofState determines and reports to the Congress that the government is makingsubstantial and continuing progress in meeting its commitments under aframework agreement with the United States.

13. Zimbabwe is subject to section 620(q) of the Foreign Assistance Act andsection 512 of the FY 2004 Appropriations Act.

Countries identified above as candidate countries, as well as countries thatwould be considered candidate countries but for the applicability of legal provi-sions that prohibit U.S. economic assistance, may be the subject of future statu-tory restrictions or determinations, or changed country circumstances, thataffect their legal eligibility for assistance under part I of the Foreign AssistanceAct during FY 2005. The Millennium Challenge Corporation will include anyrequired updates on such statutory eligibility that affect countries identificationas candidate countries for FY 2005, at such time as it publishes the noticesrequired by sections 608(b) and 608(d) of the Act or at other appropriate times.Any such updates with regard to the legal eligibility or ineligibility of particular

countries identified in this report will not affect the date on which the Board ofDirectors is authorized to determine eligible countries from among candidatecountries which, in accordance with section 608(a) of the Act, shall be no soonerthan 90 days from the date of publication of this notice.


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U.S. Agency for InternationalDevelopment

Remarks by Mr. Frederick W. Schieck

Deputy Administrator

The International Consortium on Governmental Financial Management

Miami, Florida

April 20, 2004

I am pleased to have the opportunity to return to Miami to meet with youtoday. I appreciate Mr. Van Danikers invitation. Two years ago I had the pleas-ure of discussing with many of you the United States Agency for InternationalDevelopments (USAIDs) role in financial management. Today I want to share

with you our views on the challenge to development presented by corruptionand what we can do to address this serious problem. I want also to give a spe-cial thanks to two Inspector Generals, member of the ICGFM Board, with who Ihave had the pleasure to workEverett Mosley the IG of USAID, and BillTaylor recently retired from the Inter American Development Bank where Iworked for 10 years.

This is a country that has been seized periodically by reform movements.Sometimes they have ushered in wholesale changes of policy that have trans-formed how we view the subject at hand. One such instance began in 1977when Congress passed the Foreign Corrupt Practices Act. This piece of legisla-tion prohibited certain business practices of US companies, most notably, theoffering of bribes to foreign government officials. It was widely characterized insome quarters at the time as ill-conceived and quite possibly counterproductive.Critics said that US companies would be placed in a competitive disadvantagewith foreign firms. In fact, while the US was seeking to stop the practice of

bribery of foreign governments, other countries continued to allow their firmsto count such payments as tax deductible expense.

The criticism did not stop there. There was concern that law would put intoplay certain negative incentives whose ultimate effect might even be to make

corruption worse. Given the competitive environment multinationals operate in,it was thought that the law would encourage less scrupulous companies toadopt more elaborate schemes to hide the outlawed practices. The law seemedto be just another example of a nave attempt to reform common behavior, if nothuman nature itself. Like the earlier experience in the U.S. when the productionof alcohol was prohibited, the critics predicted that the Act would run upagainst experience and eventually be repealed.

As it turned out, the Foreign Corrupt Practices Act was not another failedattempt at reformit was not a passing thought. It marked a fundamentalchange in thinking about the subject of corruption and set off a growing recog-

nition of the problem. The existence of the ICGFM and our meeting here todayis part of a movement that began back then. What is now a global allianceagainst corruption would have been dismissed as a mere tilting at windmillsa little more than a generation ago. I believe that where we stand today couldnot even have been imagined back then.

Its not that corruption was not discussed in the past. But then it wasreviewed mostly as a local issue which often had a political focus. Charges and


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counter-charges of corruption have always been a part of political campaigns,then as they are now.

Corruption in the developing world was assumed to be a given, a fact oflife. This was, more often than not, the attitude of businessmen. Policy-makershad a different perspective. During the Cold War, strategic considerations often

overrode any concerns we might have had with certain allies and their prac-tices. Academics, on their part, tended to view corruption as a cultural phe-nomenon, an outgrowth of informal, traditional societies operating within thestructures of formal, modern political systems that were inherited from a colo-nial past. According to this theory, corruption stemmed from the dislocationsthat these societies suffered under imperialist rule. These academics tended tomake corruption almost a taboo topica politically incorrect subject, if youwillwhile other circles either accepted or ignored it.

All this has changed. Corruption is far from a taboo subject. It is now on theagenda of national, regional, and multinational policymaking bodies. It is the

concern of citizens and groups inside and outside societies that are mostaffected. It is being confronted openly by businesses, civil society organizations,academia, think tanks, and the media.

