Who Decides on Public Expenditures?: A Political Economy Analysis of the Budget Process in Paraguay

Over the last decade, every Paraguayan administration has faced greater political challenges and financial pressures than its predecessor. The result has been a chronic fiscal deficit since 1995. This study disentangles the budget-making process in Paraguay by studying the key players influencing the budget cycle (preparation, approval, execution, and control), their powers, and their incentives. The document discusses how the incentives for cooperation affect the conditions for the sustainability of public expenditures, the efficient allocation of resources, and the representative quality of the spending. First the general theoretical framework based on both a transaction cost theory of the policymaking process and the public expenditure management literature is introduced. The authors emphasize the interactions between historical legacies, the overall institutional design, and budgetary procedures as factors that shape politicians' incentives to display cooperative behavior in the elaboration of the budget. Then, Paraguay's historical background, its current institutional framework, and the emerging features of the policymaking process are described. The formal and informal rules that guide the budget policy-making process are also addressed. The analysis is based on the formal instruments (the constitution and related laws) and on in-depth interviews with several policymakers in the executive branch and in Congress. Finally, it is discussed how the generally low incentives for cooperation have created negative conditions for the sustainability of public expenditures, the efficient allocation of resources, and the representative quality ofthe spending.