MattAndrews

Dos the USA exhibit ‘bad’ debt governance?

In my last post I showed that the recent record of debt and debt servicing looks different when one looks at different countries. This makes it difficult to identify 'good' or 'bad' governance in any comparative way. I would rather say we should say that some countries tend towards a more conservative governance in their debt management than others. Other countries have more of a risk-accepting governance model.

The key issue is "what has the government been authorized to do" and, consequently, "when are they doing this well—so that they exercise the authority effectively—and when are they doing this poorly—exercising the authority in too conservative or too risky a fashion."

Let's think about this in relation to the United States:

• Many on the conservative side of US politics complain that the federal government has exercised its authority to raise funds through debt poorly—being too risky. One expects that these commentators want the USA to be in the more conservative domain of the graph below (which I showed a few days ago)…where Sweden and New Zealand currently are. They often say that the US is going to become like Greece.
• Less conservative commentators think that the USA can probably still raise more debt without increasing its debt service costs too much or becoming like Greece. They reference the fact that debt has grown in recent years without growing debt service costs (see second graph, shown this morning) and argue that too conservative a stance could stymie the country's efforts to get out of the economic doldrums.

The political debate about US debt is an important one in that it will determine whether the US continues shifting right on the horizonatal axis (increasing debt) or turning a 180 and decreasing debt. As I have suggested, there are normative angles to this debate…as with any debate on governance…where the question is "what kind of authority does government have and is it running up against limits to authority?"

Interestingly, this is not a purely ideological debate, and there are various factors one can look at to see if the US debt governance currently qualifies as 'good' or 'bad' in a fairly objective sense. Here are two of them:

First, when one compares the US situation today with that of the past, it is obvious that the territory currently being traversed is not new. The US experienced high debt levels between 1945 and 1956, for instance, and saw debt rise substantially in other periods (between 1980 and 1990, for instance). These instances tended to coincide with the overexpenditure associated with wars and with expenditure and revenue implicatos of economic downturns. It seems these factors are acepted as reasonable drivers of acceptable public sector debt. So, the argument in 2012 is that the federal government has amounted debt because of wars in Iraq and Afghanistan and the 2008 crash. Given such events, the current debt does not reflect a government acting outside of its authority.

Second, the US can still access cheap debt to finance spending that many seem to believe is warranted. The US federal government borrows at historically low rates right now and it appears that the public demands federal engagement more than conservative pundits would like to believe. Polls show that citizens are more interested in the government helping create jobs, infrstructure etc. than bringing down the debt (given that the latter is always a lower-rated issue than the former). So it seems that government is being authorized to incur more debt and when it does so it is not necessarily driving up costs (at least not for now).

There are obviously many other points to consider, but if these two make sense then one cannot say that the current governance of debt in the USA is 'bad'. Risky, yes. But not 'bad'. And not worthy of all the hype it attracts.

 

Governance and Debt in the USA, Greece, Ireland and Sweden: 4 contexts, 4 stories or 4 versions of the same story

I blogged about debt and governance in the last few posts.

The core idea behind these posts is to see how we might conceptualize and measure governance in the field of government debt management. Conceptually, the idea is simple: Citizens give governments authority to use debt to further the goals ad needs in running the state. In terms of measures, I suggested we look at the amount of debt (relative to GDP) and the cost of servicing the debt (as the opportunity cost of not doing other things).

I came out with a two dimensional view of the situation and potential scenarios: From conservative governance to managed risk to higher risk governance scenarios.

I suggested that we cannot simply refer to 'good governance' or 'bad governance' in these scenarios but we should use the analysis to ask questions about governance challenges facing different countries.

Some folks asked me offline how I would use the data in this manner, and I thought I'd give some perspectives on this. My first approach is to ask why different countries are located in different places in the debt governance realm and what this tells me about the kind of authority they have (a key idea in my approach to governance) and what the recent and even past trajectory suggests about current status.

Let me start by showing some recent history for four countries, which shows (me at least) how darn complex any work on governance is.

First, the USA. The graph below shows that the USA has consistently spent just over11% of its revenues servicing debt, since 2001.What has changed is the level of debt, reflected in a rightward shift throughout the period. This suggests that the government is authorized to increase debt and can do so without incurring additional costs in the immediate period. The question of course, is how much more debt can be incurred and if the costs will stay at this level. This is an important question and is not just technical but also reflects the political dynamics within the country. It does not suggest that austerity is required, but that the country is in risky territory and authorities need to ensure their mandate is secure as they move ahead. I will get into this a bit more in the coming days, trying to understand why the US government has increased debt in the past decade and if this suggests problems with debt governance or not.