In this regard, I would like to note that the anti-corruption provisions of theU.S. Foreign Corrupt Practices Act eventually inspired conventions broadlyadopted by the Organization for Economic Cooperation and Development(OECD), the Organization of America States (OAS), and the United Nations.Multilateral organizations such as the World Bank and the Inter-AmericanDevelopment Bank also recognize the importance of the provisions. In thisregard, we second the World Bank in its support of the Extractive IndustriesTransparency Initiative (EITI), which recognizes the high stakes at play aroundthe world, for both developed and developing countries, in helping to free oil,gas, and mining industries from control by corrupt elites. The efforts of theWorld Bank and various regional development banks are to be commended fortackling the issue. Moreover, corruption will be prominently featured in the

June summit of the G8 at Sea Head, Georgia and we can anticipate furtherinitiatives on this score.

Bilateral agencies consider the issue of corruption as central to developmentas well. As many of you know, the United States has established the Millennium

Challenge Corporation. Since the enactment of the law, President Bush reiterat-ed strongly that good governance is an essential condition of development. Sothe Millennium Challenge Account will reward nations that root out corrup-tion. Therefore, a countrys position on corruption will be viewed as a majorfactor in determining eligibility for funding. In addition, the program will iden-tify countries that have demonstrated an abiding commitment to democraticgovernance and market oriented economic policies and that can benefit fromsupport in furthering such endeavors. This initiative is one of the most vision-ary development initiatives in a long while. It will provide the impetus forrecipient countries to accelerate economic growth to the point where they can

graduate from the group of countries requiring concessional assistance. Sincethe passing of the law, the MCA is already impacting on counties that may nar-rowly miss eligibility. It is encouraging those countries to stimulating reformefforts that will qualify them in later rounds.

We in USAID consider the issue of fighting corruption central to our develop-ment mission. Administrator Natsios has commissioned an agency-wide anti-corruption strategy which will incorporate anti-corruption elements into allappropriate facets of agency operations. We have supported Transparency


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International, one of the worlds premiere anti-corruption organizations, almostfrom its inception, and we fund a host of other NGOs engaged in the commonfight. The USG supported the Kimberly Process to end the trafficking in blooddiamonds. USAIDs field Offices are engaged in legitimizing this industry sothat the revenues derived from it can serve long-term development objectives.We are proud of our quarter century association with the International

Consortium on Governmental Financial Management and the workshops itsponsors. Lastly, we continue to support the Americas Accountability and Anti-Corruption Project, which some of you in the audience are actively involved in.

This increased interest in tackling corruption can be explained by a numberof factors. The end of the Cold War brought an end to ideologically driven for-eign assistance. In the new era, trade is increasingly seen as key to launchingcountries on the path of development but that this can be undermined by cor-ruption and rent-seeking government officials. With the globalization of tradeand capital markets, businesses have faced ever tougher competition and have

become more reluctant to tolerate the risk and expense associated with the ingenuine practices of the past. At the other end of the trade process, countrieswith high levels of corruption find themselves unable to attract the outsideinvestment their economies so desperately need.

Political changes also enter the equation. The so-called third wave ofdemocracy has brought to increasing numbers of the worlds citizens the powerof the vote and the enjoyment of civil liberties, such as freedom of speech andthe right to assemble. Popular pressure has prompted leaders and oppositionfigures to confront corruption and show a strong anti-corruption commitment.

Though the financial costs of corruption cannot be precisely measured, itssignificance, by all estimates, is major. How can we put a price tag on the cor-rupt desires of a Charles Taylor of Liberia and the devastation he brought to hiscountry? It is equally difficult to calculate the cumulative effects of petty corrup-tion, the money that is slipped out of sight to a custom officer, bureaucrat, trafficofficer, magistrate, or policeman.

We see corruption as the serious development challenge it is. It can infect allthe institutions of democratic governance and its formal processes. Corruptionin elections and legislative bodies reduces accountability and short-circuits rep-resentative government. Judicial corruption suspends the rule of law and

undermines the institution uniquely positioned to fight the problem. Corruptionin public administration skews the provision of public services from intendedbeneficiaries to the well-connected and influential. It erodes the institutionalcapacity of government as formal proceedings are ignored, resources siphonedoff, and officials hired and promoted without regard to competency or perform-ance. Indeed, the recent gains in democracy are threatened where these govern-ments do not bring corruption under effective control.

