SOCIAL DEVELOPMENT DEPARTMENT The World Bank The Political Economy of Policy Reform: Issues and Implications for Policy Dialogue and Development Implications Andrew Norton and Sabine Beddies Social Development Department, The World Bank March 6, 2009

SOCIAL DEVELOPMENT DEPARTMENT Political Economy of Reform: “take home messages” Assessing risks and exploring opportunities for sector reform/ operations Lack of stakeholder ownership, opposition, or capture of benefits by powerful interests in daily work - practitioners grapple with: 1. Why have reforms or operations stalled, stopped, or reversed despite apparently technically sound design and/or implementation? 2. Why do some reforms, when implemented, not have the poverty- reducing benefits that had originally been anticipated? ‘ Power-based model of change‘ - economic, social, political theory: understand dynamics b/w political actors, institutions, economic processes. Combined look at equity and distribution of power Links b/w Analysis -> Policy Dialogue -> Actions: translating political economy analysis into practical measures to enhance sustainability, effectiveness and equity of Bank operations.

SOCIAL DEVELOPMENT DEPARTMENT Political Economy of Reform – Key for Operations Context: Initial reform focus was economic (e.g. utility privatization, market liberalization) Some operations stalled, delayed, or reversed, despite sound design Why? Powerful interests sit on rents; capture future benefits -> lack of attention to political economy of reform Reform Examples:

SOCIAL DEVELOPMENT DEPARTMENT Opportunity: Assess Political Economy of Reforms and Operations Definition Political Economy: political processes - economic variables Political Economy of Reform:  Support or opposition to reforms and operations  Capture of benefits by influential interests Combined Focus 1.Equity: What are distributional impacts (‘winners & losers’) across socio-economic groups and geographical areas? 2.Power relations: What are stakeholder interests, influence; incentives; institutions; risks and opportunities to design more equitable and sustainable polices and operations? Rational: Enhance equity & sustainability of reforms/ operations If powerful interests loose: likely to block policy change (retain status quo) If less powerful groups don’t share benefits: inequities remain

SOCIAL DEVELOPMENT DEPARTMENT Opportunity Assess Equity of Policy Reforms and Operations Poverty and Social Impact Analysis (PSIA)  Over 160 PSIAs in 70+ countries, 20+ sectors across Regions  Definition: Analysis of the distributional impact of policy reforms on the welfare of different social groups, with a particular focus on poor and vulnerable groups BUT… incentives, influential interests, capture of benefits not always considered, e.g.  Powerful interests block change/ gain from status quo; capture future benefits  Less powerful/unorganized groups remain excluded from sharing benefits of growth (inequities remain) Selected Examples of political economy consideration: Romania Mining, Bangladesh Port, Tanzania Crop Boards, Yemen Water, Albania Water, Tajikistan Land, etc

Institutional analysis: “rules of the game”- govern group behavior, interaction in political, economic and social spheres of life Multi- disciplinary approach to policy change and operations Social analysis: social relationships, governing interaction at different organizational levels (incl. households, communities, social groups) Political analysis: power relations & entrenched stakeholder interests affecting decision- making & distributional outcomes Tools for Institutional, Political, and Social Analysis (TIPS, 2005)

SOCIAL DEVELOPMENT DEPARTMENT Challenge - Lack of understanding and managing of ‘political economy of reform’ Analysis: Political economy literature not translated effectively into operations Operations: ‘Hidden expertise”- TTLs have tacit knowledge about political economy, but are unable to write about it due to ostensibly technical relationship with partner gov’ts’.” More systematic approach is needed

SOCIAL DEVELOPMENT DEPARTMENT Political Economy of Reform Framework  Objective:  unpack "black box" of political economy;  help illustrate "what works, why and how" (selected sectors: agricultural liberalization; public-private partnerships in water supply and sanitation)  Aim:  More systematic approach for better understanding and managing of political economy of reforms/operations  Diagnostic and action frameworks to help practitioners enhance development effectiveness of reforms/ operations  Approach:  Collaboration with operational teams across sectors, regions  Inductively develop framework, grounded in operational experience - “from operations for operations”

Political Economy of Reform – Issues and Implications for WB Lending (FY08 ESW)

