GRIPS Development Forum
Discussion Paper

Institution Building for Poverty Reduction and Local Governance:
The Cases of Tanzania, Ethiopia and Kenya

Yuichi Sasaoka
National Graduate Institute for Policy Studies

April 2005

No.13

© GRIPS Development Forum
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Institution Building for Poverty Reduction and Local Governance:
The Cases of Tanzania, Ethiopia and Kenya

Yuichi Sasaoka
National Graduate Institute for Policy Studies

April 2005

Acronyms and Abbreviations
APR
CAS
CCM
CG(M)
BHN
EFA
ERS
GBS
HDI
HIPCs
IFM(I)S
JICA
JBIC
JSA
KLGRP
LATF
LGRP
LGRT
LGSP
MDGs
MTEF
NARC
PAF
PER
PETS
PFM
PRBS
PRGF
PRS
PRSC
PRSP
PSR
RDS
SDPRP

Annual Progress Review
Country Assistance Strategy
Chama Cha Mapinduzi (Revolutionary Party of Tanzania)
Consultative Group (Meeting)
Basic Human Needs
Education for All
Economic Recovery Strategy
General Budget Support
Human Development Indicator
Heavily Indebted Poor Countries
Integrated Financial Management (Information) System
Japan International Cooperation Agency
Japan Bank for International Cooperation
Joint Staff Assessment
Kenya Local Government Reform Program
Local Authority Transfer Fund
Local Government Reform Program
Local Government Reform Team
Local Government Support Program
Millennium Development Goals
Mid-Term Expenditure Framework
National Alliance Rainbow Coalition
Performance Assessment Framework
Public Expenditure Review
Public Expenditure Tracking Survey
Public Financial Management
Poverty Reduction Budget Support
Poverty Reduction Growth Facility
Poverty Reduction Strategy
Poverty Reduction Support Credit
Poverty Reduction Strategy Paper
Public Sector Reform
Rural Development Strategy
Sustainable Development and Poverty Reduction ProgramInstitution Building for Poverty Reduction and Local Governance:
The Cases of Tanzania, Ethiopia and Kenya

Table of Contents

Acronyms and Abbreviations
Chapter 1
Background of the Research......................................................................... 1
Chapter 2
Direction of the Poverty Reduction Strategy .............................................. 5
2-1 Institutionalization and Participation .................................................................. 5
2-2 PRS Implementation in Tanzania, Ethiopia, and Kenya ..................................... 7
2-2-1 Tanzania ........................................................................................................ 7
2-2-2 Ethiopia......................................................................................................... 9
2-2-3 Kenya .......................................................................................................... 11
2-3 Progress and Ambiguity .................................................................................... 12
Chapter 3
Challenges of Revenue Collection .............................................................. 14
3-1 Background ....................................................................................................... 14
3-2 The Current Situation in Tanzania, Ethiopia, and Kenya.................................. 15
3-2-1 Tanzania ...................................................................................................... 15
3-2-2 Ethiopia....................................................................................................... 17
3-2-3 Kenya .......................................................................................................... 18
3-3 Future Directions............................................................................................... 18
Chapter 4
Decentralization ........................................................................................... 19
4-1 Dynamics of Decentralization........................................................................... 19
4-2 Overview of the Decentralization in Tanzania, Ethiopia, and Kenya ............... 21
4-2-1 Tanzania ...................................................................................................... 21
4-2-2 Ethiopia....................................................................................................... 26
4-2-3 Kenya .......................................................................................................... 28
4-3 Summary ........................................................................................................... 31
Chapter 5
Tentative Conclusions.................................................................................. 32
References .............................................................................................................................. 35<Figures and Tables>
Figure1-1: Key Institutions in Typical Budget Cycle……..………………………………………..3
Table 2-1: PRSP Formulation in Tanzania, Ethiopia, and Kenya (as of September 2004)………...7
Table 3-1: Proportion of Government Revenue to GDP in Tanzania, Ethiopia, and Kenya ……..15
Table 4-1: Decentralization in Tanzania, Ethiopia, and Kenya (as of September 2004)………….21

Chapter 1

Background of the Research

The Poverty Reduction Strategy (PRS) is a basic policy of three East Africancountries—Tanzania, Ethiopia, and Kenya. The PRS includes coordinated formation of policy
and strategy for poverty reduction, budget allocation to priority sectors, execution of policy
actions based on the budget, and establishment of management systems for efficient andeffective service delivery, poverty monitoring, and auditing. The PRS has various origins in
the development debates and practices, and it is embodied in the Poverty Reduction Strategy
Paper（PRSP）1. The three countries have started the formulation and implementation of their
PRSPs, which are prepared by governments and endorsed by the International Monetary Fund(IMF) and the World Bank as the basis for concessional assistance2.
The three countries are all ranked in the lowest group based on the Human
Development Indicator (HDI); they carry heavy accumulated debt, have a budget deficit, andface a high risk of food shortages and starvation. Recently, the poverty rate, which is obtained
as a percentage of the total population living in absolute poverty, has declined slightly in
Tanzania and Ethiopia, but has risen in Kenya. These trends are viewed as persistentsocio-economic trends inherited from the period before the introduction of the PRS rather
than as a consequence of the PRS. However, these countries suffer from hardships and cannot
easily develop their markets and trade with the outside world under the existing human andphysical endowments. For these countries, the PRS policy framework has become particularly
important for laying the foundation for future poverty reduction and economic growth.
This paper describes institutions, mainly public financial institutions at both the central
and local levels. Institutions are defined as “social practices consisting of easily recognizedroles coupled with clusters of rules or conventions governing relations among the occupantsof these roles” (Oran, 1989:32) 3 . Institutions by themselves do not guarantee poverty
reduction or social progress; they are needed to maintain sustainable efforts to reduce poverty.
Without appropriate institutions, neither the public sector nor the private sector will develop
steadily in low-income countries. Institution building generally takes a long time to produce
meaningful results. It is in this sense that the design and implementation of the PRS, a recent
mainstream approach to international development in Sub-Saharan Africa (SSA) as well as inother low-income countries, must be examined from a long-term perspective.
1

Because Poverty Reduction Strategy (PRS) is a more familiar and broader framework, the PRSP has cometo be called PRS. PRSP began with the introduction of Heavily Indebted Poor Countries (HIPCs) initiative; itguarantees large-scale debt cancellation in exchange for accepting a set of conditionalities.
2
In 1999, the Annual Joint Committee of the IMF and the World Bank moved away from conventional
Structural Adjustment Programs and agreed to adopt PRSP. This was a symbolic start of PRS on the side ofmultilateral aid. Bilateral donors tended to keep distance from PRSP at the time and did not share the general
guidelines for PRS; instead they formed the DAC Pov-Net group (OECD, 2001).
3
Organizations, by contrast, are material entities possessing physical locations (or seats), offices, personnel,
equipment, and budgets (Oran, 1989).
1

Institutions have various functions including financial, technical, legal, social, andcultural. Many of these functions cut across the public and private sectors. Some functions are
unique only to the public sector, while others are unique to the private sector. The legal
system is the domain of the public sector, while markets are the domain of the private sector.
Governance is another broad function to be supported by various institutions in the public andprivate sectors. Public financial institutions can be regarded as a budget cycle system, andthey are indirectly related to all the other institutions. This paper focuses on public financial
institutions, because public finance is thought to be related to public needs, and therefore, it
motivates people to create good governance.
Public financial institutions must be built in various areas in the PRS process including
policy planning, budgetary allocation, sector and regional planning, service delivery, taxation,
and auditing as shown in Figure 1-1. This figure shows key institutions in a typical PRS
budget cycle system. The institutions highlighted in this paper are underlined. Because
development agencies are organizations and not institutions in public administration or actors
in international relations, they are not underlined4. Figure 1-1 does not include monitoring
systems of poverty incidence, but they can be considered to cover the whole PRS process. In
all areas, public and private institutions jointly contribute to poverty reduction; it is therefore
important to use a participatory and/or bottom-up approach for institution building.
This paper focuses on the poverty reduction strategy, revenue, and decentralization (theissue of local governments and local authorities). They are closely related in the PRS budget
cycle. Revenue is needed to strengthen the financial power of the government for sustainable
poverty reduction. Decentralization is needed to ensure the delivery of public institution
services to the people through local governments, thereby improving the people’s trust in thegovernment and their willingness to pay taxes5. Therefore, revenue and decentralized financial
institutions are important for establishing a sustainable and reliable budgetary process.
Decentralization is targeted at ordinary people and the poor at the grass-root level. People
who receive public services are usually more involved in public affairs. Local revenue
collection is one of the corner stones of decentralization because it ensures financial
autonomy at the local level. Therefore, from the financial point of view, a combination of the
PRS strategy, revenue, and decentralization is indispensable for long-term poverty reduction.
While it is important to examine the institutions needed to sustain the PRS(P) process,we need to be careful about the speed, design, and adaptability of institutional reforms.
Absorptive capacity, asymmetrical information, and changing political will always affect theadaptation of institutional reforms. Several instruments such as the Public Expenditure
4

However, development agencies are expected to undergo institutional changes to mainstream their poverty
reduction strategy, partnership, and policy objectives, as outlined in Chapter 5 of the DAC Poverty Reduction
Guideline (OECD, 2001).
5
Revenue is a rather neglected issue in the study of financial sustainability for poverty reduction except for
IMF. Central sector allocation and strategic resource planning receive immediate attention by all the donors.
2

3

Local
Priorities

External
Influence

Project,TA,
Pool Fund

National
Plan（PRSP）

Operating
Ministries

Expenditure
Requests

Budget Cycle
SystemDomestic Political
Influence

Regional or District
Development Plans

Ministry ofPlanning

Ministry of Finance

Externally
ImposedConditions

Auditor
GeneralReport, PETS

Auditing
Expenditure
Tender, etc.

Macro
Model
Projections

Approval

BudgetSpeechService
DeliveryRecurrent
BudgetBudget
Allocations

Capital
BudgetTax
Collection
System

If △~Ⓨ↑

Consumption

Y

Note: Originally drawn by Mr. John M. Cohen in his class (Kennedy School.U.S. 1994.4) and modified by the author (2004.4).

Foreign
Grant
Aid

Government
Revenue

International
Loans, IMF, WB.
Bilateral General
Budget Support.

Members of Parliament,
Power Elites, Parties,
Civil Society Organizations,etc.

