Diverse Models of Macroeconomic Coordination

—Thailand, Malaysia and the Philippines—

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1. Critical Role of Central Economic Agencies in Managing the Development Process, including Aid

 

Strengthening central economic agencies is one of the priority agendas among administrative and governance reforms. This is because these agencies must assume the strategic core functions, as the agents to manage the transformative, development process. Such role is critical, especially at the early stages of development[1].

 

At least two kinds of arguments place importance on the role of central economic agencies. First, it is generally accepted that economic cases for central administration exist and require: (i) policy coordination in the presence of scale and scope economies (such as macroeconomic management); (ii) inter-jurisdictional externalities, with spillover effects across localities (such as large-scale infrastructure development); and (iii) support to local governments through the resource transfer of financial and technical terms (Bardhan 1997). Such role and functions are complementary to decentralized administration and should also provide an environment to nurture private sector development. Second and more fundamentally, the central governments of latecomer countries must assume a gdevelopmentalh role. Development is a transformative process that requires institutions that promote radical accumulation, change and transformation (Leftwich 2005). This point adds a distinctive dimension to Weberfs concept of modern, rational bureaucracy[2].

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The central economic agencies play a key role in the areas of macroeconomic management and economic policymaking. They are responsible for managing budget, public investment, and aid and providing the right economic incentives for private and non-governmental actors. In doing so, the central economic agencies must:

Based on this understanding, we examine the macroeconomic coordination mechanisms in selected East Asian countries—Thailand, Malaysia, and the Philippines—to better understand: (i) how the central economic agencies in these countries have functioned in the area of macroeconomic coordination, i.e., policy and resource alignment with development priorities; and (ii) what are key factors affecting the operations of central economic agencies. The 1970s and the 80s are of our special interest because, in those days, Thailand and Malaysia were building an institutional basis and mobilizing larger resources for development. We also analyze the experience of the Philippines to obtain a comparative perspective, primarily after democracy restoration, because the government has initiated effort to rebuild the central economic agencies since the late 1980s.

 

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Key Perspectives

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As Figure 1 shows, our analysis is built on the two perspectives: (i) functions and coordination mechanisms of central economic agencies; and (ii) actors that affect their functions, such as leaders and technocrats.

 

Ideally, top leadership should provide a long-term development vision and have a strong political will to realize the vision. The technocrats of central economic agencies assume the responsibility for translating the vision into action plans by mobilizing and utilizing both domestic and external resources. This includes formulating development plans and strategies, articulating priority policies, programming public investment, and managing resources within hard-budget constraints. The technocrats are also responsible for coordinating with various stakeholders (line ministries, other state agencies, local governments, donors, and the private sectors) to facilitate the implementation of priority projects and the delivery of essential public services.

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2. Contexts for Macroeconomic and Aid Management—Thailand, Malaysia, and the Philippines

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Overall Development Performance

 

Thailand and Malaysia are the second-tier high performers of the gEast Asian Miracleh economies—following South Korea, Taiwan, Hong Kong, and Singapore—and are generally considered to have successfully managed the development process with strong ownership. Both countries have achieved steady economic growth with poverty reduction over the past four decades. Although they faced crises and shocks, Thailand and Malaysia have managed to attain relatively uninterrupted rapid growth, except for several years of severe recession in the 1980s and financial crises in the late 1990s. Moreover, the aggregate growth has been accompanied by economic stability and poverty reduction (see Table 1). Now, both countries are emerging as donors. During the 1970s-80s, the economies of Thailand and Malaysia achieved major structural transformation, and these governments made strenuous efforts to build and enhance the functions of central development administration to meet the increasingly complex challenges of managing development and aid.

 

The record in the Philippines has been mixed. In terms of per capita GNP, the Philippines scored the highest among the three countries around 1950 and higher than Thailand until the mid-1970s; but its economy has had limited structural transformation. During the Marcos era (1965-86), the country failed to transform its central economic agencies into strategic core centers of development management. Nevertheless, the post-Marcos era has seen major efforts to reorganize the central economic agencies and strengthen inter-agency coordination.

