Institutional and Governance Rev

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					 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
        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.
    1.6
    1.4
    1.2
      1
    0.8
    0.6
    0.4
    0.2
      0
            .
          ep       AC th % ral % P/cap
        .R      L        u       u
  Do
       m
                    e yo       er    GD
                S am       S am Same
    Puzzle 2: Democracy reduces
    peceptions of honesty/integrity,
              Indonesia
4


3
                                    Suharto
                                    falls
2


1


0
1995    1996   1997   1998   1999   2000      2001
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 Bureau- Gross
                 Law     cratic  secondary
                         Quality school
                                 enrollment
  Newspaper Yes 4.8      4.4     91%
  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).
Political market imperfections since 1990:
           pre-electoral credibility
                 Rule of Bureau- Gross
                 Law     cratic  secondary
                         Quality school
                                 enrollment
  Years of   Yes 4.8     4.6     90.4%
  continuous
  elections
  greater than No 3.5    3        59%
  median?
  Age of       Yes 4.6   4.5      88.5%
  political
  parties
  greater than No 3.8    3.3      62.8%
  median?
 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: Yes
  IDN, 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 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.
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.
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
  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).

				
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