Appendix I. How Countries Undertook Their Adjustment Efforts

George Mackenzie, Philip Gerson, and David Orsmond
Published Date:
April 1997
  • ShareShare
Show Summary Details

This appendix provides a detailed description of changes in expenditure policy and public expenditure management, tax policy and administration, and of certain aspects of public enterprise reform that took place during adjustment efforts in the eight countries of the study. This material provides the backing for the analysis of public sector reform in Section III. Here the presentation is on an “expenditure-by-expenditure” and “tax-by-tax” basis, rather than the country-by-country basis used for most of the discussion in the main text. The discussion of classification and definitional issues near the beginning of Section III applies to this appendix as well.

Types of Expenditure Reductions Undertaken

Directly Productive Activities


Both Chile and Thailand began their adjustment efforts with high levels of literacy,45 high primary enrollment ratios, and low pupil-teacher ratios. Nonetheless, in the first adjustment period Chile increased the shares of total education expenditure and primary current education expenditure in GDP even as total noninterest expenditure was reduced.46 In Thailand, primary and secondary education expenditure also increased their shares during the first adjustment period, and education policies were reoriented to increase the share of supplies and materials, to upgrade teachers through retraining, and to improve educational planning, administration, and evaluation. During the second adjustment period, overall public education expenditure declined in both countries as the private sector financed a greater share of education at the higher level.47

In contrast, Bangladesh and Senegal began and ended the adjustment period with the lowest literacy levels of the group, low enrollment levels, and high pupil-teacher ratios. At just 1.3 percent of GDP, Bangladesh was spending less than any other country on education at the outset of the adjustment period. Despite this low share and its obvious need for basic education, Bangladesh was allocating almost one-fourth of total expenditure to tertiary education during the preadjustment period (a high share compared with that in most of the other countries), although externalities in education expenditure are mainly associated with primary education. The share allocated to primary education declined from around 50 percent during the preadjustment period to just below 40 percent a few years into the second adjustment period, when education expenditure was reduced during the initial adjustment effort. The share of primary education did increase, and that of tertiary education declined, when total expenditure increased as a share of GDP toward the end of the second adjustment period.

Senegal was spending 4.0 percent of GDP on education before it began its adjustment efforts. Despite the low average level of Senegalese educational attainment, the tertiary share was relatively protected during the adjustment period. Pupil-teacher ratios at the primary level increased markedly over the period as a whole.

Education expenditure policy in other countries is more difficult to characterize. Although part of the increase in education expenditure in Ghana was channeled to primary education, both primary school education expenditure shares and enrollment ratios remained low, and the share of tertiary funding also increased, albeit from a low base. Moreover, in recent years an imbalance between wages and salaries and supplies of necessary teaching materials and infrastructure has emerged (Ghana, 1994). In Morocco, education expenditure as a share of GDP declined during the adjustment period, although this was mainly due to declining enrollment ratios (Morrisson, 1991). The decrease in education expenditure in Mexico during the first adjustment period led to a severe decline in real education expenditure at the primary level. Real primary expenditure and its relative share in total education recovered during the second adjustment period (World Bank, 1994a). In India, the share of total expenditure allocated to the primary sector has not been particularly high, and pupil-teacher ratios are also among the highest of the group.


Judged by standard indicators (infant mortality rates, longevity, and the like), Chile’s health status was among the best of the group at the outset of its adjustment efforts. Chile nonetheless appears to have increased the availability of primary care, judging from the decrease in population per nurse. Preventive care remained free; although curative care was means-tested, it remained free for pregnant women and children under six. Thailand, with a greater need, was also successful in this regard.48 The share of its health expenditure allocated to preventive care tripled in the early 1980s as health expenditure was reoriented toward basic care in rural areas, maternal and child care, family planning, and nutritional programs (Wheeler, Raudenbush, and Pasigna, 1989; and World Bank, 1991a). Though average health indicators in Mexico are comparatively good, at the end of the adjustment period 11 to 21 percent of the populace were living without access to health care services; moreover, the quality of services and medical supplies deteriorated, especially in rural areas.49

The lowest health standards of the group were recorded by Bangladesh and Senegal, and standards in Ghana and Morocco were also low, even though at the outset of the adjustment period the level of health expenditure in U.S. dollars per capita in these countries, Bangladesh excepted, was similar to or even above that in Thailand. Bangladesh did reorient expenditure toward primary care, and there were improvements in all health indicators, but total health expenditure remained low, given the country’s overall need. During the adjustment in Ghana, the ratio of population per nurse increased, yet that for hospital beds declined, suggesting that the increase in health expenditure that occurred during the adjustment period was allocated more to tertiary than to primary care; access to health facilities in rural areas remained limited (Roe and Schneider, 1992). In Morocco, while cutbacks in capital expenditure affected all levels of health, cuts in operational expenses were focused on hospitals, although health expenditure remains biased toward tertiary and urban health care (World Bank, 1994c). In Senegal, the ratio of expenditure on salaries and wages relative to materials and supplies rose from about 1½ in 1982 to by 1989; nonetheless, there was also some refocus toward primary care through, for example, an increase in rural health “huts.”50


The evidence—which must be treated with some caution because of data deficiencies—suggests that, despite the general decline in capital expenditure, four of the eight countries succeeded in increasing the share of the capital budget allocated to potentially productive areas such as expenditure on education, health, and social infrastructure (for example, water and sewerage).51 The large decline in Chile in part reflected the phasing out of direct public provision of housing in favor of housing subsidies, which decreased capital expenditure and increased subsidies; capital expenditure on roads increased. In Ghana, the considerable external project financing available in the adjustment period was used to increase capital spending in priority areas such as transport, agriculture, health, and education, as well as for expenditure operations and maintenance.52

At the outset of the adjustment period in Morocco, the implementation rate and rate of return on government capital investment was low, in part because of the limited capacity of the civil administration to assess and implement project priorities. This situation improved when measures aimed at strengthening project design and implementation were undertaken, and the share of directly productive investment increased. In Thailand, capital expenditure on health and education was protected from the overall decline; capital investment in other areas was undertaken only after a clear need had been demonstrated—a restrictive form of expenditure management that was later abandoned.

