Institutional and Governance Reviews and the Role of Political Economy Analysis in Operations Philip Keefer DECRG Flagship Course on Governance and Anti-corruption 21 April 2003

Operations and Institutions: The Questions What are the incentives of politicians »to allocate funds to pro-poor activities? »to demand effective implementation? »to improve the investment climate? »to refrain generally from rent-seeking/ corruption?

Operations and Institutions: The Questions What are the incentives of civil servants »to implement programs effectively? »to exercise discretion fairly? »to refrain from corruption/rentseeking generally ?

What are the development problems addressed by institutional analysis? Insecure property rights Corruption Schools without teachers Highways without maintenance Clinics without medicine Failed loans

Education/Public investment spending, Dom. Rep.

Corruption Perceptions, Indonesia Suharto falls

Some institutions that influence the investment climate Table 1.1. Political institutions and governance Rule of law Bureaucratic quality Do checks and balances exist? Yes No Are elections competitive? Yes No Are parties well- established? Yes No3.12.8

Answers to these questions start with citizens/voters »100 countries used competitive elections to elect their leaders, up from 60 in »Even in the least institutionalized democracies, politicians care about elections (e.g., Pakistan, Indonesia). When does voter pressure lead to better/worse outcomes?

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. »Road construction out of PM ’ s/Prez ’ s office, yes; road maintenance, no. »Special exemptions from regulations, yes; rule of law, no.

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).

Conflicts of interest among politicians, civil servants Between: Politicians and civil servants. Legislators and the executive branch. PM ’ s/presidents and ministers.

Consequences of conflicts of interest Centralization – presidents/PMs do not trust civil servants to implement programs. Bias towards “ easy to measure ” / “ easy to monitor. ” Low 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)

What to look for in doing institutional analysis? Are there checks and balances? In presidential systems, look at legislative authority of president and budget power. In parliamentary systems, look at intra- party competition, role of coalition partners in budget formation.

Urgency Decrees Laws Presidential decrees of “ urgency ” are commonplace in Peru

Budget authority – who can propose the budget? Only the executive? Peru, Bolivia, etc. and all parliamentary systems. Or only the legislature? (US)

Budget authority: who can amend, how? 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 More executive power over spending, fewer checks and balances overall, less rule of law More exec. power, without compensating credibility mechanisms (e.g., strong parties), spending drops, biased towards the “ measurable ”. Executive preferences over legislative (possibly including lower deficits).

Do politicians care only about targeted resource allocation? 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 $

Some policy implications If politicians care only about targeting, do not rely on the government to improve quality. Use politician interest in targeting to structure sector programs. Structure reform to address underlying problem(e.g., voter information, politician credibility, intra- government conflicts of interest) Attack symptoms indirectly (corruption, expensive campaigns)