Corruption also generates considerable economic distortions and inefficien-cies that affect both the public and private sector. In the public sector, it typicallydiverts investment from education and projects that hold most development

promise into capital projects that favor bribes and kickbacks. It lowers compli-ance with regulations. This all too often results in poor quality infrastructure,unsafe and poor construction, as well as environmental damage. In the short-term, this puts additional budgetary pressures on the government, while thelong-term effect reduces economic growth. The private sector has to deal withincreased cost of bribes and extortion, the management costs of negotiating withcorrupt officials, and operating in an atmosphere pervaded by risk and fear ofcrossing influential figures, not to mention criminal prosecution.


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Responding to the development challenges posed by corruption requires anunderstanding of its causes. From an institutional perspective, corruption ariseswhen public authorities have wide discretion, little accountability, and perverseincentives. This means that the more activities public authorities control or reg-ulate, the greater the opportunities for corruption. Furthermore, the lower theprobability of detection, the greater the probability that corruption will take

place. In addition, the incentives for pursuing self-serving ends lowers therewards for the honest discharge of duties.

This institutional perspective suggests countering corruption through thefollowing:

1. Reducing the role of government in economic activities;

2. Strengthening transparency, oversight, and sanctions; and

3. Redesigning terms of public employment to improve incentives and increaseprofessionalism.

To limit official authority and its control over the economy, enlightened pri-vatization schemes should be pursued, accompanied by adequate measures oftransparency and legal frameworks that guard against merely converting publicmonopolies to private ones. State authority can be limited by eliminating tariffs,exchange rate restrictions, price controls, and permit requirements that encour-age bribery. Encouraging competitive procurement practices as well as competi-tion in the provision of public services also has a substantial impact.

Accountability can be enhanced by open budget process and decentraliza-tion, through freedom of information legislation and financial disclosurerequirements. It is here where organizations like ICGFM are particularly rele-

vant. Measures to modernize and professionalize financial management systemsare key to our anti-corruption efforts. This includes the design of financial soft-ware, installation of hardware, and the training of professionalized accountingand auditing staffs. Additionally, hot lines and whistle blowing protections can

be extended to witnesses of corrupt practices. Credible sanctions must be estab-lished through reform of penal codes and by fortifying the independence of

judicial bodies. We must work to protect the integrity of elections so that we caneffectively remove bad actors when warranted. Offices with a clear anti-corrup-tion mandate can be established.

We can work to promote ethical behavior in public service by tightening jobrequirements, establishing anti-nepotism regulations, and developing codes ofethics. Ways must be sought to improve compensation systems in order toattract and retain more qualified personnel. This might be financed through theelimination of ghost workers, redundant staff, and predatory officials in waysthat frees resources while improving morale and professionalism. The experi-ence of Ghana is a good example in that this Government reformed its criticallyimportant department of revenue through such methods.

We can also work to change general attitudes toward corruption, mobilizingthe political will to combat corruption by monitoring public relations campaigns

and workshops, support civic advocacy organizations such as TransparencyInternational (TI) and expand its national chapters, train journalists in the skillsof investigative reporting, and bring bilateral and international pressure on themore serious offenders. I would just like to note that USAID has worked withmany countries to establish investor roadmapssurveys that lay out, step bystep, permit by permit, everything an investor has to do to start a new business.This has proven to be not only a useful tool in the battle against corruption, butone increasingly used by donor agencies in broader reform efforts to empower


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economically marginalized populations and improve a countrys businessclimate.

I want to emphasize that the inventory of potential responses is large andvaried, and covers reforms directed at government institutions as well as societyat large. But the mix of incentives, the relative emphasis placed on them, and

the sequence in which they should be pursued, will vary from time to time andfrom country to country.

In the time remaining, I would like to highlight some of USAIDs anti-corruption efforts in very different parts of the world.

USAID/Colombia is finishing the first phase of a $6.8 million anti-corruptionactivity aimed at increasing transparency and accountability at both the nationaland municipal levels. The project has brought internal control mechanisms,

based on international standards, to 21 local governments and 3 of Columbiasmajor cities. Implementation manuals have been published and distributed tolocal and national entities. Over 2,000 local and national level controllers have

been trained in the new accounting regulations. In addition, public ethics codeshave been developed and adopted, with the necessary follow-on training.USAID has worked with a broad array of civil society organizations to enhancepublic participation in decision-making and monitoring projects. Over 100 smallgrants have been made to citizen groups for this purpose.

USAID helped the Republic of Georgia launch a new administrative law thatbrings greater transparency and accountability to government operations, aswell as delineating citizens rights as to information and the conduct of admin-istrative proceedings. Georgias law requires government actions to be public

and government information to be freely available. It has been instrumental inthe rise of a more independent and vigorous press and has been called by aleading Georgian jurist as the single most important Georgian law, after the1995 constitution.