Nonetheless, in some countries problems that contributed to the initial poor return of capital investment were still evident at the end of the adjustment period. In Bangladesh, expenditure declines were concentrated in the transport and communications sectors and to a more limited extent in the health sector; the overall rate of return of capital expenditure remained low owing, among other factors, to complex procedural requirements for project approval and execution and inadequate project evaluation procedures and training of managers, which contributed to a generalized weakness in public expenditure management systems. In Senegal, in the initial adjustment period, real capital expenditure declined by over 30 percent, affecting in particular education and to a lesser extent health (Rouis, 1994). Senegal adopted a three-year rolling capital plan in the second adjustment phase with the intention of increasing the overall low rate of return on capital projects. Although some progress has been achieved in project evaluation—more projects are subject to economic and financial appraisal, and staff numbers have been increased—the majority of projects are not rigorously evaluated. The result is that projects with a low or negative rate of return may be approved (World Bank, 1993b). Finally, in Mexico the initial reductions reduced real capital expenditure by half, cutting heavily into capital expenditure in health and education (World Bank, 1994a).

In the second adjustment period, Chile and Thailand experienced increasing bottlenecks in roads, transport, and seaports because of their tight capital expenditure policies and rapid economic growth. In consequence, investment expenditure has increased from a low of about percent of GDP for both countries at the end of the 1980s to about 3 percent in Chile and 4 percent in Thailand by 1993. Similarly, Bangladesh recently increased capital expenditure in the transport and communications, education, and to a lesser extent the health sector, with a decline in capital expenditure on industry, which had in any case effectively functioned as current transfers to cover the operating deficits of public enterprises. Increases were also reported in Morocco and in education and transport and communications infrastructure in Mexico.53

Indirectly Productive Activities

Civil Service Wage Bill

Chile experienced the largest reduction in the share of the wage bill in GDP over the course of the adjustment;54 in Thailand, the wage bill increased as a share of GDP despite the overall decline in noninterest expenditure. By the end of the second adjustment period, the civil service wage bill was 8.3 percent of GDP in Senegal, and as much as 10.7 percent in Morocco; in the other countries it ranged from 2 percent to 6 percent. At the outset of adjustment, the emphasis of countries’ efforts to contain the wage bill was on tight wage restraint and not employment reduction. This was the case in Mexico during the first adjustment period, when the wage bill declined from 4.1 percent of GDP in 1982 to 3.3 percent in 1988, but civil service employment increased by about 20 percent. Average real civil service wages usually declined, and the differential between the lowest and highest paid civil servants was compressed.55 As the gap between public and private sector wages widened (to 25 percent in the case of Thailand), the departure of skilled public servants is thought to have compromised the effectiveness of the civil service and often to have required some reversal of the earlier wage restraint.56

Only a few countries were successful in permanently restructuring the civil service during the adjustment process. The most substantial reform efforts were undertaken in Chile and Ghana. In Chile, salary supplements for skilled civil servants were granted early in the first adjustment phase, the cost of which was offset by eliminating automatic and full indexation of wages with the consumer price index, and by a sharp reduction in employment, except in education and the judiciary (Meller, 1992). In Ghana, the wage differential between the highest- and lowest-paid civil servants was increased—from a multiple of 2½ at the outset of the adjustment effort to a multiple of 10 in 1991—and the number of skilled staff increased. The budgetary impact of these measures was offset by a reduction in staffing at the lower-skilled levels (by 12 percent of the total civil service over 1987-92). These efforts at reform were hampered by a failure to integrate the computerized payroll records of the Ministry of Finance with the records of the Head of the Civil Service.57 In Morocco, hiring was eventually slowed from an average increase of 6½ percent a year during 1981-83 to percent during 1984–86, and it remained at around this rate over the rest of the period. However, the continued growth in employment contributed to the high civil service wage bill (World Bank, 1994c). In Senegal, the number of civil servants was held roughly constant by suspending the practice of hiring all university graduates into the civil service and eliminating “ghost” workers. The practice of tenure meant that outright dismissal from the public service was not possible. A voluntary departure program was put in place, but it did not prove successful in reducing overall civil service employment (Rouis, 1994).

Subsidies and Transfers

The cost of consumer good and producer input subsidies decreased in all but one of the countries (Senegal) as most prices were increased toward market levels. Chile’s efforts were the most substantial. It liberalized some 3,000 prices at the outset of the adjustment in 1973 and 33 prices of basic foods and public utilities thereafter. In Mexico, explicit commodity subsidies declined from 1.3 percent of GDP in 1983 to 0.4 percent of GDP in 1988, reflecting the elimination of general subsidies and their replacement by targeted food assistance programs.58

In general, during these price reform efforts, targeting of food toward the very poor was improved by increasing provision of food in exchange for work under the aegis of public works programs (Bangladesh, Chile, Ghana, India, Morocco, and Senegal) or efforts to avoid increases in the prices of goods that were heavily consumed by the poor (Ghana and Morocco). The most vulnerable groups were also protected during the adjustment period through other poverty alleviation schemes. In Chile and Morocco, distribution of food was better targeted to mothers and pregnant women as well as to children at school.59

In Ghana and Mexico, poverty alleviation funds were established (Pamscad in Ghana, and Pronasol or Solidaridad in Mexico) targeting variously the provision of primary education and health, nutrition, water, sewerage, and electricity. Both were established in the second adjustment period. Pronasol concentrated on improving the delivery of basic services and on providing physical infrastructure for the poor, and its total expenditure reached 0.9 percent of GDP in 1993. Like social investment funds in other countries, Pronasol has been criticized for poor targeting and project selection. The sharp increase in transfers in Chile during the initial years of the second adjustment period reflected the cost of public employment programs in the early 1980s and the restructuring of the social security system from a public to a private-based system. Enterprise reform efforts and their effect on the level of transfers from the budget are discussed below.