Key Institutions in Typical PRS Budget Cycle System

International NGOs
Multinational Corporations,and Media

Figure 1-1

Productive
Investment

Review (PER) and the Mid-Term Expenditure Framework (MTEF) can be introduced into thefinancial institutions of a PRS(P) country. Institutions which we examine in this paper are
assisted by these instruments. Revenue is reviewed in the PER and projected in the MTEF.
Some local governments have begun to implement the PER and MTEF.
More and more donors have begun to assist and actually promote institution building
for poverty reduction. Much attention has been paid to whether imported institutional reforms,
indigenous administrative institutions, and local technical capacity have been effectively
matched in the recipient countries. If reforms produce too many new institutions andinstruments, there is a risk what might become isolated from the capacity and willingness ofthe government. In order for the PRS to contribute to poverty reduction in an effective manner,
policy makers, practitioners, and researchers must understand the current situation, problems,and challenges of institution building for poverty reduction.
Upon this recognition, we need to examine whether the PRS in SSA is supported byinstitution building and whether development assistance provided by donors including Japan
makes an effective contribution to this process. We also need to examine whether the PRS
process, which is imposed by the donors, leads to a gradual development of ownership in therecipient countries, or whether the reform agenda is too overwhelming when compared to theabsorptive capacity of the recipient governments and the time given for reform
implementation. These reality checks should be done regularly by outside researchers who are
not biased against any government or aid agency. Neutrality is hard to achieve for any
researcher and research institution, but active interaction and open exchange of views among
researchers are important for a fair examination of the PRS.
This paper views the present PRS process as an opportunity for the poor to get out ofthe poverty trap; it also recognizes many tasks and risks. The next chapter gives a brief
overview of the PRS process in Tanzania, Ethiopia, and Kenya. Chapter 3 describes thecurrent situation and the challenges in revenue collection in the three countries. Chapter 4
discusses the dynamics of fiscal and democratic decentralization for poverty reduction. Lastly,
Chapter 5 presents tentative conclusions.
This research is part of a broader research project undertaken by the National Graduate
Institute for Policy Studies (GRIPS) Development Forum, which examines institution
building for poverty reduction in SSA from the viewpoint of the public and private sectors aswell as the macro and micro perspectives and analyzes the social support for, as well as theeffectiveness, stability, and market viability of, the new institutions. In August and September
2004, a Development Forum team conducted preliminary research in Tanzania, Ethiopia, andKenya—countries believed to be given high priority in Japanese aid programs.
The research project was implemented with the support of many concerned institutions
and people. I would like to thank the governments of Japan, Tanzania, Ethiopia, and Kenya,and the many government and donor-organization officials who provided us with useful4information. I would also like to thank the staff of the Japan International Cooperation
Agency (JICA) for their generous support of our field research.
This paper describes preliminary findings; for this reason, the presented analysis has
limitations. The paper will be revised and improved as I receive comments from internal andexternal organizations and individuals.

Chapter 2
2-1

Direction of the Poverty Reduction Strategy

Institutionalization and Participation

In Tanzania, Ethiopia, and Kenya, the governments are vigorously pursuing the PRS andrelated policies. Expenditures greatly exceed revenues, and foreign assistance has increased
dramatically. The three countries are classified as Heavily Indebted Poor Countries (HIPCs).
The term enhanced “HIPCs” initiatives were applied to Tanzania in 2001, and later to Uganda
and Burkina Faso; in 2004, it was applied to Ethiopia, Ghana, Senegal, and Niger. In contrast,
Kenya is considered a relatively sustainable country, like Vietnam, and has not been classified
as a HIPC6. The government of Kenya anticipates that the country’s debt will be reduced as aresult of its policy to replace domestic debt with foreign debt (IMF, 2003a: 6).
The HIPC Initiative identifies 38 countries, out of which 32 are in SSA, as potentiallyeligible to receive debt relief (as of September 2004). The original scheme called for thecountry to have a track record of strong performance on a series of measures before being
accepted for debt relief. Fourteen countries have reached completion points on the scheme, 11of which are in SSA, after fulfilling the conditions of a PRSP—a process involving
wide-ranging consultations with civil society and donor groups on future priorities for public
policy targeted for poverty reduction. At present, the number of countries implementing a
PRS(P) has expanded rapidly and becomes larger than the original countries receiving HIPC
debt relief.
With an increase in international aid under the formulation of PRS, the problem ofmainstreaming aid into the national budgets of recipient countries, so-called on-budget (e.g.,donor funds which are at least registered as the government budgets) has started to attract a lotof attention. In Tanzania, more than 20 percent of the recurrent budget is supported byfinancial aid, which addresses the issues of sustainability and aid dependency7 (IMF, 2003c:2). Aid dependency concerns are also applicable to Ethiopia, but not necessarily to Kenya,
6

The ratio of debt to export in net present value was 109 percent in 2003, which is below the HIPC
standard.
7
Aid dependency has not been exacerbated since FY 2003 with a record of 50 percent of aid in the budget
due to an increase in revenue (aid through off-budget support was not included in this calculation).
5which only has the potential to face these issues. Financial assistance may result in an
appreciation of the value of national currencies because of a substantial external financial flow,
but such concerns have not yet been necessary in Tanzania and Ethiopia. Tanzania intends toprioritize General Budget Support (GBS) over other aid modalities, while Ethiopia and Kenya
are inclined to accommodate a variety of aid modalities.
As for poverty monitoring, it is only Tanzania (where the Office of the Vice President is
the responsible agency) which is forming an institution with clear goals. Although there iscurrently no institution in Tanzania that can measure the input, output, and outcomes ofpoverty reduction, the need for the overall effectiveness of poverty reduction is being
discussed. A public expenditure tracking survey (PETS) has been conducted in Tanzania toevaluate the efficiency of service delivery. In December 2003, Ethiopia submitted to theInternational Monetary Fund (IMF) and World Bank a comprehensive plan for monitoring andevaluation of poverty reduction and in May 2004, it presented an action plan. However, noconcrete framework has yet been established.
There has been criticism of the low participation of NGOs and civil society in theprocess of PRSP formulation in Tanzania, Ethiopia, and Kenya (Booth, 2003: 277). It has also
been noted that there is no participatory mechanism embedded in civil society in thesecountries and that the government makes all decisions by itself. In addition, some critics haveclaimed that the process of PRS and HIPC completion point are being combined and that they
are implemented in such a hasty manner that there is not enough time to consult with civilsociety. On the other hand, many PRS reports are being prepared such as Public Expenditure
Reviews (PERs) and Mid-term Reviews as well as Annual Progress Reviews (APRs). It isalso true that civil society partially participated in the preparation and discussion of thesereports. In Ethiopia, a poverty action network was established with the participation of civilsociety and NGOs to discuss the quality of public service and the ways of participation of
Civil Society Organizations (CSOs) and NGOs in PRS process.
These movements to promote partnership between government and donors invite highexpectations from the PRS process, which is different from that of Structural Adjustment
Lending (SAL). Here SAL can be characterized as the process among a limited number ofstakeholders. Yet, a strategy that determines a concrete path to poverty reduction andeconomic growth has not been devised. It has also been observed that the long-questioned
conditionality of donors has been replaced by benchmarks that are limited to minimum targets
but that the number of conditions has not been reduced.
The following sections describe the current situation with the PRS, the process of its
implementation, the changes of expenditure performances in Tanzania, Ethiopia, and Kenya,and the future of the PRS.

6

2-2

PRS Implementation in Tanzania, Ethiopia, and Kenya

2-2-1

Tanzania
In 2000/01, the poverty rate in Tanzania with respect to Basic Human Needs(BHN) was
36 percent, and the food poverty rate was 18.7 percent, according to a Household Budget
Survey. The poverty rate has not decreased significantly in the 1990s. The macro economy
has been stable since the late 1990s, and the GDP growth rate reached 6.2 percent in 2002 and5.7 percent in 2003 (GoT, 2004a: 11). This shows that Tanzania has virtually met the PRSP’s
goal of a GDP growth rate of 6 percent, but this has not resulted in household poverty
reduction at the micro level. The agricultural sector recorded a growth rate of 5 percent in2001 and 2002, but this was mainly due to favorable weather; the growth rate was expected todecrease to 3.3 percent in 2003. There is high unemployment among youth and women inurban areas, and 21.3 percent of children aged between 5 and 17 are in child labor.
In Tanzania, the PRSP was formulated in 2000, and three APRs have been publishedsince then. “A second generation” PRS8 was being formulated, as of December 2004. Whileunder the first-phase (generation) PRS, priority sectors were allocated proportionately morebudget resources than other sectors, under the second-phase PRS, there is no distinction
between priority and non-priority sectors; this strategy was adopted to pursue an
outcome-oriented cross-sectoral plan upon recognition that non-priority sectors are also
important for improving the efficiency of investment in priority sectors9. Furthermore, there
has been more recognition that employment and economic growth are important for poverty
reduction, and priorities have been expanded to incorporate, for example, secondary
education.

Table 2-1

PRSP formulation in Tanzania, Ethiopia, and Kenya (as of September 2004)
Tanzania
Ethiopia
Kenya
Year: Formulation
2000
2002
2004
of PRSP(SDPRP)(ERS)
Priority Sectors and Education (primary),
Agriculture, social sector Governance, security,
Issuesroads, water and(education and health),law, PSR, infrastructure,sanitation, judiciary,
HIV/AIDS, infrastructure production sector, justicehealth, agriculture,(roads, communications,and social sector
HIV/AIDS
water supply), ESRDF(education, health, HIV,(social investment fund)nutrition, employment),
agriculture in arid andsemi-arid areas
Note: From PRSPs of Tanzania, Ethiopia, and Kenya.

