Political Economy in Practice at the Bank

Stephen NdegwaAFTPR

Why is political economy critical?

A complete understanding of the “governance environment” in a given country must include an understanding of the political process, and not merely a better understanding of public administration

What is the nature of the “political seas” and “sea bottoms” through which a country team seeks to navigate its “ship” of development assistance?

CTs cannot devote all of their attention to their program of assistance narrowly defined, i.e. to the “ship” and what is inside it.

CTs must also consider the relationship between the ship and the seas through which it sails.

The Bank’s work is embedded in a larger societal context that often affects its outcomes in unforeseen ways. These include:

The political process and the institutions within which that process plays itself out (arguably the most important dimension of this larger societal context)

But also: A country’s social structure -- especially the extent

to which society is a peasant based agrarian society or urbanized one.

The structure and configuration of cultures (i.e. ethnicity) and language.

Informal practices (e.g. and especially clientelist networks and patronage) as well as formal ones.

History Each society IS unique, and therefore “one size”

does not fit all.

Institutional Checks & Balances• Independent, effective judiciary

• Legislative oversight

• Decentralization with accountability• Global initiatives: OECD Convention, anti-

money laundering, WCO

Institutional Checks & Balances• Independent, effective judiciary

• Legislative oversight

• Decentralization with accountability• Global initiatives: OECD Convention, anti-

money laundering, WCO

Civil Society Voice & Participation

• Freedom of information• Public hearings on draft laws• Media/NGOs• Community empowerment• Report cards, client surveys

Civil Society Voice & Participation

• Freedom of information• Public hearings on draft laws• Media/NGOs• Community empowerment• Report cards, client surveys

Political Accountability• Political competition, credible political parties• Transparency in party financing• Disclosure of parliamentary votes• Asset declaration, conflict-of-interest rules

Political Accountability• Political competition, credible political parties• Transparency in party financing• Disclosure of parliamentary votes• Asset declaration, conflict-of-interest rules

Competitive Private Sector• Economic policies• Restructuring of monopolies• Effective, streamlined regulation• Robust financial systems • Corporate governance• Collective business associations

Competitive Private Sector• Economic policies• Restructuring of monopolies• Effective, streamlined regulation• Robust financial systems • Corporate governance• Collective business associations

Good governance has many dimensions & “entry” points

Public Sector Management• Meritocratic civil service with adequate pay• Public expenditure, financial management, procurement• Tax and customs• Frontline service delivery (health, education, infrastructure)

Public Sector Management• Meritocratic civil service with adequate pay• Public expenditure, financial management, procurement• Tax and customs• Frontline service delivery (health, education, infrastructure)

GOODGOVERNANCE

GOODGOVERNANCE

Part II

Is Politics Bankable? Philip Keefer’s PREM Learning Presentation

Adapted

Why do politics matter?

Politicians are the ultimate arbiters of welfare-enhancing, growth-promoting, equitable policies.

They are the ultimate arbiters of success of foreign assistance.

The political economy question: What are the incentives of politicians to

pursue development-oriented policies?

The paradox Efficient public goods and broad public

policies (e.g. regulation) are critical to development.

Government incentives are therefore more pro-development the more they favor these over rent-seeking and private good provision.

The paradox: when politicians prefer policies that benefit fewer people, when with the same resources they could choose policies that benefit more people.

Priority questions for addressing the paradox in development policy

The primary development question: what interventions improve political incentives to pursue development-oriented policies?

The secondary question: How can we design sector interventions to be compatible with political incentives?

The tertiary question: How can we build constituencies for reform?

The “quaternary” question: are key decision makers supportive of reform?

Some reasons why politicians systematically ignore reform: information

Political market imperfections – information We can’t expect political accountability for

development outcomes when: public doesn’t know what political decisions

were made; public can’t observe outcome of decisions. public can’t observe the impact of decisions on

their welfare. Most donor interventions do not increase citizen

info; others fail to provide the right kind of info. They should: informed citizens (exposed to media)

much more likely to receive transfers (India, US); (probably) more likely to demand public goods.

Reasons why politicians ignore reform: credibility

Political market imperfections – credibility Politics is not about policy/public goods in poor countries:

high tax/high redistribution vs. low tax/low redistribution; competition in social service delivery versus no competition; deregulation versus regulation.

Why? Politicians cannot credibly promise high quality public

goods, public policy to most citizens. Can sometimes credibly promise populist transfers (free power) to most citizens. Can usually credibly promise clientelist benefits (pork barrel, jobs in government) to a few citizens.

Hence, few programmatic political parties in poor countriesat best, we see populist reputations (e.g., free power); more often, purely clientelist (vote-buying/vote blocs/jobs in gov).

Reasons why politicians ignore reform: polarization

Political market imperfections – social polarization Citizen polarization leads them to care more about

who benefits from policy than the welfare effects of policy.

Related to credibility and information: in credibility- and information-free environments, promises to co-religionists most credible, easiest to monitor.

Donors pay insufficient attention to how they might mitigate (1) the political factors that exacerbate polarization and (2) effects of polarization on implementation of reforms.

But they should: substantial evidence (Kenya, US, etc.) that public good provision suffers in multi-ethnic settings.

Program design implications Information components already in some

programs/projects: citizen report cards, PETS dissemination, media outreach…

Often fail to provide information crucial to political accountability:

outcome info (benchmarking of school/health performance); info on decision process (e.g., how much money approved, by whom).

