# **1. Introduction**

Public financial management (PFM) systems are a core area for reform in many developing countries. PFM systems support decision making on fiscal policy and underpin budget implementation and reporting. Shortcomings in such systems can lead to lack of fiscal discipline and macro-economic instability, weaken the alignment between the allocation of public resources and national policy priorities, and contribute to greater waste and corruption in the delivery of public services.

Donors have been actively engaged in supporting the reform of PFM systems across many developing countries. However, progress with strengthening PFM systems has varied – with greater success in some areas, countries, and time periods and less so in others. This experience is leading to two complementary searches: one for technical interventions that may be a ‘better fit’ and better targeted at problem-solving, and a related search for better understanding of how non-technical and especially political economy factors come into play and influence where and which PFM reforms succeed.

However, if we think about tailoring PFM reforms to particular country circumstances, we have to first ascertain to what extent PFM performance is influenced by broad country characteristics. For example, if a country’s income per capita and its strength of PFM systems are highly correlated and if the rate of variation is high (i.e., higher income is associated with much better PFM systems), then it follows that the scope for improving PFM systems in a low income country will tend to be limited – no matter how technically sophisticated and politically smart the reform approach is designed. Conversely, if the picture is more mixed, and statistically the relationship between income per capita and PFM performance is weak or absent, then in principle, potential progress is less constrained by income levels, and the search for specific ‘good fit’ and smart reform approaches is more likely to be of value. Apart from GDP per capita, there are a number of other country characteristics that have been proposed to influence the performance of PFM systems, and which we explore in this paper with a view to testing the overall limits that such characteristics might set for successful PFM reforms.

Over the past decade, comparative data about PFM systems has become available through the PEFA (Public Expenditure and Financial Accountability) initiative and the CPIA (Country Policy and Institutional Assessments). This has helped spur new avenues for research into determinants of PFM quality. Building on previous research in particular by de Renzio, Andrews and Mills 2011, we explore two relationships in this paper: (i) the relationship between country characteristics and PFM performance (both levels and changes over time), and (ii) the quality of PFM systems and expected outcomes. We do this via three main guiding questions:

1. How much of the variation in the quality of PFM systems across countries can be accounted for by macro-level country characteristics, such as income level, mineral resource dependency, and a list of other factors?

2. Can changes in the quality of PFM systems within countries over time be explained by trends in these macro-level country characteristics?

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