Other Current Goods and Services—Operations and Maintenance

An evaluation of expenditure on other current goods and services is important for an assessment of the growth-promoting character of expenditure adjustment, both because of its role in maintaining public sector infrastructure and because the civil service needs some minimum level of complementary inputs to perform its functions. When that level is too low, the efficient performance of even the minimal role that a government should play will be compromised.

Among the eight countries, expenditure on other current goods and services declined from an average of 4.6 percent of GDP to an average of 2.8 percent during the adjustment period. There was an increase in the nonwage component of operations and maintenance expenditure in Bangladesh over the adjustment period and in Ghana in connection with the rapid increase in priority investment. In contrast, in the initial adjustment effort in Morocco, operations and maintenance expenditure was decreased and then held constant in real terms in the second adjustment period; was cut in the adjustment period in India; and fell in some critical areas in Senegal (see discussion of administrative reform, below).

Tax Reform (Financing Expenditure and Its Distorting Effects)60

Shares of Revenue in GDP

On average, receipts from direct taxes as a share of GDP showed little change over the adjustment period, and the bulk of the tax revenue increase was generated from taxes on the domestic sale of goods and services.61 Collections of the latter, which initially averaged 5.3 percent of GDP and around 35 percent of total tax revenue, increased by 0.8 percent of GDP. This average masks considerable variation within the group; receipts increased sharply in Ghana and in Morocco (largely because of new petroleum excises) but fell in Chile (after the base rate was reduced), India, and Senegal. In general, receipts increased following the introduction of more broadly based sales taxes, such as the VAT; often, the introduction of a VAT led to a reduced share of revenue from excises (Bangladesh, Chile, and Thailand).

Receipts from international trade taxes—mostly customs duties—averaged 3.7 percent of GDP and around 25 percent of total tax revenue at the outset of the adjustment period. A fairly constant average ratio to GDP over the adjustment periods masks a decline in this ratio in five countries and an increase in the other three (Ghana, Mexico, and Thailand). These divergent experiences variously reflected the lowering of duty rates, exchange rate devaluations, and the easing of import restrictions and foreign exchange availability, which increased the share of imports to GDP.

Effect of the Tax System on Private Sector Incentives

At the outset of the adjustment effort, personal income taxes in the eight countries had high rates—top marginal rates ranging from 53 percent to 75 percent—and a narrow base. Reform efforts typically emphasized a substantial reduction (up to 35 percentage points) in the top rate, and in the income level at which the top rate applied (on average a decline from 60 times per capita GDP to 35 times per capita GDP). The minimum taxable income level was also increased in the poorer countries (Bangladesh, Ghana, and Senegal), which would have facilitated administration. Efforts to widen the base of the personal income tax were more limited. As a result, the personal income tax generally continued to discriminate among different forms of income, and its base continued to suffer from the erosive effects of various exemptions.

As regards the corporate income tax, most countries initially had a rate structure with substantial differentiation by sector of activity (as much as 35 percentage points from one firm to another). Certain sectors, such as agriculture, were completely exempt in some countries. Tax holidays for newly incorporated enterprises (implying a complete exemption from the corporate income tax and other taxes for an extended period) were common; this complicated the administration of the corporate income tax. Surcharges and progressive rates were commonly applied (Bangladesh, India, Mexico, and Morocco), often to compensate for the consequent loss of revenue.

Several reforms were introduced during the adjustment periods. First, in most countries there was a decline in corporate income tax rates of up to 20 percentage points, with the largest declines in Chile and Ghana. The rate structure was unified in three countries (Chile, Morocco, and Thailand)—countries that also had the best tax administration departments—but remained complex in others (Bangladesh, Ghana, India, and, to a lesser extent, Mexico). Second, there were efforts to broaden the tax base—or to prevent further erosion of the statutory base—but these were essentially limited to the introduction of presumptive taxation or a minimum profits tax (where the receipts could be offset against corporate income tax) levied on gross assets or sales (Mexico and Morocco, which adopted presumptive systems like those already in place in Senegal and Ghana). Some countries rolled back provision for tax holidays (Chile, Mexico, and Morocco), although preferential exemptions remained prolific in most countries. Finally, inflation adjustment to compensate for the effect of inflation in asset prices on tax liabilities was introduced or refined in Chile and Mexico.

As regards taxes on the domestic sale of goods and services preceding the reform efforts, only two countries (Mexico and Senegal) had a VAT; four other countries added VATs during the adjustment period (Ghana was the exception;62 a modified VAT based on the excise system is used in India63). The adoption of the VAT presented an opportunity to reduce the distortive effects that sales and excise taxes can have on the relative prices of consumer goods, since a VAT has the potential to be broadly based without entailing cascading or multiple rates. However, not all of these potential strengths were incorporated in the VATs that were actually adopted.

In particular, while some countries introduced the VAT with just one rate (Bangladesh, Chile, and Thailand), the VAT in Morocco and Senegal had as many as five rates, despite the added administrative complexity this entailed. Further, while the base of the VAT was broader than that of the taxes it replaced, it continued to exclude part or all of the distributive stages in Morocco and Senegal. During the adjustment period, no substantial efforts were taken to widen the VAT base, although Mexico did unify the rate. Agriculture typically remained exempt from sales taxes (Ghana, India, Mexico, Morocco, Senegal, and Thailand). For excise taxes, the major change in structure was usually the replacement of specific rates by ad valorem rates, a measure that would have increased the elasticity of these taxes. In Bangladesh, India, and Morocco, the number of goods subject to excises or the rates applying to them remained high.

