Rethinking the Politics of Fiscal Governance in Fragile States

Major international actors are deepening their engagement with fiscal governance in fragile and conflict-affected settings (FCAS). Traditionally, the policy discussion on fiscal governance in FCAS has been dominated by public financial management specialists and economists concerned with fiscal stability, equity or economic efficiency. International organisations such as the World Bank and the IMF, as well as bilateral donors, have long provided policy advice, to FCAS, with respect to central fiscal functions.

Alongside this technical policy agenda, there has been in recent years a growing appreciation of the more overtly political aspects of fiscal governance. Fiscal governance is not just significant in an economic sense, but also lies at the centre of the compact between governing authorities and citizens. Money – and how it functions as a “public” resource – is fundamental to understanding the political economy of FCAS. In other words, the fiscal domain is important, not just as a contextual factor that provides incentives and shapes the character of conflict/fragility, but also as a source of institutions.

Against this backdrop, the operational and programmatic space has evolved. The need for flexible approaches to fiscal policy formulation, and politically-informed engagement that adapts to changing conditions and incentives, is widely accepted amongst donors, multilateral organisations, and reformers within national governments. In place of ‘standard’ packages of fiscal reform methods in fragile environments, there is greater scope, at least in principle, for policy experimentation, and for addressing opportunities that are specific to each context.

The World Bank, for example, acknowledges that adapting its fiscal support to the conditions that characterise fragility requires “sensitivity to the political economy and to managing the incentives of various actors, especially spoilers” (World Bank, 2020: 9). The IMF, meanwhile, states that helping country authorities in FCAS achieve better macroeconomic outcomes means “calibrating the pace and timing of structural reforms to political economy dynamics and institutional capacities”, with an explicit focus on the incentives and constraints that can be expected to influence a government’s interest in fiscal reforms (IMF, 2022: 2).

However, there are still pervasive gaps between these strategic ambitions, and practice. Despite recent commitments to adopt more conflict-sensitive and politically-responsive approaches, and wide recognition of the need for better integration of political economy analysis (“PEA”) in policy-making, major multilaterals still need to engage with the trade-offs between fiscal policy measures and institutional patterns that sustain, or potentially augment, the drivers of conflict and fragility. Moreover, at the international level, firewalls still exist between technical advisors working on fiscal and monetary policy, on the one hand, and governance, conflict, and peacebuilding advisors, on the other.

To help address these issues, we suggest practitioners and policymakers understand fiscal practices as constitutive of the broader institutional landscape in FCAS, alongside other sectors such as justice. In addition, at least some elements of policy interventions should be designed to channel the political and social effects that come from these institutions – such as horizontal and vertical trust. Finally, if aid budgets continue to narrow, there may also be greater pressure to mobilise alternative actors and sources of investment in FCAS, such as the private sector. In keeping with the thrust of our recommendations, there may be a need to ensure that such actors are sensitive to the institutional effects of their investments on fragility and conflict.

The following two sub-sections start to develop these implications in more detail.

Politics and analytics

In the World Bank and IMF quotations above, politics (or political economy) relates to the interests and incentives of elites and their respective constituents, and how these shape the behaviour and the functions of institutions. However, in our view, fiscal practices shape enduring social relationships between people and with powerholders in ways which are not easily reduced to or analysed in terms of particular interests and incentives.

Take trust. A case can be made that trust is more accurately thought of as a dynamic quality that emerges through repeated and patterned interactions between actors over time, rather than an outcome of rational calculation or an assessment of interests. We can see from empirical accounts that the factors that influence trust in fiscal institutions in FCAS often reflect a long evolutionary history of political relationships. In Liberia, for example, a history of exploitative logging concessions and taxation is said to have bred an aversion toward taxation amongst the local population, especially among indigenous tribes (USAID, 2023). In other instances, historic events and subsequent patterns can help to account for institutional behaviour in the present-day. Prichard (2010), for example, cites the case of Chile, which has been more successful in growing its revenue base than its neighbouring countries. In addition to a number of technocratic tax reforms, Prichard identifies processes in the 1990s during the country’s transition from dictatorship, where representatives from across the political spectrum were invited to establish an inclusive fiscal pact with broad agreement on the contours of tax and expenditure policy. These examples underscore the importance, when designing fiscal policies, of not only understanding how different actors regard their interests, but also the potentially enduring effects of institutional forms and legacies.

