Economic Governance: Guidelines For Effective Financial Management

structure and other factors. These measures haveincluded greater reliance on indirect taxes,reliance on declarations and withholding of taxesby third parties, cross-checking of information,auditing of cases, as well as enactment andenforcement of penalties. International taxevasion and avoidance can be countered byconclusion of bilateral tax treaties providingmutual assistance and exchange of information.Developing countries with economy intransition must grapple with the problem ofmaximizing the mobilization of financialresources from both domestic and foreignsources and ensuring that they are used in themost efficient and productive manner to benefitall sections of the population, and that publicfinancial operations are reliably and promptlyaccounted for to inspire the confidence amongthe citizens and foreign donors and investors.As observed by the Group of Experts onPublic Administration and Finance, in manycountries, financial management capabilitieshave been eroded by the pursuit of financialpopulism ineffective and distorted budgetarymechanisms and breakdown of existing financialmanagement institutions. The countries willhave to harmonize methods of strategicmanagement and control of aggregate financialvariables with processes for changingexpenditure priorities and enabling effective andinnovative management of service deliveryinstitutions.Fiscal policy plays a major role inpromoting and sustaining stabilization andgrowth, in the context of close interdependencebetween fiscal, monetary and external sectorpolicies. Weak fiscal discipline, on the otherhand, in an unstable economic environment maygive rise to large fiscal imbalances which arefinanced through inflation. Many countries runfiscal deficits to finance their public expenditurebecause their tax bases are too limited to allow ahigh tax burden. Even when broader tax basesare available, tax administrations are tooinefficient to collect taxes legally due. Wideningof the tax base through legal and administrativemeans is an effective answer to realize the fulltax revenue potential. Greater efficiency in thecollection of taxes can reduce the budget deficits,halt the deficit financing and consequentialinflationary pressures. Higher inflation hascritical allocating and distributional implicationsthat impede growth and encourage capital flight.Financial management reforms typicallyincorporate the following components, namelyuse of structured planning and programming as ameans of evaluating and selecting ways ofachieving desired objective; taking resourceallocation decisions within the framework of aunified budget; integration of budgeting andaccounting; encouragement of financialaccountability; preparation of consolidatedreports and measurement of outputs and inputs.The scope of public accounting systems may beextended to establish multiple accountingstructures to generate date required for managingpublic affairs and measure the cost, performanceand productivity of government programmes andprojects. At times, the performance of traditionalaudit is hampered by weakness of the accountingsystems, lack of trained auditors, insufficiency offinancial resources allocated for audit, absence ofclearly defined audit standards, and less than fullindependence enjoyed by audit authorities. Acomprehensive methodology of evaluationincorporating target efficiency goals, targetefficiency-related reporting and analysis needs tobe developed to facilitate audit of performanceand link it more closely with programme andproject implementation. In short, a sound publicfinancial management system must be supportedby an appropriate audit system which willdetermine how public resources have been used,Tax evasion and tax avoidance at bothnational and international levels have seriousimplications for fiscal policy, in that they violatethe principle of fiscal equity and undermine theconcept of voluntary compliance with tax laws.They can greatly diminish the value of codifiedtax incentives and thereby affect allocativebehaviour to thwart redistributional programmes,create artificial biases in macro-economicindicators and increase tax burden when tax ratesmust be increased to offset the revenue lossesincurred, thereby imposing an unfair burden ontaxpayers who cannot shift their tax liabilities.Taxpayers have experienced the futility ofpaying taxes, since in many countries, the publicexpenditure has failed to yield commensuratebenefits to the population at large. The scope ofmeasures adopted by tax administrations tocombat tax evasion and avoidance, variesaccording to the characteristics of the countryconcerned, its legal structure, its politicalvi

evaluate the results achieved with thoseresources and verify compliance with legalaccounting and administrative provisions andprocedures.The advent of globalization coupledwith liberalization of international capitalmarkets has engendered critical problems in thedomestic and international financial systems,including financial sector vulnerabilities, in theform of unsound financial and banking systemsand deficiencies in financial incentive structures,institutions and policies with widespread loss ofconfidence in financial markets. This situationhas highlighted the need for establishingregulatory oversight and market discipline ascomplementary means for achieving a stable androbust financial system. Supportive legal andregulatory environment, strong internalgovernance, external discipline provided bymarket forces as also external governanceprovided by regulation and supervision at bothdomestic and international levels are theattributes of a sound financial system. Thegrowing accent on privatization has imposednew tasks on governments, such as, setting uplegal and regulatory framework, regulation ofmonopolies, protection of consumers and ingeneral, creation of necessary environment forprivate sector to operate efficiently. In short,there is a growing awareness amongst financialsystem regulators to develop a consistentinternational framework of financial andsupervisory standards and best practices topromote strong and healthy financial systems inall countries.In conclusion, it has beenacknowledged that sound governance is essentialfor ensuring sound and sustainable humandevelopment. The challenge facing all countriesis to create a system of economic governancewhich promotes the process of decision makingwhich directly or indirectly affect a country’seconomic activities or its relationship with othereconomies. Developing and transitionaleconomy countries will have to strive to reduce,if not eliminate altogether, the subversive impactof corruption in its economic activities, establishstrong institutional framework and strengthen theadministrative and technical capacities of itspublic administrators to achieve sustainablesocio-economic development.

