Institutional and Governance Reviews and the Role of

Political Economy Analysis in Operations

Philip KeeferDECRG

Flagship Course on Governance and Anti-corruption

1 December 2004

Political economy and the operational challenge

We would like to persuade politicians

» to allocate funds to pro-poor activities;

» to demand effective policy implementation;

» to improve the investment climate;

» to refrain from rent-seeking/ corruption (to improve governance).

Political economy and the operational challenge

We would like civil servants

» to implement programs effectively;

» to exercise discretion fairly;

» to refrain from corruption/rentseeking generally (to improve governance).

Understanding political/bureaucratic incentives

informs donor response to all development challenges

• Insecure property rights• Corruption• Schools without teachers• Highways without maintenance• Clinics without medicine• Failed loans/stalled disbursement

Puzzle 1: Low educ. spending, high public invest. spending,

Dom. Rep.

00.20.40.60.8

11.21.41.6

Dom. Rep.

LAC

Same youth %

Same rural %

Same GDP/ca

p

Puzzle 2: Democracy reduces peceptions of honesty/integrity,

Indonesia

0

1

2

3

4

1995 1996 1997 1998 1999 2000 2001

Suharto falls

Solving the puzzles: how politicians get votes, make credible decisions

100 countries used competitive elections to elect their leaders, up from 60 in 1990.Even in the least institutionalized democracies, politicians care about elections (e.g., Pakistan, Indonesia). When does voter pressure lead to better/worse outcomes?Reforms don’t work if people don’t believe them. What institutions improve credibility?

Sources of distortion in voter-politician relationships:

information

Lack of voter information about:

» which politicians are responsible for a policy;

» their actions;

» their contribution to voter welfare.

Consequences of distortion: information

Politicians:» under-provide goods that are difficult to

attribute to their own actions or that contribute only indirectly to citizen welfare;

» cater to special interests, extract personal rents.

» centralization, parliamentary slush funds

Examples of policy distortion from information

» School buildings, yes; education quality, no (most of our client countries)

» Road construction out of PM’s/Prez’s office, yes; road maintenance, no (Pakistan under Sharif).

» Special exemptions from regulations, yes; rule of law, no (Peru, Indonesia).

Political market imperfections since 1990: Information

Rule of Law

Bureau-cratic Quality

Gross secondary school enrollment

Yes 4.8 4.4 91% Newspaper circulation greater than the median?

No

2.9

2.7

42%

Sources of distortion in voter-politician relationships:

CREDIBILITY

Voters cannot believe pre-electoral promises of political competitors because:

» political parties/candidates have no reputation for policy or competence;

» voters have no information about performance.

Credibility-induced distortions

Politicians» Under-provide public goods» Over-provide non-public goods.» Extract large personal rents.

Examples -- same as information, plus:» Civil service reform, no; political

appointments of high quality officials, yes (maybe).

Rule of Law

Bureau-cratic Quality

Gross secondary school enrollment

Yes 4.8 4.6 90.4% Years of continuous elections greater than median?

No

3.5

3

59%

Yes 4.6 4.5 88.5% Age of political parties greater than median?

No

3.8

3.3

62.8%

Political market imperfections since 1990: pre-electoral credibility

How to diagnose information/credibility problems:

examples• How do legislators spend their time?

Pakistan: almost all time spent doing favors (“homestyle”). UK: 6 hours/week.

• Significant policy differences between parties? US, UK, FR, DEU: YesIDN, PAK, BNG, ECU, ARG: No

• Are political campaigns expensive? DR: campaign costs = 10x per capita US campaign $

What to do about information/credibility problems

• If politicians care only about targeting, do not rely on the government to improve quality, reduce corruption.

• Use politician interest in targeting to structure sector programs (Foncodes, Peru).

• Structure public sector reforms to give politicians opportunities to extract politically relevant rewards.

• Structure reform to address underlying problems (e.g., use them to build party reputation for policy reform; use them to increase voter information about who is responsible for reform and what reform is accomplishing).

Post-election credibility – the other big political economy

distortion• Absent political checks and

balances, governments can act opportunistically (promise one thing, deliver another).

Checks and balances dramatically improve the rule of law (reduce opportunistic behavior) and bureaucratic quality (oversight of executive branch performance).

Checks are not a panacea if conflicts of interest among

politicians not resolvedConsequences:

• Centralization – presidents/PMs do not trust civil servants nor cabinet to implement programs.

• Low budgets: legislature does not trust executive branch, especially when it has little control over budgets.

Examples of distortions from conflict of interest

• Public spending in Dominican Republic – well below the LAC average.

• Reformist administrations do not invest in education (Peru).

• Pakistan motorway• Centralization in Ministry of the

Presidency (Peru)• Cronyism (Indonesia)

Checks and balances are not a panacea: if low political payoff in

blocking actions against the public interest

• Absence of electoral imperatives for political veto players to act in the public interest undermines the value of checks.

Checks have a negative effect on rule of law, school enrollment when elections are less competitive, since they increase the “common pool” problem.

0

50

100

150

200

250

1994 1995 1996 1997 1998 1999 2000 2001

Urgency Decrees

Laws

Where legislator incentives are weak, checks evaporate: “Urgency” decrees in Peru

How to assess “good” checks and balances

Are there checks and balances? • In presidential systems, look at legislative

authority of president and budget power.

• In parliamentary systems, look at party fragmentation in cabinet; whether coalition partners can block budgets they don’t like; whether coalition partners are likely to retain posts in a new cabinet if vote of confidence succeeds.

Budget authority – proposal and amendment power

• Only the executive can propose? Peru, Bolivia, etc. and all parliamentary systems. Or only the legislature? (US)

• Only amendments to reduce spending? Dominican Republic, Peru, Colombia, Chile)Or unrestricted authority? (US, Brazil, Costa Rica, Ecuador)

Budget authority: what happens if no budget is approved?

Does spending• drop to zero (Pakistani local

government)? • follow last year’s budget (Brazil)? • follow president’s proposed budget

(Peru)?

Budget authority: implications

Without compensating credibility mechanisms (strong parties with well-established policy reputations), more executive power over spending, fewer checks and balances overall, leads to

less rule of law less spending.

What to do about absent or badly functioning checks and

balances?Don’t exacerbate the problem by

cooperating with ministers who circumvent checks. . . But

Raise the political price for ministers/ legislators who exercise blocking power irresponsibly (through the provision of information about consequences of decisions) (example: Nepal).

Help ensure the credibility of inter-politician agreements.

Conclusions Institutional/Political economy analysis (e.g., through the IGR instrument) can shape country and sector strategy:

• Identifies what can work/what is sustainable

• Provides framework for o packaging diverse programs/projects to

enhance sustainability.o introducing information/consultation into

program design in meaningful ways.o structuring priorities (infrastructure vs.

public sector reform or with public sector reform).