 

 

Table 1: Basic Socio-Economic Indicators for Selected East Asian Countries

 

Country

GNP per capita(US$)

Average annual growth rate of GNP per capita

1965-90 (%)

Life expectancy at birth 1990

(years)

Population below poverty line

1976

1990

Total (%) 1980-89 average

Rural (%)

1980-89

Average

Korea, Republic of

670

5400

7.1

71

16

11

Malaysia

860

2320

4.0

70

27

38

Philippines

410

730

1.3

64

58

64

Thailand

380

1420

4.4

66

30

34

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Sources: Data are compiled based on World Development Report 1976, 1992, 1993 and Human Development Report 1992.

 

 

Macroeconomic Management

 

The period of the 1970s-80s was of special importance for all three of these countries. All three governments faced the challenges to meet the increasingly complex demand for development. In response, these governments increased the levels of spending and borrowing in order to mobilize larger amount of resources to finance development, particularly from the latter half of the 1970s. Careful analysis shows that the central economic agencies of Thailand, Malaysia, and the Philippines took different approaches to macroeconomic management. As shown in Figure gSelected Fiscal Indicatorsh, their approaches and performance vary—in light of the size of public expenditures and the level of debt financing.

 

A key feature of Thailandfs macroeconomic management is strong fiscal conservatism and prudent debt management. The legal limits for fiscal deficits and external borrowing were strictly adhered to. Nevertheless, the public expenditures grew in the mid-1970s and 1980s, and the government borrowing started to rise during the first half of the 1980s, including external debt. Malaysia is known by fiscal activism. The size of Malaysiafs central government expenditures and that of outstanding debt, as percentage of GDP, were the largest of the three countries. The governmentfs adoption of the New Economic Policy (NEP) in 1971 necessitated the larger public expenditures than before, and the Malaysian government incurred sizable fiscal deficits during the late 1970s-early 80s. The government actively mobilized various resources, including domestic and external borrowing throughout the 1980s. Thanks to the accelerated growth which started from the latter half of the 1980s, both Thailand and Malaysia were able to turn fiscal deficits into surpluses and reduce the outstanding debt.

 

In the Philippines, the level of public expenditures has been comparable to that of Thailand and much lower than that of Malaysia. But, the country has problems of allocative efficiency and productivity of public investment. During the 1980s, the government increased domestic and external borrowing to finance development programs. The Philippines continues to face a heavy debt burden, and the resultant debt overhang limits the fiscal space.

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Aid Management

 

The three countries also differed in the degree of aid dependency, as well as their approaches to aid management. Compared to todayfs Sub-Saharan Africa, Thailand and Malaysia were less dependent on aid. Still, in Thailand, aid was an important source of financing development expenditures. The Philippines had the higher level of aid dependency in the late 1980s, comparable to that of Vietnam and Kenya (about 20%) (see Table 2). (But, this level is much lower than that of Tanzania (near 80%) today.) Figures show the trend of mobilization of official development finance in the three countries. The expansion of aid volume, shifts in donor composition and funding type imply that the size and complexity of aid increased by the 1970s-80s and that these central economic agencies came to face the greater challenges of aid management than before—including the need for prudent external debt management and careful analysis of cost-benefit and feasibility of prospective investment projects.

 

Thailand actively used aid throughout the 1980s, but successfully avoided heavy (protracted) dependency. Moreover, the Thai government was sensitive to the concessionality of loans, as well as comparative advantages of respective donors. Malaysia was least dependent on aid among the three countries and moreover, used aid selectively. Aid mobilization was largely limited to the areas where the introduction of new knowledge and technology was desired, and the government tacitly avoided donor intervention into the domestically sensitive policy areas. The Philippines mobilized aid actively throughout the 1970s-80s and continues to do so. With the relatively high level of debt service payments, the government has limited fiscal space for discretionary funding, including capital expenditures.

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Table 2: Aid Dependency

(Sum of ODA and development finance from the World Bank and the ADB)

 

 

ODA+WB+ADB amount received (US$)

ODA+WB+ADB as a percentage of total central government expenditure

ODA per capita

1988

ODA as a percentage of GNP

1988

1975

1988

1975

1988

Malaysia

$181mil

$391 mil

6.1%

3.8%

$6.1

0.3%

Philippines

$314mil

$1403 mil

12.0%

17.7%

$14.3

2.2%

Thailand

$177mil

$862 mil

8.0%

9.9%

$10.3

1.0%

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Sources: Amount of aid (ODA+WB+ADB, gross)@is calculated based on OECD/DAC, International Development Statistics (IDS) online, http://www.oecd.org/dataoecd/50/17/5037721.htm.

