Economic Governance: Guidelines for Effective Financial ...

ST/ESA/PAD/SER.E/9 Department of Economic and Social Affairs Division for Public Economics and Public Administration

ECONOMIC GOVERNANCE: GUIDELINES FOR EFFECTIVE

FINANCIAL MANAGEMENT

United Nations . New York, 2000

NOTES

The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The designations "developed" and "developing" economies are intended for statistical convenience and do not necessarily express a judgement about the stage reached by a particular country or area in the development process. The term "country" as used in the text of this publication also refers, as appropriate, to territories or areas. The term "dollar" normally refers to the United States dollar ($). Comments and inquiries regarding this report may be directed to: Mr. Guido Bertucci Director, Division for Public Economics and Public Administration Department of Economics and Social Affairs United Nations, New York, NY 10017 United States of America Fax: 1-212-963-9681 Telex: 42231 UN UI

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FOREWORD

Good governance is considered

synonymous with sound development management. However, economic governance of national state is facing serious problems because its traditional sovereignty over economic affairs has been imperceptibly eroded to other levels of world economy. Globalization represents a growing constraint on countries to utilize their own countryspecific national policies which can be overridden by the power of foreign government and foreign based multinational corporations. As a result, the search for effective governance has to proceed at the institutional and territorial levels, in addition to the nation state.

The slow economic growth in developing and transitional economy countries and its negative global implications has alerted the international financial organizations to promote and implement action-oriented responses to enable these countries to enhance financial resources mobilization and their efficient, effective and rational utilization to achieve sustainable economic development with social justice.

Developing and countries with economy in transition have recognized the need to reorient their tax systems and strengthen their administrative capacity with a view to closing the "compliance gap", being the gap between actual and potential revenues. While tax reform has generally come to mean the redistribution of existing burdens downward, cutting back tax expenditures and broadening the tax base, in recent years, these policies have been pursued in the context of intense competition for capital investment consequent upon globalization of financial markets.

Another important constituent of economic governance ? public expenditure management has its approaches and recommendations solidly anchored on the economic, social, administrative and implementation capacity realities of the country concerned. With a view to ensuring that the government's financial resources are used lawfully, efficiently and effectively and with transparency and accountability, it would be necessary to devise strategic method of public financial management and control.

The reduction of the role of government in the economic sphere and the recognition of private sector as `engine of economic growth' has meant that government has a new vital role in creating an effective legal and regulatory framework in which private sector will be enabled to operate.

The need to evolve basic principles and guidelines for ensuring effective economic governance in developing and transitional economy countries cannot be overemphasised. I am happy to note that the Public Finance and Private Sector Development Branch has made a commendable contribution by bringing out this publication on this topical subject. I am sure that public officials, academic community and research students concerned with this subject will find this publication of considerable interest and will stimulate further study and research.

This study was prepared for the Public Finance and Private Sector Development Branch by Suresh Shende, Interregional Adviser in Resource Mobilization. The views expressed are those of the individual and do not imply any expression of opinion on the part of the United Nations.

Guido Bertucci Director

Division for Public Economics and Public Administration Department of Economic and Social Affairs

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TABLE OF CONTENTS

Page

Notes ..........................................................................................................................................................................ii

Foreword

iii

Table of Contents

iv

Executive Summary .....................................................................................................................................................v

1. Introduction ..................................................................................................................................................... 1

2. Concept of Good Governance.......................................................................................................................... 1

3. Issues Relating to Corruption .......................................................................................................................... 6

A.

Introduction ...................................................................................................................................... 6

Causes of corruption ....................................................................................................................................... 8 Consequences of corruption.......................................................................................................................... 10 Economic costs of corruption ....................................................................................................................... 11 Institutional framework for fighting corruption............................................................................................ 12

4. Revenue Administration ................................................................................................................................ 13

A.

Introduction .................................................................................................................................... 13

Efficiency and effectiveness of revenue administration ............................................................................... 15

5.

Public Expenditure Administration................................................................................................................ 38

A.

Introduction .................................................................................................................................... 38

Public financial management........................................................................................................................ 39

6.

Regulatory Framework .................................................................................................................................. 66

7.

Conclusion ................................................................................................................................................... 101

Annexes

I -

Table 1 - The growth of general government expenditure, 1870-1996 ........................................ 103

II -

Table 2 - Privatization of state-owned enterprise ......................................................................... 105

III - Table 3 - Network industries: Modes of privatization and sector reform..................................... 106

IV.

Table 4 ? Capital flows to developing countries and countries in transition ............................... 107

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EXECUTIVE SUMMARY

There is widespread awareness that lack of accountability, good governance and transparency in government operations impede the progress towards sustainable economic development. Traditionally, international financial organizations have advised member countries to pursue sound economic policies ? policies that promote growth through low inflation, sound and prudent monetary and fiscal policies and a sustainable balance of payments position. Presently, in the context of changed economic environment, it is necessary to broaden the scope of the economic policies to include other elements, popularly known as "second generation reforms" which are considered vital for economic growth and financial stability, namely:

The concept of governance in the context of promotion of sound and sustainable economic development comprises of efficient government, effective civil society and successful private sector. Good governance is based on participatory and democratic traditions, promotion of equity and equality, gender balance and promotion of synthesis of diverse perspectives and mobilization of resources for social purposes, and in the final analysis based on the rule of law. Effective economic governance, in this context, would seek to evolve well structures, harmonious and complementary fiscal, monetary and trade policies and establishment of monitoring and regulatory authorities for promotion and coordination of difference economic activities.

1.

Reduction in extravagant and

unproductive government expenditure;

2.

Higher spending on primary health and

education; and adequate social

protection for the poor, the unemployed

and other vulnerable underserved

sections of the society;

3.

The creation of a more level playing

field for the private sector activity, by

increasing the openness, stepping up the

privatization process, reducing the

power of monopolies through

appropriate legal and administrative

measures, and setting up more

transparent and simpler legal and

regulatory systems and frameworks;

4.

Stronger banking sector which protects

small savers and other depositors, and

reduce risks for shareholders and

creditors by enforcing stricter prudential

standards and information disclosure

requirements;

5.

Reform of tax systems to make them

more efficient, effective, equitable and

fairly comprehensible; and

6.

Greater transparency and accountability

in government and corporate affairs.

These elements could be considered to constitute the basic framework of good economic governance.

"Corruption" most often applied to abuse of public power by politicians and civil servants for personal gain, is motivated by greed and by the desire to retain or increase one's power. Controlling corruption has emerged as one of the most important concerns within the international community. Corruption is a pervasive phenomenon which can be found in a wide spectrum of countries of vastly differing ideologies, economic conditions and social development. There has been unmistakable attitudinal change towards corruption: governments have become unable to conceal evidence of corrupt practices, level of public tolerance for corruption has declined and spread of democratic process affords less opportunities for practising corruption. Higher public investment, regimes of regulations and authorizations, higher taxes, trade restrictions, lower salaries of public officials and other discretionary powers wielded by public officials are the main causes of corruption. The economic consequences of corruption are increased transactions costs and uncertainty, inefficient economic outcomes, undermines State's legitimacy, hampers growth of competitiveness and affects the performance, integrity and effectiveness of government institutions. Developing and transitional economy countries should establish proper institutional framework for fighting corruption and enhance the morale of public officials by meeting out strict punishment to corrupt officials

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