8

Since Tanzania starts PRS(P) process earlier than most of other countries, its first phase (cycle) will end
in FY 2004/05.
9
Peniel M. Lyimo, Permanent Secretary, Ministry of Finance, 2004.8.
7

The government was closely collaborating with donors in formulating a Full-PRSP in
2000-2001. Conditions in the following areas were considered to have been fully met:
macro-economy, priority sectors, rural development, and governance. These reformconditions were actually covered by existing programs undertaken by the government anddonors. Many donors participated in preparing a Full-PRSP for assessment at a HIPC
completion point, and they pressured the IMF and World Bank for approval by a joint
declaration before completion point. This collaboration among donors seemed to continue in2004 and, although there are various views on donor coordination activities, local DAC(Development Assistance Committee) are now trying to formulate a joint aid strategy.
The government of Tanzania has declared its intention to prioritize poverty reduction bypromoting Poverty Reduction Budget Support (PRBS), which is a framework for General
Budget Support (GBS), and to formulate its PRSP (at present, 14 donors including Japan
participate in PRBS). In 2003/04, 34 percent of international aid was provided as GBS, and 17
percent of aid was provided as earmarked Budget Support. Budget Support of the World Bankis provided in the form of Poverty Reduction Support Credit (PRSC), which has been
integrated into PRBS since 2002. The risk of causing a war by increasing military
expenditures in Tanzania is very low; the main concern in providing budget support iscorruption10. On the other hand, GBS does not have immediate effects on the formation ofcivil society, and it is practically limited to budget allocations to governmental organizations
and institutions (Frantz, 2004: 19).
The monitoring of the Performance Assessment Framework (PAF) targets not only thereform process indicators but also the sector monitoring indicators in the Annex. If the effectsof the PRS are questioned by low performance, steps should be taken to review the Public
Financial Management (PFM) as a means to achieve the PRS and use the results of themonitoring in the formulation of the next budget. As for APRs, no clear role has been stated
for these reviews in any of the three countries. In Tanzania, APRs cite annual findings onpoverty monitoring. However, the data of the National Bureau of Statistics and those of line
ministries are not immediately related and the results of analysis are not utilized in policy
formulation. Thus, it appears that although there is some variation among the three countries,
APRs, if translated into national languages, are more useful than the PAF for establishingdomestic accountability, for example, in civil society and parliament.
Although rapid expansion of budget support has led to aid dependency, there has been apositive change in two areas. One is that the proportion of salaries in the recurrent budget has
been rather constant while the number of primary teachers has increased (the proportion ofsalaries to GDP was 4.3 percent in FY 1998 and 4.2 percent in FY 2000 and FY 2003 [GoT,
2004b: 11]). Other Charges (recurrent budget other than salaries) have increased the most (by10Corruption refers not only to bribes but also to abuses of public authority such as the forging of
documents and nepotism.
8

4.5, 5.8, and 10.4 percent in the above FYs), followed by the development budget (3.8, 5.3,
and 5.2 percent in the above FYs). The other change is that the social sector has been given
top priority from the pro-poor perspective; however, the proportion of the budget directed tothe social sector has been declining since 2002/03, and slightly more resources have been
allocated to economic growth related strategies such as the development of infrastructure11.
2-2-2

Ethiopia
The poverty rate in Ethiopia decreased slightly (from 45.2 to 44.2 percent) between FY
1995/96 and 99/2000. However, while in rural areas the level of poverty decreased (from 47
to 45 percent), in urban areas it increased (from 33.3 to 37 percent) (MoFED, 2004a: 7).
Ethiopia suffered a famine in 2002/03; food aid was provided to 13 million people, and real
GDP decreased by 4 percent. Since then, food production and economic growth havestabilized.
After the collapse of the military regime in 1991, a new government was established,
and it adopted a 5-year national development plan called “Plan for Development, Peace and
Democracy.” In line with this new plan, in 2001, the government initiated PRS(P) preparation,and in December of the same year, it completed an Interim PRS(P) in order to obtain a
Poverty Reduction Growth Facility (PRGF) credit from the IMF. In this Interim PRS(P), fiveareas were selected as priority sectors including agriculture, social sector, and HIV/AIDS12. A
pool fund was established in September 2001; the UNDP is responsible for the
implementation and management of the fund, and a local Consultative Group (CG) functions
as a management committee of the fund (currently, a second phase of the fund is being
developed).
In 2002, the Sustainable Development and Poverty Reduction Program (SDPRP) was
inaugurated, and the PRS and Millennium Development Goals (MDGs) were declared as
long-term goals for poverty reduction. Although there was criticism that this program
paralleled the World Bank’s Country Assistance Strategy (CAS) and that the Ethiopian
government was dazzled by the funds extended by the World Bank, the SDPRP became afoundation for poverty monitoring and consultations between the government and donors. The
goal of the SDPRP is broad-based growth, reduction of economic fragility, and improvementof quality and service delivery. Four pillars of the program are an agriculture-led
industrialization strategy, judiciary and public service reforms, decentralization andempowerment, and capacity building in general.

11

The proportion of priority sectors in the total budget has increased from 34.7 percent in 1999/00 to 46.3
percent in 2001/01, but it declined to 45.6 percent in 2002/03.
12
Budget allocations to priority sectors constitute more than 40 percent of the total public expenditures.
The five priority sectors consume 30 percent of the recurrent budget and more than 70 percent of thedevelopment budget.
9

The attitude of the Ethiopian government was appreciated by the donors at a CG
meeting in 2002 and as a result, 3.6 billion dollars in aid was pledged to Ethiopia for FY
2003-05. The first APR was submitted in December 2003, and in general, the donors
evaluated the government’s efforts positively. The Joint Staff Assessment (JSA) advised thatthe government include promotion strategies in wider areas such as private and financial
sectors, rural development, food security, and land reform. An interim APR was completed in
September 2004, and the next APR is to be submitted in January 2005. The analysis of the
MDGs and APRs will be the basis for SDPRP II, whose implementation phase will begin in
July 2005.
The government of Ethiopia expressed its expectation of GBS assistance for the firsttime in the period of the SDPRP, in December 2002, and some donors including the World
Bank, the U.K., and the Netherlands insisted on its effectiveness. By 2004, six moreorganizations started to provide GBS. In FY 2005, GBS is expected to increase to 387.6
million dollars; 71.1 percent of this aid is multilateral and 14.2 percent is bi-lateral. The
budget funding for poverty reduction including GBS increased by 13.8 percent in 2002/313.
However, the rate of budget disbursement is not high, and it remains at 77.6 percent (OED,
2004: 16). In addition, defense spending decreased from 13 percent of GDP in 1999/00 to 3.5
percent of GDP in 2003/4 (MoFED, 2004b: 16). The donors regard the financial discipline of
the Ethiopian government very highly.
Food security was given priority in December 2003, and the performance of SDPRP was
favorably evaluated as being in crisis. The World Bank offered a PRSC earlier than it hadplanned (grants accounted for one-third of the total PRSC in FY 2004/05). Under the PRS,
budget resources were distributed to priority sectors with care, and the share of these sectors
increased from 41 percent in 2000/1 to 54 percent in 2004/5. Food security and education
were the most highly prioritized sectors among all sectors, while the health sector wasunder-funded. The military budget was intentionally frozen.
Since 2003, there have been increased efforts to develop a PRS matrix. There are several
challenges in the enormousness of indicators and the difference between the matrices of the
PRSC and SDPRP. With regard to poverty monitoring, there is a lack of capacity in the
Department of Macro Planning and Policy Analysis of the Ministry of Finance and Economic
Development (MoFED) and in the Central Bureau of Statistics (note: capacity building is
initially required for these key departments). Decentralized management of finances began in
FY 2001/2 at the woreda level, which is two levels below the level of the region. This practicehas drawn considerable attention14. The share of the education and health sectors amounted to
13

The current budget is geared towards the social sector in Ethiopia, and the need to increase investments
in infrastructure, agriculture, and hydroelectricity was also indicated (Leulseged Ahmed, Christian Relief &Development Association).
14
Woreda is usually translated as ‘district’. The role of zones, which are between the woreda and province10

61 percent of the whole budget of the federal states at the regional level in FY 2001/2 (69.7
percent at the end of FY 2003/04 according to the interim APR 2004). It is unclear, however,whether these funds are sent from the regions to woreda governments and whether they makepublic service more efficient.
2-2-3

Kenya
Kenya’s long-term economic performance deteriorated in the 1990s under the Moi
regime, and the poverty rate increased from 48 percent in 1990 to 56 percent in 2001 (GoK,
2003: 1). Under the regime of the National Alliance Rainbow Coalition (NARC), which won
the democratic election, an active dialogue was initiated between the government and donors,
and an increase in development aid was pledged at a CG meeting in 2003. The NARC
government showed a sincere attitude toward reform; in 2002, an anti-corruption bill wasapproved by the parliament, followed by bills on procurement and auditing of the government.
However, there have been allegations of corruption in the government and criticism of thegovernment’s attitude towards reforms. Much attention is being paid to the government
responses and to whether it will undertake sincere actions to counterclaim the allegations. It
should be noted, however, that there has been some progress in the state ofgovernance—examples include protection of the freedom of speech, a demand for a review ofunjust bidding, and public announcements of job postings in the government, none of which
previously existed.
In 2004, the donors threatened to postpone aid disbursement unless the government took
measures to eliminate corruption. Since then, domestic borrowing has been increasing. Whileunder the previous regime, expenditures were below the expected level and the debt was notincreasing, under the current government, the domestic debt has increased to an unsustainablelevel. Moreover, because negotiations with the IMF delayed the second tranche of the PRGF,
there had already existed a problem of financial management15.
In 2000, IMF suggested that the government of Kenya not submit the Interim- PRSP and
Full-PRSP, because there was still room for improvement of the content. In 2002—theelection year—the new government prepared a new policy document, but the donors claimedin June 2003 that the document lacked a description of macro-economic policies andmeasures against poverty. The donors asked the government to revise the document by theend of 2003. Meanwhile, the Kenyan government formulated its Economic Recovery Strategy(ERS) and showed positive consideration of both economic growth and PRS. Because
expenditures on Personnel Emolument (PE) are disproportionately high in the financial
structure of the government, it is difficult to disburse development budget funds to implement
the fairly ambitious ERS program, which covers many sectors and issues. Also, while thelevels, has shrunk, and woreda governments are regarded as district governments.
15
Nobuhiro Ikuro, JBIC, Nairobi Office, 2004.9.
11

government is familiar with macro-economic analysis, institution building for poverty
monitoring is a relatively new area16.
A CG meeting was held in December 2003, and 4.1 billion dollars was pledged for three
years (which is larger than the amount pledged for Ethiopia). In January 2004, 350 million
dollars of external debt was reduced for a period of three years upon agreement with the Paris
Club (out of which 70 percent debt are coming from JBIC). A PRGF grant of 350 million
dollars was also approved in November. The overall debt of Kenya at the end of 2002 was 5.2
billion dollars. Two conditions—a reduction in the number of civil servants and in the numberof public corporations—were stipulated at the time of fund disbursement in the second
tranche of the PRSC by the World Bank.
Ministry of Finance and Ministry of Planning and National Development started
positive collaboration on making ERS planning and monitoring system17. Both Ministries
which were split in 2003 agreed to activate MTEF process already adopted in 1999. The
former is in charge of expenditure tracking and the latter is in charge of project monitoring
function. Regarding poverty monitoring in general, the ERS had 186 indicators at the
beginning. These indicators which contained unclear content and lower priority would be
examined and selected before the formulation of APR 2003/04 to be published in 2005.
In the Kenyan PRS, both poverty reduction and economic growth are considered in abalanced way. The ERS includes expectations of economic growth and an investment plan fora period up to 2007, and it incorporates a goal of creating jobs for 500,000 people every year,
which was promised during the election period as one of the major slogans. The sector shareof expenditures on infrastructure and rural development is high in the development budget
component; while Personnel Emolument funds in the social sector have come to constitute ahigh percentage of the recurrent budget since the introduction of free primary education (FPE)in January 2003. Although it is difficult to reduce government personnel due to political
opposition, the quality of local public services is generally considered unsatisfactory.
2-3

