Professional Documents
Culture Documents
Strengthening
Budget Oversight and Public Sector Auditing in
Emerging Economies
CARLOS SANTISO
This study reviews a decade of support by the World Bank and the Inter-American
Development Bank to parliaments and external audit agencies in Latin America.
It underscores recent developments in development finance reflecting a broader
understanding of the determinants of fiscal credibility and financial integrity. It
reveals a learning curve in multilateral assistance to budget oversight institutions.
It argues that there exists unexplored potential to improve the effectiveness of
multilateral assistance to budget oversight institutions, including in the choice of
strategies and instruments. More fundamentally, it underscores the need to tackle
the underlying political economy of public finance accountability.
La liberté politique ne se trouve que dans les gouvernements modérés [. . . .] Pour qu’on ne puisse
abuser du pouvoir, il faut que, par la disposition des choses, le pouvoir arrête le pouvoir. F
Charles de Secondat de Montesquieu (1689–1755)
Carlos Santiso is a governance adviser to the United Kingdom Department for International Development
in Glasgow, UK, and a political economist at the Johns Hopkins School of Advanced International Studies
in Washington, DC, USA. He specializes in the political economy of governance reform and public finance
accountability in emerging markets, in particular, public budgeting and external auditing. An earlier ver-
sion of this study appeared in the Review of the United Nations Economic Commission for Latin America
and the Caribbean in 2004, the CEPAL Review no. 83 (2004). The research for this study was completed
while the author was a Visiting Fellow at the Chilean Comptroller General’s Office in August 2004. An
expanded version of this study was presented at the 2005 Annual Conference of the Latin America and
Caribbean Economic Association (LACEA) in Paris, France, in October 2005. It was awarded the Second
Prize of the XVIII Competition of the Latin American Centre for Development Administration (CLAD) on
the Reform of the State and the Modernization of Public Administration in Santiago de Chile on October 20,
2005. The usual caveats apply. The findings, interpretations, and conclusions expressed in this paper are
entirely those of its author. They do not necessarily represent the view of the aforementioned institutions.
He can be reached at csantiso@hotmail.com.
1. The governance of the budget refers to the institutions, individuals, interest, and incentives governing
the formulation, approval, execution, oversight, and control of the budget. Allen Schick, A Contemporary
Approach to Public Expenditure Management (Washington, DC: WBI, 1998). Carlos Santiso, ‘‘Budget
Institutions and Fiscal Responsibility: Parliaments and the Political Economy of the Budget Process,’’
World Bank Institute (WBI) Working Paper (Washington, DC: WBI, 2005).
2. ‘‘Horizontal accountability’’ is hereby defined as ‘‘The existence of state agencies that are legally
enabled and empowered, and factually willing and able, to take actions that span from routine oversight to
criminal sanctions or impeachment in relation to actions or omissions by other agents or agencies of the
state that may be qualified as unlawful.’’ Guillermo O’Donnell, ‘‘Horizontal Accountability and New
Polyarchies’’ in The Self-Restraining State, ed. Andreas Schedler, Larry Diamond, and Marc F. Plattner
(Boulder, CO: Lynne Rienner, 1999): 38. Scott Mainwaring and Christopher Welna (eds.), Democratic
Accountability in Latin America (Oxford: Oxford University Press, 2003).
3. Those institutions performing the external auditing of public finances are hereafter referred to as
external audit agencies. They are often referred to as supreme audit institutions. Rick Stapenhurst, ‘‘The
Legislature and the Budget,’’ WBI Working Paper (Washington, DC: WBI, 2004).
4. See the following: Santiso, Budget Institutions and Fiscal Responsibility. Carlos Santiso, ‘‘Legislatures
and Budget Oversight in Latin America: Strengthening Public Finance Accountability in Emerging Econ-
omies,’’ OECD Journal on Budgeting 4, no. 2 (2004). Allen Schick, ‘‘Can National Legislatures Regain an
Effective Voice in Budget Policy?’’ OECD Journal on Budgeting 1, no. 3 (2002): 15–42. Allen Schick, A
Contemporary Approach to Public Expenditure Management (Washington, DC: WBI, 1998). Joachim Weh-
ner, ‘‘Back from the Sidelines? Redefining the Contribution of Legislatures to the Budget Cycle,’’ WBI
Working Paper (Washington, DC: WBI, 2004). Joachim Wehner, ‘‘Between Rubber Stamp and Policy
Maker: Legislative Budgeting in Forty-Eight Countries,’’ mimeo (2004). Nick Manning and Rick
Stapenhurst, ‘‘Strengthening Oversight by Legislatures,’’ PREM Note 74 (Washington, DC: World Bank,
2002). OECD, Budget: Towards a New Role for the Legislature (Paris: OECD, 2001). Warren Krafchik and
Joachim Wehner, ‘‘The Role of Parliament in the Budget Process,’’ South African Journal of Economics 66,
no. 4 (1998): 512–541. Humberto Petrei, Budget and Control: Reforming the Public Sector in Latin America
(Washington, DC: IADB, 1998).