Now, Greece. This story is totally different. Since 1995 Greek debt has been above 100% and debt servicing costs have been historically higher (as a percentage of revenues) than in recent years. The government reduced servicing costs in the period between 95 and 99 and managed to keep debt at around 110%. Then, between 2000 and 2007 they carried on decreasing servicing costs but saw debt/gdp ratios rise to about 125%. Sine 2008 both debt/gdp ratios and servicing costs have been rising, which reflects the real trouble this country is in. The governance challenge is two-fold: bring the debt down and convince the public to endure higher servicing requirements. Both demand austerity.

Now, Ireland. I have not blogged about Ireland to date but it is an interesting case and one that several of my past and present students are interested in. The situation here is again completely different to the other two. Ireland decreased its debt and debt servicing burdens substantially between 98 and 07, partly because a growing economy influenced the measures but also because there was pressure for the government to show itself as fiscally disciplined. This was part of its story in the past fifteen years of engagement in the EU. One can see that the government was locked into appearing (at least) like a conservative governed debt context (a Swedish story, perhaps). Between 08 and 10 one sees that debt and debt servicing levels have risen substantially, largely because of problems in the economy. The debt governance challenge has changed into one of containing rising debt and servicing costs in the context of a slow growth economy. The question is whether the government can change its approach to respond to this challenge. (I hear it is….)

Now, Sweden. I have to cover Sweden because it has been a focal point of so many ideas about what the USA should do to escape crisis and get its house back into order. The graph below shows the situation is again totally different. I only show data from 1995 but you can see that Sweden has been on one consistent path towards lower debt and debt servicing levels since that time. You can also see that it has been in a different part of the graph to the USA or that entire period as well The USA government has always had higher debt servicing costs (at least measured in this way) which seem appropriate in the context. The Swedish debt governance challenge seems to be consistent since the early 90s when crisis was deep and prolonged: Get debt down and keep it down.

What is the point of these graphs and analyses? First, to show again that politicians who say the USA risks becoming like Greece should stop making such commentary. And commentators who say that the Swedes have lessons for the USA to learn from should think carefully about why the two countries seem to have such different looking legacies: what does this say about what is appropriate in the different contexts and how might this impact what kinds of governance reforms are possible. It seems to me that governance stories are highly contextual. The four stories of debt and debt governance I see here look like different stories that demand different interpretations and different responses. They are not 4 versions of the same story that can be interpreted through the same lens and lends itself to the same solutions.

Debt and Governance: The USA is not Greece; but it isn’t Sweden either

I blogged about debt and governance a few days ago, suggesting in a highly simplistic fashion that we should look at government debt levels as an indicator of governance. The argument is simple: Governments are authorized by citizens to raise revenue through debt when it makes sense and to manage the debt exposure to ensure the country's fiscal dependence.

I reflected on data that showed developing countries have lower debt to GDP levels than many developed countries do. This is a reversal of the past, where developing countries typically found themselves in debt problems that were arguably construed as reflecting a failure of governance.

Now, what do we make of high debt figures in developed countries? Is it also a failure of governance? Philipp Krause responded to my simple post by saying that it may be the exact opposite. If governments like Japan and Italy can borrow at cheap rates to levels of 150 - 200 percent of GDP, surely it shows that they are seriously creditworthy and the government is just getting better leverage in financial markets.

Certainly an interesting argument. Of course, there is a cost of borrowing, and every cent one pays in servicing debt is money that could be spent differently. Some countries manage this cost better than others, by structuring their debt appropriately, etc. Even when they do this, of course, many argue that governments are just deferring the debt costs to future generations. And even well managed debt portfolios can become costly in the short run as well.

This is important because today's governments are not elected by future generations, and governance is most simply about exercising authority on behalf of those who gave it to you... today's electorate. Unless, of course, today's electorate indicate a concern for the future.

In reflecting on this, I'm going to suggest that we look at two dimensions of 'debt and governance' in today's terms when thinking about this issue.

• The first dimension is the amount of debt a government has incurred, as a percentage of GDP, relative to peers.
• The second dimension is the cost of that debt in today's terms, measured as the percentage of revenues collected, also relative to peers.

