Political Imperatives and Public Sector Reforms in Developing Countries INTERNATIONAL CENTRE FOR PARLIAMENTARY STUDIES LONDON 11th December 2013 Mushtaq H. Khan, SOAS, UNIVERSITY OF London http://www.soas.ac.uk/staff/staff31246.php

Definitions Public sector reforms refer to improvements in service delivery capacities of the state based on improvements in accountability, anti-corruption, and improvements in state capacity There are political pressures on developing country states to improve service delivery but there are also political imperatives slowing down reforms A failure to understand the political constraints facing particular public sector reforms in a country often results in wasted opportunities and frustration The policy challenge is to design public sector reforms in ways that can be implemented so that development outcomes can be accelerated 2

The Functions of the Public Sector Provision of public goods that the private sector will not provide: this requires tax collection and making decisions about spending priorities in transparent and accountable ways, followed by effective monitoring and accountability for failures and poor delivery Policies that assist the private sector overcome ‘market failures’: subsidies and regulations have to be designed and allocated effectively, monitoring of outcomes has to be effective and transparent, support has to be withdrawn or redesigned if outcomes are poor or not achieved Welfarist redistributions to maintain political stability and achieve socially desirable distributive outcomes 3

Governance Reforms that Appear to Address these Problems Strategies to reduce corruption so that decisions to spend money are not influenced by special interest groups, delivery is efficient and leakages reduced Strategies to improve democratic processes and accountability: this is desirable anyway but also because it can help to monitor service delivery and achieve better distributive outcomes Strategies to improve the quality of personnel and technical skills in different departments: in particular to reduce politicization of appointments, for instance by having an effective public service commission to make bureaucratic appointments However, attempts at achieving these goals in developing countries often resulted in limited success 4

The conventional strategy for controlling corruption The standard economic theory of corruption focuses on a very general view of corruption as an illegal transaction driven by public officials with the ability to take discretionary actions In this theory, corruption is driven by the greed of public officials and their ability to take discretionary action Anti-corruption strategy according to this view should reduce or remove discretion and mitigate greed through incentives for rule-following behaviour by public officials But this analysis is a good description of the drivers of a very narrow range of corruption in developing countries Even for this subset of corruption, the institutionalization of rule-following behaviour is not simple in developing countries

Anti-Corruption Policy According to the Standard Theory According to the simple theory, anti-corruption strategy should reduce or remove discretion (by removing unnecessary functions and/or introducing procedures to reduce discretion such as tighter procurement rules) and change the cost-benefit equation facing public officials by raising the costs of corruption by measures such as raising salaries of public officials (which raises the cost of losing the official jobs), harsh penalties if detected (like prison sentences), greater democracy, transparency and a better rule of law (to raise the probability of getting caught and punished) But the ‘standard theory’ fails to put corrupt transactions within a macro-political economy context: in developing countries, targeting individual cost-benefit calculations appear to have little effect because it is usually not an individual decision

Corruption: General Features Hide Many Differences Corruption is an illegal form of a rent-seeking ‘exchange’ between public officials and private organizations/citizens Corrupt transactions have two parts: the ‘influencing activity’ is almost always illegal (but some forms of influencing can be legal: for instance lobbying). The ‘intervention’ may be legal or illegal, socially beneficial or otherwise. If either or both parts of the transaction are illegal we have a corrupt transaction.

Legal versus illegal rent seeking Corruption can be seen (for the most part) as illegal rent seeking Much of the decline in corruption in richer countries is simply the conversion of illegal rent seeking into legal rent seeking the greater legitimacy of property owners in advanced countries allows them to legitimately spend resources to influence policy and this allows legalized rent seeking higher tax revenues allow property rights and regulations to be better protected and enforced and make it more difficult for public officials to violate these rights In addition, the imperative for political corruption declines as we will see: higher tax revenues allow winning electoral strategies to emerge that do not require off-budget resource allocation to clients 8

Legal versus illegal rent seeking At one level, there is no difference between legal and illegal rent seeking: either can be more or less damaging and the policy priority is to address the damaging types of rent seeking However, illegal rent seeking or corruption is more problematic for several reasons corruption undermines the legitimacy of the state and the ruling coalition and can contribute to growing political instability in a society legal rent seeking can be regulated using formal rules, and these can be enforced. If outcomes are poor, the formal regulatory structure can be changed. In the case of corruption the outcome of the rent seeking process depends on the balance of power and capabilities of organizations and the outcome is not easy to regulate. The only policy option may be to fit developmental policies to the political realities to minimize damaging outcomes 9

Limitations of the standard governance and corruption agenda There are structural drivers of corruption in developing countries that are not addressed by liberalization, transparency, harsh punishments, salary increases, the work of anti-corruption agencies or sanctions imposed by donors Corruption is often not an individual choice that can be affected by changing individual costs and benefits. Rather, the choice in a developing country is often of joining public office or staying out: once in, an individual may face little ‘choice’ because politics is organized in a particular way However, this does not mean that corruption should be tolerated because many types of corruption are damaging for development: the point is to identify and design feasible policies that can reduce avoidable and damaging corruption even in the presence of unavoidable types of corruption

Taxes, Property Rights and Democracy Democracy in advanced countries is characterized by powerful feedbacks between the economy and politics The economy is broad-based and productive with many taxpaying (capitalist) enterprises with an interest in the protection of their rights and in efficient service delivery Economic and political power are ‘aligned’: the formal economic sector has ability to protect their rights and to pay sufficient taxes for service delivery and political stabilization through rule-following politics Developing countries do not have a broad productive economy Economic and political power are not aligned: property rights can be routinely changed by those with political power Moreover, either because the tax base is limited or it comes from natural resources, redistributive politics is not rule-following: informal (patron-client) politics is the norm

Constraints on Democratization Strategies Democracy in developing countries typically takes the form of patron-client politics (where the powerful violate rules to satisfy their clients) rather than social democracy (where redistribution and subsidies are organized in rule-following ways). The political imperative to create jobs for clients results in the politicization of appointments and can lead to low quality in public service A low tax base means expenditures on enforcement (including salaries of public officials) is low Some developing countries have natural resources like oil, copper or iron ore: this gives them a large budget but without a broad taxpayer base. Here there are taxes but they do not come from a broad-base of taxpayers who can hold the government to account and the state is once again likely to face weak public scrutiny

A More Complex View of Public Sector Reform Strategies General anti-corruption, democratization and capacity building strategies have achieved very limited success in developing countries The political structure of developing countries and the configuration of powerful groups and organizations determines the types of political distribution that are required for maintaining political stability Viable public sector reform strategies have to work with some types of patron-client politics that will continue in the medium term: reforms should focus on improving capacity in critical departments and sectors Not all types of corruption can be immediately addressed: many types of political corruption are structural and some illegal rent seeking is likely to continue as long as all rights and rules have not been fully institutionalized

Reforms to Strengthen Developmental Policies All interventions including potentially developmental ones create new income opportunities (rents), and outcomes depend on whether the rents can be ‘managed’ in a way that desirable outcomes can be achieved When developmental policies fail, this is usually because powerful organizations influence the allocation or management of the rents to affect outcomes (for instance subsidies fail to achieve results or are allocated to the wrong recipients) Attempts to solve this problem by reducing corruption or improving transparency and accountability across the board are likely to result in limited benefits A more feasible strategy is to focus on the most important development priorities and i) design policy so that the requirements of monitoring and disciplining rents are minimized (if possible by avoiding policies that require powerful players to be disciplined) and ii) focus on technical and administrative capacity building for critical government departments 14