Aid amount as a percentage of expenditures is calculated based on Key Indicators of Developing Asian and Pacific Countries1993.

Data for ODA per capita and ODA as a percentage of GNP/GDP are based on World Development Report 1990.

 

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3. Diversity in Macroeconomic Coordination Mechanisms—Policy and Resource Alignment with Development Priorities

 

Then, how have these countries organized themselves for development? What are key factors affecting their macroeconomic and aid management? Our analysis shows that there are diverse models of macroeconomic coordination. Their institutional design and coordination features vary significantly—in terms of, for example, the existence of a super-ministry, their functional division of labor, the relationship between top leadership and technocrats, the relationship between the Executive and Legislative branches, and so on. At the same time, there are gfunctionalh commonalities and the other factors that have affected the operations of the central economic agencies as the strategic core centers of development management.

 

Table 3 summarizes the types of development management and the functional features of central economic agencies in the three East Asian countries. More specific country descriptions follow.

 

 

Table 3: Type of Development Management and Functional Features of Central Economic Agencies (CEAs)

 

@ Thailand
(esp.70s-80s)
Malaysia
(esp.70s-80s)
The Philippines
(late 80s-now)
Role of CEAs in development management
  • Strategic core centers
  • Strong fiscal discipline,
        prudent debt
        management
  • Active, but selective use
        of aid; exit plan from aid
  • Strategic core centers
  • Fiscal activism; overall
        balanced macroeconomic
        management
  • Selective use of aid; exit
        plan from aid
  • Strategic core centers?
  • Problems of allocative
        efficiency; heavy debt
        burden
  • Selective use of aid?
  • Feature of macroeconomic coordination
  • Centralized system, with
        strong coordination
        among four CEAs (see
        below *)
  • Subtle check and
        balance, shared
        responsibilities
  • Centralized system,
        under the super-ministry
        (EPU)
  • Multi-layered, rule-based
        coordination for both
        planning and
        implementation
  • gDual trackh system, with
        the executive branch
        challenged by the
        congressional
        intervention
  • Insufficient, inter-agency
        coordination
  • Role of DPs
  • Guiding policy alignment
        with development
        priorities, under
        institutionalized hard-
        budget constraints
  • Guiding policy and
        resource alignment with
        development priorities
  • Limited policy and
        resource alignment with
        DPs
  • Enforcement of macro-guidelines
  • Comprehensive (incl.
        ODA, SOEs)
  • Comprehensive (incl.
        ODA, SOEs)
  • Limited, with exemptions
  • Functional responsibilities of CEAs Prime Ministerfs Office
  • NESDB*: development
        planning, development
        budget, public investment
        selection, aid
  • BOB*: budget
  • DTEC: technical
        cooperation
    Ministry of Finance
  • FPO* + PDMO (1999- ):
        fiscal policy and debt
        management, loan aid
    Central Bank
  • BOT*: monetary policy
  • Prime Minister's Dept.
  • EPU: development
        planning, development
        budget, public investment
        selection, aid
  • ICU: public investment
        monitoring
  • PSD: personnel
        management
    Ministry of Finance
  • MOF: budget, fiscal
        policy and debt
        management
    Central Bank
  • BNM: monetary policy
  • Executive Branch
  • NEDA: development
        planning, development
        budget, public investment
        selection, aid
  • DBM: budget
  • DOF: fiscal policy and
        debt management
  • Central Bank: monetary
        policy
    Legislative Branch
  • LEDAC: Legislative
        Executive Development
        Advisory Council
  • Notes:

    ·   Thailand: NESDB (National Economic and Social Development Board); BOB (Bureau of the Budget); DTEC (Department of Technical and Economic Cooperation); FPO (Fiscal Policy Office); PDMO (Public Debt Management Office); BOT (Bank of Thailand)

    ·   Malaysia: EPU (Economic Planning Unit); ICU (Implementation Coordination Unit); PSD (Public Service Dept.); MOF (Ministry of Finance); BNM (Bank Negara Malaysia)

    ·   Philippines: NEDA (National Economic and Development Authority); DBM (Dept. of Budget Management); DOF (Dept. of Finance); BSP (Bangko Sentral ng Pilipinas)

     

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    3-1. Thailand

     

    The political leaders granted the economic technocrats the authority to plan and administer development policies. In terms of the configuration of central economic agencies, no single super-ministry exists, and the responsibilities for economic policymaking have been shared among the four core agencies—the National Economic and Social Development Board (NESDB), the Bureau of Budget (BOB), the Fiscal Policy Office (FPO) of the Ministry of Finance (MOF), and the Bank of Thailand (BOT) (see Figure 2). Fiscal and monetary decisions have been left almost entirely to these four agencies. As a result, the economic technocrats are insulated from political interventions and could exercise substantive power. This has enabled the government to maintain the macroeconomic stability and coherent economic policies, even when the political environment was volatile during the1970s.[3] The stable and predictable macroeconomic environment contributed to promoting the activities of the private sector.

