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Modernizing Government and Fiscal Reform in Kerala Program

sector: Public Sector Management | country: India

The experience of the Program highlights a number of issues that future ADB programs need to consider. First, the full implementation of a program does not automatically translate into effective and sustainable outcomes. Second, there may be a trade-off between the ease of implementation and achieving the desired outcome. Third, there may be a trade-off between the breadth and depth of reforms in a program. Fourth, for a program to achieve positive and sustainable outcome, governments must possess strong ownership, capacity, and resilience to undertake difficult yet necessary reforms. These questions and other related lessons are discussed below.

Strengthening the Linkage between Outputs and Outcome. The experience of the Program encapsulates a major conundrum. While the conditions and covenants were largely met, the outcomes do not appear to have been realized. The fundamental problem is that major risks outlined in the design and monitoring framework ended up being major constraints. This in particular relates to lack of political will to make difficult decisions such as disallowing pay increases, limited bureaucratic commitment to and ownership of reforms as evidenced by the reaction to the functional review of the Secretariat, and a service culture without consideration of resource constraints. All these resulted in a weak linkage between outputs and outcomes. A program needs to carefully consider the linkages between the outputs and outcomes, and to mitigate risks that weaken such linkages.

Importance of Government Ownership of and Commitment to Fiscal Reforms. Related to the point above, fiscal reforms are bound to face political opposition. In Kerala, since stakeholders had limited agreement of the need to balance public finances so as to be able to sustain the MGP, in the end there was limited success on both fronts. Accordingly, a successful ADB program must be underpinned by strong government ownership, commitment, and capacity to weather initial resistance to reforms. ADB needs to actively undertake policy dialogues to secure and sustain government commitment. More importantly, the desire to reform must stem from within the government.

Balancing the Trade-Off between Breadth and Depth of Reforms. The Program contained 56 conditions and nearly 60 program-specific covenants. However, it overlooked some binding constraints such as pay revision on the fiscal stress. The inclusion of the MGP and fiscal reforms in one program, while posing no major implementation problems, may have diverted attention from the much-needed fiscal reforms. Identifying and tackling the root cause of a problem may bring about more benefits compared with an overly broad program.

Balancing the Trade-Off between Implementation and Building Mechanisms to Bring about Sustainable Changes. The design of the Program took into account the specific political, cultural, and institutional circumstances of Kerala. This allowed a generally smooth implementation. However, reforms have not been able to reduce fiscal stress, and no major policy and institutional changes have been introduced to improve the efficiency of public service delivery. The Program design needs to carefully consider the trade-off between the ease of implementation and the need to undertake difficult yet necessary changes. While it is important to carefully consider political constraints, it is also necessary to tackle the major impediments to the functioning of an economy. Effective communication and adequately addressing adjustment costs are also important in ‘buy-in’ public support for difficult reforms.

Complementary Nature of the Program Components. The Program encompassed fiscal reform and the MGP. Effectiveness and sustainability could have been improved through better integration of the two components. Integration of program components needs to be done at both the design and implementation stages.

Institutional Underpinning of Reforms. Reforms need to be supported by a strong institutional underpinning. The setting up of the MGP Department served as a platform to coordinate the MGP initiatives. However, the transitional nature of the MGP Department is inconsistent with the need for long-term improvement in modernizing government. It is vital for reforms to be integrated into existing and more permanent government structure so as to sustain momentum.

Importance of Communicating with the Public on Reforms. Communication and adequate measures to address the concerns of people who are likely to be affected by reforms are necessary to reduce opposition. The experience of the Program highlights the importance of communication and consultation with stakeholders as the initial relatively passive approach did not work in favor of ADB and KG. Program design needs to take the time and resources required for this purpose into consideration. Resident missions need to actively engage in programs, given their geographical proximity to the local government.

Lessons from Validation

India: Modernizing Government and Fiscal Reform in Kerala Program

Such reform programs need an effective communication strategy to outline the benefits of reform and mitigation measures for those affected.

It may be necessary to separate fiscal and governance reforms in design; however, continued separation during implementation is problematic, as the Program showed.

Maintaining political commitment to fiscal reform requires significant investment in policy dialogue and flexibility to adapt to external factors.

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