SOCIAL DEVELOPMENT DEPARTMENT Agricultural Liberalization: selective Political Economy Challenges Reforms to ease fiscal drain on public budgets, e.g. Price liberalization, removal of subsidies or trade restrictions, Quantities: removal of regulatory controls, quantity restrictions (input, output markets), movement of goods; relaxing quotas or licensing; Institutions: restructuring public enterprises, eliminating/restricting roles of marketing boards, private sector participation, regulation via performance contracts -> enabling environment for institutions for efficient and inclusive markets Institutional vacuum: liberalization of state-controlled markets, privatization of public services started too early or w/o adequate process planning. Opposition from powerful interests (retain status quo, rents) e.g. removing gov’t price controls -> market sets prices -> removes indirect producer taxation via below market prices/ undermines rent seeking of interests in parastatals as market forces erode mediating role. Phased liberalization, retain some public sector role (e.g. remote areas, food security, etc)

SOCIAL DEVELOPMENT DEPARTMENT PPP in Water Supply/Sanitation: selective Political Economy Challenges 1.Reluctance of gov’ts to charge cost recovery tariffs, enforce collection (e.g. connected urban middle class - unconnected poor) 2.Public perception/influence on operations/policy reforms is unclear 1990s: “PSP seen as solution”: expertise & investment for network rehabilitation and expansion  mainly int’l, multinat. private operators - public perception: profit maximization, lack of accountability, low willingness to pay 2000s: surge of local, regional private providers (estimated 160 mio HHs served by private providers in 2007 vs. estimated 96 mio HHs in 2000) Work on commercial basis, but responsible behavior to local population, dialogue with LGs, ensuring local preferences are met (higher accountability); consumer willingness to pay WB emphasis for PPP: transparency, contract enforcement, plus contractual and regulatory frameworks Shift in incentives, performance enhancement of utilities: more accountable, commercially-oriented service provision, creditworthy, customer-focused Decentralization: important starting point for institutional change (e.g. central-local government relations)

Opportunity: Political Economy of Reform Framework - Linking Equity, Power Relations, Development Operations Analysis Policy Dialogue …of Refrom/Operation  Winners & losers (inclusion/ exclusion)  Supporters & opponents …with broad range of stakeholders  Build coalitions for change (equitable & sustainable development)  Communicate effectively combined with Nat. Policy Refroms / Operations Translate into design & implementation of …for enhanced development effectiveness

SOCIAL DEVELOPMENT DEPARTMENT

Political Economy of Reform - Key Messages 1. PSIA is effective approach to understand & manage political economy 2. Effective engagement by development agencies is needed Good political economy analysis, applied early in process Sustainable process of building coalitions for change: dialogue with wide range of stakeholders (incl. partner governments, donors, other development partners, and the public). Promoting transformative processes of institutional change, incl. empowerment and bottom-up accountability

SOCIAL DEVELOPMENT DEPARTMENT Political Economy of Reform - Key Messages (cont.) 3. Change of incentives, behavior, practice in development agencies Contextual understanding through analysis AND dialogue (distributional equity of reform outcomes, power relations, better access to reliable data) Broader range of interaction of development partners with wider range of stakeholders -not limited to MoF or line ministries-, (incl, sub-national gov’ts; parliament; private sector; civil society) Partnership approach, based on listening and learning More emphasis on participatory processes and communication; and valuing and using of local expertise

SOCIAL DEVELOPMENT DEPARTMENT Application – Selected Examples Global Sector Studies & Cross-Network Interaction Sanitation ESW: multi-disciplinary (ETW, SDV,FEU) -> inform projects/portfolio mgt, development practitioners Slum Upgrading: multi-disciplinary (SDV,FEU, WBI) -> inform projects/programs/portfolio mgt, policies, development practitioners Country Sector Studies West Bank Gaza: ESW Water (& conflict/governance) -> portfolio mgt, future operation Yemen: Water (& decentralization) -> Nat water strategy, and Multi-donor Water SWAp India Solid Waste Management Bangladesh Chittagong Port -> projects/programs Support to individual task teams (incl. ToRs, TA, client dialogue) Partnership with development partners Community of Practice on Political Economy in pipeline: PRMPS, SDV, EXT,…