For taxes on international trade, particularly taxes on imports, there was a general decline in the level and dispersion of tariff rates over the adjustment period, and in the number of goods subject to the maximum rate, as countries shifted from taxes on imports to greater reliance on broader forms of indirect taxation that reduced the excessive levels of protection. In general, there was a substantial decline in both average nominal and average effective rates of protection, and nontariff barriers were replaced by tariffs. The pace of reform varied, with rapid change in some countries (Chile, India, Mexico, and Morocco) but a more moderate pace in others (Bangladesh, Ghana, Senegal, and Thailand). The slow progress in Bangladesh and Senegal probably reflected difficulties experienced by these countries in raising revenue from other sources, given inadequacies in their tax administration departments. Recently, tariff reform efforts were reversed in Senegal.

Finally, revenue from export and other taxes on international trade—which was low at the outset of the adjustment effort—had been virtually eliminated by the end of the adjustment period, except in Ghana, where export taxes are the principle means by which the income of cocoa growers is taxed.

Public Expenditure Management and Tax Administration Systems

This subsection is concerned with the public expenditure management and tax and customs administration systems in the case studies, focusing on how these systems changed during the adjustment process and on how the systems appear to have affected the implementation and achievement of taxing and spending priorities.

Several qualifications should be made. First, owing to complexity, it is difficult to establish objective criteria for a judgment on whether a public expenditure management or tax and customs administration system is effective and efficient, and hence to gauge the extent to which changes in public expenditure management or tax and customs administration procedures have altered their effectiveness. For the same reason, comparisons of public expenditure management and tax and customs administration procedures between countries—even abstracting from the general lack of data—are to an extent subjective. Nonetheless, even if fine distinctions cannot be made, the differences in the operating procedures are often marked. Consequently, broad conclusions on the likely effectiveness of a change in public expenditure management or tax and customs administration procedures can be drawn, or comparisons of one system with another made, with some assurance. Second, the effectiveness of an administration system depends to a considerable extent on the environment in which it must function. For example, the effectiveness of a system can be reduced if civil service policies underpay skilled civil servants, since a consequence of such a policy may be a shortage of well-trained budget and tax officers. Third, in view of the learning curve, it may take substantial time before changes in administrative systems actually increase effectiveness.

Public Expenditure Management

Budgetary Procedures, Control, and Information Systems

Effectiveness and Discipline of Budget Preparation. Before the adjustment efforts, establishing the annual level for total expenditure by a “top-down” approach—where aggregate expenditure is set on the basis of projected revenue and available financing and then allocated among expenditure needs—rather than a “bottom-up” approach—where aggregate expenditure is set by summing the various expenditure programs that line ministries propose—was undertaken only in Chile, India, Mexico, and Morocco (Table 4). In these countries, the Ministry of Finance was in charge of the overall budget process, although it naturally acted in consultation with the spending departments to establish budget priorities. Techniques to appraise expenditure priorities within an overall expenditure envelope were not strong in India and Morocco, so that expenditure estimates tended to be based on previous allocations rather than an assessment of current priorities. Early in the adjustment period, Thailand also switched to a top-down approach; unlike the other countries, the primary agent in the budget process in Thailand is located in the prime minister’s office, and responsibilities for the budget process are shared among a number of institutions that are coordinated through working groups and committees.64

