How institutional arrangements affect incentives governing the size, allocation, and use of budgetary resources and improve transparency and accountability binding key players to particular fiscal outcomes and making it costly for them to misbehave.

Campos and Pradhan examine how institutional arrangements affect incentives that govern the size, allocation, and use of budgetary resources. They use a diagnostic questionnaire designed to elicit the relative strengths and weaknesses of specific systems in terms of instilling fiscal discipline, strategically assigning spending priorities, and making the best use of limited resources. In applying their methodology to a sample of seven countries (Australia, Ghana, Indonesia, Malawi, New Zealand, Thailand, and Uganda), they also examine how donor assistance affects expenditure outcomes. They first compare the farreaching reforms introduced in Australia and New Zealand, two countries at the cutting edge of institutional reform. In New Zealand, reform focused on achieving general fiscal discipline and technical efficiency (getting the best output at the least cost). In Australia, reform focused on strategic priorities and a shift from central to line agencies to identify savings within hard budget constraints. The two countries took dramatically different paths, but both sought to alter the incentives that affect the size, allocation, and use of resources, and to improve transparency and accountability, binding key players to particular fiscal outcomes and making it costly for them to misbehave.

Systems in Indonesia and Thailand were reasonably effective in instilling fiscal discipline, but Indonesia seemed to be somewhat better at allocating resources to protect basic social services and alleviate poverty during periods of fiscal austerity. Thailand's overcentralized system did not capitalize on useful information from line agencies and lower levels of government. Donors play a central role in spending outcomes in the three African countries studied Ghana, Malawi, and Uganda. Donors provided incentives for short-term fiscal discipline, but the way they imposed spending cuts impeded the prioritizing of expenditures, and multiple donor projects fragmented the budget. Donor conditionality on the composition of expenditures, and donor driven attempts to improve technical efficiency, were ineffective. Lack of transparency and accountability meant that rules were not enforced and budgets were often remade in an ad hoc, centralised way, so that the flow of resources to line agencies was unpredictable.

This paper a product of the Public Economics Division, Policy Research Department is part of a larger effort in the department to improve the allocation and use of public expenditures. The study was funded by the Bank's Research Support Budget under the research project ""The Impact of Budgetary Institutions on Expenditure Outcomes"" (PRO 68030).