1. INTRODUCTIONThere has been a perceptible growth ofawareness amongst the international developmentorganisations, national governments and theacademic community about the impediments to theeconomic development process caused by lack ofaccountability, good governance and transparency ingovernment operations. The consequences flowingfrom the absence of any of these factors in thedeveloping countries and transitional economies havemanifested themselves through lack-lustreperformance on the economic front, erosion of publicconfidence in the ability of the government to raisethe living standards of the population and calling inquestion the development strategies adopted thus farby these countries in conjunction with the developedcountries and international organisations throughbilateral and multilateral aid programmes. Indeed,despite the presence of natural, material or financialresources in some of the developing or transitionaleconomy countries, they have not been instrumentalin significantly changing the conditions of life of avast majority of the population primarily as a resultof the absence of accountability, good governanceand transparency in government operations.Good governance consists of effective and wellco-ordinated efforts directed to achieve optimumresults through a harmonious blending of natural,material, human and financial resources forincreasing the socio-economic welfare of thepopulation. Good governance has necessarily to becomplemented by strict accountability andtransparency in government operations. While thedeveloped countries have been able to harness theirabundant physical and financial resources throughgood governance to establish firm foundations fortheir economic and social infrastructure, developingand transitional economy countries will have toincorporate lessons of good governance to implementtheir development strategies. While good governanceencompasses the idealistic and all-pervasiveattributes which promote socio-economic welfare ofthe population at large, we have a limited task ofidentifying the factors which are applicable to goodeconomic governance and that too, further restrictedto laying down guidelines for effective financialmanagement.Good governance, and more particularly,economic governance, necessarily implies utmostintegrity, moral rectitude and probity in public life onthe part of persons entrusted with responsibilities inall spheres of the national life. The basic structure ofcivilised life in a society is dependent upon the abilityto govern according to the will of the people in ademocratic way. Hence, the basic concepts of goodeconomic governance will involve a democraticstructure, adherence to the principles of morality, andefficiency and effectiveness of operations to ensuresound financial management. In this context, theprinciples of good economic governance appearhighly relevant for developing countries andtransitional economies embarking on programmes forsustainable economic development.Developing countries and transitionaleconomies situated in different continents have vastlydifferent economic background, potential andaspirations. Similarly, notions of democracy andmorality differ from country to country, although thebasic ingredients of both these concepts are relativelynon-controversial It would be indeed difficult to laydown a common framework of good governanceapplicable to all developing countries and transitionaleconomies.Hence, this publication has the modest ambitionto identify all such precepts of good economicgovernance which may appear to be so basic,fundamental and non-controversial that they may befound useful by these countries. In the ultimateanalysis, good economic governance will beconditioned by effective economic policies, adequateinstitutional and regulatory framework and efficientand well-trained administration. As the emphasis hereis on laying down guidelines for effective financialmanagement, there is the further requirement ofappropriate setting of the fiscal policy within theoverall framework of harmonious and well coordinated monetary and trade policies along with thefiscal administrative set-up which possesses theattributes of efficiency and effectiveness.Every effort is being made to explain in acogent and intelligible manner the basic canons ofgood economic governance with special emphasis onefficacious financial management techniques,applicable primarily to developing countries andtransitional economies.2. CONCEPT OF GOODGOVERNANCEGovernance in broad terms signifies theexercise of political, economic and administrativeauthority to manage a nation s affairs comprising thecomplex range of mechanisms, processes,