The combination of these dimensions is shown, for about thirty of the world's wealthiest nations, in the figure below. (All data from the World Bank's World Development Indicators).

The first thing I see in this figure is that there is a positive relationship between the size of a country's debt relative to GDP and its servicing costs—at least in this one period cross section. In other words: the bigger a country's debt today, the more a country tends to pay today. So, a country like the USA pays about 11 cents of every dollar raised revenue on interest to service its debt—compared with Sweden where less than 3 ӧren are spent n interest, out of every Krona collected as revenue.

I like the table as a way of indicating the governance challenges of a given country—note I am not saying that the indicator should be construed as reflecting good or bad governance. There are sixteen quadrants in the way I show the countries and a country's location says different things about its debt governance:

• Countries in the bottom quadrant are experiencing debt levels and debt service costs that are lower than the average for wealthy OECD countries. At a stretch one might say the debt here is being conservatively governed (which conservatives might call good governance). Sweden and New Zealand are in this quadrant in 2010.
• As one moves up and to the right you are looking at countries with higher than average levels of debt and costs of debt servicing (as percentage of revenues). The United States fits in this area, where its debt levels are abut twenty percent higher than the average in wealthy countries (measured as a percentage of GDP, of course). Its debt service costs are just over twice the average in wealthier countries (at over 11.2% of revenues collected). The countries around the United States are in a riskier part of the graph than Sweden and New Zealand in 2010. Sweden was in this area in 1996—when it was coming out of its 1992 financial crisis. This space might be called a managed risk governance situation where government is extending its authority to borrow and taking the short term hit of extra payments because it can access funds that it believes are needed. In Sweden the resources were needed to get out of a financial crisis that it has now moved past. In the USA the authorities argue that the higher debt is also needed to get out of crisis. The question is whether this managed risk situation will pan out.
• As one moves further right and up countries have higher debt and debt service costs. The inhabitants of these quadrants are few. Iceland, Italy, Greece, and Japan. These countries are in a high risk governance situation where the burden of debt is high and the current cost of debt is also high. Countries in this situation may be able to access additional debt (for now) because of their peculiar economic circumstances (Japan is still one of the world's biggest creditors, for instance, and much of its debt is domestic) but they may also have gone into a debt crisis situation where they cannot access conventional debt (Greece). Risky territory, that may be accepted by citizens but is still costly—now.

For those who like to criticize the USA debt situation and suggest that Armageddon is days away, the graph should show something simple: THE USA IS NOT GREECE. It should also show that the UA is not Sweden, or any other conservatively governed debt regime. The question is whether this is a problem or not, and if governance strategies should change as a result of the USA's position.

For those who are interested in governance, this final question is of utmost importance. This is because it is the kind of product that we should be developing from governance indicators. Strategic questions to guide comparative policymaking, not singular measures that suggest whether a country exhibits 'good' or 'bad' governance. The contextual nature of governance prohibits such simple measures and we should stop pretending these kinds of measures are useful.

Government Debt and Good Governance: Rich Countries Now Lag Poorer Countries....

Regular visitors to this blog know that I spend a fair amount of time thinking about governance and governance indicators. I have proposed a range of ideas for measuring governance in the past. Let me try a new one today.

As in the past, I like to define governance as being about the way governments exercise authority on behalf of citizens. In this respect I think that governments are given authority to raise revenues through taxes and debt (and other means) to responsibly finance interventions in society.

It makes sense then to say that good governance must be reflected in the degree to which governments exercise this resource mobilization and management authority.

A potential measure of this--which is clear to understand--is the level of debt to GDP in a given country. This was certainly used as a measure to argue that African and other developing country governments could not govern in the 'stabilization' years of the 1980s. Many many governance reforms came from such logic.

So I looked at World Bank data on this for about 70 countries and generated the following simple excel graphs. They show how countries with lower GDP per capita tended to have higher debt/gdp ratios as recently as 2001 (with a trend line showing slight negative relationship between the variables). But if you look at the other two graphs you will see that the trend line changed over the 2000s and there is now a positive relationship: Wealthier countries now have higher debt to GDP ratios on average than poor countries.

