Political Economy and Growth Philip Keefer Development Research Group PREM Growth Course 26 March 2009

1. Political Economy and GrowthPhilip KeeferDevelopment Research GroupPREM Growth Course26 March 2009

2. Why not just focus on economics? Partial reforms don’t deliver big growth bang for buck. Economic explanation: • Wrong reforms (e.g., not the “bottleneck” reforms). • Exogenous constraints (capacity; land-locked; neighbors; no knowledge) • Synergies absent (Reform more than sum of parts). • None distinguish fast- and slow-growers, though. Political explanation: • Governments have limited interested in growth • Explains partial, poorly implemented, halting, wrong reforms; inattention to exogenous constraints; lack of synergies. • Assertion: if one size does not fit all, it’s more likely because of politics than economics.

3. What do politicians need to do to support growth? Growth requires: Policies that give a substantial fraction of entrepreneurs access to finance skilled workforce land and transportation regulatory approvals and security from opportunistic behavior by government officials (etc.) When do politicians pursue these? When political success depends more on broad public than on special interest support When they can align incentives of public officials who implement these policies.

4. What dimensions of politics matter? 2 key political market imperfections (PMIs): lack of information; lack of credibility (Keefer and Khemani, WBRO 2005) Citizen information Uninformed citizens can’t hold governments accountable for poor performance. Discourages pro-citizen (pro-growth) policies (no political credit) Encourages pro-special interest policies (no blame). e.g., Grossman and Helpman: special interests finance advertising to reach uninformed citizens.

5. Lack of Political Credibility Low political penalty for reneging on promises. Why? • Challengers can’t promise to do better. • Incumbents bear no reputational loss. • Citizens cannot hold government officials collectively responsible. Policy consequences • Low credibility promotes narrow targeted (clientelist) policies, discourages broad public policies (Keefer and Vlaicu, JLEO 2008). • Explains policies in young democracies: more corruption, less rule of law, less secondary education, larger public sector wage bill/GDP (Keefer, AJPS, 2007).

6. Political parties key Institutionalized parties allow broadly credible promises: Instill collective responsibility; Generate reputational costs from reneging Give governments leverage over officials: harder for officials to play divide and conquer; appointments less likely to be cronyistic; government-official “contracts” more credible. Parties institutionalized if: Voters vote for party, not just candidates. Parties raise money. Party members can replace party leaders. Per capita growth ~2.5 percentage points higher in democracies with programmatic parties.

7. Same issues important in autocracies Autocrats who want to pursue growth need to bring government officials on board. But how can they credibly promise to reward officials for success? Institutionalization (of parties, bureaucracies, military) (Gehlbach and Keefer). Autocrat allows large sub-group of citizens to organize (60 million members of the Chinese Communist Party) Increases their ability to overthrow autocrat if he reneges. Increases their willingness to invest. Autocrat can write pro-growth contracts with party members

8. Ruling party institut’n and investment • OLS, SEs corrected for clustering, p-values reported • Observations: non-democratic episodes • Source: Gehlbach and Keefer (2007)

9. Applications: Benin, Ghana, MENA Benin, Ghana: CEMs concerned with growth. Key concern: What are the incentives of political decision makers to pursue growth? MENA: Flagship on the private sector in the region. Key concern: What are the incentives of political decision makers to encourage private investment?

10. Benin – democratic “success”, growth “failure”

11. Benin: Governance weak

12. Gov. expenditures don’t increase human capital

13. Benin: low information, low credibility African politics often characterized as “neopatrimonial” or “clientelist”. More likely when citizen information low and no loss of credibility from slow growth. Benin exhibits both of these traits.

14. Benin: Citizens uninformed Afrobarometer question on whether fees are obligatory in public primary schools, public health clinics. 65-75% answered correctly in 17 countries other than Benin. 31-51% answered correctly in Benin. Many media outlets, but . . . Under-capitalized. Little spent collecting news about government policies. Governments are willing to apply pressure against critical media.

15. Benin: parties not institutionalized Parties not programmatic (2006, Database of Political Institutions): 60 percent of biggest parties in all democracies are programmatic. None of Benin’s parties. Parties unstable (not institutionalized). ~100 parties disappeared in 2005, ~75 new parties in 2007. Youngest governing coalition (FCBE) won the most seats in 2007; oldest (PRD) lost a seat.