The IFIs inform and, at the same time, are informed by developments in international
standards of fiscal propriety and sound financial management. This section reviews the
recent developments in fiscal standards and codes and the analytical and advisory work
deployed by the IFIs in the area of public finance and fiscal governance.
5. Assistance to civil society organizations involved in the oversight of the budget is excluded from this
review, as this is an emerging area of engagement for multilateral institutions. Nevertheless, it is a prom-
ising one. See, for example, the International Budget Project (IBP): www.internationalbudget.org.
6. World Bank, Governance and Development (Washington, DC: WB, 1992): 1.
7. Pedro Pablo Kuczynski and John Williamson (eds.), After the Washington Consensus: Restarting
Growth and Reform in Latin America (Washington, DC: Institute for International Economics, 2003).
Carlos Santiso, ‘‘The Contentious Washington Consensus: Reforming the Reforms in Emerging Markets,’’
Review of International Political Economy 11, no. 4 (2004): 827–843.
8. Ernesto Stein, Ernesto Talvi, and Alejandro Grisanti, ‘‘Institutional Arrangements and Fiscal Per-
formance: The Latin American Experience,’’ IDB OCE Working Paper 367 (Washington, DC: IDB OCE
367, 1998). Alberto Alesina et al., ‘‘Budget Institutions and Fiscal Performance in Latin America,’’ IADB
OCE Working Paper 394 (Washington, DC: IADB OCE, 1999).
9. Ibid. Stein et al. (1998).
10. Alberto Alesina and Roberto Perotti, ‘‘Budget Institutions and Budget Deficits,’’ NBER Working
Paper 5556 (Cambridge, MA: NBER, 1996): 7.
11. Santiso (2006).
12. Santiso (2006); Wehner (2004); Schick (2002).
BRAZIL
COLOMBIA
CHILE
COSTA RICA
NICARAGUA
EL SALVADOR
MEXICO
PERU
ECUADOR
LAC10: 0.44
ARGENTINA
Note: The indicator of external auditing measures the credibility and effectiveness of external audit
arrangements. It is the normalized value of an index constructed from four sub-indices measuring: (i) the
independence of external audit agency, as provided by constitutional and legal provisions; (ii) the
perception of credibility of audit findings; (iii) the timeliness of audit reports, as provided by a survey of
budget practices in Lavielle, Pérez, and Hofbauer (2003); and (iv) the enforcement of audit
recommendations, as assessed by UNDP (2004) (Table 16). Possible values range from 0 to 1. A score
of 1 indicates that external auditing is perceived as credible, while a score of 0 indicates that external
auditing is perceived as ineffective.
ative data, there exists some evidence on the contribution of legislative oversight and
external auditing to fiscal governance.
We have constructed an index of the quality of external auditing arrangements for a
sample of ten Latin American countries to assess their influence on the quality of fiscal
governance. The indicator of external auditing, shown in Figure 1, measures the cred-
ibility and effectiveness of external audit arrangements. It is the normalized value of an
index constructed from four sub-indices measuring (i) the independence of external audit
agency, as provided by constitutional and legal provisions; (ii) the perception of cred-
ibility of audit findings; (iii) the timeliness of audit reports, as provided by a survey of
budget practices in Lavielle, Pérez, and Hofbauer;13 and (iv) the enforcement of audit
recommendations, as assessed by United Nations Development Programme (UNDP)14
(Table 16). Possible values range from 0 to 1. A score of 1 indicates that external auditing
is perceived as credible, whereas a score of 0 indicates that external auditing is perceived
13. Briseida Lavielle, Mariana Pérez, and Helena Hofbauer, Latin America Index of Budget Transpar-
ency (Washington, DC: International Budget Project, 2003).
14. UNDP, Report on Democracy in Latin America: Towards a Citizens’ Democracy (New York:
UNDP, 2004): 96.