Progress and Ambiguity

Tanzania, Ethiopia, and Kenya differ with respect to the time of initiating the PRS, thecontent of PRS, and the relationship with donors. Tanzania made the most progress in reforms
with the development of its administrative system and in partnership with donors. Recent
complications of ‘composition of’ the priority sectors (clusters) and the abolition of local
16

The Joint Staff Assessment (JSA) recognizes that the government of Kenya is weak at conducting factor
analysis of poverty due to inexperience with poverty assessment. Thus, donors assisted the government in
conducting a household budget survey in 2004, based on which an extensive poverty assessment is to beundertaken in 2005.
17
Joint efforts on policy planning and budget are emphasized internally and externally (David Nalo,
Permanent Secretary, Ministry of Planning and National Development)
12

taxes, in my view, reveal ambiguity as well as consistency in the government’s position
towards the PRS. Ethiopia places agriculture and social sectors at the center of its PRS, and it
seeks donor assistance. Although the proportion of local revenue in the whole revenue is not
low when taking into account the capacity of the government and although corruption isminimal, there is a risk that donor dependency and transaction costs may increase as a resultof confusion in the government caused by a number of items on the reform list. Kenya
formulated an ERS that clearly reflects the position of the new government with its many
expectations. However, because of its diverse strategies and the characteristics of its financial
structure, effective implementation of ERS can hardly be expected for some time.
The three countries have conducted APRs, but they are still at the stage of institution
building for policy, finance, and monitoring rather than at the stage of examining clear outputs
and outcomes. For these countries, there is only one option left—to concentrate on building amechanism of resource allocation which would enable the transfer of funds from donors andthe central government to local governments under the PRS. The funds are centering on thesocial sectors, because pro-poor growth scenario is hardly envisioned at the moment. Were it
not be either stable agriculture-based development or economic growth owing to a strong
industrial sector, the remained option would be social sectors. It is very important whether thegovernments of the three countries will make an effort to construct mechanisms that would
make it possible for services to reach end users and for funds not to be stopped at the upper
level of local society and municipalities where rent-seeking groups with vested interests (e.g.,
powerful members of the parliament and the ruling party, or their powerful supporters) havebeen formed. In Kenya, where policy reforms based on the PRS are not being implemented,
there is a risk that the new regime may adopt the interests of the old regime. In the other two
countries, where policy reforms based on the PRS have progressed and where someinstitutions have been built, local governments and civil society are still frail and there are notmany organizations that can inform the government and donors of the collective opinions ofcivil society.
An important mechanism for evaluating local service delivery is the Public Expenditure
Tracking Survey (PETS), which was undertaken in the education sector in Tanzania. The
PETS is a survey that examines whether sectoral budget funds from the central government
reach end users under the local governments. Although the fact that funds reach final service
points or end users does not guarantee effective service delivery, it is impossible to deliver
services if funds and materials do not reach end users. In this sense, the PETS is apreconditional survey. To ensure the transfer of funds to local governments, local government
budgets are publicized to the population through various media. To ensure the transfer offunds to each school, school headmasters post a notice about the receipt of the funds on thebulletin boards. As a next step to accountability, a PETS result and annexed survey should be
added to the PER sector reviews.
13

The usefulness of GBS is evident in Tanzania and Ethiopia. The governments also claimthat GBS and sector budget support have improved the predictability of aid flows (URT,
2003b: 12)18. However, two limitations must be mentioned here. First, since only GBS is
expanded, sector performance cannot be measured accurately. The nature of block grants(BGs) in Ethiopia does not serve the purpose of sector performance as well. There is a risk of
distorting the existing structure of incentives in each sector. The second limitation is the
problem of resource allocation within the government and to civil society. GBS is geared too
much towards the government, and donors must agree on the distribution of funds to thegovernment and civil society. In particular, it should be noted that GBS does not have
immediate effects on building good relations between civil society including the poor andpolicy makers and on governance building.
Institution building is based on a bottom-up approach, and it relies on collective will andactive participation of community members and local organizations (see Chapter 4).
Institution building in the rural PRS process is behind all other policy actions. This is an areathat is difficult to promote only by means of central institution reforms and programatization.
The only example in the rural area may be the formation of strategies for the Rural
Development Strategy (RDS) in Tanzania. What needs to be strengthened is organizations thatare rooted in local communities such as agricultural cooperatives and school management
committees. Appropriate channels must be created to support administrative service provision,
allow community members to complain about services, and enable them to participate incommercial activities in local markets.

Chapter 3
3-1

Challenges of Revenue Collection

Background

In Tanzania, Ethiopia, and Kenya, there has been a decline in revenues in the short andmedium terms. This decline has become a concern because of an attention paid to highvolume of aid, an emphasis on investment in the social sector and weak economic growth.
While it would be unrealistic to expect an increase in revenues at this time, it may be possible
to increase revenues to some extent by improving tax collection, for which institutions must
be built. It would not be possible for these countries to ensure sustainability without creating
an institution that will increase revenues in the medium and long terms in response to anincreased aid flow. In other words, if an institution is built which will increase revenues in thelong term, it may be possible to justify an increase in aid and aid dependency in the short and18

According to this report, predictability will improve if the strict conditions of the donors are relaxed.
14

medium terms19.
The three countries are oriented towards increasing their revenues by reorganizing
revenue institutions, overcoming heavy dependence on customs duties in tax collection, andactivating the private sector to generate business; the main taxes in these countries are
expected to be the VAT and the income tax. Once a central tax collection system is established,these tax revenues will get on the right track with normal economic growth. Nevertheless,increasing local revenues is generally difficult because it is difficult to establish a tax
collection system even though there are some potentially important sources of revenue suchas the building property tax and the land use tax.
Among the three countries, Tanzania has the lowest ratio of government revenues to
GDP and Kenya has the highest ratio. However, recent trends in Tanzania and Kenya show
some improvement in the ratio. In Tanzania, the VAT is high, and the VAT efficiency ratio(VAT revenue/VAT rate to GDP) is 0.2, which is lower than the SSA average (0.27). In
contrast, in Kenya, the ratio of revenues to GDP is high because the informal sector isdominant and the GDP was considered to be underestimated, which caused relative decline in
the efficiency of tax collection. Therefore, institutions must be built to ensure effective tax
collection, including from the informal sector, and to establish measures against tax evasion20.
3-2

The Current Situation in Tanzania, Ethiopia, and Kenya

3-2-1

Tanzania
Tanzania has a remarkably low ratio of revenues to GDP among all countries in Africa.
In FY 2004, the income tax system in Tanzania was amended, and its revenue increase effectis highly anticipated. Many local taxes were abolished in 2003 and 2004, which has led to aconcern about the idleness of policy makers. The abolished taxes included a development levy

Table 3-1

Proportion of Government Revenue to GDP in Tanzania, Ethiopia, and Kenya(％；excluding grants)
1997-2001
2002
2003
2004 (estimate)
Tanzania
11.2
11.0
11.4
12.2
Ethiopia
18.2
20.0
19.5
18.6
Kenya
24.6
21.0
21.2
22.2
SSA Average
20.0
20.8
21.3
21.9
Note: The SSA average excludes South Africa and Nigeria.
From Regional economic outlook Sub-Saharan Africa, by IMF, 2004, p. 37.

19

Bevan (2001) claims that there is no short-term solution to the revenue problem and that effective
measures must be taken to increase revenue before donor funds start to decrease; he also points out that therevenue problem cannot be solved by economic growth alone.
20
Government of Kenya statement, CG meeting 2003
15

and taxes on business licenses and natural resource products (the tax rate on crop cess was
reduced). There is also a rational side behind the abolition of taxes: For example, thedevelopment levy, which was called a “nuisance tax,” cost as much to collect as it produced inrevenue. Although the abolition of local taxes reduced the tax burden on the people, it also
directly reduced the revenues of the local governments. Approximately half the shortage ofrevenue was subsidized by grants from the central government, which specified the uses ofthese grants in various sectors. There is also a view that the fact that CCM (Chama Cha
Mapinduzi, the Revolutionary Party of Tanzania) suddenly decided to abolish local taxes, andthe central parliament ignored the possible reactions of the local governments; this process initself symbolizes that CCM and the central government neglected the ownership of the local
governments21.
One of the factors behind the recent increase in revenues is tax collection efforts by the
Tanzania Revenue Authority (TRA). The TRA performance of activities at present has
improved substantially compared to that at the end of the 1990s22. After the establishment of
the TRA in 1996, the ratio of revenues to GDP increased from 11 percent in 1995/96 to 12
percent in 1996/97, but it declined to 10 percent in the late 1990s and 2000, when corruption
involving customs clearance workers was said to increase (Odd-Helge Fjeldstad, 2003: 166).
It is interesting to see whether TRA situation has improved with recent efforts aimed at
institutional management.
In low-income countries, there is a close relationship between a high tax rate on the one
hand and evasion and corruption on the other. It is not impossible to imagine that those who
evade import taxes, sales taxes, and corporate taxes bribe tax collectors within the amount of
their benefits from evasion. A 1993/94 survey, which became the basis for the establishmentof the TRA found that the actual amount of customs clearance revenue lost as a result of
evasion was 2.5 times greater than the officially reported amount (Gandhi, et al., 1995: 10).
The recovery of taxes by the TRA and the abolition of tax exemption are signs of a positivechange; however, the tax rate is still too high, the tax collection system is too complex, andthe monitoring and auditing of revenue are too weak.
The abolition of local taxes can be regarded as a populist policy used prior to theelection of 2005; the real concern, however, is whether the weakened revenue base of thelocal governments will improve after the election. The Ministry of Finance is planning toconduct a survey on new sources of revenue in 2004, and it explained to the author that a newtax may be introduced in FY 200523. According to the Local Government Reform Team(LGRT) and the Kinondoni Municipal Council, one possibility is the introduction of the land
rent tax in urban areas; and also wants to increase the assigned revenue share to local councils.
21

