Institutional and Governance Reviews and the Role of Political Economy Analysis in Operations Philip Keefer DECRG Flagship Course on Governance and Anti-corruption 1 December 2004

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Institutional and Governance Reviews and the Role
of Political Economy Analysis in
OperationsPhilip KeeferDECRGFlagship Course
on Governance and Anti-corruption1 December 2004
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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).

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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).

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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

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Puzzle 1 Low educ. spending, high public invest.
spending, Dom. Rep.
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Puzzle 2 Democracy reduces peceptions of
honesty/integrity, Indonesia
Suharto falls
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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 dont work if people dont believe them.
  What institutions improve credibility?

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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
  (most of our client countries)
• Road construction out of PMs/Prezs office, yes
  road maintenance, no (Pakistan under Sharif).
• Special exemptions from regulations, yes rule of
  law, no (Peru, Indonesia).

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Political market imperfections since 1990
Information
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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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Political market imperfections since 1990
pre-electoral credibility
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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

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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).

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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).

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Checks are not a panacea if conflicts of interest
among politicians not resolved

• Consequences
• 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.

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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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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.

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Where legislator incentives are weak, checks
evaporate Urgency decrees in Peru
250
200
150
Urgency Decrees
100
Laws
50
0
1994
1995
1996
1997
1998
1999
2000
2001
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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 dont like
  whether coalition partners are likely to retain
  posts in a new cabinet if vote of confidence
  succeeds.

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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)

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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

• 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.

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What to do about absent or badly functioning
checks and balances?

• Dont 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.

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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
• packaging diverse programs/projects to enhance
  sustainability.
• introducing information/consultation into program
  design in meaningful ways.
• structuring priorities (infrastructure vs. public
  sector reform or with public sector reform).