0.60
0.50
External Audit Index
y = 0.057x + 0.2173
R2 = 0.3843
0.40
0.30
0.20
0.10
0.00
2.0 3.0 4.0 5.0 6.0 7.0 8.0
Corruption Perception Index (TI 2004)
Note: The External Audit Index measures the quality and reliability of external audit
arrangements. Possible values range from 0 to 1. A score of 1 indicates that external auditing is
perceived as credible, while a score of 0 indicates that external auditing is perceived as
ineffective. The 2004 Corruption Perception Index of Transparency International is used as a
proxy indicator for the prevalence of corruption. Possible values range from 0 to 10. A score of
10 indicates that the country is perceived as highly clean, while a score of 0 indicates the
country is perceived as highly corrupt.
15. Carlos Santiso, ‘‘Lending to Credibility: The Inter-American Development Bank and Budget
Oversight Institutions in Latin America,’’ CEPAL Review 83 (2004): 171–190. Santiso (2004).
0.50
0.40
0.30
0.20
0.10
0.00
20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0
Budget Transparency Index (IBP 2003)
Note: The External Audit Index measures the quality and reliability of external audit arrangements.
Possible values range from 0 to 1. A score of 1 indicates that external auditing is perceived as
credible, while a score of 0 indicates that external auditing is perceived as ineffective. The overall
degree of transparency for 2003 is provided by the perception survey of the aggregate Index of
Budget Transparency (IBT) in Lavielle, Pérez, and Hofbauer (2003). Possible values range from 0 to
100. A score of 100 indicates that the budgetary process is perceived as highly transparent, while a
score of 0 indicates that the budgetary process is perceived as highly opaque.
In the course of the 1990s, the MDBs have started to provide significant support to
strengthen the institutions of public finance governance, in the broader context of the
second-generation institutional reforms.16 Since the early 1990s, the WB and the IDB
have assisted Latin American countries to modernize their financial administration
through the establishment of integrated financial management systems.17 Increasingly,
though, technical assistance and investment operations are specifically designed to
strengthen domestic institutions for fiscal transparency and financial accountability.
16. Carlos Santiso, ‘‘Development Finance, Governance and Conditionality: Politics Matter,’’ Inter-
national Public Management Journal 7, no. 1 (2004): 73–100. Carlos Santiso, ‘‘Re-forming the State: Gov-
ernance Institutions and the Credibility of Economic Policymaking,’’ International Public Management
Journal 7, no. 2 (2004): 271–298.
17. In the course of the 1990s, Argentina, Bolivia, El Salvador, Honduras, Guatemala, Nicaragua, and
Venezuela have benefited from technical assistance loans and grants to enhance their financial management
systems. William Dorotinsky and Yasuhiko Matsuda, ‘‘Reforma de la gestión financiera en América
Latina: Una perspectiva institucional,’’ Reforma y Democracia 23 (2002): 141–166.
18. Santiso (2004). Carlos Santiso, ‘‘Good Governance and Aid Effectiveness: The World Bank and
Conditionality,’’ Georgetown Public Policy Review 7, no. 1 (2001): 1–22.
19. IMF, Good Governance: The IMF’s Role (Washington, DC: IMF, 1997). IMF, Review of the Fund’s
Experience in Governance Issues (Washington, DC: IMF, 2001). IMF, Partnership for Sustainable Global
Growth: Interim Committee Declaration (Washington, DC: IMF, 1996). Anton Op de Beke, IMF Activities
to Promote Good Governance and Combat CorruptionFAn Overview (Washington, DC: Policy Develop-
ment and Review Department, June 7, 2002). George Abed and Sanjeev Gupta (eds.), Governance, Cor-
ruption, and Economic Performance (Washington, DC: IMF, 2002).
20. World Bank, Reforming Public Institutions and Strengthening Governance: A World Bank Strategy
(Washington, DC: WB Public Sector Group, 2000).
21. World Bank, World Development Report 1997: The State in a Changing World (New York: Oxford
University Press, 1997). World Bank (2000).
22. Harald Fuhr and Philipp Krause, Overview of Core Public Sector Reform Projects 1982–2002
(Washington, DC: WB, 2003).
23. Riccardo Pelizzo and Rick Stapenhurst (eds.), ‘‘Legislatures and Oversight,’’ WBI Working Paper
(Washington, DC: WBI 2004). Manning and Stapenhurst (2002).
24. World Bank (2000: 60).
for reasons of either limited mandate or limited expertise, we do not envision the Bank becoming
involved in some other areas of public sector reform, such as . . . general parliamentary processes
or political governance.26
The WB’s approach to external audit agencies has traditionally focused on fiduciary
risk aspects and the WB’s own audit policy.27 The WB’s assessment of the reliability of
audit arrangements in borrowing countries is primarily designed to ascertain whether
they provide sufficient assurances that lent funds would be managed efficiently according
to internationally recognized standards of integrity.28 The assessment informs its deci-
sions on the amounts of policy-based lending, as well as the conditions attached to it.
