Analyzing the Link between PFM System Strength and Public Investment Performance

This paper is a product of the 2019 PEFA Research Competition that focused on the role of Public Financial Management (PFM) in public service delivery. The PEFA Research Paper Series provides open access to PEFA sponsored research to quickly disseminate knowledge that contributes to ongoing PFM discussions around the world. The broader objectives of the PEFA Research Competition are to contribute to addressing gaps in knowledge on fiscal management, how to improve PFM systems, and the practical implementation of PFM reform. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in the papers are entirely those of the authors. They do not necessarily represent the views of the PEFA Program or those of the PEFA Partners.

Authors: Tim Robinson, Joseph McGrann, Adam Kadir, Inés Jiménez-Ontiveros, and Uzma Ashraf Barton

Investment in key infrastructure can promote economic growth and improved service delivery. However, weaknesses in public financial management (PFM) and public investment management (PIM) systems can constrain countries from realizing the full gains of public investments. Existing research and empirical evidence point to positive linkages between the quality of PFM systems, aggregate fiscal discipline, and budget credibility. Assessing the effects of PFM reforms on public investments and service delivery, however, remains underexplored. This study seeks to address this gap by examining the link between the strength of country PFM systems and public investment outcomes. Using an event study framework, we analyze the relationship between improvements in PFM systems (as measured by changing scores on select PEFA indicators) and a range of public investment outcomes (as measured by various international benchmarks for infrastructure quality and infrastructure-related service delivery). Our results suggest that PFM strengthening efforts oriented toward achieving quantifiable intermediate outcomes (e.g., improving adherence to approved budgets) are more likely to lead to observable improvements in public investment and service delivery results. These intermediate outcomes provide a clearer base of assessment to link PFM improvements to public investment outcomes.

PEFA Research Paper Series: PFM System Strength and PIM Performance (English)