As with all indicators we should contextualize the measure and i need to say up front that this is the product of an hour or so tinkering around...so don't go presenting this to your class as gospel! This is all the more important given that debt is now the political focal point in countries like the USA. So it behooves us to remember that 'ggod governance' could lead to higher debt to GDP ratios in some times than in others (like after a financial crisis).  It is also important to look at actual data and remember that US government debt to GDP is only about 75 % now. IT IS NOT GREECE (sitting at 1bout 135%, behind Japan at over 150% according to the World Bank). In this list of about seventy the USA ratios are lower than a variety of countries: Hungary,Malta, the United Kingdom, France,Ireland,      Belgium, Portugal, Barbados, Singapore, Iceland, Italy, Greece, and Japan.

I will bog a little more on the US situation in coming days, thinking about the kinds of processes that might help improve the governance of resource mobilization and management when this crisis is over...

In the meantime I really wanted to revel (as a development person) in the fact that poorer developing countries seem to have managed to keep their debt to gdp ratios in check over the past decade. Of course this reflects the fact that the 2008 crisis hit wealthier countries disproportionately. It could also suggest that developing country governments don't try to spend more in downturn because they realise fiscal policy is blunt if you can't actually implement the spending plans you propose (because of some of the process problems I have recently discussed).

Swedish lessons for dealing with the 'fiscal cliff' and beyond

I try to keep away from US current affairs. But in the spirit of my prior blogs, I think there are some lessons that US lawmakers could take from Sweden as they consider policy responses to the fiscal challenges they face. As I suggest, the lessons are about 'how' the Swedes did things, not what they did. These lessons come from an interview with Goran Persson, the former Prime Minister. They are simple:

(http://www.consorci.org/accessos-directes/patronal/documents-i-publicacions/articles-i-publicacions-d2019interes/reformingthe%20public%20sector%20in%20a%20crisis.pdf)

First, it is extremely important to be in the driver’s seat. You must make it clear that you are responsible for the process and that you are prepared to put your position at stake. 

Second, the consolidation program must be designed so that the burdens are  shared fairly. Public-sector  cuts will hurt the most vulnerable people in society, so those who are better off need to contribute—for example, by paying higher taxes. Public support for tough policies would quickly deteriorate if they were not perceived as fair, and parliament would lose the political will to make hard decisions. 

Third, the consolidation program has to be designed as a comprehensive package; if you are in as deep  trouble as we were, an ad-hoc hodgepodge of measures will only have a limited chance of success.  Moreover, by presenting the measures together, it becomes clear to all interest groups that they are not  the only ones being asked to make sacrifices. It also has to be a front-loaded program. By starting with the most difficult measures, you demonstrate your resolve and increase the chances of achieving the early results, which will be important for getting the continued support that is critical for sustaining the effort.

Transparency is the fourth lesson. You must never play down the effects of the program’s measures. On the contrary, remind the public again and again that this will hurt. It is one thing to get support in parliament for the program; it’s another to stay in control during the implementation phase, when the measures become real for ordinary people in their daily lives. You must also be completely honest when you communicate with financial markets. Clarify assumptions and calculations. Don’t use any bookkeeping tricks. Only then can you recover credibility; only then can the program earn legitimacy. Indeed, you should always go for conservative estimates. If, for instance, you estimate that economic growth will be 1.5 percent and you end up with 2.5 percent, you will have solved much of the credibility problem.

 

 

If we asked how the current discussions were going in respect of these four pieces of advice, what would we find?

1. Do we know who is responsible for getting the USA out of ths current situation? The President and his administration, of the House leader, or the House itself, or the Senate, or the Congress,. or interest groups, or the press....

Note a good answer, I am afraid.

2. Are proposals fair and equally painful? The democrats suggest that they are after fairness but their rhetoric is all about the rich taking the hit; The Republicans seem to be protecting the rich. I would love to see both sides coming out with data showing how their strategies hurt all sides...the ones who vote for them and those who do not. I don't see this yet.

Again, not a good answer, I am afraid.

3. Is the policy solution frontloading pain? Hmmmm. It seems to me that the negotiations on all things are constantly aimed at showing that we need as little change as possible...some call it kicking the can down the road. It seems to me the negotiations aim to kick a range of cans down a very long road. I have not heard anyone coming out with ideas about the real reforms needed to taxes, entitlements, etc. and proposing at least ways of starting in all these areas.

Again, not a good answer, I am afraid.