Nevertheless, the WB is increasingly emphasizing the development objectives of its en-
gagement with external audit agencies in developing countries.
In 2003, the WB reviewed its audit policy in order to better link fiduciary and de-
velopment objectives, indicating that the WB ‘‘would determine whether an operation
should include measures to address weaknesses identified in relevant analysis of the
country’s public financial management.’’29 Furthermore, in 2004, the WB adopted a
strategy delineating its approach to the strengthening of external audit agencies,30 seek-
ing ‘‘to place greater reliance on the normal financial reports and audit processes of
borrower countries when these are considered to meet acceptable standards. Where
weaknesses are identified, the WB supports programs to build capacity.’’31
Regional development banks are also broadening their support to budget oversight
institutions.32 In Latin America, the IDB has developed lending programs specifically
designed to strengthen legislative budget institutions. The IDB does not have the political
restrictions that the WB has. Quite the contrary, the Eighth Replenishment of its re-
sources in 1994 mandated it to contribute to the consolidation of democracy in the
25. Richard Messick, ‘‘Strengthening Legislatures: Implications from Industrial Countries,’’ PREM
Note 63 (Washington, DC: World Bank, 2002).
26. Ibid., 62.
27. World Bank, Audit Policies and Practices for World Bank-Financed Activities (Washington, DC: WB
OPCS R2003-007 and International Development Association (IDA)/R2003-0013, 2003).
28. WB’s policy on fiduciary risk in investment lending is set out in Operational Policy OP10.02 on
Financial Management revised in April 2004 and its policy on fiduciary risk in policy-based lending is
contained in Operational Policy OP8.60 on Development Policy Lending revised in August 2004. World
Bank, Operational Policy OP10.02: Financial Management (Washington, DC: WB OPCS, 2004).
29. World Bank, From Adjustment Lending to Development Policy Lending: Update of World Bank
Policy (Washington, DC: WB OPCS, 2004): 27.
30. World Bank, Supporting and Strengthening Supreme Audit Institutions: A World Bank Strate-
gyFDraft (Washington, DC: WB OPCS, 2004).
31. World Bank (2003). John Wolfensohn, ‘‘Accountability Begins at Home,’’ International Journal of
Government Auditing 31, no. 1 (2004): 1–3.
32. Santiso (2004).
33. IDB, Renewing the Commitment to Development (Washington, DC: IDB, 1999).
34. IDB, Modernization of the State: Strategy Document (Washington, DC: IDB 7/03, GN-2235-1,
2003).
35. Ibid., 12.
36. Ibid., 13.
37. Ibid., 5.
38. Ibid., 18.
39. IMF, Good Governance: The IMF’s Role. IMF, Manual on Fiscal Transparency (Washington, DC:
IMF, 2001).
40. Ibid.
41. IMF, Code of Good Practices on Transparency in Monetary and Financial Policies: Declaration of
Principles (Washington, DC: IMF, 1999). IMF, Manual on Fiscal Transparency.
42. OECD, Budget: Towards a New Role for the Legislature (Paris: OECD, 2001).
43. IMF, Brazil: Report on the Observance of Standards and CodesFFiscal Transparency, 01/217
(Washington, DC: IMF, 2001).
44. IMF, Chile: Report on the Observance of Standards and Codes–Fiscal Transparency, 03/237 (Wash-
ington, DC: IMF, 2003).
45. World Bank and Inter-American Development Bank, República de Chile: Evaluación de la re-
sponsabilidad financiera pública (Washington, DC: WB, 2004).
46. IDA, Linking IDA Support to Country PerformanceFThird Annual Report on IDA’s Country As-
sessment and Allocation Process (Washington, DC: World Bank, 2002).
47. World Bank, Guidelines for the World Bank’s Work on Public Expenditure Analysis and Support
(Washington, DC: WB Public Sector Group, 2001).
48. World Bank, Country Financial Accountability Assessment: Guidelines to Staff (Washington, DC:
WB Financial Management Sector Board, May 27, 2003).
49. World Bank, ‘‘Peru: Institutional and Governance Review,’’ Report 22637-PE (Washington, DC:
WB, 2001).
