The quest for development effectiveness has been a learning process, both conceptually and empirically. One of the important outcomes of the process has been the emphasis on the notion that sustainable economic growth must be a precondition for poverty reduction. Structural fiscal policies which aim to shape the supply side of the economy to generate growth and structural transformation are critical. They complement private investment through the provision of public goods such as public infrastructure or the education of the workforce. But the question still remains: will public investment in infrastructure be sufficient for unleashing faster economic growth in Sub-Saharan Africa?
The evidence, both academic and empirical seems to say not necessarily. We see from the works of Rodrik, Hausmann and Velasco (2005) that developing economies face multiple constraints to growth, and that public policy should focus on removing the binding constraints that really matter. However, that requires an accurate diagnosis of the binding constraints to growth. While the broad categories of public expenditure which best promote economic growth and development are well established from cross country empirical analysis (e.g. spending on education, health and public infrastructure with strong complementarities for private investment), the specific expenditure priorities (e.g. which specific investment projects) are often much more difficult to identify and vary from country to country.
A review of the development experience of Kenya, Senegal and Uganda over the last two decades highlights some interesting lessons.
Building capacity for Diagnostic Analyses: While these Governments have sought to re-orientate their budgets towards capital investment, this will only raise growth if a shortage of public infrastructure is really the binding constraint to growth and if the specific infrastructure projects which were implemented in these countries not only generated the highest rates of return but also removed the binding constraints to sustainable growth. In Kenya, priorities for capital expenditure reveal a lack of consistency between strategic long term planning and the medium term and sector development plans. In Senegal, too, there was not only a lack of coherence and clear direction for fiscal policy, some infrastructure investments were just vanity projects. Uganda’s shift in fiscal focus to public infrastructure, either assumed infrastructure was the binding constraint while ignoring the poor business environment, or resulted from political or donor pressure. The capacity for adequate diagnostic analyses could be much improved in all three cases.
Creating Fiscal Space: The implementation of structural fiscal policies almost always requires budgetary resources which have to compete with other demands on the budget. Consequently a shift in the development priorities towards structural fiscal policies is only possible if governments can create “fiscal space”, from more revenue or grants, better allocative efficiency or increased but sustainable borrowing. During the last decade, Kenya and Senegal, but not Uganda, have been able to create fiscal space for structural fiscal policies, defined for this purpose as development spending. Uganda was unable to do so because while donor grants declined as share of GDP, mobilization of domestic revenue remained stagnant.
Using fiscal resources effectively: But creating the fiscal space by itself is not enough. Economic growth and structural transformation also depends critically on the efficient use of fiscal resources - which includes both technical and institutional capacity to effectively undertake, complete and operate projects and adequate public financial accountability. All three countries have tried to reform their Public Investment Management systems with varying success. In Kenya, project design, implementation and operation were ineffective due in part to lack of budgeting for recurrent operational costs and there remain critical capacity shortcomings. Both Senegal and Uganda have implemented Public Financial Management reforms, including legislative reforms, but Public Expenditure and Financial Accountability reports reveal limited tangible improvement. All three countries seem to be debilitated from lack of human and institutional capacity as well as weak governance, pervasive corruption and political patronage.
These country studies have started to reveal important implications not only for the knowledge products of the World Bank but also for its dialogue with client countries. First of all, not only do better methodologies need to be developed for identifying the binding constraints to growth in each country, the dialogue needs to impart an understanding of the value of objectivity and independence in the application of those methodologies, working closely with the clients. Secondly, while knowledge needs to be offered for strengthening the institutional capacity for project evaluation and implementation, the dialogue needs to also inculcate the understanding and capacity for transparency in the public investment management system. Thirdly, and most importantly, not only does capacity need to be built for sound PFM, an understanding of the value of fiduciary integrity is critical to the success of the dialogue on development effectiveness issues.
Effective development needs to be accountable and may require a consolidation of the lessons of the past to achieve a more rigorous diagnostic approach, both for the development institutions and the client countries. Moreover, the evolving aid architecture requires reconciliation with the idea that money and the budgets and projects they support, while necessary, are not often sufficient. The knowledge and understanding of capacity and the willingness for making that difference also needs to be there.
Last, but not least, the financial resources the World Bank brings are increasingly becoming small relative to the overall aid envelope and even smaller relative to the private flows to the developing world. In order to be effective in this changing situation, the Bank’s role needs to be more catalytic. By understanding and relieving the bottlenecks and binding constraints, the Bank can not only successfully implement concerted country partnership strategies in what could be the starting point of a new rigorous diagnosis based approach to development interventions, but can also set an example for other development partners. Such an approach will redouble World Bank’s impact in meeting the twin goals of poverty reduction and shared prosperity.