     

    In Thailand, five-year development plans are indicative. They specify development priorities, but do not bind budget allocation. Public investment has been scrutinized and selected in the annual budget formulation process, not in the development planning process (except for the period of 1972-81 when the third and forth development plans contained the public investment plans). This system allows for flexibility in the medium-term planning, while enabling the technocrats to conduct vigorous scrutiny of all public sector projects—including domestic, ODA, and SOEs—in the annual budget and debt approval processes. The four agencies are key members of the National Debt Policy Committee and the National Committee on State Enterprises. Legal limits for fiscal deficits and external borrowing have been strictly enforced, through the coordination among four agencies.

     

    Thailandfs budgetary process is distinguished by: (i) a centralized role of the executive agencies; (ii) limited involvement by the legislature; and (iii) a key role played by the BOB in providing a vertical link between the central economic agencies and the spending agencies. These institutional features have contributed to sound fiscal performance. Notably, the BOB dispatches gMobile Unitsh (a team of budget analysts) to each department for detailed reviews of the planned and ongoing projects and programs. For long, the BOB used the line-item budget system and adopted the Planning Programming Budget System only from 1982. The Medium-Term Expenditure Framework (MTEF) was introduced only recently in 2003.

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    Figure 2: Thailand: macroeconomic coordination mechanism

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    3-2. Malaysia

     

    Since independence in 1957, the successive Prime Ministers have exercised strong leadership, and the technocrats of central economic agencies served as the support arm to realize the visions provided by the Prime Ministers. The responsibilities for policymaking have been concentrated in the Prime Ministerfs Department—such as the Economic Planning Unit (EPU), the Implementation Coordination Unit (ICU), and the Public Service Department (PSD)—as well as the Ministry of Finance (MOF). Especially, the EPU functions as the super-ministry, taking a lead role in the formulation of long-and medium-term visions and collaborating with the MOF in the budget process (see Figure 3). Malaysia has inherited such strong central control from the colonial administration.

     

    In Malaysia, five-year development plans are directive, with budget implications. Here, development plans contain public investment plans, and investment selection takes place as part of the development planning process. The Malaysian system ensures the linkages between development plans, public investment plans and annual budgets. It enforces the budget and sector ceilings during the plan period, although there is room for making adjustments at mid-term reviews. The MOF annually allocates operating and development budgets, and the EPU appropriates development allocations across sectors and states (including the level and allocation of development budget). Malaysia introduced a program performance budgeting system in 1969 and in 1990 shifted to the Modified Budget System—an output and outcome-based budgeting system. Since the early 1980s, the MOF has invited the private sector in the budget dialogues (part of the annual budget process). Under a parliamentary system, the legislative has limited influence on the budget process.

     

    Malaysia has meticulous, multi-layered inter-agency coordination mechanisms to ensure policy coherency, covering domestic (federal and states), ODA and SOE projects. As apex, it has the Prime-Minister-chaired committees (such as the National Planning Committee, the National Action Committee) and planning and implementation coordination takes place through the gtop-downh and gbottom-uph approaches. In this regard, a cadre of elite technocrats (the gplanning cellsh) plays a key role; specializing in budgeting, planning, and monitoring, they rotate among the planning sections of the entire government and provide macro-sector links.

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    Figure 3: Malaysia: macroeconomic coordination mechanism

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    3-3. The Philippines

     

    The Philippines faces the more complex situation. Its decision-making structures are highly dualistic and fragmented among different government agencies and the legislature (see Figure 4). The Congress (both the House and the Senate) has strong control over the Executive branch, typically in the budget process, which leads to the marginalization of the role of economic technocrats. Also, there exists room for ensuring policy coherency within the Executive. The basis for current planning machinery was established in 1987, as part of administrative reorganization in the post-Marcos era. There are four oversight agencies responsible for economic policymaking—the National Economic Development Agency (NEDA), the Department of Budget Management (DBM), the Department of Finance (DOF), and the central bank. While they are the core members of Cabinet-level inter-agency coordination committees, their actual coordination needs further strengthening.