A. Economic management
1. Management of inflation and macroeconomic imbalances
2. Fiscal policy
3. Management of external debt
4. Management and sustainability of the development program
B. Structural policies
5. Trade policy and foreign exchange regime
6. Financial stability and depth
7. Banking sector efficiency and resource mobilization
8. Competitive environment for the private sector
9. Factor and product markets
10. Policies and institutions for environmental sustainability
C. Policies for social inclusion and equity
11. Gender
12. Equity of public resource use
13. Building human resources
14. Social protection and labor
15. Monitoring and analysis of poverty outcomes and impacts
D. Public sector management and institutions
16. Property rights and rule-based governance
17. Quality of budgetary and financial management
18. Efficiency of revenue mobilization
19. Quality of public administration
20. Transparency, accountability, and corruption in the public sector
sound public expenditure management and accountability. Similarly, the IGRs for Par-
aguay50 and Argentina51 focus on the institutional context of financial management and
fiscal control. As the WB notes, ‘‘The IGR relates to the CFAA in its diagnosis of the
shortcomings of formal public finance management systems that are due to inadequate
capacity, incentives, or signals.’’52 Indeed, there is a gradual convergence between the
traditional economic approach to public finance management and the political economy
approach to public finance accountability, which partly captures the influence of party
50. World Bank, ‘‘Paraguay Institutional and Governance ReviewFBreaking with Tradition: Over-
coming Institutional Impediments to Improve Public Sector Performance,’’ WB Report No.31763-PY
(Washington, DC: WB, 2005).
51. World Bank, ‘‘Argentina Institutional and Governance Review: Concept Paper’’ (Washington, DC:
WB draft mimeo, 2003).
52. World Bank, Country Financial Accountability Assessment: 2–3.
These developments are, in turn, informing the lending strategies of multilateral devel-
opment banks. The following section focuses on those investment loans designed to
strengthen parliaments and external audit agencies. These loans are used as (imperfect)
proxy indicators of multilateral support to budget oversight institutions.
53. OECD, Harmonizing Donor Practices for Effective Aid Delivery (Paris: OECD DCD DAC Guide-
lines and Reference Series, 2003). PEFA, Revised Consultative Draft PFM Performance Measurement
Framework (Washington, DC: PEFA, 2004).
54. World Bank and IMF, Bank/Fund Collaboration on Public Expenditure Issues (Washington, DC:
IMF FAD and WB PREM, 2003).
55. OECD (2003).
83
84
TABLE 3 (Continued)
57. Santiso (2006). Gerardo Uña, El Congreso y el Presupuesto Nacional: Desempeño y Condicionantes
de su Rol en el Proceso Presupuestario (Buenos Aires: Fundación Konrad Adenauer, 2005).
58. Messick (2002).
59. Santiso (2006).
60. Stein et al. (eds.), The Politics of Policies: Economic and Social Progress in Latin America (Wash-
ington, DC: IDB, 2005).
61. Messick (2002).
62. Miguel Carbonell, ‘‘Los Conflictos entre el poder legislativo y el poder ejecutivo en México,’’
Contribuciones 3 (2002): 11–24. Jeffrey Weldon, ‘‘Legislative Delegation and the Budget Process in Mex-
ico,’’ in Legislative Politics in Latin America, ed. Scott Morgenstern and Benito Nacif (New York:
Cambridge University Press, 2002): 377–412.
63. Edgar Rojas and Harold Zavarce, ‘‘Instituciones para la coordinación de la polı́tica monetaria y
fiscal: Un enfoque transaccional para el caso venezolano,’’ paper presented at the XVI Regional Seminar on
Fiscal Policy of ECLAC, Santiago de Chile, January 26–29, 2004.
64. Carlos Santiso, ‘‘Lending to Credibility: The Inter-American Development Bank and Budget
Oversight Institutions in Latin America,’’ CEPAL Review 83, 171–190 (2004). Carlos Santiso, ‘‘Legislatures
and Budget Oversight in Latin America: Strengthening Public Finance Accountability in Emerging
Economies,’’ OECD Journal on Budgeting 4, no. 2 (2004).
2005 Brazil IDB Program for the Strengthening of 64.4 38.6 25.8 4
External Control of States and
Municipalities (PROMOEX)
2004 Haitia WB Economic Governance Reform NA (50.3) NA NA 1
Operation Project (includes a
component on strengthening financial
oversight and fiscal control institutions)
2004 Peru IDB Modernization of the Office of the 14.50 10.15 4.35 4
Comptroller General
2002 Brazil IDB Modernization of the Federal Court of 10 5 5 3
Accounts
2002 Chile IDB Modernization of the Office of the 25 15 10 4.5
Comptroller General of the Republic
2002 Ecuador WB Public Sector Financial Management 1.03 (18.84)b 1.03c (13.86) 0 (4.98) 4.5
Project
2002 Nicaragua IDB Modernization Program of the General 6 5.40 0.60 4
Auditing Office
2000 Colombia IDB Strengthening the Offices of the 42 23 19 4
Comptroller General and Auditor
General of the Republic
2000 Dominican IDB Program for Modernizing the National 2.45 (28)d 2.45e (22.30) 0 (5.70) 3
Republic Congress and the Office of the
Comptroller General
2000 Hondurasf IDB Strengthening and Modernization of the 3 2.5 0.50 NA
89
TABLE 5
Multilateral Lending to External Audit Agencies in Relative Terms
Annual multilateral
External audit lending
agency annual budget
In million In million As percentage of external
Country US$a US$a audit agency’s annual budget
Source: Based on the information provided by the respective external audit agencies’ websites.