16. Benin: Low citizen attachment to parties Citizens indifferent between parties when parties not programmatic/institutionalized. 66% of 1200 Benin respondents to the Afrobarometer survey indicate they do not feel close to any party; twice as many as in Ghana. Politicians know parties don’t matter, so they switch often. “I prefer to start my own party rather than accept a subordinate role in the party of another.” Consequence: 95% of Beninese respondents: politicians rarely or never keep their promises (Ghana: 82%).

17. Benin: Presidents weakly accountable for growth Presidents are the key decision makers in Benin. Absence of parties means campaigns based on individual, not party characteristics. Two consequences. Rely on clientelist payouts to voters and donations from special interests: attenuates incentives to pursue growth. Difficult to govern: Can only trust those vested in president’s success since no institutionalized party.

18. Institutions exacerbate low accountability Rules in Benin marginalize legislators. President has sole authority to propose budgets AND (very unusual): de facto authority to declare budget amendments by deputies to be invalid, b/c cost implications insufficiently documented. President of the National Assembly almost entirely controls agenda of Assembly and (very unusual) 2/3 vote necessary to remove him. Deputies indicate little legislative oversight of budgets, little interest/capacity in advancing policy agendas. Citizens have no reason to hold deputies accountable for growth failures if they’re essentially powerless to influence policy.

19. Benin: policy implications Institutional Increase vote threshold for parties Increase responsibility of National Assembly for budget Information Increase collection and dissemination of information about gov’t decisions. Start with budget – currently even the National Assembly is poorly informed about budget implementation. Make it easy for media to report on government performance. Improve the quality of education Current policy emphasizes quantity

20. Ghana: could do better • Growth better than SSA average; signif. FDI; big reforms w/r/t red tape, education, health. • But: • Growth far lower than East Asian countries at similar levels of development. • Governance no better or worse than average of all other countries. • Public spending not productive • Secondary school enrollment 20 percentage points lower than comparators. • Public investment and government employment are several percentage points of GDP higher than average; • But public investment has not been growth-maximizing.

21. Puzzle: limited impact of competitive elections (2000)

22. Puzzle: limited impact of competitive elections (2000)

23. What explains limited policy responsiveness to elections? Again, political market imperfections: • Uninformed citizens, • Limited political credibility • not fully (but more than in Benin) institutionalized parties Leading to: • continuing preference for policies serving targeted constituencies; • slow improvement of public goods; • continued significant rent-seeking

24. Ghana: Information • No newspapers: Afrobarometer 2005: 60% NEVER get news from newspaper vs. 14% in South Africa • Low education – and it matters: • Up to 10 years of education (vast majority), 36 percent could identify Economic Recovery Program (ERP); • more than ten years of education: 66 percent. (Afrobarometer 1999)

25. Ghana: Non-credible electoral promises Few, stable parties in Ghana (in contrast to Benin) • Less dependent on charismatic leaders; more party discipline; members have more influence on party leadership But: • No programmatic differences • preference for the market similar between NDC and NPP, their supporters. • Broad public campaigns focus on competence/ corruption, not promises regarding future policies. • Party and party policy stances irrelevant to unusually large number of legislative campaigns. • Enormous importance of personal handouts by candidates, not parties.

26. Why is Ghana doing well? • Despite strong political incentives to pursue clientelist policies, Ghana is doing better than neighbors. Why? • No dominant political party (not Senegal). • Two main political parties are relatively “institutionalized” (not Benin). • Strong traditional restraints on arbitrary behavior by key “patrons” – chiefs and elders. • Continually falling risks of extra-institutional threats to the regime.

27. Policy implications-info and education Information • Accelerate transparency reforms and the dissemination of relevant information to citizens. • More aggressive collection and dissemination of government performance information • Examples: • test scores and class sizes by school • mortality by hospital; etc. • spending by community. Quality and quantity of education • Bias in the system towards construction and quantity improvements. • Need access expansion, but also dramatic quality improvement.

28. MENA: What are the growth issues? • By many measures, MENA and East Asia are similar. • But private investment, exports, growth far lower in MENA. • Why? • Overall political environment does not favor growth, even if specific policy reforms are evident.

