Institutional and Governance Reviews and the Role of Political Economy Analysis in Operations Philip

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Institutional and Governance Reviews and the Role
of Political Economy Analysis in
OperationsPhilip KeeferDECRGFlagship Course
on Governance and Anti-corruption21 April 2003
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Operations and Institutions The Questions

• What are the incentives of politicians
• to allocate funds to pro-poor activities?
• to demand effective implementation?
• to improve the investment climate?
• to refrain generally from rent-seeking/
  corruption?

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Operations and Institutions The Questions

• What are the incentives of civil servants
• to implement programs effectively?
• to exercise discretion fairly?
• to refrain from corruption/rentseeking
  generally?

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What are the development problems addressed by
institutional analysis?

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

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Education/Public investment spending, Dom. Rep.
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Corruption Perceptions, Indonesia
Suharto falls
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Some institutions that influence the investment
climate
Table 1.1. Political institutions and governance
Table 1.1. Political institutions and governance
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Answers to these questions start with
citizens/voters

• 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?

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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.

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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

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Examples of policy distortion from information

• School buildings, yes education quality, no.
• Road construction out of PMs/Prezs office, yes
  road maintenance, no.
• Special exemptions from regulations, yes rule of
  law, no.

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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.

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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).

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Conflicts of interest among politicians, civil
servants

• Between
• Politicians and civil servants.
• Legislators and the executive branch.
• PMs/presidents and ministers.

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Consequences of conflicts of interest

• Centralization presidents/PMs do not trust
  civil servants to implement programs.
• Bias towards easy to measure/ easy to
  monitor.
• Low budgets.

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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)

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What to look for in doing institutional analysis?

• Are there checks and balances?
• In presidential systems, look at legislative
  authority of president and budget power.
• In parliamentary systems, look at intra-party
  competition, role of coalition partners in budget
  formation.

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Presidential decrees of urgency are commonplace
in Peru
250
200
150
Urgency Decrees
100
Laws
50
0
1994
1995
1996
1997
1998
1999
2000
2001
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Budget authority who can propose the budget?

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

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Budget authority who can amend, how?

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

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Budget authority what happens if no budget is
approved?

• Does spending
• drop to zero (Pakistani local government)?
• follow last years budget (Brazil)?
• follow presidents proposed budget (Peru)?

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Budget authority implications

• More executive power over spending, fewer checks
  and balances overall, less rule of law
• More exec. power, without compensating
  credibility mechanisms (e.g., strong parties),
  spending drops, biased towards the measurable.
• Executive preferences over legislative (possibly
  including lower deficits).

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Do politicians care only about targeted resource
allocation?

• 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

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Some policy implications

• If politicians care only about targeting, do not
  rely on the government to improve quality.
• Use politician interest in targeting to structure
  sector programs.
• Structure reform to address underlying
  problem(e.g., voter information, politician
  credibility, intra-government conflicts of
  interest)
• Attack symptoms indirectly (corruption, expensive
  campaigns)