Suleiman S.A. Ngware, University of Dar es Salaam 2004.9
Stergomena Tax, Economic Social Research Foundation 2004.9
23
Department of Policy Analysis, the Ministry of Finance, 2004.9
22

16

The property tax (which is 10,000 shillings per annum and which is imposed on buildings)
has not been used effectively and it is another candidate of revenue according to officials at
the Ministry of Finance and the Kinondoni Municipal Council. Whether an effective tax
collection system can be established or not is being debated in the central and local policy
makers. The future of land rent tax depends on the implementation of the land reform; andproperty tax needs to fill the gap between its severe content of the law and the actual
non-application situation (law is being neglected).
3-2-2

Ethiopia
In 2001, the Ministry of Revenue was created in Ethiopia as part of a structural reform.
The new ministry became in charge of tax reforms, which used to be the responsibility of the
Ministry of Finance, and later, of customs clearance. As a major tax reform effort, a newincome tax law was passed in 2002; the new law established different tax rates and reduced
the corporate income tax from 35 to 30 percent and the business income tax from 40 to 35
percent. In 2003, a part of sales tax was abolished and the VAT was introduced24. The main
sources of revenue are customs duties and trade-related taxes; the VAT and income tax are
new hope. Tax collection was improved in 2002 when major institutional reforms were
undertaken, but it has not been stable. First, the government improved some income tax rates
to strengthen incentives. Second, the sales tax was replaced with a VAT (15%), and a turnovertax (2%) was introduced in small stores (with an amount of sales lower than 500,000 Birr) towhich the VAT did not apply.
These reforms are outlined in the “Tax and Custom Reform Program”, in which themain content is presented in a logical framework (FDR, 2004: 23). There are other institution
building activities such as the introduction of a tax payer registration system in 2004, thecollection of presumptive taxes from groups from whom it is difficult to collect taxes, theestablishment of VAT-related departments, sections, and regional offices, and the managementof data by using information technology.
Although the effects of these reforms will become visible in several years, there is no
guarantee that revenues at the local level will increase. In Ethiopia, where a relatively highlevel of revenues has already been achieved in spite of scarce resources, this may not be thetime to expect a further increase in revenues25. Ethiopia urgently needs to establish a tax
collection system to collect major taxes in urban areas because the disparity between thestandards of living in Addis Ababa and in rural areas is very big. In this sense,
decentralization at the woreda level may be limited to the development of sustainable
activities in local communities over a short-to-medium term because it is not coupled withauthority on revenue collection as an outcome of financial decentralization.
24
25

The VAT does not apply to export, health, education, power, and agriculture.
Alexander Y. Kyei, IMF representative 2004.8.
17

3-2-3

Kenya
There has been a declining trend in the ratio of revenues to GDP since the late 1990s(from 29 percent in 1995/6 to 21.6 percent in 2001/2). This is generally considered, together
with a decrease in donor funds, one of the factors that have led to an increase in domestic debt
and domestic interest rate, although the latter was also affected by inefficient bankmanagement (IMF, 2003b: 28). Among the reasons behind the low level of revenues are tax
exemption and evasion as well as a reduction of the corporate tax and commodity tax26. There
are three priorities in ensuring revenue growth—introducing a VAT (with some exceptions),
increasing customs duties (the tax rate has been declining), and strengthening a progressive
income tax. In FY 2004/5, as a main tax the commodity tax will exceed the VAT (on domestic
and imported goods) and customs duties.
The main sources of revenue at the local level in FY 2002/3 were the property tax (25.8
percent), the water and sewage tax (19.4 percent), fees for Single Business Permit (SBP, 14.8
percent; see 4-2-3 for details), and market use fees (6.9 percent). These taxes generated 9.1
billion Kenyan shillings (K.sh.) (MoLG, 2003: 6). Grants from the central government
amounted to 3 billion K.sh., and the ratio of grants to local revenues was 3 : 1. The property
tax is regarded as a main source of local revenue, and it is expected to increase (Kelly, 1999).
By law, the property tax can be imposed on both land and buildings but in reality, it is
imposed only on land. The revenues of town councils, which are smaller than municipalities,
come primarily from SBP fees, market use fees, and bus parking fees.
In sum, Kenya’s main challenges are expanding its tax collection base and improving
the efficiency of tax collection including from the informal sector. Kenya used to have moreaccess to foreign currency, more tax revenues, and less international aid than its neighbors. It
is interesting to see whether this trend will continue or whether tax revenues will decrease and
Kenya will follow the development patterns of its neighbors, with an increase in international
aid. If Kenya adopts a development course that prioritizes rural social sectors as did Tanzania
and Ethiopia, it will have to increase local revenues in order to build sustainable social
services. If Kenya chooses a unique development course that pursues economic growth, it will
have to abolish some taxes that hamper economic growth and create a tax system that canredistribute the benefits of growth. At present, Kenya must take steps to prevent its tax
revenues from decreasing.
3-3

Future Directions

Two revenue policies are considered important from the perspective of the PRS. First, it
is important to increase the revenues of the whole country by establishing an efficient and26

The ratio of revenues to GDP is the second highest in SSA, after South Africa, but it is seen as a result of
the underestimation of nominal GDP (IMF, 2003b: 7).
18

functional tax system and to promote economic activities and equity. From this point of view,
drastic reforms that impede economic activities and related investments should be avoided,and gradual reform goals should be set. Second, the government must disburse local revenues
in local areas instead of pumping up these revenues, and it must strengthen the mechanism ofredistributing revenues among local governments (the Local Authority Transfer Fund [LATF]
in Kenya is the first such mechanism). In the long run, it is crucial to improve the revenue
capacity and the reporting system of local governments and to build a financial mechanismthat would lead from dependency on aid and central government to self-reliance.

Chapter 4
4-1

Decentralization

Dynamics of Decentralization

When promoting decentralization, the government must take into account the existing
political dynamics over resource redistribution in possible collusion between central and local
power elites, in addition to practical necessities and the significance of decentralization(Crook, 2003: 86). From the pro-poor perspective, even if an institution has been establishedto transfer funds to local governments under a decentralized system, it does not necessarily
guarantee that the funds will reach final service points. Thus, when the combined reforms of
the PRS and decentralization begin to stagnate and services do not reach end users, the publicand donors must ask whether this is a result of weak institutions or whether it is an intended
distortion by groups with vested interests27. It is vital for the central and local governments in
SSA to form a sense of “downward accountability” to the local community including the poor
under the PRS framework, although the ideas of democratic decentralization and participatory
development will take a long time to take root in African countries.
This argument is related to views that modern nation-states have not been formed in
SSA. One such argument centers on a discussion of “the (Neo) Patrimonial State”, and it
claims that the roles and responsibilities within governments in SSA are not clearly divided
and that political parties are a mere mechanism of connecting certain personal relations rather
than a means of advocating clear policies. Nonetheless, it is also true that democratic
institutions such as the multi-party system and democratic procedures such as universal
suffrage are being introduced in governance in SSA. This means that the emergence of moreadvanced nation-states is more important than how they are labeled. Decentralization is also a
democratization measure, and it can be recognized not only as an external process imposed bydeveloped countries and donors but also as an indigenous process.
27

Groups with vested interests who follow old rules and local government officials constrain the demandfor capacity building (Litvack et al., 1998).
19

Decentralization reforms have increased the revenues of local governments in Tanzania
and Ethiopia. However, we need to examine whether the increase was due to an increase inforeign aid or whether it was due to institutional changes 28 . It is also important tocontinuously assess whether reforms match the needs of the local community 29 .
Decentralization is a democratic process of resource allocation, when there are a number ofpoor people and needs for various services in rural areas and they have the right to receive
services in an efficient and equitable way. In this sense, there is a close relationship between
the progress of decentralization and the needs and requirements of budget support 30 .
Furthermore, the more cross-sectoral the structure of a local government’s development planis, the more appropriate the direct budget support and GBS to local governments are as an aid
modality31. Therefore, coordination is needed between decentralization and sector programs,
which are major components of the PRS, and concrete actions in this direction are now being
discussed32.
The strength of the government of Ethiopia lies in its low need for Civil Service Reform(CSR) because of a relatively small scale of the government and its adeptness at
implementing various reforms33. In contrast, the government of Kenya has too many officials,
and it must implement its CSRs as part of the PSR (Public Sector Reform) in order to propel
the PRS. In Tanzania, the number of pubic servants was decreasing until FY 2002, but thehiring of more teachers since FY 2003 has reversed the trend. Furthermore, it is unclear how
local government officials, teachers, and health workers perform their duties more vigorously.
This problem cannot be solved by imposing more conditionality by donors; rather requires theformation of “downward accountability” of local governments to the local community.
In East Africa, there are several types of grants that are provided by the central
government to local governments through the mechanism of financial decentralization. The
central government imposes a few constraints on the use of these funds. While in the past,
grants by sector were the main source of subsidy. This year, in advanced districts of Tanzania,
the Government introduced the Recurrent Grant System (RGS), which covers the recurrent
budget and is aimed at ensuring flexible execution of funds beyond sector, and the Capital
Development Grant (CDG), which injects resources in the development budget. In Ethiopia,
cross-sectoral block grants have been the main source of local governments, and the
responsibility for their implementation has shifted from regional governments to woreda

28

The proportion of grant in local finance is 82 percent in Tanzania, 70 percent in Ethiopia, and 31 percent
in Kenya respectively.
29
Tomoki, Kobayashi, JICA Tanzania Office 2004.9.
30
Joseph N. Mallya, Local Government Reform Team in Dar es Salaam, 2004.9.
31
In Tanzania, Northern European Area-based donors plan to shit their resources to GBS in Treasury.
32
This also relates to institutional arrangements of PSR and PFM.
33
Increase of foreign aid and revenue as well as additional input of human resource is likely to result in
expansion of new activities.
20

