Innovation and Isomrphic Reforms Limits in Public Finance Management Reforms

From a macroeconomic perspective, the financial health of a government—and by extension, the entire country—is reflected in its debt sustainability and budget deficit. These indicators stem from the nation's public finance management (PFM) capacity. Over the past three decades, there has been significant investment in transferring financial and fiscal knowledge from advanced economies, along with adopting information technology solutions inspired by best practices and advanced economies. Despite these efforts, the results of such financial investments and the development of PFM innovations and technologies have often fallen short of expectations. This study employs the theory of 'institutional isomorphism' to explore why public finance innovations frequently yield suboptimal outcomes. It finds that the effects of institutional isomorphism are limited when the dimensions of reforms are not visible to external observers, pertain directly to the core activities of the organization, or involve a decentralized set of stakeholders who adhere to differing professional norms and derive legitimacy from various sources. This research evaluates these constraints in 76 developing countries between 2016 and 2023, controlling for political and economic factors. It concludes that PFM reform initiatives that are downstream, operational, decentralized, involve dispersed stakeholders, and have multi-year scopes are less likely to be successful, with respective odds ratios of 0.65, 0.83, 0.85, and 0.56. Conversely, initiatives involving centralized actors or overseen by such actors (through indirect citizen supervision via parliament) are more likely to enhance quality, with a higher probability of success, indicated by odds ratios of 1.32 and 1.28.