Applied governance and political economy perspectives for growth analysis Verena Fritz Governance Specialist PREM Public Sector Governance World Bank Course on Applied Inclusive Growth Analytics Joint Vienna Institute July 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  With the aim of identifying feasible policy options  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 for WB 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 challenges Analysis of stakeholders, incentives, rents/rent-distribution, historical legacies & earlier reform experiences; social trends & forces and how they shape stakeholder actions Problem driven

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 Influence political and public sector action and policies and their implementation Outcomes (growth, poverty reduction, human development, dealing with development challenges – pollution, (social) conflict, etc.) 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 debate Paraguay & 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 (2009: 4%); Mongolia: % (2009: 2.7%), Kazakhstan : 10% (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)