Table 4.Overview of Public Expenditure Management Systems and Recent Improvements
1. Effectiveness and discipline of budget preparation1. Effectiveness and discipline of budget preparation
Use of ceilingsNoAfter 1975, ceiling set by Ministry of Finance (MOF) prior to preparation of ministry spending estimatesNot initially; being establishedYes, but not effectively usedYesYesNoNot initially; switch in 1980s to overall ceiling based on conservative revenue estimates
Rigor of approval proceduresNot adequate; complex procedural requirements for project approvalMOF has tight control over processLittle coordination of process by MOF prior to 1986; improved in 1986-90, but further steps neededMOF strong in approval process but does not rigorously assess ministry requests; states’ budget allocations and transfers regularly revised upward during the fiscal yearMOF coordinates process and can veto ministries’ spending proposalsMOF coordinates process; improved substantially for spending within the capital budgetMOF coordinates process, but does not adequately assess spending proposals; tendency to budget on the basis of past year’s outcome; capital spending sometimes approved outside of formal investment programTight control exercised, but with many different institutions involved
Effective appraisal techniquesIncremental budget on basis of previous year’s outturnGoodInitially not adequate; improved in 1986-90, with review established in some ministries to improve spending estimates; further steps neededUsually continuation of past allocative sharesSpending requests considered in macroeconomic perspective; evaluation of capital spending requests improved with use of cost-benefit analysisNot adequateTendency to budget on basis of previous year’s outturn rather than on basis of prioritiesReliance where possible on evaluation of costs and benefits
Link between capital and recurrent expenditureLink between planning commission work and budget not adequate, especially for operations and maintenance expenditureFairInadequate link prior to reform effort; improved in 1986-90, but need for better link with operations and maintenance expenditureDivision of expenditure on plan and nonplan lines rather than capital and noncapitalGoodFair; improved in second adjustment periodNeed for better linkFair, improving
2. Control and administrative efficiency2. Control and administrative efficiency
Control procedures and real locations of expenditureProcedures exist but often not followed; increasing use of suspense and imprest accounts, and use of contingency fund for regular operating expenditureCentral control of payment established prior to reform efforts; MOF has strong control and can reassign allocations during year; contingency fund of 8% of expenditure in 1993Extensive use of cash rationing prior to reform, with transfer between categories without consideration of priorities; improved 1986-90 with procurement and payment procedures tightened; unused appropriations now lapseAppropriations often adjusted in a discretionary manner; infield payment and account offices appear to try to increase annual allocations within the regionMOF can adjust appropriations during the year in response to revenue shortfallsControllers approve commitments on basis of budget appropriations; unused appropriations now lapseMOF tends to reassign appropriations during the year on basis of which departments run out of money first; spending approval and payment procedures very slow, often bypassedTight and detailed, though in consequence slow approval process for release of funds to ministries; rigidities impede expenditure reduction in event of revenue shortfalls
Use of financial planning and cash managementNot adequateWell-established system prior to reform; cash management system improved after 1975 with use of single treasury accountNot adequate initially; improved 1986-90, though further improvements neededNo formal cash management process, though daily settlementsVery effectiveUnified account at the treasuryNot adequateGenerally good, though weakness in accommodating off-budget accounts
Coordination of aid and loans with budget during the fiscal yearAid management and rest of budget execution and cash requirements not adequately coordinatedGoodCoordination and monitoring of aid with respect to budget improved after 1986, though further reform neededFairUnit established to track aid received during the yearFairNeed for improvementFair, improving
Debt-management systemMonitoring of debt obligations of government not adequateGoodWeak prior to 1986; substantially improved by 1990Slow, problems reconciling different sourcesVery effectiveGoodImprovedFair
3. Transparency of budget and accounts3. Transparency of budget and accounts
ClassificationBased on line items rather than economic and functional classification; some current expenditure classified under development budgetVery detailed on both an economic and functional basisData presented on hybrid economic classification before reform began; improved 1986-90, with reclassification of different types of omnibus categories and preparation of functional classificationTransparency improved after mid-1980s; economic and functional classificationGoodEconomic and functional classification of expenditure preparedSome current expenditure classified under capital budget; double counting of up to 8% of expenditureSwitch in early 1980s from classification on basis of line items, but not transparent; conversion to economic and functional classification possible, however
CoverageOverlapping coverage by MOF and planning commission of externally financed projects; some key information is lacking (for example, actual and contingent obligations)Good, though purchases of military equipment financed off-budgetReasonably comprehensive; coordination of domestic and foreign exchange budget improved after 1986Incomplete; use of suspense accounts outside budgetGoodGoodIncomplete; some agricultural and capital spending outside budget; efforts made during the adjustment to include the extrabudgetary special and diverse accounts within the budgetFair; some revolving accounts and externally financed projects are outside budget; improving
AccountabilityAccounting and control failures; breaches often go unsanctionedGoodNot adequate initially; detailed auditing of fiscal accounts since 1988More use of internal audit neededFairFairNot adequateGood
Timeliness, reliability of fiscal reportingLack of single authoritative source, hence incomplete and delayed reporting, especially for foreign currency transactions; little use of computerGood system prior to reform period; computerizedNot adequate prior to 1986; some improvement in timeliness with computerization; further reform neededImproved, though flow of information to MOF needs to be more timely; computerization of some functions after 1991Good for central government accounts; delayed for state and local government accountsFairData on project implementation delayedGood; mostly computerized, with some aspects paper-based
4. Medium-term macroeconomic and planning framework4. Medium-term macroeconomic and planning framework
Use of macroeconomic framework in budget preparationJudgmental with little analytical basis; development budget prepared on the basis of a rolling three-year planStrong coordination of macroeconomic framework and the budget; after 1975 planning authority evaluates and selects investment projects, maintains project databankMacroeconomic framework prepared but not effective prior to 1986; lack of adequate procedures for approving development projects; improved by 1990, including formulation of capital budget planStrong coordination of macroeconomic policy and the budget, though not within a multiyear perspective; high caliber of staffBudget considered in a medium-term perspective; strong coordination of financial policiesFair; budget prepared jointly by MOF and planning authorities on basis of common macroeconomic frameworkPublic investment program based on a macroeconomic framework was introduced in 1985–87Multiyear approach introduced, but fell into disuse due to lack of faith in departments’ long-term requests; recently reinitiated using Budget Department forecasts of spending needs
5. Management5. Management
Degree of decentralization of financial management authority and responsibilityDecentralization of accounting and expenditure control to spending units in 1980s; appears to have been counterproductive owing to lack of effective controlsPrior to reform, MOF exercised very strong control; same after 1975, but flexibility given to ministries to prepare budgets within an overall ministerial ceiling and to maintain own accountsStrengthening of capacity of spending ministries needed to increase control over spendingCentralizedCentralizedSpending agencies have power to commit and issue payment orders under overall authority of the MOFHighly centralizedHighly centralized; but some delegation, beginning in the early 1980s, of authority to departments—for example, to transfer limited funds within the same project

In contrast, use of such an expenditure ceiling was not effective in Bangladesh and Ghana—a difficulty that was compounded by the lack of adequate control of the budget process by the Ministry of Finance. At the outset of the adjustment efforts in Bangladesh, Ghana, and Senegal, the level and allocation of expenditure within the budgets of these countries were usually based on the past year’s appropriation rather than on the basis of an ongoing examination of priorities, which led to inefficient expenditure allocations and created incentives for expenditure overruns.65 Further, of these countries only Ghana took steps to improve this aspect of the public expenditure management system, and then only during the second adjustment period. As one consequence of this approach, development and current expenditure were poorly linked, which compromised the productivity and sustainability of capital expenditure through, for example, inadequate expenditure on operations and maintenance. Indeed, weaknesses in the allocation system were expressed in the lack of supplies and materials provided to the tax administration departments in Ghana and Senegal, which compromised their effectiveness (see below).