4. Transparency? Frank dialog? I don't think this is what I see. The kind of economic and governmental restructuring that seems necessary is not really what many politicians are discussing. The President's fiscal commission last year raised many areas where many far-reaching reforms are needed to put the country onto a more sustainable fiscal path in the future. I don't see many politicians addressing these issues. What I see is politicians on different sides raising the issues they know their supporters will approve and keeping far away from other issues. Some call this pandering.

Again, not a good answer.

 

 

I don't pretend to know the solutions to the current US situation, and I am sure that 'what' Sweden did will not address the issues in a huge economy like that of the USA. But the process principles (about ‘how’ to do this) raised by the ex-Swedish Prime Minister seem pretty interesting. And a good set of ideas for US policymakers to consider.

Building State Capability at Harvard’s Kennedy School

The Center for International Development at Harvard's Kennedy School has just launched its program on Building State Capability. This is some shameless self promotion of that initiative, but if you are interested in these blog postings it is a good place for you to visit.

http://www.hks.harvard.edu/centers/cid/programs/building_state_capability

In particular, you might be interested in looking at our new paper, Escaping Capability Traps.
http://www.hks.harvard.edu/centers/cid/publications/faculty-working-papers/cid-working-paper-no.-240

One of the arguments we make is related to the discussion I have been having about complex contexts. We propose that the best way of introducing reforms into complex contexts is not to do loads of ex ante studies, but rather to

• enter the context through problems people care about, and then
• progress iteratively with small interventions that flush contextual impediments out, build capability and confidence and political support, and
• allow constant feedback…ultimately fostering the emergence of new hybrids.

In a sense, this is like saying that you need to muddle through the sea of icebergs in your context, ensuring that every step helps you navigate better in future.

Note how different this is to the way institutional reforms are commonly done: They are pre-designed as solutions, pre-planned over years, with limited opportunity for feedback and learning.

Doing reform in a sea of icebergs...the reality of contextual challenges

In my last three posts I have made a few comments about context and governance reform.

• I have noted that contexts in which reforms are planned are always full of preexisting institutions (rules of the game): There is no such thing as a blank slate on which to write a new reform script.
• I have also argued that the institutions one is likely to find look like icebergs, comprising visible elements like laws and invisible elements like norms and cultural-cognitive devices. Institutions are not laws or norms or cultural cognitive mechanisms; they are amalgams of all three.

I noted that many outsiders either treat institutions as one of the three or they don't look hard enough at the norms and cultural-cognitive mechanisms they cannot see. These are like the parts of an iceberg that lie below the water line. They are not easy to see, but can cause even the best reform to fail (like the Titanic).

Some say this iceberg sunk the Titanic (see http://www.irishcentral.com/news/Chilling-photograph-of-iceberg-that-sank-the-Titanic-emerges-147487545.html)

I will get even more complex today, with the idea that all contexts actually have multiple institutions at play.

The idea of an 'interinstitutional' context is not new, but it is important. All contexts are like seas of icebergs, with different sizes and shapes. Some dominate others, some are easy to pass by.

When one thinks about institutional reform I always suggest identifying the icebergs in place, and navigating between them. Think about an application, building on the brief discussion about US budgetary politics I began yesterday.

• There are more rules of the game than 'the Constitution' (which many think is the start and end of all budgetary institutions).
• There are formal Constitutional rules that give Congress responsibility, but keep it vague as to who in Congress is actually responsible, for bringing out the budget.
• There are less formal electoral rules that make the President responsible, though without formal authority to speak of.
• There are rules of the game that force political representatives to speak of limited government, because voters like to hear about this.
• There are rules of the game that require political representatives to get as much federal spending to their districts as possible, with 'pork' drawing support.
• There are rules that make defense spending a sacred cow for some, and health and social security spending a sacred cow for others.
• Etc.

One question I have is whether commentators are honest about thinking about all of these rules of the game when criticizing one or other aspect of the system (understanding that half-truthful criticism and blame-game politics seem also to be a dominant 'rule' of the US system). Another question is whether reformers see these multiple rules when thinking about how they will address the problems before them.

Past reforms (including budget controls in the late 1980s) had minimal impacts and just 'went away' because they did not fit into the sea of institutional icebergs in place. In fact, while the US public financial management system underwent its most aggressive period of reform in past decades it also saw its weakest results (at least in terms of fiscal discipline).