In Bangladesh, USAID has helped establish a local chapter of TransparencyInternational. It has been engaged in widespread reporting and watchdog activ-ities as well as general consciousness-raising within the country. SchoolManagement Committees also have been establishedin some of the mostunderserved regions of the countryto monitor low-level corruption in theeducation sector. Illegal sub-contracting of teaching, unauthorized leave, and

illegal payments demanded by teachers or other exploitative practices are alltoo common. Mothers Groups have been formed and issue what is their ownreport card on the functioning of their childrens schools.

I dont for a moment want to suggest that corruption is just a concern of thedeveloping world. In our own Agency, vulnerabilities have greatly increased inthe past two years as we have undertaken major new programs in HIV/AIDSand, of course, in Iraq and Afghanistan.

USAID funding for HIV/AIDS has increased from $139 million in FY 1999to more than $700 million in FY 2003. This year, USAID will also be managing

a portion of the Presidents Emergency Plan for AIDS Relief, which is projectedto rise to $15 billion. The Office of the Inspector General is working to makesure that oversight mechanisms are in place, the costs charged are reasonablein amount, and that the costs incurred are justified.

We are managing ten contracts in Iraq, valued at over $2.2 billion. OurInspector Generals office there is conducting performance audits and hasissued 22 concurrent financial audit reports. Concurrent means that we arentwaiting until the end of the year to do the audit but rather we are beginning the


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audit just as the project or activity being audited gets under way, with the audi-tors maintaining a presence throughout the year at the work sites and in theoffice of the grantees and contractor.

The same approach is being used in Afghanistan through a contract with apublic auditing firm supervised by the Inspector General. The Office is also

spending considerable audit resources reviewing our $500 million infrastructureprogram, including the Kabul/Kandahar Road.

The USAID Inspector General has also been selected as auditor for theMillennium Challenge Account. I should point out here that Agency manage-ment and the Inspector Generals office collaborate on establishing yearly objec-tives and standards for success that we can achieve together. Among these isour common endeavor to help improve management so that we can get the bestvalue for our tax dollar in the service of the people in the developing world.

Let me end with the observation that no country has ever been free totallyfree from corruption; however it is a goal that we can all share in trying to

achieve it together.

Thank you.


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Reforming Fiscal Institutions andStrengthening Government

Accountability: Legislative BudgetOversight in Emerging Economies

CARLOS SANTISO

Carlos Santiso is a governance adviser to the United Kingdom Department forInternational Development in Lima, Peru, and a political economist at the

Johns Hopkins University School of Advanced International Studies inWashington DC, United States. Email: [email protected]

I. Legislatures and the budget process in presidential systemsReforming budgetary institutions is a critical task for emerging economies.

Designing feasible fiscal reforms and achieving sustainable impact on fiscal per-formance require adequately understanding the political economy of the budgetprocess. The role of legislatures in budget policymaking is a key dimension ofthe governance of the budget. Legislatures authorise the executive to raise rev-enue and manage public expenditures, exercise oversight and ensure accounta-

bility. They help ensure government accountability in the management publicfinances, by approving budget allocations, overseeing budget execution and

controlling budget performance.Enhancing legislative scrutiny of the budget and oversight of its execution is

increasingly considered as a means to strengthen government accountabilityand curb corruption (OECD 2001). In many developing countries, however, therole of parliaments in budgeting is subdued and often dysfunctional, partly as aresult of executive predominance, but also because of legislatures own deficien-cies. The greatest challenge remains to strengthen democratic accountabilitywhile ensuring fiscal discipline. This study briefly reviews recent trends in therole and performance of parliaments in the budget process in Latin Americanemerging economies.

II. Legislative budgeting and government accountability

Legislative budgetary institutions, such as standing committees, legislativebudget offices and general audit offices, have largely been neglected in the firststage of economic reform and financial administration modernization. Theynevertheless perform critical accountability functions (Morgenstern and Nacif2002; Mainwaring and Welna 2003). Legislatures constitute central agencies ofstate self-restraint and external accountability in public finance management.They help enforcing the accountability cycle of public budgeting: ex ante

accountability, ensuring that budget allocations adequately reflect policy priori-ties; concurrent accountability, overseeing the execution of the budget by the exec-utive; and ex post accountability, holding government to account for performanceand results. In practice, however, legislatures have often failed to adequatelyand responsibly perform their accountability functions. What then explainsthis disjuncture between the potential contribution of legislatures to public

budgeting and their actual role?


