1. Institutional and Governance Reviews and the Role of Political Economy Analysis in Operations Philip Keefer DECRG Flagship Course on Governance and Anti-corruption 1 December 2004

2. Political economy and the operational challenge We would like to persuade politicians »to allocate funds to pro-poor activities; »to demand effective policy implementation; »to improve the investment climate; »to refrain from rent-seeking/ corruption (to improve governance).

3. Political economy and the operational challenge We would like civil servants »to implement programs effectively; »to exercise discretion fairly; »to refrain from corruption/rentseeking generally (to improve governance).

4. Understanding political/bureaucratic incentives informs donor response to all development challenges Insecure property rights Corruption Schools without teachers Highways without maintenance Clinics without medicine Failed loans/stalled disbursement

5. Puzzle 1: Low educ. spending, high public invest. spending, Dom. Rep.

6. Puzzle 2: Democracy reduces peceptions of honesty/integrity, Indonesia Suharto falls

7. Solving the puzzles: how politicians get votes, make credible decisions 100 countries used competitive elections to elect their leaders, up from 60 in 1990.  Even in the least institutionalized democracies, politicians care about elections (e.g., Pakistan, Indonesia). When does voter pressure lead to better/worse outcomes?  Reforms don ’ t work if people don ’ t believe them. What institutions improve credibility?

8. 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.

9. 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

10. Examples of policy distortion from information »School buildings, yes; education quality, no (most of our client countries) »Road construction out of PM ’ s/Prez ’ s office, yes; road maintenance, no (Pakistan under Sharif). »Special exemptions from regulations, yes; rule of law, no (Peru, Indonesia).

11. Political market imperfections since 1990: Information

12. 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.

13. 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).

14. Political market imperfections since 1990: pre-electoral credibility

15. How to diagnose information/credibility problems: examples 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 $

16. What to do about information/credibility problems If politicians care only about targeting, do not rely on the government to improve quality, reduce corruption. Use politician interest in targeting to structure sector programs (Foncodes, Peru). Structure public sector reforms to give politicians opportunities to extract politically relevant rewards. Structure reform to address underlying problems (e.g., use them to build party reputation for policy reform; use them to increase voter information about who is responsible for reform and what reform is accomplishing).

17. Post-election credibility – the other big political economy distortion Absent political checks and balances, governments can act opportunistically (promise one thing, deliver another). Checks and balances dramatically improve the rule of law (reduce opportunistic behavior) and bureaucratic quality (oversight of executive branch performance).

18. Checks are not a panacea if conflicts of interest among politicians not resolved Consequences: Centralization – presidents/PMs do not trust civil servants nor cabinet to implement programs. Low budgets: legislature does not trust executive branch, especially when it has little control over budgets.

19. 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)

20. Checks and balances are not a panacea: if low political payoff in blocking actions against the public interest Absence of electoral imperatives for political veto players to act in the public interest undermines the value of checks.  Checks have a negative effect on rule of law, school enrollment when elections are less competitive, since they increase the “ common pool ” problem.

21. 0 50 100 150 200 250 19941995199619971998199920002001 Urgency Decrees Laws Where legislator incentives are weak, checks evaporate: “ Urgency ” decrees in Peru

22. How to assess “ good ” checks and balances Are there checks and balances? In presidential systems, look at legislative authority of president and budget power. In parliamentary systems, look at party fragmentation in cabinet; whether coalition partners can block budgets they don ’ t like; whether coalition partners are likely to retain posts in a new cabinet if vote of confidence succeeds.

23. Budget authority – proposal and amendment power Only the executive can propose? Peru, Bolivia, etc. and all parliamentary systems. Or only the legislature? (US) Only amendments to reduce spending? Dominican Republic, Peru, Colombia, Chile) Or unrestricted authority? (US, Brazil, Costa Rica, Ecuador)

24. 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)?

25. Budget authority: implications Without compensating credibility mechanisms (strong parties with well- established policy reputations), more executive power over spending, fewer checks and balances overall, leads to  less rule of law  less spending.

26. What to do about absent or badly functioning checks and balances?  Don ’ t exacerbate the problem by cooperating with ministers who circumvent checks... But  Raise the political price for ministers/ legislators who exercise blocking power irresponsibly (through the provision of information about consequences of decisions) (example: Nepal).  Help ensure the credibility of inter- politician agreements.

27. Conclusions Institutional/Political economy analysis (e.g., through the IGR instrument) can shape country and sector strategy: Identifies what can work/what is sustainable Provides framework for o packaging diverse programs/projects to enhance sustainability. o introducing information/consultation into program design in meaningful ways. o structuring priorities (infrastructure vs. public sector reform or with public sector reform).