Applied governance and political economy perspectives for growth analysis

Verena FritzGovernance Specialist

PREM Public Sector GovernanceWorld Bank

Course on Applied Inclusive Growth Analytics

Joint Vienna InstituteJuly 2, 2009

The big-picture debate about governance and growth interactions

Interactive relationship:• Governance matters for growth• Growth/increasing wealth (and possibly also the distribution

of wealth) matter for governance

The search for priorities:• The need to prioritize growth strategies for specific contexts,

e.g. through an analysis of the constraints to growth• The need to prioritize efforts to improve governance

– Not all potential governance improvements are affordable for poor countries (Khan/Grindle)

– Some governance improvements may matter more for enabling growth than others (Meisel & Ould)

Why GPE for growth analysis?• Develop a sharper diagnostic lens on ‘government failures’,

and of GPE dimensions of other constraints to growth• ‘Growth therapeutics’ :

– treating constraints to growth requires attention to technical (& fiscal) as well as governance and political economy dimensions

• Donor efforts based purely on technical analysis & best-practice approaches have often proven unsuccessful

• Donors are often ‘surprisingly’ surprised by policy decisions (or non-decisions) in client countries

• How to do GPE for growth analysis? – Need to stretch ourselves beyond a pure ‘common sense’ approach to political economy– To understand the complex motivations of stakeholders rather than

relying strongly on individual ‘reform champions’– To understand the interplay between formal and informal institutions,

and the motivations of stakeholders

HRV: governance as direct and indirect constraints

GPE for inclusive growth• Achieving inclusive growth is likely to pose greater

governance challenges than ‘just growth’– Inclusive growth involves greater activity by the public

sector: providing education for all, wider coverage of health services etc.

– Establishing and protecting the rights of a larger share of the population (not just the well-connected)

– Providing good enough governance and effective government action not only in main centers, but also in more remote regions

Complementing constraints to growth and governance in country analytic work

• Translating identified constraints to growth into feasible policy solutions

• Using governance and political economy analysis to understand– governance arrangements associated with constraints to

growth and– underlying political economy drivers

Þ With the aim of identifying feasible policy optionsÞ These may be ‘unorthodox’ or ‘second best’, e.g. selective

property rights enforcement (Haber/Rodrik/Khan); partial rather than wholesale reforms of tariff structures, etc. (highly case & issue specific)

Complementary analysis Vulnerability/ problem: identified constraints to

growth

Technical diagnostic: what changes would have what

effects on relieving constraints to growth?

Governance and political economy diagnostics

Identification of governance arrangements and underlying

political economy drivers

dialogue

Context informed, feasible options for WB policy advice to government/engagement with local stakeholders

and forWB programming/operations

Doing things differently to overcome constraints to growth in a feasible and effective way

Example: infrastructure• Infrastructure is the most frequently diagnosed constraint to growth• Lack of fiscal and other funding resources & weak technical planning

capacity as important reasons for an inability to address the constraint• Technical diagnostic: what size & type of power plant? What type of

transport infrastructure (road, rail, port, etc.) & where? Costing and returns of these options?

• But: governance and PE dimensions also need attention because poor use of existing resources is part of the problem– Poor public investment planning ; including low expenditures on

maintenance• Capacity constraints + governance weaknesses and PE incentives

– Weak aid coordination– Failure to mobilize private resources (especially energy)– Project execution:

• Funds lost due to kickbacks/corruption & subsequent ‘savings’ made by contractor to re-coup those costs; selection of incompetent firms; disputes over actual costs (start/stop), etc.

Infrastructure – cont’d• Potential feasible solutions (case specific!):– Promote focus on maintenance spending– Pay attention to the political dimensions of

investment planning – e.g. by developing cabinet-level discussions

– Support public debate on who can pay for what (implicit or explicit subsidies are often regressive)

– Explore options for social monitoring of project execution

A basic structure for GPE analysis: Three layers of problem-driven GPE analysis

Political economy

Vulnerabilities& concerns

Institutional/ governance arrangements & capacities

Evidence of poor outcomes to which GPE issues appear to contribute

E.g. repeated failure to develop solutions to lack of results in sectors. Infrastructure is constraint to growth but is not being improved

What are the institutional arrangements & are they capable, effective & efficient?Why are things this way? Why are policies or inst. arrangements not being improved?

Mapping of institutions: laws, regulations; responsible public bodies; formal and de facto rules of the game; analysis of integrity/corruption challengesAnalysis of stakeholders, incentives, rents/rent-distribution, historical legacies & earlier reform experiences; social trends & forces and how they shape stakeholder actions

Prob

lem

driv

en

Structural

Constitutional set up, electoral rules; policy and budget processes,  Set-up of government; ministries and their roles and mandates  

Informal: rules of patronage networks Political leaders; political parties, (organized) interest groups; heads of SOEs;  external stakeholders

Examples

Historical legacies, economic base and level of development, commodity prices; population dynamics;  

Institutions

Variables

Actors/ stakeholders In

flu

en

ce p

oliti

cal an

d p

ub

lic s

ecto

r acti

on

an

d p

olicie

s a

nd

th

eir

im

ple

men

tati

on

Ou

tcom

es

(gro

wth

, p

overt

y r

ed

ucti

on

, h

um

an

d

evelo

pm

en

t, d

ealin

g w

ith

d

evelo

pm

en

t ch

allen

ges –

pollu

tion

, (s

ocia

l) c

on

flic

t, e

tc.)

A basic structure continued: 3 sets of variables, interactions & effects on

policies & outcomes

Selecting operations given existing reform space

Seeking to expand

reform space pro-actively

Philippines public procurement reform – pro-active coalition building to combat entrenched corruption networks

Zambia telecoms: focus on local winners

Mongolia Mining: TA with local think tank for public debateParaguay & Bangladesh roads: external monitoring by stakeholders

Ethiopia PBS to mitigate reputational risk: support subnational service delivery with participation

India power: reform sequencing

Operational value: Defining how to proceed to make reforms

happen

Governance and growth in resource-rich countries

• Resource rich countries have less need for good enough governance to generate growth during boom price (= high prices for resources)– E.g. recent GDP growth: Zambia: 5-6.5% p.a. 2004-2007 (2009: 4%);

Mongolia: 8.5-10.2% (2009: 2.7%), Kazakhstan : 10% 2001-2007 (2009: -2%)

• BUT: poor governance is a key factor for the ‘resource curse’ – re-enforcing negative effects during downturns & hindering the translation of resource wealth into long-term development

• Some key mechanisms:– Wasteful expenditures & public investments during boom times– Focus on rent-seeking rather than profit seeking among elites– Failure to manage macro-economic and fiscal risks

Indirect governance failures (especially RR countries)