a
The fluctuation of the dollar warrants caution when using it as a referent.
also reflect the MDBs’ requirements for counterpart financing in middle-income coun-
tries. Countries realize that achieving fiscal discipline requires robust budget oversight
institutions and the subscription of multilateral lending constitutes an important signal-
ling mechanism that can strengthen the hand of reformers. These considerations, along
with the pressure from external audit agencies for more resources, partly explain why
governments accept to underwrite loans designed to strengthen those institutions tasked
with overseeing and constraining them.
In broad terms, multilateral loans tend to focus on improving the administrative
efficiency of external audit agencies through strategic and organizational development,
human resource management, capacity building, and improvements in information
technology, equipment, and infrastructure. They also include provisions for improving
relations with civil society, enhancing the publicity of audit findings, and increasing
transparency in auditing practices. Furthermore, they emphasize legal and financial
compliance auditing, admittedly the core business of external audit agencies. They
sometimes include provisions for ‘‘innovative initiatives,’’ in particular, performance
auditing, environmental auditing, or auditing techniques for regulating agencies of pub-
lic utilities. Moreover, they privilege improving operational auditing of specific govern-
ment programs and agencies, especially in the social sectors, rather than enhancing the
institutional role of external audit agencies in the auditing of public accounts and the
certification of government accounts by the legislature. Arguably, this latter core func-
tion would be naturally enhanced as a result of the strengthening of the external audit
agency as a whole, albeit not automatically as reformers tend to expect.
A striking feature of these investment loans is that they tend to strengthen external
audit agencies in isolation of the rest of the public sector they are embedded in, rather
than seeking to enhance the inter-institutional linkages and functional relationships
between the different components of the systems of fiscal control. Yet, the effectiveness
of external control mechanisms and legislative budget oversight in Latin America is
68. Jack Diamond, ‘‘The Strategy of Budget System Reform in Emerging Economies,’’ Public Finance
and Management 2, no. 3 (2002): 358–386.
69. Stein et al. (2005: 258).
70. Rick Stapenhurst et al., ‘‘Scrutinizing Public Expenditures: Assessing the Performance of Public
Accounts Committees,’’ WB Policy Research Working Paper WPS3613 (Washington, DC: WB, 2005).
Joachim Wehner, ‘‘Principles and Patterns of Financial Scrutiny: Public Accounts Committees in the
Commonwealth,’’ Commonwealth and Comparative Politics 41, no. 3 (2003): 21–36. David McGee, The
Overseers: Public Accounts Committees and Public Spending (London: Pluto Press, 2002). SIGMA, ‘‘Re-
lations between Supreme Audit Institutions and Parliamentary Committees,’’ SIGMA Paper 33 (Paris:
OECD, CCNM/GOV/SIGMA(2002)1).
71. INTOSAI, Independence of Supreme Audit Institutions: Final Task Force Report (Vienna: INTOSAI
General Secretariat, 2001).
93
94
TABLE 6 (Continued)
Institution
linked Institution Quasi-
Ex ante to the linked to the Autonomous judicial
Country control executive legislature institution powers Nomination procedures Terms of office Removal procedures
Source: Based on Tables 9.2 and 9.3 in Mark Payne et al., Democracies in Development: Politics and Reform in Latin America (Washington, DC: IDB, 2002):
228–231.