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There is great controversy as to what the most appropriate role of parlia-ments ought to be in public budgeting. The prevailing economic orthodoxyposits that excessive legislative prerogatives in public budgeting tend to lead tofiscal disequilibria, greater budget deficits and public debt; overspending andunder-taxation are likely results (Stein 1998; Alesina 1999). It thus warns againstthe dysfunctional fiscal effects of unrestrained legislative budgetary powers and

consequently favors the insulation of economic policymaking within the execu-tive branch. These problems can be minimized by assigning control over the

budget to agents with incentives to internalize the costs of the programs thestate finances. Consequently, it is argued, hierarchical budget systems thatconcentrate power in the finance minister, vis--vis other ministers, and in theexecutive vis--vis congress (Stein 1998:3) tend to provide stronger proceduralincentives for promoting economic prudence. Such views, which have influ-enced economic policies in Latin America in the 1990s, counsel giving greaterindependence to the institutions of economic governance, in particular central

banks, tax authorities and regulatory agencies. The 2000 Law of FiscalResponsibility adopted in Brazil constitutes a more recent attempt atestablishing numerical and procedural budget constraints.

Nonetheless, there are important risks associated with hierarchical budgetaryarrangements. They tend to allow for excessive executive discretion in public

budgeting, especially in presidential systems of government. Often, uncon-strained executives misuse their constitutional authority and delegated powers,left largely unchecked by amenable parliaments. Unfettered executive discre-tion, reflected in particular in the extensive and early use of executive decrees tore-allocate budget appropriations, hampers external scrutiny and hinders exter-

nal accountability in governmental financial management. Henceforth, beyondweakening the mechanisms of democratic accountability in public finance,unconstrained executive discretion has often permitted corruption and statecapture.

Finding the most adequate balance between executive and legislative prerog-atives in budget policymaking is a critical challenge for emerging economiesstruggling to consolidate their democratic institutions. Ultimately, the gover-nance of the budget reflects a delicate balance between executive power andlegislative oversight. A key challenge of the governance of the budget inemerging economies thus resides in the ability of institutional arrangements

to adequately combine democratic accountability and fiscal prudence.

III. Legislatures and budget policymaking

Strengthening legislative budget oversight is required to re-equilibrateexecutive-legislative relations in public finance management, especially inpresidential systems of government characterized by weakly institutionalizedmechanisms of accountability. Legislative budgeting can be defined by thescope of budget authority and the effectiveness of budget oversight. The legalframework for legislative budgeting only partly explains the actual performance

of legislatures in the budget process.In Latin America as elsewhere, there exists an important gap between the

formal powers and actual role of parliament in public budgeting. Legislative budg-eting is a recent development in the history of Latin American legislatures: thefirst budget formally approved by the Argentinean legislature was that of 1990.The contribution of legislatures to budget oversight remains inhibited by struc-tural factors related both to the internal organization of parliamentary work andthe broader external context of executive-legislative relations.


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The challenges of legislative budgeting are twofold: those related to thecapacities of legislatures and the organization of parliamentary work, and thoserelated to their incentives to exercise their budgetary powers effectively andresponsibly. These two sets of factors interact in different ways along the differ-ent stages of the budget cycle.

A first set of factors are internal to the legislature itself, related to deficienciesin the structures, processes and procedures of legislative budgeting, asdefined by constitutional rules, legislative norms and parliaments internalrules. They essentially relate to organization, resources and capacity.

A second set of factors are external to the legislature, linked to the formal andinformal rules shaping executive-legislative relations, the presidential natureof the political system, the over-reliance of executive decree authority,skewed electoral incentives, and a fragmented political party system.

IV. Legislative budget authority: legal framework

Four sets of variables are particularly determinant to assess the effectivecontribution of parliament to budget policymaking and oversight: whetherparliament is legally empowered to intervene in budgeting, whether it is endowedwith the required technical capacities, whether it possesses the necessary politicalwill, and whether the governance environment is conducive. Legislative

budgetary powers are different in successive phases of the budget cycle, i.e.formulation, adoption, execution, and control.

Legislative budgetary powers, contained in the constitution, the organic budgetlaw and parliaments internal rules, are severely limited by the prerogatives ofthe executive. Constitutional provisions endow Latin American presidents withuncommon powers in public budgeting, both in absolute and relative terms,although important variations between countries. Assessing the budgetary pow-ers of the executive in 23 presidential systems, Mathew Shugart and StephanHaggard (2001) find that in seven of them presidents enjoy exclusive powerover spending legislation and the legislature confronts severe constraints onemending presidential proposals.