     

    In the Philippines, overall, six-year development plans and medium-term public investment plans have a limited role in the alignment of policy and resources to development priorities. The linkages between the two plans remain weak, and there exist no budget ceilings for development plans and public investment plans. Since the late 1980s, the Philippines government has been making strenuous efforts to better synchronize the development planning, public investment planning, and budget formulation, for example, by introducing the MTEF and other new instruments. Nevertheless, such efforts are often challenged by congressional interventions in the annual budget process.

     

    The coverage and enforcement of macroeconomic guidelines are also limited. For example, large Government-Owned and Controlled Corporations (GOCCs) are exempted from the ceiling of the Foreign Borrowing Act (i.e., contingency liabilities). Vigorous appraisal and monitoring procedures are applied only for the ODA and BOT (Built-Operate-Transfer) projects. Furthermore, Congressionally initiated projects (gpork barrelh funds) allow each Congressman to propose projects, which are outside the regular budget process.

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    Figure 4: The Philippines: macroeconomic coordination mechanism

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    4. Implications for Todayfs Developing Countries

     

    The experiences of Thailand, Malaysia, and the Philippines provide the following useful lessons to todayfs developing countries that are making efforts to strengthen the central economic agencies:

    Despite the diversity in institutional design and coordination features, there are commonalities that have enabled the central economic agencies of Thailand and Malaysia to function as the strategic core centers of development management. There are variations in specific aspects of coordination mechanisms, such as the degree of development plans binding medium-term resource allocation and project selection. But, overall, these central economic agencies function as the agents to plan, coordinate, monitor and ensure that projects that are being implemented are in the national development plan and have been budgeted for.

     

    More specifically, the following principles have greatly contributed to establishing the strategic core functions in the central economic agencies.

    At the same time, the Philippines experiences suggest that building gformalh institutions is not enough. The political environment and its interplay with leaders and technocrats affect whether and how the central economic agencies operate. Especially, the existence of pervasive congressional interventions suggests the vital importance of fostering gshared development visionsh between key political leaders and technocrats.

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    [1] Our view is built on Shimomura's hypothesis, which proposes the need to identify a limited number of gstrategich good governance elements, rather than attempting to establish good governance in all scores simultaneously (Shimomura 2005). Shimomura argues that in light of resource and capacity constraints of developing countries, it is more realistic to give weight to a set of gstrategich good governance elements that may trigger development.

    [2] Weber outlined the key characteristics of a bureaucracy as: (i) functional specialization; (ii) clear lines of hierarchical authority; (iii) expert training of managers; (iv) decision making based on rules and tactics developed to guarantee consistent and effective pursuit of organizational goals; and (v) assignment of work and personnel based on competence and experience.

    [3] Such technocrat-led economic management has changed under the Thaksin administration, which took office in 2001 and introduced a top-down approach based on new public management. Following the September 2006 military coup which ousted Prime Minister Thaksin, it is yet to be seen whether the post-Thaksin administration will continuously adopt the new public management approach.


     

    Bibliography

     

    Bardhan, Pranab, 1997. gThe Economics of Decentralisation in Less Developed Countries.h In The Role of Governance in Economic Development: A Political Economy Approach. 45-63. OECD Development Center.

     

    Campos, Jose Edgardo and Hilton L.Root, 1996. The Key to the Asian Miracle: Making Shared Growth Credible. Washington, D.C.: The Brookings Institution.

     

    Leftwich, Adrian, 2005. "Democracy and Development: Is There Institutional Incompatibility?" Democratization, 12:5, Dec. 2005, pp.686-703.

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    Ohno, Izumi and Masumi Shimamura, 2007. Managing the Development Process and Aid: East Asian experiences in building central economic agencies. GRIPS Development Forum. 

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    Shimomura, Yasutami, 2005. gThe Role of Governance in Development Revisited: A Proposal of an Alternative View.h Discussion Paper on Development Assistance No.5, FASID International Development Research Institute. download

     

    The World Bank, 1993. The East Asian Miracle: Economic Growth and Public Policy. Washington, D.C.