and reliable funding, as well as access to skilled personnel. Thus, MDBs could more
purposefully enhance the agencies’ functional and institutional relations with the leg-
islature (in particular, with budget and public accounts committees, responsible for
holding government to account), the judiciary (the administrative and criminal courts
tasked with following-through the recommendations of audit reports) and civil society,
and the media (those civil society organizations involved in social auditing and budget
oversight).72 Similarly, there is scope for promoting greater international dialogue, net-
working, and partnerships between external audit agencies.73
Lastly, until recently, multilateral loans have tended to concentrate their efforts at the
national or federal level. However, external auditing of government finances is generally
weaker at the subnational level than at the national level.74 Multilateral banks are
starting to address the weaknesses of subnational government auditing in federal sys-
tems, such as in Brazil, or accompany their deconcentration in unitary states, such as in
Peru. In June 2005, the IDB approved a US$38.6 million loan to Brazil for the first phase
of a US$64.4 million program to strengthen the systems of budget oversight and external
control at the state and local levels.75 This operation represents the largest loan to
external audit agencies, reflecting not only the size of the country but also the sheer
magnitude of the task. The commitment of the Brazilian government to strengthening
subnational auditing is reflected in the relative importance of counterpart financing, 60
percent of the total, which demonstrates the federal government’s desire to anchor fiscal
discipline in the public finances of Brazilian states and municipal governments as part of
the 2000 Law of Fiscal Responsibility.
Multilateral lending to budget oversight institutions is still evolving. Four main policy
implications can nevertheless be extracted from this review.
Question of Strategy
A first lesson concerns the choice of the most effective strategy for strengthening budget
oversight and external auditing. A distinction could be made between integrated and
focused approaches. Integrated approaches, such as those privileged by the WB, incor-
72. Catalina Smulovitz and Enrique Peruzzotti, ‘‘Societal and Horizontal Accountability. Lessons from
a Fruitful Relationship,’’ in Mainwaring and Welna (2003: 309–332).
73. World Bank, Supporting and Strengthening Supreme Audit Institutions: A World Bank Strate-
gyFDraft (Washington, DC: WB OPCS, 2004).
74. Diamond (2002).
75. IDB, ‘‘Programa de Modernización del Control Externo de Estados y Municipios–PROMOEX,’’
Documento de Proyecto (Washington, DC: IDB April 13, 2004).
Choice of Instruments
A second lesson relates to the choice of instruments. It could well be argued that some of
these instruments are more effective at reforming budget oversight institutions, while
others are more effective at strengthening them. Investment lending and technical as-
sistance are likely to be more effective when they add capacity to an already capable
institution. In contrast, the conditionality attached to larger policy-based loans is likely
to be more effective at reforming institutions whose performance is judged as lacking or
inadequate. Analytical work, advisory services, and policy dialogue can serve both pur-
poses, as do IMF’s surveillance mechanisms. Additionally, there exists scope for en-
hancing the synergies between available instruments, adopting sequenced approaches to,
first, the reform of fiscal institutions and, then, their strengthening.
These considerations are also reflected in the IDB loan to Guyana subscribed to in
2004. The conditionality attached to its policy-based loan component is intended to
accompany a process of constitutional and institutional reform, which started in 2000:
the Fiscal and Financial Management Programme, which combined the ‘‘stick’’ of pol-
icy-based lending conditionality and the ‘‘carrot’’ of technical assistance grants and
investment lending to tackle the structural dysfunctions of the external audit agency. The
approach was informed by a CFAA undertaken by the WB in June 2002, which made a
series of recommendations for reforming fiscal control. The adoption of a new audit loan
was part of the conditionality package; yet, technical assistance was also promised. In
2001, a constitutional amendment was passed to enhance the independence of the au-
ditor general and, with IDB technical assistance, a new audit law and new internal rules
and procedures were drafted. Once these prior conditions had been fulfilled, the IDB
Political Economy
The third lesson concerns the centrality of political economy considerations in explaining
the effectiveness of budget oversight and external auditing of public finances. Strength-
ening technical capacity per se does not necessarily or automatically improve the effec-
tiveness of external audit agencies, nor has it prevented them from being captured. Power
and politics matter.
The case of Nicaragua is symptomatic in that regard.76 Public sector reform in Nic-
aragua suffered major setbacks in the wake of the constitutional reforms of 2000. These
resulted in the division of key state institutions along party lines, including the external
audit agency, the Contralorı́a General de la República, now headed by a five-member
council divided along party lines. At the same time, the new administration reaffirmed its
commitment to fight corruption and increase transparency. Fiscal control is generally
characterized by poor government accounting, weak ex ante controls and ineffective
internal audit systems and inconsequential external audits. Capacity constraints and
organizational dysfunctions are now compounded by the politicization of the agency and
the neutralization of the external audit function. The IDB nevertheless designed a
US$5.4 million loan for a US$6 million program to modernize the external audit agency.
However, a legitimate question is whether the agency needs to be strengthened, or rather
whether it should be reformed and, therefore, whether the choice of the instrument was
the most adequate under such circumstances.
More fundamentally, the case of Nicaragua illustrates the fact that increasing tech-
nical capacity and enhancing analytical capabilities are likely to remain ineffectual as
long as there does not exist the political space for them to be exercised effectively.