Table 4-1
1.Recent
decentralization

2. Number of local
governments
・extended units ofcentral government
・basic units
・minimum units
3. Selection ofchiefsDecentralization in Tanzania, Ethiopia, and Kenya (as of September 2004)
Tanzania
Local government reform
policy (1998)
Legal amendment(1999/00)

EthiopiaConstitution (1994)
Woreda decentralization(in 4 regions in 2002)

Kenya
Draft of constitution(2004)

・21 provinces

・None

・8 provinces, 66 districts

・114 districts

・9 regions and 2 special
administrative cities
・612 woredas (districts)

・175 (67 counties, 1 city,
62 towns, 45 municipals)
・NoneElection by local
assembly

Election by local assembly

・10,054 (10,045
villages, 9 towns)
Election by local
assembly

governments. In Kenya, the number of block grants based on the government revenues is
expected to increase through various channels.
Conditional grants have been criticized for being vertical and for taking discretion awayfrom local governments because their use by sector is determined by the central government;
still, they can be used in PRS priority sectors to monitor the results by sector and evaluate
cost-effectiveness in the budget and aid. In contrast, block grants are more suitable for local
autonomy and decision making in the longer term because local governments and bodies can
attach a lot of importance to local opinions and discretion, respect individual needs, and can
respond to urgent changes in plans. The problem is that unless a reliable monitoring system is
put in place, it may be difficult to uncover financial diversion and to evaluate the effectivenessin the short-to-medium term34. Grants should be selected based on the policy environment in,and the capacity of, each country.
Below is an overview of recent trends in fiscal and democratic decentralization in
Tanzania, Ethiopia, and Kenya.
4-2

Overview of the Decentralization in Tanzania, Ethiopia, and Kenya

4-2-1

Tanzania(i)
Recent Trends
In 1982, the Local Government Act was adopted in Tanzania (it was amended in
1999/00), and a number of grants were established. Under the Local Government Reform
34

The concrete analysis on grant system is the next round research topic. The analysis here is of tentative
nature.
21

Program (LGRP) initiated in 1996, a local government reform was undertaken in 38 districtsin Phase I of the LGRP, and the country was divided into three parts. However, the reform
was too radical and it did not go as planned; in June 2002, the program was modified. In therevised LGRP, more time is devoted to particular areas and subjects; the program is to becompleted by June 2005.
In 2004, the parliament adopted a new law mandating the unification of fiscal year
period between the central and local governments and a revision of the system of grant
distribution from the recurrent budget for education and health. As a result, the discretion andpotential authority of district governments came to be respected. Also, the Local Government
Support Program (LGSP) is currently under preparation; this is a program funded by theWorld Bank, Ireland, and the Netherlands, for which 121.7 million dollars has been pledged
for a period of five years. The Local Government Development Program (LGDP), which wasonce funded by the World Bank, covered infrastructure area such as local bus terminals androads between rural cities. In contrast to the LGDP, the LGSP could cover all development
plans with a bottom-up approach, and it is a primary source of development budget resources
for many local governments.
There has been some progress in the fiscal decentralization of local governments;
however, there are still many problems. First, the share of education in the recurrent budget isremarkably high (61.5 percent), followed by the share of general administration (13.9 percent)and that of the health sector (11.9 percent) (GoT, 2004b). The share of other sectors, besides
education, in both the recurrent and development budgets has decreased. This means thatpriority sectors are virtually limited, and that their budget allocation is not built in a balanced
way. Second, current reports on disbursement between the central and local governments
include too much detail to be handled by the capacity of local governments. Third, there is alack of data on poverty at the local level at both the planning and reporting stages.
District-based data collected after a household budget survey in 2000 do not include data on
poverty. The planning and reporting stages of poverty data are being discussed by the
Research and Analysis (R&A) Team of the poverty monitoring working group and in PERs, inwhich local governments now participate.
The relationship between local governments and Area-based development programs also
attracts attention. There are 35 donors including NGOs that have taken the area-based
approach to promote rural development in districts and at lower levels of government.
Bilateral donors now disburse earmarked funds to the Ministry of Finance and not to local
governments; at the same time, they promote activities to build the capacity of localorganizations. The donors have agreed that by 2008, this approach should become the main
approach in the LGSP. This means that each donor’s activities in rural development will be
undertaken within a framework in which all plans and budgets are controlled by the central
government. The advantage of this approach is that it integrates dispersed donor activities,
22which are difficult to monitor in the PRS framework, and ensures that they are consistently
managed by the central government. On the other hand, there is a risk that the number ofprograms contributing to local organizations besides local governments may decrease if all
financial sources and plans on rural development belong to the local government.
While more developed districts receive more grants, have their own local revenues, andreceive LGSP funds, weak districts receive only a small amount of funds. In weak districts,
there are few staff trained in participatory planning and appraisal. Personnel training has been
conducted by the PORALG (Presidential Office of Rural Administration and Local
Government) in 47 districts, but what officers learned has not been realized in their places35.
Such disparity in capacity among districts can exacerbate the gap in opportunities.
(ii)
Fiscal Decentralization
The main financial challenge is the introduction of a formula-based method for grantcalculation; other challenges are the abolition of local taxes and the disparity in capacity
among districts. The old formula, for example, used the number of students and enrollment
rate as a coefficient for calculating the district budget for education. Because this formula isbased on the current situation of service provision and because it allows relatively rich areas
such as urban areas to receive systematically more grants than it does rural areas, the pro-poor
nature of the framework has been questioned (Boex, 2003: 387). As a result, the government
started to discuss the introduction of a new, more equitable, formula.
More basic living conditions have been introduced to coefficients of the formula in thecalculating method. In the health sector, for example, weighting scheme of coefficients is 70
percent from population, 10 percent from distance between home and health facility, 10
percent from poverty statistics, and 10 percent from under 5 mortality rate (U5MR). As aresult of the calculation, a more pro-poor-oriented resource allocation was developed;
however, there has been criticism that the new formula does not reflect the current situation
accurately. A fundamental challenge with grants is deciding whether they should prioritize
equality or efficiency. In responding to this challenge, it is important to understand that thecapacity of local governments in areas with a greater need for equality is low. For this reason,
the government developed two transitional grant systems--the Capital Grant (CG) system,
which provides general grants, and the Capacity Building Grant (CBG) system, which
provides grants for institution and capacity building.
Funds for CGs and CBGs are provided from the development budget under the LGSP.
This method has been used to disburse CGs for education and health since July2004; it willsoon be used in other sectors. Conditions for receiving CGs include auditing reports, good
progress of activities, and clear plans. Based on these conditions, CGs have been disbursed to35

Various training programs for local government officials are conducted under the skill training program
called Opportunities and Obstacles to Development (O&OD).
23

47 districts. Twenty five districts, which do not meet these conditions, receive CBGs forcapacity building for financial management. The overall grant system is maintained in therecurrent budget (Personnel Emolument and Other Charges) and development budget. Also,
there is certain flexibility in budget execution, and cross-sectoral usage is to be introduced in
the CG in 2005.
By FY 2004, the Integrated Financial Management System (IFMS) was introduced in 32
out of 114 local governments; this system is to be introduced in 30 more local governments
during FY 2004/0536. Although both the IFMS and auditing are indispensable to capacity
building of local governments, the present plan may still be ambitious. Because it is districts
which are now responsible for development plans, the provinces, which were in charge of
local administration until 1998, have shifted their role to monitoring and auditing. Auditing
results are reported in the following order: districts, provinces, PORALG, and the Ministry of
Finance. To uncover financial diversion and misuse of funds by using a PETS, an auditing
system must be established in the Public Financial Management Reform Program (PFMRP).
(iii)
Democratic Decentralization
The government advocates devolution as the objective of decentralization. The
expression Democracy by Devolution, or “D by D”, has been used frequently. On the other
hand, decentralization involves a risk of potential collusion between central and local power
elites. Moreover, political motivation to promote bold decentralization emanates from theperspective of ethnicity and religion37. It is unclear to what extent CCM in Tanzania will
promote democratic decentralization in the near future. Some local taxes, which wereabolished in 2004, were sources of funds used at the discretion of local governments; theserevenues, however, were used at the relatively low level of local governments (ward, village
and sub-village). Thus, the abolishment did not deal a serious blow to local power elites.
Rather, it had an effect of getting support of the incumbent members of the parliament (MPs)in the coming election by reducing the tax burden on the taxpayers. There are enormous
anti-taxation sentiments among the population of Tanzania, to which power elites are
susceptible; it is hard to expect positive institution building in local society based on therelationship between MPs and local residents.
(iv)
Public Expenditure Tracking Survey (PETS)
In Tanzania, a PETS was conducted in the education sector in 2004. It found that in2004, 85 percent of the development budget and 54-64 percent of the recurrent budget of thecentral government reached schools (MoF and REPOA, 2004: 54). Within the recurrent
36

Joseph Mallya, LGRT 2004.9
District-based decentralization in Uganda and Ghana was effective in constraining the federalist
movement of powerful ethnic groups.
37

24

budget, 76-86 percent of capitation grants—but only 28 percent of textbooks—reachedschools in 2002/3. The amount of money in capitation grants per student that reached schools
varied from 1,600 Tsh. (Tanzania shillings) to 8,300 Tsh. 265,000 Tsh. Capacity Building
Grant had been promised for each school, but only 50 percent of this amount actually reachedschools.
The above results are not impressive compared with those of a second PETS conductedin Uganda at the end of 1990s which found dramatic improvement of service delivery, buthave improved since a survey conducted in 2001. The Tanzania PETS suggests that financial
resources spread across ministries under the Primary Education Development Program be
managed by the Basic Education Development Committee (BEDC). With reference toinconsistency in services as well as leakage, it also recommends that capitation grants betransferred to schools directly from the Accountant General’s Office. However, although thisis a second survey, it is an important departure, and it should be recognized that justpronouncing the results of the survey is of great value to institution building.
After the PETS conducted in Uganda in the 1990s, the government of Uganda took
various counter-measures to improve the system with unfavorable results revealed by the
PETS. By improving and combining its PFM, decentralization, and education sector program,
Uganda was able to build effective institutions of service delivery and monitoring. In contrast,
in Tanzania, the results of the PETS conducted in 2001 as part of the PER were not effectively
utilized by the government. The latest survey is expected to help the government improve thesystem, but the recommendation of the REPOA and government report that funds betransferred to schools directly from the Accountant Generals’ Office is similar to the modalityof the Free Primary Education Program in Kenya, which bypasses local governments andwhich delays the process of decentralization.
In Tanzania, there are too many reform agendas including one for decentralization; thesereforms are beyond the absorptive capacity of the government38. Direct fund transfer toschools remains unavoidable means of service delivery. However, unfavorable PETS results
should not lead to the abandoning of the policy direction itself. Then, what went wrong? Since
2000, the pace of reforms in the LGRP has been slowing down. Although there has been
progress in fiscal decentralization, central authority is still strong. Therefore, compromised
complex administrative structure and duplication of law articles had to be made39. The
complexity made public financial flows non-transparent and local administration weak. In
some cases, it will be necessary for the decentralization plan to give way to other valid plans
and to wait until the capacity of local governments and organizations is improved.

