Applied governance and political economy perspectives for growth analysis

1. Applied governance and political economy perspectives for growth analysis • Course on Applied Inclusive Growth Analytics • Joint Vienna Institute • July 2, 2009 Verena Fritz Governance Specialist PREM Public Sector Governance World Bank

2. The big-picture debate about governance and growth interactions Interactive relationship: • Governance matters for growth • Growth/increasing wealth (and possibly also the distribution of wealth) matter for governance The search for priorities: • The need to prioritize growth strategies for specific contexts, e.g. through an analysis of the constraints to growth • The need to prioritize efforts to improve governance • Not all potential governance improvements are affordable for poor countries (Khan/Grindle) • Some governance improvements may matter more for enabling growth than others (Meisel & Ould)

3. Why GPE for growth analysis? • Develop a sharper diagnostic lens on ‘government failures’, and of GPE dimensions of other constraints to growth • ‘Growth therapeutics’ : • treating constraints to growth requires attention to technical (& fiscal) as well as governance and political economy dimensions • Donor efforts based purely on technical analysis & best-practice approaches have often proven unsuccessful • Donors are often ‘surprisingly’ surprised by policy decisions (or non-decisions) in client countries • How to do GPE for growth analysis? – Need to stretch ourselves beyond a pure ‘common sense’ approach to political economy • To understand the complex motivations of stakeholders rather than relying strongly on individual ‘reform champions’ • To understand the interplay between formal and informal institutions, and the motivations of stakeholders

4. HRV: governance as direct and indirect constraints

5. GPE for inclusive growth • Achieving inclusive growth is likely to pose greater governance challenges than ‘just growth’ • Inclusive growth involves greater activity by the public sector: providing education for all, wider coverage of health services etc. • Establishing and protecting the rights of a larger share of the population (not just the well-connected) • Providing good enough governance and effective government action not only in main centers, but also in more remote regions

6. Complementing constraints to growth and governance in country analytic work • Translating identified constraints to growth into feasible policy solutions • Using governance and political economy analysis to understand • governance arrangements associated with constraints to growth and • underlying political economy drivers • With the aim of identifying feasible policy options • These may be ‘unorthodox’ or ‘second best’, e.g. selective property rights enforcement (Haber/Rodrik/Khan); partial rather than wholesale reforms of tariff structures, etc. (highly case & issue specific)

7. Complementary analysis Vulnerability/ problem: identified constraints to growth Governance and political economy diagnostics Identification of governance arrangements and underlying political economy drivers Technical diagnostic: what changes would have what effects on relieving constraints to growth? dialogue Context informed, feasible optionsfor WB policy advice to government/ engagement with local stakeholders and for WB programming/operations Doing things differently to overcome constraints to growth in a feasible and effective way

8. Example: infrastructure • Infrastructure is the most frequently diagnosed constraint to growth • Lack of fiscal and other funding resources & weak technical planning capacity as important reasons for an inability to address the constraint • Technical diagnostic: what size & type of power plant? What type of transport infrastructure (road, rail, port, etc.) & where? Costing and returns of these options? • But: governance and PE dimensions also need attention because poor use of existing resources is part of the problem • Poor public investment planning ; including low expenditures on maintenance • Capacity constraints + governance weaknesses and PE incentives • Weak aid coordination • Failure to mobilize private resources (especially energy) • Project execution: • Funds lost due to kickbacks/corruption & subsequent ‘savings’ made by contractor to re-coup those costs; selection of incompetent firms; disputes over actual costs (start/stop), etc.

9. Infrastructure – cont’d • Potential feasible solutions (case specific!): • Promote focus on maintenance spending • Pay attention to the political dimensions of investment planning – e.g. by developing cabinet-level discussions • Support public debate on who can pay for what (implicit or explicit subsidies are often regressive) • Explore options for social monitoring of project execution

10. A basic structure for GPE analysis: Three layers of problem-driven GPE analysis E.g. repeated failure to develop solutions to lack of results in sectors. Infrastructure is constraint to growth but is not being improved Vulnerabilities& concerns Evidence of poor outcomes to which GPE issues appear to contribute Problem driven What are the institutional arrangements & are they capable, effective & efficient? Mapping of institutions: laws, regulations; responsible public bodies; formal and de facto rules of the game; analysis of integrity/corruption challenges Institutional/ governance arrangements & capacities Why are things this way? Why are policies or inst. arrangements not being improved? Analysis of stakeholders, incentives, rents/rent-distribution, historical legacies & earlier reform experiences; social trends & forces and how they shape stakeholder actions Political economy

11. A basic structure continued: 3 sets of variables, interactions & effects on policies & outcomes Variables Examples 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.) Historical legacies, economic base and level of development, commodity prices; population dynamics;   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 Institutions Political leaders; political parties, (organized) interest groups; heads of SOEs;  external stakeholders Actors/ stakeholders

12. Operational value: Defining how to proceed to make reforms happen Seeking to expand reform space pro-actively Selecting operations given existing reform space Zambia telecoms: focus on local winners Mongolia Mining: TA with local think tank for public debate Philippines public procurement reform – pro-active coalition building to combat entrenched corruption networks India power: reform sequencing Paraguay & Bangladesh roads: external monitoring by stakeholders Ethiopia PBS to mitigate reputational risk: support subnational service delivery with participation

13. Governance and growth in resource-rich countries • Resource rich countries have less need for good enough governance to generate growth during boom price (= high prices for resources) • E.g. recent GDP growth: Zambia: 5-6.5% p.a. 2004-2007 (2009: 4%); Mongolia: 8.5-10.2% (2009: 2.7%), Kazakhstan : 10% 2001-2007 (2009: -2%) • BUT: poor governance is a key factor for the ‘resource curse’ – re-enforcing negative effects during downturns & hindering the translation of resource wealth into long-term development • Some key mechanisms: • Wasteful expenditures & public investments during boom times • Focus on rent-seeking rather than profit seeking among elites • Failure to manage macro-economic and fiscal risks

14. Indirect governance failures (especially RR countries)