The World Bank Group book PEFA, public financial management, and good governance (Mustapha, S., Long, C., Löffler, G. and Mills, Z. 2019) outlines how to assess the status of a country’s public financial management system. PEFA measures the extent to which PFM systems, processes, and institutions contribute to the achievement of desirable budget outcomes: aggregates fiscal discipline, strategic allocation of resources, and efficient service delivery.
PFM systems in developing contexts
Chapter 3 investigates what shapes PFM systems in developing contexts by examining the relationship between political institutions and the quality of PFM systems. The chapter builds on the existing theoretical and empirical literature by refining and nuancing previous hypotheses on this relationship, retesting hypotheses using a larger sample, and testing new hypotheses.
Much of this theoretical and empirical literature is based on observations for higher-income countries. The authors find little evidence that these relationships hold in low- and middle-income countries and note some counterintuitive relationships. Although they do find some evidence that having multiple political parties controlling the legislature is associated with better PFM performance more generally, their findings point to the need for further refinement and testing of the theories on the relationship between political institutions and PFM in low- and middle-income countries
Measuring budget credibility
Chapter 4 explains how budget credibility can be measured; in particular in fragile states. In fragile states, even those conforming to 'best practice,' may experience a crippling combination of factors that leaves them stuck in a 'capability trap.' Low human capacity, lack of physical infrastructure, and persistence of parallel informal systems are some of the factors that can impair the proper functioning of a well-designed PFM system in a fragile state. The chapter then investigates whether PFM reforms can produce the desired outcomes in fragile states, but the results are mixed. Context matters and needs to be understood.
Revenue administration and domestic resource mobilisation
Chapter 6 looks at the relationship between PEFA indicators for revenue administration and domestic resource mobilisation. It focuses specifically on the credible use of penalties for noncompliance as a proxy for the type of political commitment that is necessary for improving tax performance. The analysis shows that countries that credibly enforce penalties for noncompliance collect more taxes on average.
The chapter highlights the finding that 'external advisers could assist with setting credible penalties for noncompliance, but they are unlikely to be able to do much about the administration of penalties in the absence of political will' (page 128).