# **1. Introduction**

Public Financial Management is a key concern of governments and development practitioners. Institutions governing public finances have a determining impact on the economic and social costs and benefits of revenue collection and expenditure. Some have recently gone so far as to claim that ‘successful “societal evolution” hinges on the systems and procedures societies develop to manage public finance and procurement’ (Porter, Andrews, Turkewitz, and Wescott 2010). Reflecting its importance for the achievement of development outcomes, increasing attention and resources are being devoted to strengthening the public financial management systems of developing countries worldwide (World Bank IEG 2008). Global trends towards increased investment in Public Financial Management reform are now being played out in the Pacific, where donors – dealing with recent and projected increases in aid flows and strong political imperatives to make greater use of country systems while ensuring value for money and fiduciary control – have substantially increased efforts in public financial management reform. Most of the independent Anglophone Pacific countries currently have PFM reform programs of some sort underway, often supported by international technical assistance.

Following similar regional and global analyses, this paper provides the first detailed quantitative analysis of PFM performance in small Pacific Island countries (PICs) using the Public Expenditure and Financial Accountability (PEFA) framework. The PEFA framework allows standardized assessment of PFM systems against “good practice” norms, with performance against 31 indicators, and 73 dimensions of the public financial management system scored using an A-D scale, and “A” scores representing “international good practice”. At the time of writing, the PEFA framework had been applied in 118 countries, including nine PICs. Using crosssectional data from PEFA assessments, we examine the PFM performance of twelve small PICs (Fiji, Kiribati, Nauru, Niue, Tuvalu, Vanuatu, Samoa, Tonga, Cook Islands, Marshall Islands, Palau, and Solomon Islands) in relation to broader global patterns. We approach this analysis in two steps.

Firstly, we examine the performance in PEFA assessments of small PICs relative to other countries with similar characteristics. We present simple comparisons between PICs and other country groups. We find that the performance of PICs lags the performance of countries at similar levels of income in other regions. We further find that this result is driven by a common pattern of unusually poor scores against a small set of particular PEFA dimensions, including those relating to procurement, internal audit, and strategic budgeting. Controlling for other factors that have been shown to influence performance in PEFA assessments, we identify population size as an important driver of PEFA performance and find that the observed poor performance of small PICs can be largely explained by their small populations.

Secondly, we examine the causal linkages between small population and poorer PEFA performance, both globally and in the Pacific. Using a number of tests, we find strong support for the hypothesis that small countries perform more poorly due to the capacity constraints.

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