Contents

I.   The Importance of Institutional Capacity

II.  Prioritizing Needs for Capacity Building

III. The IMF Contribution to Capacity Building

IV. International Coordination of Capacity Building

Reducing poverty in the world's poorest countries fundamentally depends on a substantial effort from the countries themselves, especially in implementing reforms needed to improve economic performance. Unfortunately, countries often lack the capacity to implement needed reforms or even to make the best possible use of foreign assistance. The Millennium Development Goals (MDGs)—global targets for 2015 that the world's leaders set at a September 2000 summit meeting—are an ambitious agenda for reducing poverty.¹ It is therefore essential that the international community make a concerted effort to help poor countries develop the institutional capacity needed to reach the MDGs. This brief looks at some key issues and the role of the IMF in the international effort at capacity building.

I. The Importance of Institutional Capacity

"Institutional capacity" is often used as a shorthand for a country's administrative and management capacity, particularly with respect to implementing economic policies. This encompasses a wide range of activities:

• the ability to collect the statistical information needed for effective policy implementation, and to do so in line with internationally accepted standards;

• the ability to effectively plan government expenditure and the delivery of public services at both the central and local government levels;

• the public sector's aid absorption and project implementation capacity;

• the effectiveness of agencies to fight corruption and enhance governance;

• the establishment and operation of appropriate regulatory and/or prudential frameworks for companies and banks;

• the making and enforcement of rules and laws and judicial reforms;

• the protection of property rights;

• and the promotion of competition and of a market-based economic system in general.

Where capacity is weak—that is, where a government is unable to effectively carry out its own policies—the consequences for society can be very costly. A good example is the capacity to make reasonably accurate budget forecasts. In Africa just a few years ago, the difference between budgeted and actual recurrent expenditure (i.e., spending excluding investment projects, which are often donor-funded) was as high as 30-50 percent. Such difficulties in forecasting mean the country's leadership cannot make the best decisions on how to spend public money. In some countries, the government had designated primary education, public health, and road maintenance as spending priorities, yet funds often ended up being allocated to other areas.

II. Prioritizing Needs for Capacity Building

The coverage of institutional capacity is very broad, and includes a range of skills in all parts of the government, as well as the ability to transmit these skills to new staff as existing staff resign or retire. Fortunately, one of the benefits of the MDGs is to focus attention on key outcomes for government activities, which then provide a basis for prioritizing capacity-building activities. While needs vary from country to country, certain areas of institutional capacity need urgent attention in many poor countries, and merit special mention:

• Sound macroeconomic policies, including a transparent and enabling domestic business environment and an efficient financial sector based on the rule of law, are fundamental. This requires effective macroeconomic management capacity, including legislative and regulatory abilities and debt management skills.

• Reducing poverty requires strong government financial management skills, multi-year expenditure programs, and effective expenditure monitoring.

• The need to raise revenue for development and poverty reduction calls for good tax administration skills.

• Improvements in statistical capacity are crucial for better poverty and social impact analysis and to facilitate more effective monitoring of countries' progress toward their development goals.

• Improvements in the capacity to deliver public services to the population, especially the poor, are crucial to translate both tax revenue and foreign aid into poverty reduction. Indeed, it will also be important in winning increased aid from donors.

Simultaneous improvements in the various aspects of institutional capacity could create positive synergies, but progress will take time and should reflect the priorities and starting points of the country. Many low-income countries are now engaged in the process of developing Poverty Reduction Strategy Papers (PRSPs). The PRSP process is a good framework for identifying capacity enhancement needs and for the mobilization of adequate technical assistance. Crucial in this regard is the development of local expertise, not only in the government administration, but also within civil society, including local research and independent oversight institutions.

III. The IMF Contribution to Capacity Building

Developing institutional capacity is an enormous undertaking, but one, which is vital if the MDGs, are to be achieved. The IMF is strongly committed to this task, and is devoting a substantial share of its own human and financial resources—around $100 million in 2001—to technical assistance (TA) and training.² These activities are focused on the institution's core macroeconomic and financial areas of responsibility, coordinated with other agencies where appropriate. These include public finance and administration, financial sector development, and development of sound statistical systems (Table 1). Assistance is targeted to support member countries' reform efforts and development goals. Particular emphasis is placed on providing technical assistance for capacity building, recognizing that capacity limitations—rather than lack of political will—often impede implementation of economic reforms.

Even with large amounts of technical assistance channeled into well-defined areas of institutional expertise, there is a need to tightly prioritize the TA provided by the IMF. Currently, priority is being given to heavily indebted poor countries and to post-conflict countries, helping to set them on a sustainable growth path. In addition, priority is also being given to countries preparing PRSPs. A framework for assistance to these countries is being established on a multilateral basis, and the IMF's TA fits within this framework.

The IMF is providing an increasing share of its technical assistance through a regional, country-based approach. In 1993, in cooperation with other donors, the IMF launched the Pacific Island Regional Technical Assistance Center (PFTAC) to address the special capacity building needs of small island countries in the Pacific. A similar center, also launched with multi-donor support, was opened in 2001 in the Caribbean. These centers have similar objectives: to help focus TA on capacity building; to raise the effectiveness of IMF TA projects through faster response; and to increase positive externalities by sharing regionally based experiences and improving coordination with other TA providers.

IV. International Coordination of Capacity Building

The IMF is not the only provider of technical assistance, even within its areas of expertise. Almost all international development agencies support some type of capacity building through TA. To ensure its effectiveness, some degree of coordination in the delivery of this TA is essential. There is no single best way of coordinating the TA provided by these agencies, and a wide variety of approaches, from the very broad to the highly specialized, are being pursued. Examples of initiatives in which the IMF is involved at the global, regional, and country levels include:

• At the global level, the Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries is an interagency effort³ aimed at facilitating coordination of trade-related technical assistance. The International Tax Dialog is a less formalized initiative⁴ that brings together developing countries to improve tax administration through discussion and better coordination of technical assistance. And the Paris21 Task Team on Statistical Capacity Building Indicators, chaired by the IMF, is one of several initiatives aimed at improving statistical capacity.

• At the regional level, the Partnership for Capacity Building in Africa (PACT), an initiative led by the intergovernmental African Capacity Building Foundation, is aimed at strengthening human and institutional capacities in sub-Saharan Africa.

• At the country level, coordination of capacity-building support by donors is a regular feature of development assistance. It is important that the recipient countries themselves take the lead in coordinating this support. The recent review of the PRSP process has highlighted both the importance and the urgency of aligning donor support with the PRSP, and the prospects are good that PRSPs will lead to stronger partnerships with countries and better donor coordination.

Meeting the Millennium Development Goals will require that all donors improve their focus on capacity building in poor countries and ensuring that their assistance is delivered in a coordinated way. In playing its part, the IMF will focus assistance more sharply on its areas of expertise, ensuring that its efforts will be fully complementary to those of the World Bank, UNDP, and other development partners. By focusing more sharply on what they do best, and delivering TA where it is needed most, all development partners, including the IMF, can help poor countries to harness the full potential of their people to create a better future.