Control and Administrative Efficiency. A similar pattern among these countries is evident in the aspects of the public expenditure management system concerning control and management of government expenditure during the fiscal year. The control systems were already strong before the adjustment efforts in Chile, Mexico, Morocco, and Thailand.66 New expenditure requests during the year were addressed through the use of a contingency fund in Chile. Strict supplementary appropriation procedures were followed in India, but recently these have been used to increase the transfer of resources from the center to the states to cover unexpected increases in state governments’ expenditure. Cash and debt management in these countries was on the whole adequate, although the Indian system had difficulty producing timely and consistent information.

In contrast, the control systems at the outset of the adjustment period were weak in Bangladesh, Ghana, and Senegal. Transfers between expenditure categories throughout the year tended to be made without consideration of expenditure priorities; in Bangladesh, there was also poor control over supplementary spending. Aid- and loan-financed expenditure was poorly coordinated with other budgetary expenditure, which hampered budget execution and cash management. Cash and debt management techniques were not strong. In Ghana, there was some improvement during the adjustment process, as arbitrary cash rationing, which had previously been prevalent, was replaced by a better consideration of expenditure priorities.

Transparency and Timeliness of Budgetary Information. At the outset of the adjustment period, only Chile, India, Mexico, and Morocco prepared expenditure data on both an economic and a functional basis. Thailand joined these countries after initiating its adjustment efforts in the early 1980s, and improvements were also undertaken in Ghana. Weaknesses remained in Bangladesh and Senegal, including classification of some current expenditure as capital expenditure, double counting, and misclassification of items within the current budget, all of which weakened budgetary analysis.67 Coverage of the budget accounts was in varying degrees partial in all countries. The timeliness of reporting was good in Chile and improved in Ghana, India, and Thailand—where the process is at least partially computerized—but remained poor in Bangladesh and Senegal. In Mexico, the delay in reporting for the federal government remains about 45 days; it is much longer for the states.

Use of a Medium-Term Macroeconomic and Planning Framework

Most countries used a multiyear planning approach to determine part of their budget, although the approach was limited to capital expenditure. The effectiveness of this limited approach depended in part on how well capital expenditure plans were integrated with current expenditure. This integration was most effective in Chile, India, and Mexico. In Mexico, detailed medium-term projections were prepared as a part of the annual budget exercise, and for the national development plan. In Chile, the coordination between current and capital expenditure planning was improved early in the adjustment period. Lack of progress in other countries (with the notable exception of India) was at least in part a consequence of a lack of sufficiently skilled budget personnel and technical capabilities. In particular, while a medium-term approach was used in Bangladesh and Senegal for capital expenditure, the approach lacked a strong analytical base, and its coverage was incomplete. In Ghana, a medium-term perspective was prepared even before the adjustment efforts had begun but did not become an effective budget tool until late in the adjustment period, once a degree of stability and a high degree of commitment to the system by all units in the government had been achieved.68 Finally, at one stage Thailand had the most advanced medium-term perspective, but the system fell into disuse because of perceived inaccuracies of ministries’ expenditure forecasts. The system has recently been revitalized, with final expenditure forecasts undertaken directly by the central unit in the budget process.

Advanced Management Procedures

Most of the countries that had comparatively strong initial control mechanisms over expenditure at least partially decentralized financial and accounting management toward spending ministries during the adjustment period. These efforts have not been extensive, since the countries have preferred to maintain a high degree of control at the cost of potential efficiency gains from a greater decentralization. The potential pitfalls of decentralization are illustrated by the experience in Bangladesh, where decentralization efforts failed owing to poor overall expenditure control mechanisms. This experience also indicates the necessity of having an acceptable basic system in place before introducing more advanced features.

Tax and Customs Administration

Basic Systems

Many countries made an effort to improve tax-payer compliance and to promote self-assessment during the adjustment process (Table 5). These efforts included improved taxpayer education (Chile, Ghana, Senegal, and Thailand), the simplification of taxpayer forms (Chile, Ghana, Senegal, and Thailand), and of filing and payment procedures (Chile, India, Mexico, Senegal, and Thailand). In contrast, Bangladesh did not simplify its forms and procedures, despite their complexity.