38

One of the evidence is that LGRP suspended the original time table two years after its start in 2000.
The role of central and local governments for using sector grants is duplicated and the status of local
government officials is still partly attached to central government.
39

25

4-2-2Ethiopia(i)
Recent Trends
A formula-based grant system is currently being discussed in the parliament in Ethiopia.
This system has been used since 1994/5. In 2002, the formula used the weighting scheme tocalculate 55 percent for population, 20 percent for development level, 10 percent for poverty
level, 15 percent for sector progress level (poverty factors were incorporated into thedevelopment level, and the population increased to 65 percent in the formula of 2003). The
latest formula is to calculate unit costs by sector as the basis for planning. Based on the unit
costs, woreda governments will make an overall plan, which will then be aggregated by theregional government; grants for each woreda will be determined within the budget ceiling set
by the regional government with the approval of the regional assembly. In the education
sector, for example, appropriate recurrent costs per student will be decided upon and
expenditures will be estimated by multiplying the unit costs by the number of students. In thedevelopment budget, per-student costs will be calculated based on the expenditures over thelast 5 years, which will be multiplied by the number of estimated school-age children.
There are plans to change the grant calculation method from the weight-assigned
formula, which is based on several variables, to a method that multiplies the current andfuture demand of a sector by unit costs. The weight of the population is becoming greater inthe previous formulas, and thus, they are more equity-oriented with respect to the future stateof development rather than the present state. The new method has different formulas forcalculating grants in the recurrent and development budgets, and the development budget
prepares for potential capacity of a sector.
55 percent of the national budget is currently disbursed at the regional level; 70 to 80
percent of regional disbursements come from grants from the central government and 20 to 30
percent is generated as local revenue. The government admits that there is a huge verticalimbalance between revenues and expenditures. Woreda governments control 45 percent ofexpenditures at the regional level. At the woreda level, salaries account for 85 to 90 percent of
the budget, and flexible allocation of funds to non-salary items is almost impossible. Because
project aid funds—the only funds that can be used flexibly—are transferred to local
governments directly, they are not reflected in the government reporting system. To solve thisproblem, donors must inform regional governments of their projects at the local level. The
federal government will then reduce its grants to the regions by an equivalent amount under
the newly established “off-set scheme.” The off-set scheme is currently being planned foron-budget programs, and it might include off-budget areas (e.g., donor funds are notregistered in the government budget); with this scheme, donors are required to provide thecentral government with detailed information of projects at the planning stage.

26

(ii)
Fiscal Decentralization
Under decentralization, government funds are first transferred to regions as block grants
and then to woreda governments. With this system, it is difficult to monitor original sectorplans of the ministries and their fund disbursements. Central sector committees have been
given a mandate to assess implemented programs, but their actual monitoring capacity is
unknown. Regional governments have been given a mandate to monitor and regulate
development and recurrent budgets, sub-category of the recurrent budget, and fund diversion
from sector to sector, sub-sector to sub-sector, based on the decisions of regional executive
committees and with the approval of the regional assembly. Woreda decentralization, which
has been implemented since 2002, has resulted in the transfer of decision-making power not
to zones, which are one level below the level of the region, but to woredas, which are twolevels below the region.
Because of inaccuracies in collected data, a large number of woredas, and flexibility ofblock grants, it is not easy for sector ministries to correctly estimate inputs and outputs. The
education sector used to consume a dominant share of sector funds; however, local funds foreach sector are expected to increase. In this institutional environment, it will be a challenge
for the government to change the basis for poverty monitoring by incorporating changes in theoriginal sector plan and budget disbursements. Even if the total amount of sector could be
inferred, the government must monitor pro-poor allocation of funds within each sector andconduct detailed analyses of sector disbursements. On the positive side, a donor assistancesystem led by the USAID has been established in four provinces where woreda
decentralization has been undertaken.
Woreda decentralization began in 2002, and capacity building has been progressing
rapidly. More funds have been transferred from the recurrent budget to woreda using the new
formula, but the development budget is still managed by regional state governments. The
administrative capacity of woreda governments is low, and there are not enough skilled
personnel and administrative resources available. Regional governments are assisting woreda
governments in budget management. Decentralization has been criticized because of
insufficient training of woreda governments; its proponents, however, claim that institutional
capacity building is impossible to achieve without actual transfer of funds40. These two views
represent the opinions of aid workers and academics both in Ethiopia and in Japan, but the
problem is not so serious as long as the amount of resources given to woredas remains
minimal.
Decentralization in Ethiopia is faced with a number of difficulties, and the APR
conducted in 2002/03 recognized the difficulties of the transitional period (MoFED, 2003: 25).
40

A planning manual on participation of grassroots community organizations was produced, and sevenemployees from each woreda are undergoing training. Nearly 8,000 personnel have already been trained(APR, 2002/3).
27

These difficulties include insufficient planning, implementing and reporting capacity ofworeda governments, imbalance between revenues and expenditures, and delays in making
budgeting and monitoring reports. Regions have responded to these problems and have taken
short-to-medium-term measures. The central government and donors have also agreed on theneed to improve PFM in woreda governments. There has also been confusion in staff
deployment as a consequence of rapid reforms. As a result of transferring staff from zones toworedas, families were separated and were sent to unfamiliar areas. This is a crucial moment
for the government, because citizens often lose motivation to support the building of a new
institution when radical decentralization reforms fail or when these reforms are repeatedly
revised.
(iii)
Democratic Decentralization
The ruling Ethiopia People’s Revolutionary Democratic Front (EPRDF) has departed
from the policy of centralization advanced by the Mengestsu regime and has proclaimed its
respect for the independence of each ethnic group in the constitution. Because the EPRDP isan alliance of several ethnic groups, with major groups being minority groups, it delegatedpolitical authority to regional governments. In this sense, while decentralization at theregional level was based on the principle “divide and rule”, the woreda devolution reform of
2002 is regarded as being ideal, but ambitious. Rural manpower development program has
been facilitated rapidly with assistance from central ministries. However, in reality, there aremany personal connections between members of local administration and members of theruling party. Under these circumstances, it is unclear whether participatory planning with abottom-up approach is possible.
4-2-3

Kenya
(i)
Recent Trends
The Ministry of Local Government has a secretariat in the KLGRP (Kenya Local
Government Reform Program), which prepares a decentralization reform. At present, theplans and budgets of 175 self-governing bodies of various sizes are not included in thenational financial plan. Nevertheless, some district (not present local government) plans suchas the one for the Rural Development Strategy (RDS) are included in the national financial
plan. 175 Local governments with the elected assembly, make annual fiscal plans and rolling
plans for a three-year budget. In making plans, a bottom-up participatory planning approach isused under the Local Authority Service Delivery Action Plan (LASDAP). It should be noted,
however, that there has been no clear movement for a fundamental policy change during the
preparation of a plan for adopting constitutional amendments. The future of the amendment
plan, which is aimed at democratic devolution sought by Uganda and Tanzania, is attracting a
lot of attention. This amendment plan assumes four levels of horizontal government (national,
28

zonal, district, and local), by integrating the present three vertical streams of the governments.
After the new constitution has been approved, local government-related laws will be revised,and a capacity building plan will be implemented.
The KLGRP began under the former regime in 1995, which was earlier than in Tanzania.
Under the KLGRP, the following reforms programs were implemented:(1) Single Business Permit (SBP), which dramatically simplified business permits
license systems and eliminated complex bureaucratic assessment;(2) Integrated Financial Management System (IFMS), which was introduced in local
governments in eight cities and three counties;(3) Local Authorities Transfer Fund (LATF) (see the next section), which provides
resources to all small, but politically decentralized local governments based on ainvestment formula established in 1998 that includes such variables as the
population. Local governments need to share 10 percent budget of LATF projects
from local financial resources; and(4) Financial Reform, in which the Ministry of Local Government developed
guidelines on the budget ceiling based on actual disbursements to enable
provincial financial committees to make budget approval more efficient andtimely.
Regarding the service delivery reform in the KLGRP, first, the Ministry of Local
Government has introduced a three-year rolling participatory plan as the LASDAP. Local
governments make plans for the following year based on both this plan and estimatedrevenues. Also, a poverty targeting mechanism is set for the poor whom this process regards
as a client. The third component is community contracting, for which the Ministry of Local
Government has developed guidelines.
(ii)
Fiscal Decentralization
To ensure fiscal decentralization, the Local Authorities Transfer Fund (LATF), which
returns 5 percent of income-tax revenues to rural areas must be strengthened. This fundprovides block grants (BGs) to many sectors, and it does not depend on foreign aid. In thissense, compliance with a progressive system of income taxation, which will be introduced
next fiscal year, will be very important. The LATF is expected to increase in the next six years
from 5 to 20 percent of revenue, as the income tax is increased.
With the donors’ precondition of establishing a financial management and monitoring
system, it is important to determine which level of local governments should be given
authority to make appropriate policy changes so that local governments could take appropriate
actions to keep up with the central government.

