emerge as the economy moves through time, include the elasticity of poverty with respect
to growth, the cost of increases in the HIV prevalence rate in terms of growth and the
incremental effect of higher female educational levels on child mortality rates.
All of these will be important in finding a mapping from instruments to objectives to move
more rapidly towards the goals. Making good use of such new information depends on the
capacity of government institutions to analyse and act upon it. The process by which
governments update their view of the economy because of new information is of great
interest. In many developing countries processing capacity is limited and needs to be
strengthened.
6. Decentralised policy and coordination problems
Point (6) further muddies the policy problem. Theoretical models and practical policy
discussions often assume that policy levers are controlled by a single entity, normally the
state. In practice, policy agency is dispersed among a set of institutions. Each of these
institutions controls a sub-set of instruments linked to certain objectives. In this context an
important issue is whether instruments and objectives can be “de-coupled” so that a
particular instrument can be unambiguously assigned to an objective (Mundell (1962). If this
is possible then each institution can implement its own policies and an overall solution be
reached, subject to the other problems discussed above.
But here points (4) and (5) come back into play. Interdependencies will generate spillovers
between institutions; the instruments and objectives of one institution may affect the values
of those of another. The achievement of objectives therefore depends on coordination
between different institutions. These considerations underlie the move in developing
countries towards integrated, multi-sectoral policies on the basis of unified frameworks such
as PRSs and Medium Term Expenditure Frameworks (MTEFs). The impetus towards donor
budget support rather than project-based financing has come from a realisation that
different policy areas interact and need to be considered as a coherent whole with all
institutions operating under the same policy framework.
The MDGs illustrate this. The objective of halving poverty is connected to a set of
instruments including those relating to macroeconomic performance. These include growth
rates, inflation and the fiscal balance. Some of these levers are controlled by finance
ministries and others by central banks. In turn, some of them affect objectives that come
under the watch of other institutions. For example, important instruments for halting the
spread of HIV/AIDS are controlled by health ministries, but the fiscal policies of finance
ministries influence the amount of funds going into health and therefore have a direct
impact on this goal. Similar considerations apply to many of the MDG targets. The optimal
management of these kinds of spillovers require complex forms of coordination which will
stretch the capacity of developing countries’ bureaucracies.
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