Economic Governance: Guidelines for Effective Financial Managementrelationships and institutions through which citizensand groups articulate their interests, exercise rightsand obligations and mediate differences. Governanceis not the sole prerogative of the State but itsfunctions could be assumed by or delegated tospecified institutions and organizations in the privatesector and the civil society. Such organisms operatein a legal or policy framework defined by the Statebut having autonomous existence and exercisepolitical, economic and administrative authority.There is consensus amongst internationaldevelopment organisations that good governance isthe basic pre-requisite for sustainable economicdevelopment. In fact, capacity building for effectiveand sound governance is a primary means of povertyreduction programmes. Considering the diversity ofattributes of physical and financial resourcespossessed by different developing countries andtransitional economies as also their own perceptionsof sustainable economic development, there would bedifferent approaches to the question of appropriategovernance strategy for each of these countries. Theexpression sustainable economic development hasbeen defined in the Brundtland Commission Report(1987) as the meeting of the needs of the presentgeneration without compromising the needs of thefuture generations, while UNDP regards the humandevelopment as a process of enlarging the choices forall people in society. Moreover, it gives the highestpriority to poverty reduction, productiveemployment, social integration and environmentalregeneration.The concept of governance in the context ofpromotion of sustainable economic developmentcomprises of the efficient government, effective civilsociety and successful private sector. Goodgovernance has many characteristics. Goodgovernance systems are participatory in that themembers of governance institutions have a voice inthe decision-making process based on democratictraditions. The procedures and method of decisionmaking reflect transparency to ensure effectiveparticipation. The governance system aims atbringing about sustainable development. Goodgovernance promotes equity and equality oftreatment to all based on the concept of nondiscrimination. The basic consideration in goodgovernance is being able to develop the resourcesand methods of governance. In the context of socialdevelopment parameters, it promotes gender2balance, promotes synthesis of diverse perspectivesand mobilises resources for social purposes. Goodgovernance strengthens indigenous mechanismsand ensures effective and efficient use ofresources. All civilised societies are based on ruleof law which promotes good governance. Goodgovernance engenders and commands respect andtrust.The persons entrusted with the task of takingdecisions in government, private sector and civilsociety organisations have to be accountable fortheir actions to the members of public andinstitutional stakeholders. Governmentalorganisations have to be service oriented, responsiveto the hopes and aspirations of the people, act asfacilitative and enabling, regulatory rather thancontrolling, take ownership of solutions to nationalsocial problems and able to deal with temporalissues.One of the major problems before thedeveloping countries and the transitional economiesis to create a conducive economic environment foreconomic growth and social progress. Each countrymust ascertain and evaluate its stock of natural,physical and financial resources and formulate itsstrategy for economic growth on the basis of itsability for capacity building, resource mobilisation,strengthening of the institutional framework andadministrative capability. There should be positivesteps taken to promote private sector development bycreating conducive atmosphere for its nurture andhealthy growth. Wherever possible, attempts shouldbe made to encourage and foster private-public sectorpartnership and establish adequate legal andregulatory framework to provide a level-playing fieldto both public and private sectors of the economy.Economic governance consists of the entireinstitutional framework of the government engagedin the evolution and implementation of the generaleconomic policy in all its manifestations affecting itsinternal and international economic relations.Economic governance would also necessitateevolving on a permanent basis harmonious fiscal,monetary and trade policies and establishment of amonitoring authority for effective co-ordinationbetween different economic activities. In the interestof decentralisation of functions, the central bank ofthe country should be endowed with a great deal ofautonomy and authority to implement monetarypolicy as recent experiences of the developed

Economic Governance: Guidelines for Effective Financial Managementcountries have shown. Wherever there is anindependent planning authority entrusted withmedium and long-term planning of the nationalresources, there is further necessity for close coordination with such planning authority.Economic governance presupposes theexistence of well-defined and well establishedinstitutional framework which is competent toundertake the implementation of economic policylaid down by the Government. The institutionalframework should be capable of making structuraladjustment and effectively implement stabilisationpolicies whenever required to do so. In fact, effectiveeconomic governance primarily depends on thestrength of its institutional framework, the flexibility,manouvrability and resilience to the changingpolitical, economic and social environment and theability and competence of the persons to take bold,practicable and rational decisions. Where theinstitutional framework is fragile and the decisionmakers are incompetent or indifferent, even the besteconomic policies will be worthless.Economic administrators have always a heavyresponsibility to shoulder in taking pragmatic,intelligent and quick decisions on matters which areconstantly in a state of flux. The competent,intelligent and versatile administrators can functioneffectively only when they have the necessaryinfrastructure to work on and possess the modernelectronic equipments and office automation, in theform of computers, and other ancillary means ofinformation technology. Moreover, apart from theirproper orientation and advanced training in economicadministration, these administrators should beexposed to the recent trends in managementeducation at regular intervals so as to give them aglobal perspective of their tasks. Economicadministrators cannot remain isolated in theireconomic doctrinaire approach in relation to theirtasks since events in political, social andenvironmental fields

countries, financial management capabilities have been eroded by the pursuit of financial populism ineffective and distorted budgetary mechanisms and breakdown of existing financial management institutions. The countries will have to harmonize methods of strategic management and control of aggregate financial variables with processes for changing