I write about this in my recent article (http://faculty.cbpp.uaa.alaska.edu/afgjp/PADM601%20Fall%202011/(Il)logics%20of%20Federal%20Budgeting.pdf):

    "One could list many others [reforms], from planning-programming-budgeting systems to zero-based budgeting, performance-based budgeting, and the Program Assessment Rating Tool, the formalization of internal audit in agencies, process computerization, the adoption of long-term planning, and more. In many respects, the last century was a period of great budgetary reform in the federal government.
    Interestingly, however, the sustainability problem has worsened in this period. Deficits have been more prevalent since these interventions than before. Federal spending has exceeded revenues in 75 percent of the years following the 1921 act, compared with 38 percent of the years between 1792 and     1920. Spending exceeded revenues in 16 of the 20 years after the 1990 Budget Enforcement Act introduced measures to control defi cits. Deficits have exceeded 3 percent of gross domestic product (GDP) in 8 of the 20 years since the Budget Enforcement Act, reaching such levels only 26 times in the prior 198 years (13 of which were related to wars)."

I know it is oversimplified,  but this experience suggests that past reform activity has failed, repeatedly. I fear a poorly considered reform agenda will suffer similar failure. 

• What institutional icebergs need to be navigated to make reforms work better in this context?
• Which institutional icebergs need to be navigated to make reforms work better in your context?
• How can one navigate the sea of icebergs better than is typically done?

Picture from http://www.bbc.co.uk/news/magazine-17257653

Governance contexts are full of iceberg like institutions

When I think of governance contexts, I think of institutions--what we call 'rules of the game'. I think that anyone working on reforms in developing countries (or developed countries) should have a thorough appreciation of these rules of the game.

In speaking of institutions, people commonly refer to one of a number of things: formal regulative mechanisms like laws (that influence how people behave through extrinsic means), norms (that shape choices by offering intrinsic rewards when individuals do what they see as appropriate), and cultural-cognitive devices (that influence how groups think and include one's nationality or religion).

In development there is a bias (I believe) to seeing institutions as either laws, or norms, or cultural-cognitive devices.

I think that rules of the game are not one of these concepts alone, but rather take shape when you have an amalgamation of all three. I also believe that norms and cultural-cognitive devices are more deeply embedded than regulative mechanisms like laws, and hence provide the foundation necessary for rules to have an effect. People must think in a way that supports laws and deem the regulative devices appropriate before they adhere to such.

The problem is that cultural-cognitive devices and normative mechanisms are often informal and difficult to see--so they are frequently taken for granted when outsiders look at a country or government's context. These outsiders just look at the laws in place, and prescribe reforms accordingly. In the case of Malawi I started talking about last month, development experts thought that corruption festered because of a lack of formal anti-corruption laws and a formal anti-corruption agency. In reality, there are deeply embedded norms and cultural cognitive devices that underscore decisions in the country (and have fostered corruption for decades). The new laws and agency cannot work when these foundations are in place (which helps explain why the new laws and agency have not been as succesful as many would like).

My approach is stolen from people like Richard Scott, and sees institutions as something like icebergs: with formal regulative devices that all can see and less visible normative and cultural cognitive foundations (lying below the water line). If one fails to see the foundations when crafting a reform, the reform could end up crashing like the Titanic!

Below is the figure I use in my forthcoming book, of institutions as icebergs. Makes me wonder what the iceberg behind Greece's fiscal profligacy looks like (and if the foundations support new fiscal rules and austerity measures)?

• Anyone reading about the last few years' worth of diagnostics should see that there is very little attention to the informal political norms and cognitive frameworks underpinning Greek government (http://blog-pfm.imf.org/pfmblog/2008/07/budget-reform-i.html).
• They should also see that reform advice is always the same-"introduce better laws, better formal procedures, new offices, etc."
• Unfortunately results seem similar over time as well...limited change. I know we have a big crisis in place now, but is this enough to make us think change will be greater this time around?

I also wonder what kind of iceberg foundations lie behind the US government's current budgeting woes. For all those advocating fiscal rules, balanced budget amendments, etc. in the USA I ask: What are the cultural-cognitive and normative rules of the game that have routinely undermined discipline? For those who blame the President, I ask: Who is really responsible, formally and informally, for bringing out the budget and bringing down spending?

