# **I. Introduction**

Since the middle of the 1980s, performance budgeting (PB), sometimes called performanceoriented or performance-based budgeting, has been in full swing in many countries—in emerging economies as well as in countries belonging to Organization for Economic Cooperation and Development (OECD). An OECD survey (Curristine 2005) shows that more than 70 percent of OECD countries include non-financial information in their budget documents, and the majority of emerging and developing countries recently introduced various forms of PB and management.

While many countries claim that they have introduced PB, it is not certain how many have successfully integrated performance information into the budget process. Within the World Bank, a major multilateral development bank, there is considerable concern about the success rates of PFM reforms (IEG 2008). One reason for the low rate of success is misguided reform programs that do not fit the specific country’s existing conditions. Another part of the problem relates to political economy factors that may constrain or hinder reform efforts (Bunse and Fritz 2011). In light of these concerns, it is all the more important that reformers understand the specific country’s institutional conditions, including infrastructure and political economy factors, in order to design a proper reform program.

Recently, World Bank researchers have focused on the process and efficacy of public sector reforms. Among many efforts, Andrews (2011) and Bunse and Fritz (2011) developed conceptual models, and several country teams are now exploring political economy factors that influence those reforms. This paper intends to contribute to this line of study by analyzing PB reform in the Republic of Korea (sometimes called South Korea; hereafter, Korea).

Korea embarked on a comprehensive PB reform program around 2003, after an unsuccessful attempt to introduce PB in the late 1990s. The Korean case is expected to provide useful policy implications for other countries. First, Korea provides a benchmark case of successful PB reform. Korea can be considered a model country with effective public financial management system. The country is known for its sound fiscal condition with records of successful recovery from two recent financial crises. In particular, Korea’s reformed PB system is known for its successful integration into the regular budget process. The Korean case has been drawing attention from many emerging and developing economies that share some of Korea’s traits: a recent transition to democratic society, experiences with economic development planning, frequent and regular rotation of civil servants, and a lack of capacity among civil servants.

Second, the Korean case may provide useful lessons for developing countries trying to implement a PB reform program within a short timeframe. Relatively quickly, Korea was able to develop a comprehensive PB system with decent success. Thus, the Korean case may offer useful policy lessons for countries adopting a “big bang” approach. This approach carries benefits and risks: it can create irreversible momentum for reform but requires huge resources that many countries lack. This study shows how PB reform was implemented as one component of a PFM reform package.

Third, the Korean case may be useful for countries considering a PB system focused on 2