The executive has a predominant role in the drafting and formulation of thebudget. The executive has the exclusive right to initiate the budget process,

draft and propose the budget bill. The central budget offices of the finance min-istries are responsible for coordinating the budget drafting process within theexecutive and overseeing its execution by spending agencies. Once approved bythe government, the budget proposal is submitted for consideration and reviewto the legislature, which as a set period of time allocated for that task.

Legislative amendment powers vary between presidential regimes. In five of theten cases included in Table 1, the legislature is not allowed to create or increasepublic spending, except as it pertains to its own budget. If the budget is notapproved by the set deadline, the current budget remains in effect in only fourcases (Argentina, Costa Rica, Uruguay and Venezuela). In five other cases

(Bolivia, Chile, Colombia, Ecuador, Peru), the executives proposal automatical-ly becomes law, usually by legislative decree. These clauses give the executiveextraordinary leverage over the legislature, as legislative inaction does not pre-clude the executive proposal from being adopted. They neutralize legislativeobstruction and significantly diminish the leverage of legislatures in the budget

bargaining process, as legislatures have no veto power over the executivesbudget proposal. While they help avoid deadlock over the budget, these


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provisions create a set of incentives that is not conducive to effective scrutinyand oversight.

Legislative oversight of budget execution Constitutions give parliaments animportant in the scrutiny of budget re-allocation, the oversight of budget execu-tion, and the review of public accounts. In practice, however, legislative over-

sight of budget execution is still embryonic in most Latin American countries.Legislatures exercise only a limited monitoring of the governments compliancewith budget rules and procedures. Largely unable to monitor compliance withthe approved budget, the legislature is even less able to monitor the perform-ance of public expenditure management and enforce results-based budgeting.Nevertheless, parliaments possess a potentially powerful instrument to control

budget execution and enforce ex post accountability: the annual certification ofpublic accounts. The parliaments public accounts committee informs its opin-ion with the audited report on public accounts prepared by the general auditoffice. The plenary subsequently considers the committees opinion and decides

whether to discharge government. The general audit office is generally anadvisory body to parliament, such as in Argentina, an autonomous stateagency, such as in Chile, or an independent institution with quasi-judicialpowers, such as in Brazil. The quality of institutional linkages between publicaccounts committees and general audit offices is thus a key determinant toeffective legislative budget oversight.

Accountability is also constrained by the time, timing and sequencing of leg-islative scrutiny. As Table 2 shows, there is great variation in the time legislatureshave to review the budget, ranging from 30 days in Mexico to up to 120 days inHonduras. Furthermore, there are important time lags and inconsistencies that

adversely affect the accountability cycle of the budget process. For example, thereview of public accounts and the evaluation of the auditor generals reportoften take place at a time that does not always allow them to adequately feed-

back into the budget process.

V. Legislative budget oversight: actual performance

Recent research on budget transparency in Latin America has revealed the gapbetween the quality of the legal framework for public budgeting and adherenceto it (IBP 2003.) According to the survey data reproduced in Tables 3 and 4, while

the quality of the legal framework for public budgeting in Argentina, Brazil,Chile, Mexico and Peru is generally sound, perceptions of budget transparencyare poor, especially in Peru. Legislative oversight and external auditing are par-ticularly deficient. Several structural factors explain such shortcomings:

Budget rigidity and inertia tends to limits the scope for exercising legislativebudget powers. In Brazil, 90 percent of the budget is considered rigid, as aresult of constitutionally mandated expenditures, earmarking of tax revenuesand mandatory expenditures. Hence, the type of public spending on whichparliament could potentially have the greatest influence, capital expenditure,

represents only a small fraction of public expenditures, albeit of strategicimportance for building ad hoc political coalitions, as in the case of Braziliansystem for executing budget appropriations (OECD 2003).

The gap between the approved and executed budgets further hinders legislativeoversight. Optimistic assumptions on revenues, weak execution capacity ofsector ministries and ad hoc changes in appropriations partly explainthis gap. The resulting instability of budgetary institutions and fiscal ruleshampers the consolidation of credible budget processes with predictableprocedures and enduring structures.