Table 5.Overview of Tax Administration and Customs Systems and Recent Improvements
1. Basic systems1. Basic systems
Voluntary compliance and self-assessmentLarge degree of noncompliance owing to perception by taxpayers of poor enforcement proceduresTaxpayer eduction provided; compliance relatively high (for example, for VAT)Reform based on enhancing self-assessment, with simplification of procedures and improvement in taxpayer education; lower tax rates improved compliance over the periodNoncompliance estimated to be highLow compliance tackled in 1989/90 with simplification of system to reduce time to undertake a transactionSelf-assessment promotedSelf-assessment promoted, for example, by providing taxpayer educationSelf-assessment promoted, for example, by providing taxpayer education
Filing and payment proceduresComplex filing forms and proceduresTax forms simplified in late 1970s; payment procedures simplified, with filing and payment for most taxes through the banksPrinted taxpayer forms and instructions introduced after 1983Complex; recently simplifiedSystems simplifiedCustoms procedures simplified in early 1990s; quarterly installments introduced in 1993Tax forms redesigned with provision of instructions; procedures for filing and paying VAT combined and simplifiedPreaddressed tax returns mailed; instructions and procedures for filing and paying simplified for most taxes
Detection proceduresTaxpayer identification numbers used only for personal income tax (not VAT); use of multiple rather than single ledger systemTaxpayer identification numbers introduced in 1960sAccuracy of taxpayer registry improved; focus on large taxpayersInformation systems to detect nonfilers not adequateImprovement in information system, including registries with unique taxpayer accountNeed for better identification of taxpayers; tax amnesties in 1984 and 1990 to increase tax net; identification numbers used, but not uniqueBefore 1986, files not kept up-to-date; 3,500 largest taxpayers included in computerized registry in 1988, but not subsequently kept up-to-dateUse of taxpayer identification numbers and taxpayer master files
Enforcement and collectionPenalties often waived or reduced; staff not well equipped to administer VAT (compared with their ability to administer excise taxes); understaffing of personal income tax workStrengthened in 1980s through use of audits and ability of tax administration to shut down operations of taxpayers in default; recent reform of customs departmentSending of notices; setting and applying adequate penalties; strengthened customs collection proceduresProtracted and numerous taxpayer disputes partly owing to complex tax codeImprovement in monitoring and enforcing; new fraud penalties introducedProcedures for tax assessment, collection strengthened with use of computers to cross-check returns after 1986System to monitor tax exemptions established in 1989 to reduce abuse, and techniques to address tax arrears established; customs valuation needs to be strengthenedSending of delinquency notices with referral to audit division for failure to respond
Audit techniquesFew audits of large taxpayers; computer not used to detect potential audit targetsEnhanced in 1980s; selection of cases supported by computerIntroduced audit plan with requirement to audit largest firms once every three years, and quarterly checks of tax returns of large sales and excise taxpayersAudit office establishedIntroduction of computersupported and targeted audit procedures; requirement that firms be independently audited by certified accountantAudit function strengthenedAudit function strengthenedAudit plan adopted that concentrated on audits on large taxpayers; difficulty extending audit practices outside Bangkok area
2. Use of techniques2. Use of techniques
Organizational aspectsDirect and indirect taxes administered separately; many local offices with inadequately trained staff; no tax recovery unit establishedFunctional basis for organizing tax administration introduced in 1960sRestructured into two agencies organized by function in 1985Training of personnel not adequateTax administration restructured; responsibility for collection of VAT removed from states to increase efficiency of administrationTax administration reorganized along functional lines from mid-1991; increased coordination between regional tax centers established after 1991Before 1986, tax administration organized along tax lines; structure streamlined in 1987 based on functional approach; new regional tax offices openedTax administration restructured in 1983 along functional lines
ComputerizationBasic computer system for VAT was to be introduced in early 1990s, but delayed; once introduced, essentially inoperable due to shortage of computer suppliesExtensive and efficient usage of computersComputerization of tax administration procedures after 1983, including customsSome use, but scope for further utilizationComputer systems development privatized; all local tax offices and customs houses computerized; possibility for fraud decreased with computerizationMore extensive use of computers—for example, in VAT administration and in pilot customs area at Casablanca; supplies increased to tax and customs administration in order to improve efficiencyComputerization used to detect late payers and nonfilers; customs procedures computerized, but some problems experienced with maintenance of systemComputerization of system being phased in, beginning with Bangkok area

Procedures to detect delinquent taxpayers, such as the use of up-to-date taxpayer registers, were not strong in any country except Chile at the outset of the adjustment efforts. Several countries made efforts to improve these systems during the adjustment phase (Ghana, Mexico, Senegal, and Thailand), with Ghana concentrating its efforts on large taxpayers. These efforts were not sustained in Senegal because the computer system was not adequately maintained. In other countries, such as Bangladesh and India, systems to detect nonfilers were weak, and little change was recorded.

Enforcement and collection efforts showed a similar trend. Improvements were initiated during the reform efforts in several countries (Chile, Ghana, Mexico, Morocco, and Senegal), including the sending of notices, and the adoption of new penalty structures and arrears strategies. As before, little improvement was noted in Bangladesh and India; in the case of Bangladesh, the routine waiving or reduction of penalties encouraged noncompliance and the discriminatory treatment of taxpayers. Bangladesh also suffered from the inadequate training of the tax officers assigned to administer the VAT upon its introduction in 1991.

Finally, audit procedures were generally strengthened during the reform period. These changes included computer-aided selection of audit cases (Chile and Mexico), the introduction of an audit plan (Ghana and Thailand), and an office of audit (India). This function remained weak in Bangladesh.

Organization and Techniques

The adjustment period witnessed organizational reforms of some substance. The tax and customs administration departments had been organized along functional lines (payment, enforcement, audit, and so forth, rather than by type of tax) in Chile since the 1960s, and many other countries introduced a similar structure during their adjustment efforts (Ghana, Morocco, Senegal, and Thailand). This was likely to have assisted in efforts to maintain revenue after the move away from reliance on international taxes to more emphasis on broadly based indirect taxes, a reform that can require a substantial administrative effort in the initial stages. At the end of the second adjustment period, Mexico merged the customs and tax administrations as part of a general reform of customs procedures. In Bangladesh and India, the organizational structure was along tax lines, and the level of training of officers was not strong. No substantial reforms were reported.

Computerization of procedures (including computer-aided audit selection) was either introduced or extended in scope during the reform efforts in most countries. It facilitated the cross-checking of returns (Morocco) and helped to strengthen customs procedures (Ghana, Mexico, and Morocco). Noted exceptions are Bangladesh and Senegal, where these efforts foundered because of shortages in the supply of necessary inputs and technical backup to support the computer system. The failure forced a regression to less efficient and slower manual systems.

Measuring Increases in the Effectiveness of Tax and Customs Administration

A good criterion of the effectiveness of the tax administration is the size of the tax gap, although its measurement can be difficult. The Chilean tax administration is now among the most efficient of developing countries; the VAT revenue gap (difference between potential and actual VAT revenue) declined from 24 percent in 1981 to 17 percent in 1993, which is within the range of estimates for industrial countries. Mexico also reported a significant increase in revenue (by 2 percent of GDP) during its reforms, despite a decrease in tax rates (with a 50 percent increase in the number of taxpayers filing) and an increase in external efficiency (as measured by the time required by taxpayers to file and pay taxes) and internal efficiency (as measured by the time required to process transactions and to detect errors and potential fraud). Estimates of the tax gap in the other six countries were not readily available.