29. Governance not obviously the problem: WBI Governance Index

30. ICRG Index – better in MENA, non-oil than in East Asia

31. Domestic credit to private sector high in non-oil MENA (but smaller as fraction of total)

32. So why are MENA growth and exports low? Incumbent firms favored • credit access very concentrated. • trade barriers much higher in MENA. Incumbent workers favored • labor protection much stiffer Government can’t make credible commitments to new entrants.

33. Trade barriers high in MENA Source: Kee, Nicita and Olarreaga 2006

34. Labor protection extends to public sector • 1997 (Schiavo-Campo, et al) (old but best) • Algeria, Bahrain, Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia, West-Bank Gaza and Yemen: • government (central + non-central) employment = 3.3 percent of population. • avg. govt. wage = 3.4 times GDP/capita. • China • government emp. = 1.7 percent of population. • average wage = 1.3 times GDP/capita. • Indonesia • government empl. = 1.0 percent of population. • average wage = 1.6 times GDP/capita.

35. Civil service is clue that growth is more politically important in East Asia • Merit matters more in East Asia. • Singapore: • Entrance to civil service rigorously meritocratic. • 2006: 40% of average civil service and 50% of senior civil service total compensation performance-based. • Performance criteria are related to growth objectives. • China: • Meritocratic recruitment. • Growth second only to “maintenance of order” as promotion/bonus criterion (mayors/governors). • Where does this occur in MENA? Perhaps Dubai.

36. Can’t write growth-promotion contracts with civil servants in MENA • Contracts with leaders not credible. • MENA: few/no formal obstacles to arbitrary decisions by rulers. • East Asia: Ruling parties more institutionalized (e.g., leadership transitions are regularized – China, Malaysia) and/or consequences of slow growth are high (Singapore). • Delegation to officials is key, but leaders unwilling. • Delegation gives officials greater ability to overthrow ruler. • MENA: Centralized control is key. • East Asia: Broad delegation.

37. Institutionalization in East Asia China: • Mao opposes CCP institutionalization. • ruling party institutionalization in post-Mao period • elimination of competing organization (Red Guard) • creation of formal cadre evaluation system. Indonesia: • In 1969, Suharto reforms military: • Joint command (reduces coordination costs) • Increases delegation downwards (to very local commanders).

38. MENA Contrast: military institutionalization Sadaam Hussein replaced successful officers with incompetent loyalists, established competing armed forces, • at substantial cost to military readiness and • despite external threats. (Hashim 2003). • Little delegation of authority to lower level officers • Little trust across units or between enlisted men and officers. Similar to observer claims about military organization throughout the region (Egypt, Syria).

39. MENA parties less institutionalized • Age of ruling party = institutionalization. • Takes time to institutionalize; and • Non-institutionalized parties disappear.

40. Why the difference? High rents • oil • foreign aid Lack of intra-elite cohesion • Competing clans rather than, as in China, shared experience of “The Long March.” • Abu Dhabi: of nine Amirs since 1818, five murdered, two deposed. • Sharjah: eight leaders since 1803, two murdered, three deposed. • Jordan: coup threats led King Hussein to “de- institutionalize”.

41. How to maintain support with low growth? No institutionalization Low growth, but discourages overthrow Redistribute to key interests to forestall revolt. • Spending on military: Large oil countries, 5.8% GDP; 1.3% in large East Asia (2004). • Gov. wage bill: Egypt 7.8%, Morocco 12%; East Asia<6% (2005).

42. MENA: Reform implications-coordination • Focus on inter-ministerial coordination. • Ruler strategies discourage coordination. • Philippe de Meneval discusses Bank project to promote coordination in Morocco.

43. MENA: Reform implications-investment promotion • Pursue reforms that offer guarantees to investors but don’t challenge leader aversion to institutionalization • Reforms over limited geographic jurisdictions, such as Export Processing Zones, The civil service overseeing regulatory activities can be transparently and meritocratically recruited without increasing coup threat. • Accelerated growth-oriented public investment. • Value of inv. lost to leaders if they renege on their commitments to investors; • And infrastructure cannot “rebel.”