1. Why does Political Economy of reform work matter for Operations ? Sanjay Pradhan, Vice President, World Bank Institute March 6, 2009

2. Political economy (PE) approach enhances development effectiveness  Country teams often lack systematic approach to PE  This often results in over-estimating support for reforms, stalled/problem projects, failed implementation  The process of change is central to development but is not well reflected in the conceptual or operational work of most development organizations  Yet there are good examples of quick and practical Bank PE work with promising results  For better results on the ground, systematically integrate PE in work of country teams

3. The Foundation: Three layers of problem-driven analysis Political economy Vulnerabilities & concerns Institutional arrangements & capacities What is the evidence of poor outcomes? Growth diagnostics, poverty assessments, CAS completion reports, project evaluations, etc. What institutional arrangements & capabilities contribute to poor outcomes? Why are things this way, and how to bring about change? Mapping of institutions, Public Expenditure Tracking Surveys (PETS), corruption assessments/governance diagnostic surveys Analysis of stakeholders (using various tools), incentives, rents/rent- distribution, etc.

4. Zambia: Country governance and political economy diagnosis Problem/ Concern  Stalled implementation Political economy drivers  Centralized authority  Significant space for citizen voice  Elite economic nationalism  Extreme tilt to status quo Implications for sectors/CAS platforms  No electricity & water price rebalancing (strong voice of urban consumer) => no unbundling or international concessions in electricity (economic nationalism)  No telecom gateway liberalization (economic nationalism)

5. Zambia (cont.): Tailored sector engagement Target elite incentives  Electricity generation: Mining company incentives to accept full cost of new generation capacity  Telecoms: Focus on domestic cellphone pricing which impacts urban consumers rather than international gateway which impacts influential Zamtel Build local coalitions for specific interventions  Urban water and electricity distribution: Build support from urban coalitions with incentive to protect system from decay Impact  Approach being mainstreamed in CAS implementation

6. Sequencing reforms 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 domestic pricing impacting urban than international impacting influential Zamtel 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 Making Reforms Happen Managing & Overcoming Political Obstacles

7. Media Private Sector Municipal Government Military State (Bureaucracy) Political Parties Civil Society International Legislative Branch Judiciary 1 Source: “Robust Web of Corruption: Peru’s Intelligence Chief Vladimiro Montesinos,” Kennedy School of Government Case Program, Case C14-04-1722.0, based on research by Professor Luis Moreno Ocampo; Peru: Resource Dependency Network, 2000 Vladimiro Montesinos Alberto Fujimori Entrenched corruption networks: Montesinos’ corruption network in Peru

8. Transparency and Accountability Network (20+ member groups) Walang Ku-Corrupt Movement (Youth) PAGBA & AGAP (w/in Gov’t) CBCP (Church) Philippine Contractors Association (private sector – main stakeholder) Local chambers of Commerce (Private sector) Procurement Watch: Drew other civil society groups into the advocacy efforts and coordinated the activities Forging coalitions for reform: Philippines procurement reform

9. Some emerging lessons Operational value of PE work for better results  Help unveil underlying drivers of poor development outcomes  Enhance likelihood of success through better design  Propose where and how to engage: selectivity within existing space vs. proactive expansion of existing space Tangible results require  Action-oriented PE rather than academic analysis  Managerial attention to translate findings into action  Shifting the focus from what needs to happen, to how to make it happen, for moving from a poor equilibrium to a better one

10. A WBI Perspective “Safe-space” engagement with the multiplicity of stakeholders needed to make reforms sustainable  Helping to turn analytical frameworks into action through dialogue with government, civil society and other stakeholders  Helping Bank operations and country stakeholders identify entry points and priorities for reform with higher ownership and likelihood of success A focus on capacity development  Programs to help enhance leadership, dialogue, coalitions, change management and innovation  Participatory diagnostics to help reformers de-politicize policy debates to focus on specific weaknesses with wider buy-in and understanding of problems  Linking into local, regional and global networks of practitioners and countries that have faced similar challenges

11. Discussion

12. Selected further examples

13. Bangladesh roads sector: Diagnosis Problem  Corruption in road construction and maintenance Set up  Poor planning with weak links to budgeting  Weak procurement system and internal controls Political economy drivers  Highly partisan road agency  Roads a major source of campaign finance

14. Bangladesh roads: Bank Engagement Difference in Approach  Extensive operational sector risk analysis Result  Diagnosis : Internal market for public office  Recommendation: Engage external stakeholders in monitoring roads construction and maintenance P-E Approach  Combined an economist and an anthropologist  Explaining persistence of dysfunctionalities; exploring ways of addressing them

15. Philippine procurement reform (1998-08) Problem  Corruption perceived as a very serious problem with public procurement and tax collection as major sources  “Great Wall” phenomenon – corruption pervasive Set up  Legal foundation a mess  Over 100 laws, regulations, executive orders (promulgated over a thirty year period) governing public procurement, creating inconsistencies and loopholes  Public procurement consistently perceived to be highly corrupt in annual surveys Political economy drivers  Vested interests  Procurement of infrastructure and key goods, e.g. drugs/textbooks, source of campaign funds for incumbent politicians

