Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized ,~~~~~~~~~~~~~fi 00 oa~~ A WORLD BANK COUNTRY STUDY Enhancing the Role of Government in the Pacific Island Economies The WorldBank Washington,D.C. Copyright © 1998 The International Bank for Reconstruction and Development/THE WORLD BANK 1818H Street, N.W. Washington, D.C. 20433,U.S.A. All rights reserved Manufactured in the United States of America First printing October 1998 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910,222 Rosewood Drive, Danvers, Massachusetts 01923,U.S.A. Map illustration by Karen Siatras, Meadows Design Office Inc., Washington, D.C. (www.mdomedia.com). ISSN: 0253-2123 Libraryof Congress Cataloging-in-Publication Data Enhancing the role of government in the Pacific Island economies. p. cm. - (A World Bank country study) Includes bibliographical references. ISBN 0-8213-4351-3 1. Islands of the Pacific-Economic policy. 2. Islands of the Pacific-Social policy. 3. Government spending policy-Islands of the Pacific. 4. Finance, Public-Islands of the Pacific- Accounting. 5. Total quality management in government-Islands of the Pacific. I. World Bank. II. Series. HC681.E545 1998 338.99-dc2l 98-45139 CIP - 111- CONTENTS Page No. Abstract .................... vi Acknowledgments.................... vii Acronyms and Abbreviations.................... viii CurrencyEquivalents .................... ix Executive Summary.................... xi 1. Overview.............................................................. 1I Introduction............................................................. I EconomicPerformance .............................................................. 1 The East Asian Financial Crisis.......................................... .................... 4 RekindlingGrowth .............................................................. 5 2. The Scope of Government:Focusing on Essential Public Activities............................... 7 Structure and Size of Government.............................................................. 7 RecentPolicy Initiativesto Reformthe Public Sector........................................................ 9 Focusing on Core Functionsof Government............................................................. 11 Stable, Credible,and Non-DistortionaryEconomic Policies ............................................ 12 Law and PropertyRights ............................................................. 14 EnhancingPrivate Sector Growth:A SupportiveRole for Governmentin Key Areas .... 16 ImprovingGovernance: Reducing Administrative Discretion and ImprovingPublic Accountability............................................................. 19 3. Enhancing the Effectiveness of Public Expenditures: Spending Patterns and Policies............................................................................ ..... ................ 23 Balancing the EconomicComposition of Expenditure.23 Public ExpenditureReform: Easier Said than Done.26 ImprovingIntrasectoral Expenditure: Health, Education and Infrastructure.26 Conclusions.32 4. Planning and Budgetingfor More Effective Spending.33 Signpostson the Path to Reform.33 The TraditionalBudget System:The StandardAgainst which ReformsShould be Measured.33 Characteristicsof Well-PerformingBudgets .35 Performance-OrientedBudgeting: Potential for Improvementbut Not a Panacea. 36 ProgramFormats and PerformanceMeasures .36 MakingBudgets in a Medium-TermFramework .37 Broad-Bandingand Decentralizationof SpendingAuthority .37 Strengtheningthe PSIP.38 Directions for BudgetaryReform .39 - iv - Page No. Annex 1: Count ryProfiles ................................................................. 45 Fiji ................................................................. 46 Kiribati................................................................. 50 FederatedStates of Micronesia................................................................. 53 Marshall Islands................................................................. 56 Republicof Palau................................................................. 59 Samoa................................................................. 62 SolomonIslands ................................................................. 66 Tonga................................................................. 70 Vanuatu................................................................. 74 Annex 2: Budgeting in the Pacific Member Countries - From Cash Management to Output Management ................................................................. 77 Annex 3: The Structure and Size of the Public Sector in the PMCs ............................................. 88 Annex 4: Participatory Development: The Challenge of Inclusion .................... ........................103 Annex 5: The State of the Environment in the PMCs ................................................................. 110 Annex 6: Relationship between Foreign Aid and Government Expenditure .............................. IIl Statistical Appendix on Public Finance................................................................. 1113 Bibliography ................................................................. 119 Map: IBRD 29631 -v List of Tables Page No. 1.1 GDP Growth, 1987-97 ................................................ 2 1.2 Marginal Efficiency of Investment ................................................ .4 2.1 As Aid Flows Increase So Does Government Expenditure ................................................ 9 2.2 PMC Government Resources, Expenditure, Deficits and Growth.................................... 12 2.3 Government Overall Balance, Including Grants ................................................ 13 2.4 Public Debt Indicators, 1995-96................................................ 13 3.1 Economic Composition of Government Expenditure in PMCs, 1995 .............................. 24 3.2 Government Current Expenditure on Health, 1990-96................................................ 27 3.3 Government Expenditure on Education, 1990-96................................................ 29 List of Figures 1.1 Average Growth Performance, 1985-1995................................................. 2 1.2 Achieving Sustainable Development ................................................. 6 4.1 State of Reforms in Selected PMCs ................................................ 40 List of Boxes 1.1 Pacific Islands -The Stylized Facts.......................... 3 2.1 Building Capability-Addressing Governance Issues ...................................................... 21 4.1 Strengthening Budgeting through a Medium-Term Expenditure Framework .................. 37 List of Charts Chart 2.1: Government Expenditure in Low and Middle Income Economies .7 Chart 2.2: The Government Wage and Salary Bill in Low and Middle Income Economies .8 Chart 4.1: Aid per Capita in 107 Low and Middle Income Countries .44 - vi - ABSTRACT This report discusses how the Pacific Islands development agenda could be put into practice by improving the effectiveness of government activities in nine Pacific Island countries that are members of the World Bank (PMCs)-Fiji, Kiribati, Federated States of Micronesia, Marshall Islands, Republic of Palau, Samoa, Solomon Islands, Tonga and Vanuatu. The report analyzes the scope of government in the PMCs, their spending patterns and priorities, and the budgetary processes that give rise to spending choices. It is structured along three interlinking themes about enhancing the role of government: (i) to focus on core functions, match government tasks to its capacity, and to improve public sector accountability; (ii) to raise the efficiency of public