Technical improvements are likely to be emasculated by adverse political developments.
Even perfect technical solutions would be powerless in the face of overwhelming political
incentives against sound financial management.
Reform efforts fail not only because they are incomplete, but because they are often
designed to solve technical shortcomings when problems lie in institutional arrangements
and incentives structures. Ultimately, a ‘‘good enough’’ reform is one that is technically
sound and politically feasible. Consequently, the key question for the IFIs is whether
endowing budget oversight institutions with more technical capacity can strengthen
them, or whether increased independence would lead these institutions to create and
utilize technical capacity more effectively. Should institutional capacity be built first or
should it emerge as a result of the emergence of the right political incentives?
76. World Bank, ‘‘Nicaragua: Country Financial Accountability Assessment,’’ WB Report No. 27922-
NI (Washington, DC: WB, 2004).
projects that are limited to changing instrumental elements or simply strengthen technical organ-
izational capacities, without altering the structure of incentives that affect the political will to
apply them are likely in general to have a negligible impact. Thus institutional changes that
condition the effectiveness of instrumental and organizational reforms need to be addressed at the
same time. . . . It does little good to establish a financial management system without the de-
velopment of a budgetary authority with the professional independence, power, and capacity to
enforce it.77
Multilateral lending operations often fail because they address political problems with
technical solutions.78 Therefore, there exists unexplored potential in the support pro-
vided by multilateral banks to national parliaments and external audit agencies. As Stein
et al. aptly note, ‘‘It is important to understand that contributing financial resources does
not change institutions per se.’’79 Multilateral support to budget oversight institutions
should more purposefully seek to enhance the functional linkages between institutions of
fiscal control. More fundamentally, it ought to give greater consideration to the structure
of incentives affecting institutional performance and influencing institutional change, in
particular, the role of political competition, party systems, and electoral rules on the
functioning of parliaments and external audit agencies in the oversight of the budget.
77. IDB, Modernization of the State: Strategy Document (Washington, DC: IDB 7/03, GN-2235-1,
2003): 8–9.
78. Navin Girishankar, Evaluating Public Sector Reform: Guidelines for Assessing Country-Level impact
of Structural Reform and Capacity Building in the Public Sector (Washington, DC: WB OED, 2001).
79. Stein et al. (1998: 259).
As this article has argued, the IFIs could make a more purposeful contribution to the
strengthening of oversight mechanisms by adopting a broader view of the governance of
the budget process and the political economy of financial accountability. More funda-
mentally, while they have focused in the past on the role of the executive branch in the
management of the budget process, they increasingly acknowledge the need to strengthen
the demand for financial accountability from both the formal and informal budget
oversight institutions.
The governance of the budget reflects a delicate balance between executive power and
legislative oversight. The key challenge of effective government accountability in public
finance management in Latin American presidential systems is how to balance executive
discretion and legislative oversight, thus re-equilibrating executive–legislative budget re-
lations. Additionally, greater external scrutiny and fiscal transparency is undoubtedly
required, contributing to redressing the huge asymmetries of information between the
state and society in terms of fiscal information.
In this respect, the contribution of civil society is critical not only to oversee the
budget itself but also to oversee the overseers and ensuring that the formal institutions of
horizontal accountability in the budget process, namely parliaments and external audit
agencies, perform their functions adequately and effectively. Civil society, and the media
in particular, are potentially critical allies of budget oversight institutions. More effective
synergies ought to be explored between the formal and informal institutions of govern-
ment accountability.
The review also underscores the need to acquire a better understanding of the dy-
namics of budgetary reform. This requires understanding how budget processes function
in practice and the interaction between formal rules and informal practices in shaping
fiscal outcomes. It also entails understanding how budgetary systems change over time
and which factors explain successful budgetary reform. While governance factors
provide explanations of the performance of budgetary systems, political factors provide
greater insights into the reform of budgetary institutions. The interactions between for-
mal and informal institutions along the different stages of the budget process are key to
NOTES
The author is particularly indebted to Anne Mondoloni, Barry Anderson, and Vinod Saghal for their
comments and suggestions on earlier drafts. He is also grateful to Rick Stapenhurst, Warren
Krafchik, Joachim Wehner, Enrique Paixão, Alfredo Fólica, Arturo Aylwin, Julio Rodolfo Comad-
ira, Mario Marcel, Patricia Llanos, Hernán Llanos, Joaquin Vial, Marı́a Isabel dos Santos Caetano,
Miguel Braun, Nestor Baragli, Jesús Rodrı́guez, Oscar Lamberto, Bruno Speck, and William Do-
rotinsky for their insights.