16. Philippine procurement reform (cont.) Difference in approach  Break up into two phases; focus first on getting an omnibus procurement law passed instead of launching a broad anti-corruption program  Anchor effort on building a support coalition within and outside, fueled in part by a well thought out and cleverly implemented communications strategy Result  Despite vested interests and political pressures, law passed in 2003 (it took 3 years, 3 presidents, 11th and 12th Congress)  New challenges emerge in implementing law. WB Global Polls (Nov 08) and Client Survey (Sept 08) show strong demand for WB assistance with anti-corruption work. Public opinion survey (Nov 06) showed public support for procurement reform. PE Approach  Focus on the “how” – moving from a bad equilibrium to a better one

17. Philippines tax administration reform Problem/concern  Previous Bank reform effort unsuccessful Diagnosis  Country-level political economy drivers …  Culture of corruption and patronage  Elite capture of politics  Weak legal enforcement  Low revenue mobilization … and implications for sectors/project  Low capacity, obsolete tax administration system  Low tax compliance;  Discontinuity of political leadership at agency level  Weak staff commitment/resistance to reform

18. Philippines tax administration reform (cont.) Implications  Adjusted project strategy :  Limited goals, small investment loan  Focus on demonstrating modest early successes  Resources to change management strategy within agency Impact to date  Revenue collection up  Incipient system-wide improvements  Ongoing monitoring envisioned

19. Governance and political economy diagnostics framework

20. GPE can be applied to country, sector, or specific operations Macro: country level  Analysis of overall country context. Also as a background note for meso and micro level work Meso: thematic and sector level  Thematic problem-driven GPE analysis, e.g. on natural resource management, linking governance and growth  Sector-focused problem-driven GPE to inform CAS pillars, sector strategies & Development Policy Loans, complementing technical sector analysis Micro: specific operations or policies  Such analysis is focused on generating direct advice to a single operation or for the dialogue on a specific policy issue (e.g. Prior Action)

21. Complementary analysis Vulnerability/ problem constraints to growth/poverty reduction, challenges to achieve results in sectors; unsatisfactory operations Technical diagnostic What can be done? (setting out options) – e.g. of infrastructure needs, social protection systems, etc. Problem driven governance and political economy diagnostics 1)Identification of governance arrangements and underlying political economy drivers 2)Assessment of feasibility of policy options dialogue Approach to reforms WBG policy advice to government/ engagement with local stakeholders Country-level GPE features & situation

22. 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 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.) Three groups of factors for political economy analysis

23. Thank you.

24. Country Level

25. Mongolia governance and political economy diagnostic: Country & project focused Problem/Concern  Avoid the resource curse, re-engage in mining sector Governance trends/political economy drivers  Corruption up, especially aroung mining licensing  ‘Great game’: Distributing mining licenses; conflicts of interest  Public discontent: Riots during summer 2008; Resource nationalism, demands for transparency Multi-method approach  Institutional & stakeholder mapping, opinion survey

26. Mongolia GPE diagnostic cont’d: Informed strategy & operations Difference in approach  Promote informed public debate  Support for local think tank on mining issues  Work with parliament which has a crucial role  Develop warning indicators for ‘resource curse’ Impact  CAS based on diagnostic findings  Crucial input to new Mining Sector Technical Assistance  Informing other operations, monitoring

27. Sector Level

28. India power: Diagnosis Problem  Poorly performing sector: high subsidies, unreliable supply  Fiscal drain for Indian states  Resistance to WB reform program: riots, reputational risk Institutional set up  Integrated state electricity boards  Subsidized/non-commercial tariff rates Political economy drivers  “Rich” farmer constituency – but had genuine problems & little understanding of need for reform  Corrupt vested interests  Weakly organized pro-reform constituency – lack of communication & public support

29. India power (cont.): A new engagement Difference in approach  Change in reform sequencing: Improve accountability in financial flows for greater public confidence => improve services in targeted areas => then cost-recovery  More consultative approach Impact  New operations gradual, sequenced, pragmatic Political analysis method  Low cost, quick, journalistic approach: Multi-stakeholder interviews  1 staff person, working draft in 3 months

30. Project Level

31. Paraguay road maintenance project Problem  Weak, uncoordinated planning  Neglect of road maintenance Set up  Poor governance and weak institutional capacities  Limited transparency and accountability Political economy drivers  Political competition & mass participation  But entrenched interests & corrupt, powerful elites  Political decentralization: Increased veto points  Limited citizen participation

32. Paraguay road maintenance project (cont.) Difference in approach: Road Maintenance Project  Systematic analysis of risks with corresponding mitigation measures for transparency & citizen participation  Road social contract: mechanism for civil society & government to jointly track progress & identify corrupt practices Impact  Improved public participation, consultation & oversight  New public procurement system seen as effective Political economy approach  Built on diagnostic studies and governance assessments  Stakeholders and donor consultations  Cost – 3 staff weeks Task Team Leader + 3 Mgmt meetings + 3 country workshops

33. Questions 1. What challenges and country sensitivities do country directors face in expanding the use of political economy analysis at the CAS, sector, and project levels? 2. How do you organize and acquire/enhance the skills needed by country teams to operationalize political economy work across the country programs? 3. How best to develop and roll out learning interventions for country teams?