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External factors

Legislative oversight and external auditing General audit offices providecritical information and advisory services to parliaments, directly or indirectly,in the exercise of their accountability functions. The availability of timely andreliable information on budget performance, generally provided by general

audit offices, is key to the effectiveness of legislative oversight. Improving thefunctional linkages between public accounts committees and general auditoffices is critical to anchor accountability in public finance and budget manage-ment (McGee 2002; SIGMA 2002). In turn, securing the political independenceof general audit offices, which have been significantly undermined by executiveinterference and political meddling, is critical to guarantee effective externalauditing of government finances (INTOSAI 2001.) Issues such as criteria guid-ing the nomination and removal of auditor generals and the length of their termin office, as well as the procedures regulating recruitment, promotion and dis-missal of professional staff are critical determinants of the effective independ-

ence of general audit offices. Predictable financial resources are also a necessary,yet not sufficient for institutionalizing supreme audit institutions and insulatingthem from political meddling. Most Latin American countries are indeed seek-ing to strengthen their external auditing functions, with the support of interna-tional financial institutions (Santiso 2004). Important reforms have been intro-duced in recent years. In Mexico, a general audit office, theAuditora Superior dela Federacin, was established as an advisory body to the lower chamber of par-liament in 1999 to assist parliament in the oversight of federal public finances.In 2000, parliament approved law on external accountability.

Economic governance and budgetary decision-making Beyond the constrains

imposed by the current institutional framework for legislative budgeting, thepresidential nature of political systems, coupled with an over-reliance on execu-tive decrees, has been particularly detrimental to the strengthening of the insti-tutions of government accountability in public budgeting. The use of executivedecrees in public budgeting is impressive both in absolute and relative terms incountries such as Argentina, Brazil or Peru. In practice, parliament exercises lit-tle oversight on presidential decrees. The frequent and early recourse to execu-tive decrees to re-allocate budget appropriations not only undermines the leg-islative oversight, but also weakens the credibility of the budget as an instru-ment of economic governance and strategic planning.

Political governance and legislative budgeting Legislative behavior and execu-tive-legislative relations in public budgeting are necessarily intermediated bypolitical parties and electoral rules. Stein et al. (1998) have indeed uncovered astatistically significant relationship between electoral systems and fiscal per-formance. Electoral systems characterized by a large degree of proportionality(i.e. large district magnitude) and political fragmentation (i.e. number of effec-tive parties represented in parliament) tend to have larger governments, largerdeficits and a more pro-cyclical response to the business cycle. Furthermore,the fragmentation and volatility of political party systems throughout Latin

America has been detrimental to the effective exercise of legislative budgetoversight, significantly shortening the time horizons of individual legislators.Parties lack the sort of internal coherence, cohesion and discipline that wouldallow them to act purposefully and consistently within parliament. Moreover,when the ruling party or coalition holds a disciplined majority position in par-liament, as it is often the case in Latin America, there exists a possibility of con-trol dilution: in such circumstances, presidential systems tend to have inopera-tive systems for enforcing government accountability (Messick 2002; Manningand Stapenhurst 2002).


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VI. The politics of public budgeting

The analysis of legislative budgeting in Latin America illustrates the con-straints to and conditions for enhancing the contribution of parliaments to

budget oversight in presidential systems of government. The political economyof the budget process reveals that political and technical aspects interact in

determining the effectiveness of legislative budget oversight. Ultimately, theeffectiveness of the mechanisms of horizontal accountability depends on theeffectiveness of the mechanisms of vertical accountability. The new patterns ofdivided government and executive-legislative relations emerging throughoutLatin America are having a significant impact on economic governance andpublic budgeting. Legislatures are gradually re-asserting their budgetarypowers, partly as a result of the emergence of more active parliamentaryoppositions.

Parliaments do possess important budgetary powers. However, they seldom

use them effectively or responsibly. While capacity constraints partly explainwhy parliaments do not exercise their budgetary powers effectively, governanceconstraints explain why they sometimes do not exercise them responsibly.Parliaments ability to establish their credibility as institutions of economic gov-ernance is thus contingent both on the strengthening their technical and adviso-ry capacities to perform their budget functions, and the existence of an enablinggovernance environment that allows them to be exercised effectively andresponsibly. The question of strategy then becomes whether legislative capacityshould be build first, or should it emerge as a result of increased legislativeactivism.

Sound public finance management and accountability requires finding anadequate balance between executive and legislative prerogatives in the differentphases of the budget: While executive dominance in public expenditure man-agement is more likely to ensure fiscal prudence, legislative oversight is criticalto provide effective checks and balances and enforce accountability in the for-mulation, execution and control of the budget. Ultimately, the governance of the

budget reflects a delicate balance between executive power and legislative over-sight. The key challenge of legislative budgeting in Latin American presidentialsystems is to retain the advantages of strong executive authority required toensure fiscal discipline while providing the institutional checks and balances

that guarantee effective accountability. Strengthening the institutions of legisla-tive budget oversight and the agencies of public finance integrity is undoubted-ly a structural challenge for Latin American emerging economies. It is neverthe-less a critical one.