• Are we paying enough attention to the deeply embedded contradictions that lie in the way people in this country think about government, and how this complicates budget management ("we want an exceptional government but also one that is limited";"we want power distributed across different parts of government, but also want to hold the president accountable when things go wrong";"we want our representatives to bring home the bacon and serve our districts, but we don't want to pay more taxes"). See my article on the "illogics of federal budgeting". http://faculty.cbpp.uaa.alaska.edu/afgjp/PADM601%20Fall%202011/(Il)logics%20of%20Federal%20Budgeting.pdf

The same kinds of questions could be asked of reforms in all developing countries, and governance more generally:

•  What normative and cultural cognitive mechanisms are in place in the contexts we try to introduce reforms into?
• Are the icebergs in these contexts going to sink our reforms?
• Do differences in iceberg foundations make our good governance prescriptions harmful in many contexts? (where norms and cultural-cognitive devices do not support formal governance mechanisms promoted as 'good', 'better' or 'best'?) 
• Should we be more modest in proposing solutions when it is almost guaranteed that we don't understand the contextual underpinnings of the problems at hand or the difficulties of change that will emerge?
• How could we do reform better than we currently do, given the opaqueness of contextual realities, and preexisting rules of the game?

Beyond Budgets: a new blog

This is a heads up for Philipp Krause and ODI's new blog, titled Beyond Budgets: Building Institutions from the Ground Up. I love the title, and am sure the content will be fresh and challenging.

http://www.beyondbudgets.org/blog/2012/7/19/why-most-publications-about-pfm-sequencing-are-missing-the-p.html

One thing to note about contexts: There are no clean canvases...and what's there matters

Following my last blog entry, let me suggest one thing we should always remember about the importance of context in development and governance, especially when we are contemplating institutional reform. The idea is implicit in my forthcoming book on the topic.

There is no such thing as a blank canvas, and what's there matters and may not be well identified, appreciated or understood by outsiders.

 Let me explain what I mean, and why it is important.

Most serious new institutional theorists (including Douglass North) argue that all social groups have rules of the game; including small communuities, sports teams, scout groups, ministries of education, tax collection offices, and classrooms of students.  These rules differ in size and shape across contexts and through time, but they are always there, as incumbents that have emerged to direct behavior in the context. They influence how agents think and make decisions, impact patterns of resource allocation, and shape the kinds of capacities that exist and do not exist.

In a way, they are like the paint marks an artist has already put on her canvas. Sometimes they make sense to external observers, and appear ordered and purposeful (maybe like the flowers below), and other times they make a little less sense to observers, looking disordered and messy (the Pollock painting under the pretty flowers may look like this to some, certainly I have a hard time working it out).

 

It turns out the functionality of different incumbent institutional forms may be as subjective as art, and as difficult to make sense of and appreciate for outsiders who have not learned about such mechanisms. Rules of the game in a poor country with no transparency may resemble messy and 'in need of reform' painting marks to you and me, for instance, but they could merge to provide some kind of chaotic order that works for important groups of people in the country (often even for the poor).

More importantly, the people in the country may not see any need to change incumbent rules of the game, or may lack capacities to change given the entrenched dominance of incumbents. So any new reforms you introduce become like added paint on the Pollock canvas; which has to fit in with what's already there or risk adding to the chaos; or being overwhelmed by the incumbent patterns (as seems to happen to so many reforms).

This basic observation is an important starting point for thinking about context and governance and institutional reform: Institutions always exist, in all contexts, in many different forms that have some functionality for some people in the context, and that need to be considered when thinking about reforms, but probably are never properly considered by outsiders.

It is an obvious observation, you may say, but is it always respected when development agencies craft their reform programs for developing countries, or when we as outside specialists conceive our indicators of what constitutes a good, or better, or best practice?

It seems to me that many reforms are crafted with only a passing glance at the context; which is followed by a much more serious presentation of externally devised, 'better' and 'right' rules. It seems, further, that the act of creating generic indicators of the 'right rules' turns a blind eye to the fact that different places already have rules in place and that relevant governance solutions are more than just a little likely to look different across different places (if only because the opening slates are so different).

In both instances it seems that we in the development comunity think it appropriate to craft reform solutions and think about 'good governance' ideas as if there are a bunch of clean or clean-able slates on which to work our masterpieces. The reality is that you cannot 'buy' a clean slate on which to paint new governance solutions (like those shown below) and that we should stop blaming countries when reforms fail because the reform slates were filled with other incumbents that we either did not see or did not take seriously.

We need to remember this. And stop pretending that the world is our oyster. And start developing the tools, capacities, and sensibilities to better understand how to appreciate 'what's already there'.

What do you think these tools, capacities, and sensibilities should or could look like?