DDP 766. Stephen B. Peterson. "Financial Reform in a Devolved African Country: Lessons from Ethiopia." June 2000. 34 pp.

This paper provides three frameworks for understanding the process of implementing a financial reform in an African country that has adopted a policy of devolution. The paper is based on four years of experience in implementing a financial reform under Ethiopia’s Civil Service Reform. The first framework, which we have termed the Framework for Financial Reform, provides an overall conception of financial reform. It has two dimensions: the stages of development of financial systems (external control, internal control, management, planning) and the steps to changing financial systems (comprehension, improvement, expansion). The second framework, the Four Tasks of Managing a Financial Reform, elaborates the steps in changing financial systems. These tasks include: reforming the approach to financial reform, improving the design of the reform, managing the implementation of the reform, and protecting the reform. The third framework focuses on the task of managing the implementation of financial reform and details the phases, variables and dilemmas of implementation. The phases of implementation are design, pilot, and operation. Associated with these phases are variables that affect the implementation (resources, interdependence, sequence and timing) and dilemmas (comprehensiveness and monitoring). These frameworks support the paper’s two theses: 1) that reform of financial systems in Africa must be evolutionary not revolutionary and 2) that evolutionary reform of financial systems is especially needed in devolved African countries. Evolutionary reform is needed because financial systems in the public sector are fragile traditions that need to first be comprehended. Before more complicated financial "management" reforms can be introduced that focus on outputs and outcomes, the existing "administrative" financial systems which control inputs have to be understood, implemented, and improved. "Best Practice" is often the enemy of "feasible" practice in developing countries.

Keywords: Ethiopia, financial reform, financial systems

JEL Codes: D73, H61, O10, O20, O55

Stephen B. Peterson is a development fellow at the Kennedy School of Government, Harvard University. For four years he has been the Chief of Party of the Decentralization Support Activity (DSA) Project implementing financial systems changes under the Government of Ethiopia’s Civil Service Reform. A specialist in public finance and management he holds a doctorate from the University of California Berkeley.

This paper was first presented to the Conference on "African Governance and Civil Society: Equity, Efficiency and Participation," Cornell University, March 10-11, 2000 held in honor of John Cohen. I am grateful to John Cohen for involving me in Ethiopia, to H.E. Hailemelekot T. Giorgis for involving me in the Civil Service Reform, to USAID for being an understanding and supportive patron of the reform, and to Jennefer and Mara for making it all work.