Financial Management Trends in Latin America

Article excerpt

Lynnette McCormack Asselin*

ABSTRACT. Reform of the government financial management system is part of every public sector reform program currently being implemented in Latin America. This is because of the emphasis on efficiency, effectiveness and economy that has become part of the development dialogue on public sector performance. Although it is still too early to measure the benefits derived from the reforms, it is possible to identify certain positive experiences, as well as lessons learned and problems encountered.

INTRODUCTION

By the late 1990s, public sector financial management reforms in Latin America have become the norm rather than the exception. This may be attributed to several sweeping developments, including an unprecedented period of stability and the emergence of democratically elected governments, and to various specific factors, including the reduction in the role and size of the public sector through the divestiture of public enterprises and services, decentralization of decision-making powers and functions, and the citizen's demand for more participation and information. These significant changes in government's structure and role in many Latin American countries has led to the modernization and reform of financial management systems, organizational as well as procedural changes.

Governments have experimented with several models of financial management during the last century, with obvious impact on the recent attempts at modernization and reform. Traditional public-sector financial management in Latin America was based, almost exclusively, on legal control of budget execution and on the individuals responsible for financial and/or physical resources. These individuals safeguarded the assets, handled all transactions, maintained all records, and periodically presented an account before a formally established legal authority. As governments grew and diversified, administrative organizations with specific roles and responsibilities replaced the individual. Each entity had its policies, standards, norms, procedures, and hierarchical structure. This firmly implanted fragmentation and bureaucracy in Latin American financial management. At the end of the 1950s and for the next two decades, the state acted as a promoter of development. Budgeting was the financial management tool of choice, and it was elevated to a sophisticated level. Results budgets, program budgets, zero- based budgets, evaluation budgets, capital-separated-from-operational budgets, multi-year budgets, etc. became common. Financial management systems were characterized by budgets and operational and investment expenditures.

In the early 1980s, the debt crisis in many Latin American countries mandated the adoption of measures to re-establish macroeconomic equilibrium. Changes in economic policies, in turn, forced changes in the tools of financial management. The problems caused by the debt crisis reestablished the importance of one central unit responsible for the management of public finances and central control over revenues, expenditures, and financing. More emphasis was placed on the role of the treasury and the importance of cash-management practices.

Drawing on previous trends and experiences, the integrated financial management system concept called SIMAFAL (Spanish acronym for Latin American Integrated Financial Management System) was introduced in the late 1980s. This financial management system concept applies the general theory of systems and states so that the various components or subsystems of the financial management system are linked to form one indivisible conceptual unit geared toward achieving the common goal of effective, efficient, and economic use of resources. Therefore, the financial management system should include all public revenues and expenditures, whatever their nature, origin, or use; or at the very least, those of all government agencies, whether the agencies are centralized, decentralized, autonomous, regional, or sectoral. …