These examples raise a different set of questions about fiscal governance than ones about incentives and interests. For example:

• how can policy interventions factor in the institutional politics of fiscal governance, such as social cohesion, or the historic roots of civic culture?
• What kinds of policy interventions may help build relational qualities between rulers and people that affect fiscal governance, such as horizontal and vertical trust?
• How should donors reconcile the need for conflict-sensitive and politically-feasible fiscal reforms in FCAS, with the need to also challenge the institutions and power structures that sustain undesirable governance dynamics (e.g., large-scale corruption), and pursue more transformative results over the long-term?

Institutions and organisations

Following the emphasis on interests and incentives, noted above, most mainstream approaches to PEA in FCAS focus on the performance of institutions (fiscal or otherwise) in meeting different objectives. Institutions, in other words, are the embodiment of incentives that determine the actions of political actors, and thus outcomes.

However, if we understand fiscal governance not just in instrumental terms, but as also partly constitutive of the broader institutional landscape, this raises a distinctive series of questions that are less visible from the mainstream PEA perspective. For example:

• how do the institutions generated by fiscal activity in FCAS interact with justice, security, and administrative institutions?
• Under what conditions do conflicts play out in one or another domain, and with what effects on the durability of institutions?

There numerous ways that policy interventions could try to respond, in constructive ways, to the relationship between fiscal governance and institutional formation. There might there be advantages, for example, in supporting issue-based reform coalitions that bring together otherwise disparate stakeholders to bargain with the state over particular policies – such as different sections of the business or civic community, or different ethnic groups, that are subject to similar fiscal constraints. Evidence from both relatively stable contexts like Kyrgyzstan (see Laws and Rinnert, 2022), as well as more fragmented and violent settings like Northeast Nigeria (Laws et al., 2021), suggest this kind of policy engagement has the potential to disrupt well-established institutional patterns of fiscal governance. Similarly, Benson (2023) argues in favour of bottom-up, demand-led civic engagement as a promising approach to tax policy reform in Sudan, including through coalitions that knit together civic activists, neighbourhood committees, pastoralists groups, and other grassroots organisations.

A more sociological and historic approach to analysis and engagement with fiscal governance should be complemented by more realistic expectations about the timeframes for policy reform. As noted by Miller et al. (2017), historic accounts of the development of fiscal states in Europe emphasise that several centuries elapsed before they were fully institutionalised, and major reforms were often separated by several decades. Expecting sophisticated reforms in much shorter timeframes is unrealistic, and likely to create policies that mimic the form of institutions in wealthier and more stable states (i.e. the way institutions look), without replicating their function (i.e. the way they work).

Navigating the politics and constraints of organisations and bureaucracies will continue to be critical to successful engagement with fiscal governance in FCAS, especially in the recent aftermath of the latest shifts in the development landscape and reductions in aid. In that light, individual and collective reform actors working on fiscal governance will need to create space for thorough PEA, appropriate forms of policy experimentation, and managed risk-taking, within their own agencies and organisations. This could involve identifying specific “pinch points” or leverage points within and across organisations, where research and evidence can be most effectively channeled to influence practice.

Finally, if the space for conventional large-scale forms of financial aid and technical assistance continues to narrow, there may be growing pressure to secure investment in FCAS from other sources, such as the private sector. Should that trend gain pace, international actors and reformers within national governments may need to ensure that new funds are sensitive to the institutional effects of their investments, from the perspective of conflict and fragility.

Explore the new policy brief by Ed Laws and Deval Desai: Fragility, Institutions, and Fiscal Policy – A Critical Review

References

Benson, M. (2023). ‘The Everyday Politics of Sudan’s Tax System: Identifying Prospects for Reform’. London: Conflict and Civicness Research Group, The London School of Economics/Edinburgh: University of Edinburgh, PeaceRep.

IMF (2022). The IMF Strategy for Fragile and Conflict-Affected States. Washington DC: IMF.

Miller, M., Welham, B., and Akoi, A. (2017). ‘Fiscal governance and state-building’. London: ODI.

Prichard, W. (2010). ‘Taxation and state building: Towards a governance focused tax reform agenda’. Brighton: Centre for the Future State at the Institute of Development Studies.

USAID (2023). ‘Fiscal reforms in fragile states: challenging dynamics and lessons learned’. Washington DC: USAID.

World Bank (2020). World Bank Group Strategy for Fragility, Conflict, and Violence 2020-2025. Washington DC: World Bank.