New Booz & Company Global Survey of Economic Leaders Outlines Post-Financial Crisis Mandate for Ministries of Finance

In response to the global economic crisis, management consulting firm Booz & Company today published a survey of more than 60 finance ministers and senior staff, along with other economic thought leaders, that offers a new agenda to increase efficient and effective economic cycles. The study also found that the range of extraordinary steps required to contain the crisis—from stimulus spending to asset purchases and guarantees—have transformed the mandate for ministries of finance, leaving them with responsibility for far more elements of economic management than they had in the past.

Booz & Company surveyed more than 60 decision makers with influential roles in national economies worldwide, along with internationally recognized thought leaders in macroeconomic and fiscal policy, to better understand the evolving roles and responsibilities of finance ministries. The survey results underscore the urgency of reforms.

“Global economic and fiscal management reforms have been met with different levels of success, since many of these reforms represent isolated actions taken by finance ministries that continue to operate with the same institutional and operational setup they employed before the crisis,” noted Marty Bollinger, Booz & Company Senior Partner. Bollinger said that finance ministries need to make fundamental shifts in their operational and institutional models across four key mandate areas:

• Public finance management. Large fiscal deficits caused by the crisis and its aftermath require stronger management of government finances.
• Asset and liability management. The massive acquisitions required to stabilize economies, along with the severe amounts of debt incurred in the process, have compounded the challenge of managing current and long-term state-owned assets and liabilities.
• Economic management. The crisis blurred the lines between macroeconomic players, leading to questions regarding the role of finance ministries in overseeing their national economies during normal and extreme business cycles.
• Accountability and transparency. Ensuring accountability and transparency strictly for compliance purposes is no longer sufficient. Instead, finance ministries must now ensure accountability and transparency to increase the credibility of the country’s macroeconomic management as a whole.

If finance ministries are to successfully lead the way in economic management in the post-crisis era, they must prioritize the challenges they now face across all four mandate areas so that those challenges can be addressed comprehensively, instead of through isolated, ad hoc policy changes.

Booz & Company grouped a large cross-section of countries into clusters according to several critical factors: government fiscal balance and gross government debt; the size of government intervention in the economy during the crisis; and the amount of leeway those governments have to implement fiscal and economic policy changes. Although the specific reform approach will vary from country to country, these clusters share comparable economic characteristics and broadly similar reform priorities.

1. Countries with Little Room to Maneuver: Examples include Austria, Belgium, Greece, Ireland, Italy, Netherlands, Portugal, and Spain.

Common factors: High deficits, high government debt, strong intervention during the financial crisis, and relatively low flexibility regarding current fiscal and monetary measures.

Reform priorities: Redefine social safety nets such as pensions and healthcare systems. Rethink the parameters of government activity, acknowledging the advantages of private enterprise in executing some services and functions. Raise debt-management profile, by developing capabilities to treat government debt more like corporate debt.

2. Heavyweight Countries with Heavyweight Problems: Examples include France, Germany, Japan, the U.K., and the U.S.

Common factors: High debt loads and structural deficits, relatively high levels of fiscal stimulus during the crisis, and some flexibility for further fiscal and monetary interventions.

Reform priorities: Similar to the reform priorities of the first cluster. Strengthen regulation and supervision of the finance sector.

3. Countries with Favorable Conditions: Examples include Australia, Canada, Finland, South Korea, New Zealand, Norway, Singapore, Sweden, and Switzerland.

Common factors: Lean governments and low levels of public debt.

Reform priorities: Improve risk management; champion a public-private dialogue on growth.

4. Growth Economies: Examples include Brazil, China, India, and Russia.

Common factors: Emerging nations with medium to high fiscal deficits; fast recovery from the crisis and rapid economic growth. Lack adequate risk management frameworks and institutional setups, leaving them susceptible to external shocks.

Reform priorities: Delineate and mitigate contingent liabilities; make economic systems more transparent; synchronize fiscal and monetary policymaking.

5. Countries Where Wealth Provides a Buffer: Examples include Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates (UAE).

Common factors: Emerging countries with fiscal surpluses (including revenues from hydrocarbons), primarily those in the Arab Gulf. Weak fiscal institutions that are unable to cope with the new challenges and economic paradigms that arose from the crisis.

Reform priorities: Identifying and mitigating contingent liabilities and balance-sheet risks, particularly those from financial exposure to foreign markets. Develop rigorous and transparent national economic statistics, to improve the quality of policymaking. Work to contain potential future fiscal deficits by aggressively improving productivity in the delivery of public services.

6. Revenue-Starved Countries: Examples include Egypt and Malaysia.

Common factors: Developing countries with high deficits but limited ability to raise revenue, making that their most urgent fiscal issue

Reform priorities: Building stronger public finance and debt management capabilities, without jeopardizing growth.

7. Countries with Overly Decentralized Fiscal Administrations: Examples are Argentina, Chile, Colombia, Hungary, Indonesia, Mexico, South Africa, and Turkey.

Common factors: Developing countries with medium deficits and relatively low debt loads (with certain notable exceptions) but a poor track record of past fiscal and monetary reforms, and a history of adopting expansionary policies that can lead to hyperinflation.

Reform priorities: Strengthen central capabilities, such as fiscal management. Debt and liquidity management functions are subsequent priorities.

A Capabilities-Driven Transformation Agenda

Success in the post-crisis era will come from a holistic, capabilities-driven approach for transforming the means by which finance ministries deliver on their expanded mandate. Ministries cannot choose their slate of responsibilities or the economic cycle they find themselves in, but they can choose to focus on the capabilities that will make the biggest difference in how they manage those responsibilities.

A five-step process helps ministries of finance articulate their capabilities-driven transformation agenda. Specifically:

Discover: Determine the current approach to economic oversight and intervention, supported by instruments, measures, and institutional processes.
Assess: Consider the implications of various potential ways to play—how successful they are likely to be and how well they fit the ministry’s current capabilities profile.

Choose: Decide on a forward-looking strategy and the associated capabilities to support it. This will determine how a ministry defines the parameters of its mandate to respond to the most urgent fiscal and economic reform imperatives of the country.
Transform: Put ideas into action – define specific policies and intervention instruments to apply to the chosen mandate areas or sub-areas in which the ministry has established a clear right to lead.

Evolve: Continually frame policies and decisions to reflect the ministry’s strategic approach. Improve the ministry’s capabilities system, or make changes in response to new economic reform imperatives.

Developing such an agenda will involve incorporating measures and reforms from around the world but tailoring and prioritizing them according to the ministry’s unique reform imperatives.

The report is available for download on the Booz & Company website at http://www.booz.com/media/file/BoozCo-Challenging-Mandate-Ministries-Finance.pdf.

About Booz & Company

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