29

(iii)
Democratic Decentralization
In Kenya, a constitutional definition of the local government as an organ that promotes
sound decentralization, related laws, and organizations should be adopted. It is crucial thatclear roles for the four levels of government be specified and a relationship among theselevels be determined that would eliminate overlap in responsibilities and make thegovernment efficient and easy to monitor. Advanced implementation of one part of somereforms can be attempted, because institutions for decentralization can be built with political
will and some legal revisions even if there are not enough constitutional regulations, as in thecase of Tanzania.
The NARC regime pursues democratic decentralization, but there appears to be a
conflict within the coalition. It is still unclear whether the draft constitution will be approvedin its present form and whether related laws and regulations will have an immediate effect.
Also, making local governments independent from intervention by members of the parliamentis a challenge. In particular, the current system in which up to one-third of members of a local
assembly can be nominated by political parties increases intervention in the local
development budget and road maintenance and management projects. Local elections in
Kenya have revealed clear support by political parties of multi-party democracy, andassemblies with a majority from opposition parties tend to be disadvantaged in budget
allocation. It is important to develop a political process that would make local governments
independent to avoid such interference from the legislature.
Since its creation, the NARC has been divided into the National Alliance of Kenya(NAK) and the Liberal Democratic Party (LDP), and there appears to be a serious conflict in
the NAK between members of the former Democratic Party of Kenya (DPK) and other groups.
Members of both ruling and opposition parties routinely change places depending on thecontent of discussion. The legal “regulation on party defection”, which was adopted under the
Moi regime to restrict the action of opposition parties and the number of groups within theruling party is perpetuating the form of the NARK regime even after the collapse ofcooperative organizations created for the elections, and it has resulted in the impasse of animportant function of policy decision-making41. Nevertheless, policy decisions on dispersion
of presidential authority and decentralization may still be adopted, as may a new election
system. These changes of political system can be regarded as a revival of “majimboism”,
which is a policy of deconcentration of power guaranteed by the constitution at the time ofindependence. Kenya is at a crossroads, and majimboism can be re-instated in the country
after forty years of independence.

41

The regulation on defection from parties was adopted in 1966 to contain the activities of minority groups
in the ruling party.
30

4-3

Summary

The relationship between the PRS and decentralization is very important and both policy
directions are likely to succeed if geared towards each other. Moreover, the progress ofdecentralization and the growth of the need for budget support are inseparably connected. If
foreign aid results in the provision of public services to a wider population, the need for aid
through GBS or sector pool funds (budget support) tends to increase. This need is low in
middle-income countries. Kenya and the other two countries are low-income countries andtheir need for service provision may increase as decentralization proceeds. Nevertheless, it is
too early to conclude that budget support alone can help develop local communities and build
governance widely in these countries. In order for local people to become actively involved inpublic administration, to realize popular autonomy and to activate private business, it isnecessary to build various small-scale institutions and to provide support so that local
institutions can be built spontaneously42.
Fiscal decentralization poses three risks as well as various advantages. First, there is arisk of encouraging possible collusion between central and local power elites in recipient
countries. In this case, while receiving a great amount of foreign aid under the name of the
PRS, power elites adopt rent-seeking attitudes, and thus, foreign aid will not be usedeffectively. Second, although it is usually the case sector ministries do not want to lose theirauthority over budget allocations to local governments, there is a risk of making existing
institutions more complex and delaying reforms as a result of compromise. The government
must clarify the prioritized goals of decentralization to bring them in line with other strategic
goals, and it must coordinate time framework for decentralized activities with improved
capacity of local governments and organizations. As previously noted in the evaluation ofPETS in section 4-2-1, the government should not make the grant system more complex.
Third, there is a risk of synchronizing the progress of local government empowerment with
the increase of aid dependency in rural areas, because the current reform relies on increased
assistance from donors. Fiscal decentralization is indispensable to the progress of democratic
decentralization, which can easily become stagnant; however, it should include measures toincrease revenues of the central and local governments.

42

See examples in 2-3. The community has not been established in many parts of Africa. In these areas,
only administrative boundary line exists. In Tanzania, village was established in 1975 under Ujamaa
movement.
31

Chapter 5

Tentative Conclusions

As observed in the previous chapters, institutionalization of financial mechanism under
the PRS has made some progress and has been built in the area of partnership between thecentral government led by the Ministry of Finance (and Planning) and donors in Tanzania,
Ethiopia and Kenya. Developing a country’s own institutions increases aid effectiveness bystrengthening the country’s sustainable capacity to implement and account for its policies to
its citizens and parliament. The collaborating instruments to support these institutions are
MTEF and PER originally envisioned by International Financial Institutions, GBS initiallypromoted by Northern European and British donors, and poverty monitoring systems sharedby all essential donors.
There are many problems in the area of institution building such as budget allocation,
poverty monitoring, transfer of capitation grants, and accountability building in domestic
society. Whether strategic budget allocation is on the right track is unclear even in Tanzania,
and a new allocation method called ‘cluster’ (composition of priority sectors) will be used in
PRS II. Other problems are more difficult to deal with in Tanzania. The problems of othercountries seem to be in more challenging and complex situations.
In one sense, as the other reforms have been progressed very slowly, the decentralization
policy is given great expectation as an accelerator in local development, but often causes
friction with other reform programs. Aid modality today has the tendency of centralistic
nature and it sometimes does not match well with the slow process of decentralization.
Support by local people and local organizations would be the necessary and sufficientcondition for balancing all the major reform requirements. The government must ensure that
decentralization engages all of citizens, and must satisfy them on the counts of participation
by people and accountability of the local governments to people.
The process of institution building for poverty reduction in low-income countries takes
time, regardless of whether citizens, who are the beneficiaries of service delivery, and clients
have voices over service providers, or whether clients as voters can influence policy makers.
In particular, if clients are not aware of their own rights and are excluded from theinformation on government activities, they will not be able to question why they are notreceiving services to which they are entitled. In this sense, it is critical that donors provide
grants; governments and consultants implement tracking such as PETSs periodically to
improve the financial mechanism, that is, that all the partners determine to find theappropriate financial measures of relieving “the reform congestion” such as PSR, PFM,
sector program, rural development and decentralization.
Poverty monitoring faces the same kind of difficulties. Poverty data are cross-sectoral,
often collected at the local level. However, sectoral ministries tend to concentrate on theirown sectoral issues, and the Ministry of Finance and the National Bureau of Statistics have32

had no experience in comprehensive analysis of administrative data on poverty. Moreover, thecapacity of local governments that have accumulated enormous amounts of cross-sectoral andcross-cutting data is weak, and much more time and effort will be needed to ensure that policy
implementers at the local level understand the policies and programs they implement.
Therefore, donors must provide more funds to local governments, parliaments must conduct
policy briefings, and the parliamentarians and bureaucrats must ensure poverty monitoringfrom the central government to final service points.
When considering an appropriate financial mechanism for decentralization, an ideal
form of decentralization involves local governments in the preparation of recurrent budgets
based on their own revenues and provides assistance from the central government and donors
for the development budget. However, in Tanzania and Ethiopia, where many poor people
reside in rural areas, the social sector is prioritized under the PRS, and it receives a large
proportion of the recurrent budget. The current PRS deconstructs traditional fiscal
sustainability of the local governments in the sense that they are assisted even in the recurrent
budget by donor funding. The state of affairs could be justified from the poverty reduction
point of views, but all the partners need to agree on the long term framework of financial
sustainability in these countries.
Although this is the preliminary analysis on East African countries, the implication on
Japanese aid could also be considered. In public finance and development projects indeveloping countries, the Japanese government has long been promoting the idea of self-help.
However, when it announced a waiver of debt for HIPCs (and it was the last developed
country to do so), the Japanese government changed the original idea that debt should be
repaid by borrowers. The change of position automatically requires self-help notion indeveloping countries to be firmly established through a policy dialogue under the PRS. As alogical conclusion, the Japanese government should promote the developing countries’
development of a sound macro revenue structure within the PRS framework.
Japan is different from other developed countries and from international organizations inthat it is the only donor that does not stipulate detailed conditionality for aid; this policy styleshould be appreciated and continued, but Japan should also participate in discussions on themacro and revenue policy in a more positive way. The fiscal and financial sustainability indeveloping countries should be further studied in Japan in the near future. Donors other than
IMF should pursue an active dialogue on the revenue policy with developing countries, anddonors’ project-type assistance should be oriented towards policy support and programs toincrease revenues.
Finally, in the PRS process in three countries, domestic accountability is still weak. The
APRs, which are low income countries’ periodic reviews of progress in implementing the
PRS strategies, do not play an important role at present. What was originally expected of the
APRs is unclear—it has become a ceremony conducted before donors agree to provide an33

enormous amount of financial resources. Currently, APRs do not function as a guide in the
PRS process of institution building. Because the PRS process is effective for partnership withdonors and not so effective for institution building in domestic society and especially in local
communities, APRs should be more actively used to ensure government accountability to
citizens rather than to donors. APRs should be used to openly discuss the relationship between
the PRS process and domestic constraints including political elements in both the parliament
and the media.

34References
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36

［Discussion Paper Back Number］
No.1

Global Development Strategy and Japan’s ODA Policy
Izumi Ohno and Kenichi Ohno

March 2002

No.2

米国における世界銀行の改革論議と国際開発潮流―「メルツァー報告書」後の動き―
大野泉

May 2002

No.3

Growth Promotion versus Poverty Reduction―World Bank Rethinking of Aid Policy and Implications forDeveloping Countries
Shigeru Ishikawa

August 2002

No.4

Diversifying PRSP―The Vietnamese Model for Growth-Oriented Poverty Reduction
Izumi Ohno

August 2002

No.5

PRSP・貧困モニタリング・援助協調―タンザニアの事例
榎木とも子

April 2003

No.6

現地 ODA タスク・フォース強化策としての「ガーナ・モデル」―ガーナにおける案件形成の取り組み
橋本宣幸

July 2004

No.7

アフリカにおける貧困削減の制度形成―エチオピア、ケニア、タンザニアについての暫定的考察
笹岡雄一、山田肖子、平尾英治

March 2005

No.8

Educational Finance and Poverty Reduction:
The Cases of Kenya, Tanzania, and Ethiopia
Shoko Yamada

March 2005

No.9

Supporting Growth and Poverty Reduction:
Toward Mutual Learning from the British Model in Africa and theJapanese Model in East Asia
Shigeru Ishikawa

March 2005

No.10

成長と貧困削減の途上国援助―アフリカ型の英国モデルと東アジア型の日本モデルとの相互学習のために
石川滋

March 2005

No.11

ベトナムにおける日本の制度・政策への能動関与―現地 ODA タスクフォースが果たした役割、援助協調の意味とは
島村真澄

April 2005

No. 12Development Coordination:
A challenge to Japan’s development assistance for poor countries
TAKAHASHI Motoki

April 2005

No.13

Institution Building for Poverty Reduction and Local Governance:
The Cases of Tanzania, Ethiopia and Kenya
Yuichi Sasaoka

April 2005