Financial crisis unfolds a tall agenda of reforms for finance ministries: Report

Dr. Jihad Azour, Senior Executive Advisor, Booz & Company

The global financial crisis has ushered in a new era for ministries of finance worldwide as these bodies now must do more, and solve more complex problems, than at any time in recent economic history, according to findings of a survey.

According to Booz & Company survey which covered more than 60 finance ministers and senior staff at those ministries, along with other economic thought leaders, have revealed a new agenda that if implemented properly would lead to efficient and effective economic cycles.

The worst effects of the global financial crisis have been contained. However, the range of extraordinary steps required to accomplish that feat—from stimulus spending to asset purchases and guarantees—have transformed the mandate for ministries of finance, leaving these entities with responsibility for far more elements of economic management than they had in the past.

Booz & Company solicited input via a survey of more than 60 decision makers, with influential roles in national economies worldwide, along with internationally recognized thought leaders in macroeconomic and fiscal policy, as part of a global campaign to investigate the evolving roles and responsibilities of finance ministries. The survey results indicate what fiscal and economic measures are currently being implemented in these economies, and underscore the urgency of reforms.

Nabih Maroun, Partner, Booz & Company

“ Although laudable, these measures have been met with increasing political resistance—as well as varying degrees of success—since they represent isolated steps taken by finance ministries that continue to operate with the same institutional and operational setup they employed before the crisis,” said Dr. Jihad Azour, Senior Executive Advisor, Booz & Company.

Finance ministries need to make fundamental shifts in their operational and institutional models across four key mandate areas.Large fiscal deficits caused by the crisis and its aftermath require stronger management of government finances.

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.

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.

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.

“With different debt levels, fiscal imbalances, and growth prospects across countries, there is no one-size-fits-all solution,” said Peter Burns, Partner, Booz & Company.. “However, by analyzing countries as members of a cluster with similar economic features and challenges, finance ministries within each cluster can establish reform priorities.”

Booz & Company grouped a large cross-section of countries into clusters according to several factors including 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. The result is seven clusters with comparable economic characteristics and broadly similar reform priorities.

In developing a reform agenda, finance ministries will need to look not only to the external environment but to their internal strengths as well. Fundamentally, success in the post-crisis era will come from a holistic, capabilities-driven approach for transforming the means by which these ministries deliver on their expanded mandate.

“Prior to the crisis, finance ministries had the luxury of being able to focus on a few initiatives at a time,” said Nabih Maroun, Partner, Booz & Company. “But in the post-crisis era, the size and complexity of the challenges have forced them to operate in all four mandate areas at once.” Finance ministries cannot choose their slate of responsibilities, and they cannot choose 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.

In light of the heavy burden of the responsibility for economic and fiscal management imposed on finance ministries by the crisis, a capabilities-driven transformation agenda will allow these bodies to rethink their operating and institutional models in a coherent and effective manner.

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