The views and opinions expressed in this essay are solely those of its author and should not be

interpreted as reflecting those of the aforementioned organizations. This study draws on: Carlos

Santiso (2004) Legislatures and Budget Oversight in Latin America: Strengthening Public Finance

Accountability in Emerging Economies, OECD Journal on Budgeting (forthcoming).

Further ReadingAlesina, Alberto, Ricardo Hausmann, Rudolf Hommes and Ernesto Stein

(1999) Budget Institutions and Fiscal Performance in Latin America (Washington:IADB OCE Working Paper 394.)

International Budget Project (IBP) (2003) Index of Budget Transparency in FiveLatin American Countries: Argentina, Brazil, Chile, Mexico and Peru (WashingtonDC: IBP).


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International Organization of Supreme Audit Institutions (INTOSAI) (2001)Independence of Supreme Audit Institutions: Final Task Force Report (Vienna: INTO-SAI General Secretariat.)

Krafchik, Warren, and Joachim Wehner (1998) The Role of Parliament in theBudget Process, South African Journal of Economics 66(4):512-541.

Mainwaring, Scott, and Christopher Welna, eds. (2003) DemocraticAccountability in Latin America (Oxford: Oxford University Press.)

Manning, Nick, and Rick Stapenhurst (2002) Strengthening Oversight byLegislatures (Washington DC: World Bank PREM Note 74.)

McGee, David (2002) The Overseers: Public Accounts Committees and PublicSpending (London: Pluto Press and Commonwealth Parliamentary Association.)

Messick, Richard (2002) Strengthening Legislatures: Implications from IndustrialCountries (Washington, DC: World Bank, PREM Note 63.)

Morgenstern, Scott, and Benito Nacif, eds. (2002) Legislative Politics in Latin

America (Cambridge: Cambridge University Press.)OECD (2003) Budgeting in Brazil (Paris: OECD Working Party of Senior

Budget Officials GOV/PUMA/SBO(2003)10).

OECD (2001) Budget: Towards a New Role for the Legislature (Paris: OECD.)

Santiso, Carlos (2004) Lending to Credibility: The Inter-AmericanDevelopment Bank and Budget Oversight Institutions in Latin America, CEPALReview.

Schick, Allen (2002) Can National Legislatures Regain an Effective Voice inBudget Policy, OECD Journal on Budgeting 1(3):15-42.

SIGMA (2002) Relations Between Supreme Audit Institutions andParliamentary Committees (Paris: OECD SIGMA Paper 33,CCNM/GOV/SIGMA(2002)1.)

Stein, Ernesto, Erneto Talvi and Alejandro Grisanti (1998) InstitutionalArrangements and Fiscal Performance: The Latin American Experience (Washington:IADB OCE Working Paper 367.)

Wildavsky, Aaron (1992) Political Implications of Budget Reform: ARetrospective, Public Administration Review 52:594-599 ______________ (1964)The Politics of the Budgetary Process (Boston: Little, Brown.)


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TABLE 1: Constitutional Restrictions on Legislative BudgetAuthority in Latin America

Country Argentina Bolivia Brazil Chile Columbia Costa Rica

Year of constitution 1994 1967 1988 1980 1991 1949

(amendment) 1994 1999 1989 1997 1997Only the President Yes Yes Yes Yes Yes Yescan propose the Article Article Article Article Article Article

budget 100.6 147 61(1)II 64 364 178(b)

Congress cannot No No Yes Yes Yes Noincrease the budget with with Articlefor any item or loop- loop- 351create new hole hole

budgetary Article Articlecategories 166 64

If no new budget is Yes No No No No Yespassed, current Implicit Implicit

budget remains ineffect

OR

Presidents No Yes No Yes Yes Noproposal takes Article Article Articleeffect 147 64 348

Country Equador Peru Uruguay Venezuela

Year of constitution 1998 1993 1997 1999(amendment)

Only the President Yes Yes Yes Yescan propose the Article Article Article Article

budget 258 78 215 313

Congress cannot No Yes Yes No

increase the budget Article Articlefor any item or 79 215create new

budgetarycategories

If no new budget is No No Yes Yespassed, current Implicit Article 313

budget remains ineffect

ORPresidents Yes Yes No Noproposal takes Article Articleeffect 258 80

Source: Adapted from World Bank (2001) Peru: Institutional and GovernanceReview (Washington, DC: World Bank, Report No.22637-PE): 36.


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Documents

2004 Public Fund Digest Vol4 No2