Constraints Facing Tax and Customs Administration

Civil service policies militated against the establishment of sound tax and customs administration systems in Bangladesh and India, where the tax and customs administration departments do not have the authority to select, reallocate, or discipline their own officers. In Ghana, the system was improved with the removal of the tax and customs administration department from the civil service, which enabled the employment of skilled personnel with adequate salaries, improved flexibility in hiring and firing, and facilitated in the purchase of necessary physical equipment.

As described above, several governments changed parts of the tax code in part to alleviate administrative difficulties and reduce evasion (Ghana, Mexico, Morocco, and Senegal)—for example, through the introduction of minimum corporate taxes. As noted above, however, tax systems often remained overly complex, in large measure because of the prevalence of tax holidays and other privileges. The complexity of the tax codes in Bangladesh and India contributed to the problems of these countries’ tax departments.

An important source of tax and customs administration difficulties in some countries was the relationship between the central and local government with respect to the assignment of revenue responsibilities and revenue-sharing arrangements. In India, the constitution gives the right to tax retail and wholesale trade to the state governments rather than to the central government. In practice, this has prevented the introduction of a modern national VAT system, while weaknesses in the tax administrative capacities of the states have prevented the collection of revenue from retail and wholesale trade.

Revenue-sharing arrangements have also been an important factor in shaping the tax structure, hence the efficiency, with which the tax system is administered. In India, the central government has tended to rely on international trade taxes as well as the complex excise system, since revenue from these taxes is not shared with the states, despite the distorting effects this excessive reliance entails.69 In Mexico, revenue-sharing arrangements have compromised the ability of the tax administration to collect VAT obligations. State governments were originally allocated a share of total VAT receipts that bore no relation to the share actually collected from their state, so that they had little incentive to make a vigorous collection effort. To alleviate this problem, after 1987 the states were allowed to keep 35 percent of the receipts they collected over a certain threshold. In 1992, the federal government assumed responsibility for collecting the VAT. In Morocco, the central government allocates 30 percent of VAT receipts to the local governments, with their respective shares determined by population size. A more complex formula, based on tax effort among other things, was envisaged during the last years of the adjustment effort, with a view to increasing exploitation of the local tax base.

Public Enterprises

Countries took different approaches to increasing the efficiency of their public enterprise sectors during the adjustment period, and again the intensity of their reform efforts varied. The most ambitious privatization efforts were followed in Chile and Mexico, which had among the largest programs in the world.70 In both countries, the vast majority of public enterprises had been transferred to the private sector by the end of the adjustment period, with the considerable receipts raised (averaging 1 percent of GDP a year in Chile and Mexico during the main years of the privatization program) used to fund social and capital public expenditure (in the case of Chile) or to reduce public debt (in the case of Mexico). The rate of return for the enterprises that had been privatized often increased substantially (Hachette and Lüders, 1993; and examples in Galal and Shirley, 1994).

The experience with privatization in other countries was less successful. In Bangladesh, the public enterprise sector was inefficient and a significant drain on the budget, which constrained the availability of budgetary resources for more productive expenditure. Privatization efforts of small enterprises began in the 1980s, though many later went bankrupt. Efforts began again in 1991 but have been slow because of the poor financial state of enterprises and difficulties in establishing an appropriate institutional arrangement for the transfer of ownership. After a slow start, privatization efforts have been more successful in Senegal. As in other countries, enterprises were inefficient at the outset of the adjustment period; in 1982, output per worker was 70 percent of the average for all enterprises in the modern sector, yet wages were 20 percent higher than the average (Rouis, 1994). Liquidation and privatization procedures affecting around half of the enterprises began in earnest during the second adjustment period, and one-third of the remaining enterprises have been placed under performance contracts; direct budgetary subsidies declined.

Several other countries have instead focused—at least initially—on achieving enterprise reform through the establishment of performance contracts rather than through privatization. During the second adjustment period in Ghana, annual performance agreements with respect to cost and profitability and liberalization of the administrative environment were established in order to phase out budgetary support. A government commission was established to monitor the fulfillment of these contracts and to recommend liquidation where appropriate; around one-fourth of enterprises had been either liquidated or privatized by 1991, and operating profits had improved.

In Morocco, reform efforts were made to improve the performance, monitoring, and control of public enterprises in the early 1980s, but these were generally ad hoc and met with only limited success. A more comprehensive program was followed in the second adjustment period, which included changes in tariffs and pricing policies; strengthening of the planning, execution, and monitoring of enterprise investment; restructuring of the government’s role from one of controlling the day-to-day operations of public enterprises to one of establishing performance objectives; opening of some sectors traditionally dominated by public enterprises to private competition; and, finally, taking privatization initiatives. As a result, total current and capital transfers from the government to public enterprises have declined. A reform strategy for public enterprises in India has been initiated; its major elements are increased autonomy and accountability, and the sale of substantial minority shares in a number of units to the private sector. Little overall improvement in performance has yet been registered.

Finally, Thailand’s privatization program in the first half of the 1980s was limited to small and medium-sized enterprises, owing to political opposition to privatization efforts for large enterprise. A major effort at privatization was not necessary, because the nonfinancial public enterprise sector was not particularly large to begin with. After the mid-1980s, the private sector was invited to participate in the operations of large-scale enterprises through partial equity sales, joint ventures, leasing, contracting, and franchising. By the end of the 1980s, the combined financial balance of enterprises was near balance, reflecting increased prices and tariffs and reduced operating costs, and most budget subsidies to enterprises had been eliminated.

    Other Resources Citing This Publication