Cutting-edge PMI analysis identifies nitty-gritty design elements that make the difference between no impact and substantial improvement Education services in Uttar Pradesh– no impact of “best

practice” interventions to encourage better-informed participation in public services. New “PMI-informed” design being tested in Karnataka decentralization operation.

Use PMI analysis to turn impact evaluation from a device by donors to hold governments and themselves accountable to a device that allows citizens to hold governments accountable.

Program design implications CDDs: rely on local governance to improve service

delivery. PRSPs: build local ownership for reform agenda. However, PMIs need not be fewer at the local level

(Khemani, et al.). Most successful CDD = KDP-Indonesia. Donors participate in ongoing governance, however. CDD approach usually seen as a substitute for donor oversight.

PRSPs have no/limited effect on PMIs, but these determine “who” owns “what”. Uninformed citizens in non-credible environments cannot “own” reform.

CDDs and PRSPs need to focus on credibility, information.

E.g.: Directly, CDDs do nothing for credibility of national policy makers; may help indirectly by building up credible local challengers to national politicians.

Implications for monitoring

Track whether politicians are investing political capital in promises to provide public goods.

Track whether citizens have info. to monitor these promises.

Use supervision strategically: to improve credibility of governments to citizens; to substitute for accountability where PMIs are high and citizen leverage over government officials low.

Increase supervision budgets where accountability is low – reduce where high.

What Donor Role? Donor conditionality and support to specific leaders

can be counter-productive– it can undermine leaders’ credibility to their own citizens.

In the extreme case: what should we advise military-led governments who get rid of “corrupt” political parties? Currently: we hope that economic reforms are self-

sustaining. Problem: Chile is rare.

Instead, more country-specific analysis needed on dynamics of political parties, and how reputation-building for public goods can be supported.

Assist non-democratic governments (that are so disposed) to lay the groundwork for – or at least understand the importance and characteristics of – accountable political parties.

Part III:

Brief Examples

Analysis, Advice, Action

Morocco Summary of Results

• Current Outcome indicates the results of the anticipated stakeholder dynamics on the issue given model results and analysis.

• Opportunity for Reform indicates changes in approach and strategies to overcome implementation challenges given model results and analysis.

Current Outcome Opportuntiy for Reform

FNBTAbolishment of the FNBT is highly unlikely given

the current political climate.

Broad societal consensus for a reduction to at least 90 dirham/bushel can be achieved, that includes all

cereal producers, farmers and syndicates

MarketingA strong reform coalition advocates moderate change by beginning the process to develop a

private industry body replacing ONICL No direct avenues without linkage to other issues

Tariff ReductionDespite Government support for a 30% reduction phased in over 5 to 7 years, Cereal producers will

likely block.

A broad concensus is possible to to accept at least moderate 30% reductions

Income Support

A high level of convergence is expected on selective and region-specific income support to be

extended one-time only after the initial five year period

Higher levels of consensus can be achieved

Investment Subsidies

A majority of government & socieity support broad agricultural subsidies to promote diversification

Reducing the scope and size of investment subsidies is currently politically untenable

1. (+) Need to change our partnership strategy!

2. (+) Reform is more/less difficult than we thought depending on the issue!

3. (-) Some specific results did not make sense!

4. (-) Pool of experts too limited!5. (-) Potential courses of action unclear

Utility of the general findings

1. Stakeholder analysis should come at early stage;

2. Enlarge the circle of champions beyond line ministry (focus on Ag Ministry= big mistake);

3. Get to understand the dynamic rather than the static reform process;

4. Pro-reformers use the “radical” Bank position to help craft a compromise;

5. Better to train Bank staff to conduct the analysis rather than having consultants carry the task (skill mix and relation with client) .

Overall lessons

Laos

Primacy of Political Order, Fragility, State weakness…

Monolithic vs. fragmented state -- state as arena of negotiation; esp. at realigning moments

Incomplete state formation: nationalism, economic prosperity/hemmed in, capacity

(“soft state”) Coming transition

unraveling regime consistency for several reasons

Three Bank Choices

a) Muddle through: status quo Perfectly legitimate/reasonable in public

management NPEP a muddle through script –not necessarily bad

b) Selective-strategic reform areas: Two track problem: service delivery and institutional

change 1. Public resource management 2. Capacity Enhancement >> Find Constituency for reform: Need for

unequivocal preference for reform

c) Positioning for ‘State Transformation’

Disturbing Query: “… why are we in Laos?” change to ‘how we do business differently’ Beyond 3-4 Year CAS, beyond NPEP Absence of Governance and macro-political

reforms (transparency, accountability, citizen tests of accountability) in CAS would miss opportunity

Creative use of AAA to affect agenda Access to where power resides, building trust

(less leverage) to move macro-political reform: information, SE Asia models = ‘bottom wont fall’

Ethiopia

Post-election violence, threats donor withdrawal, WB CAS & budget support

Review team to examine appropriate of strategy:

Deep divisions, swing to single party dynamic, party businesses, weak parliament

Move to ISN, move to “PBS” – Protection of Basic Services, via decentralization

Kenya

New government, Anti-corruption, uneven performance

Anglo-leasing scandal & a less than savory ‘kitchen cabinet’

What else to do, other than rant & rave? Rapid response note on “wounded

executives” + code of ethics work Result: leadership code for new cabinet,

integration of leadership/code in Bank TA

Overall Lessons

Not so much whether to do, but how and do well (integration)

Not so much smart production but smart consumption (management)

Incentives: staff vs. managers Retail/country case driven vs.

wholesale/framework driven Resources exist, other donors keen