Strengthening Political Economy Understanding ... - World Bank Group

Strengthening Political Economy Understanding for Growth Analysis A Joint DFID – World Bank Workshop 5 November 2008 London DFID: Policy and Research Division (Growth Team and Politics and the State Team) World Bank: PREM Economic Policy and Debt (PRMED) and Public Sector (PRMPS)

Workshop Summary and Next Steps Background A one day workshop was held in London on November 5th, which brought together both economists and governance specialists from various agencies, with two main objectives: first, to share emerging findings and lessons from World Bank and DFID case studies on the linkages between growth analysis/diagnostics and work on governance and political economy issues; and second, to agree next steps for taking such work forward in different operational contexts (for full agenda, see Annex 2). The workshop built on ongoing discussions about the relationship between governance and growth, and focused on how governance and political economy analysis can complement growth diagnostic work at the country level, and on the potential benefits of such work for informing DfID and World Bank operations. The workshop was also joined by a number of participants from the AfDB, ADB, Netherlands and French Aid Agencies, and academic and International Growth Center (IGC) representatives (for participants list, see Annex 3). Main Findings From growth diagnostics to “therapeutics”: The workshop highlighted the need to shift from growth diagnostics (identifying the constraints to growth) to growth “therapeutics” (identifying the policies to alleviate constraints to growth). The three country case studies that were presented (Zambia, Cambodia and Uganda) underscored the potential benefits of doing governance and political-economy analysis (GPEA) to support growth analysis. At the same time, the presentations highlighted the need for more sustained learning and guidance in this area of political economy analysis, including how to carry out this work operationally and with what actors (e.g. partner governments, the private sector, civil society etc). Growth as a multidisciplinary challenge: Given the multidimensional nature of the growth challenge, the need for building a shared understanding of key underlying concepts and applications of this type of analysis was stressed. Participants agreed that it was important to focus on addressing common problems across disciplines, and understanding how to best bring different disciplinary skills to bear on those problems and to capitalize on synergies been economists and governance specialists.

1

Complementarities between growth diagnostics and governance/political economy analysis: The growth diagnostic approach (e.g., the HRV binding constraints to growth framework) provides a useful starting point. This approach helps identify a typology of binding constraints encountered at the country level. The workshop participants agreed that governance related institutional arrangements and their underlying political-economy drivers could be inherent to all types of binding constraints. In this vein, government failures can be seen as either errors of commission (such as corruption and rent-seeking by government) versus errors of omission (weak institutional capacity). An understanding of these can be critical for arriving at appropriate and feasible policy interventions in support of the growth agenda. Participants further noted that growth diagnostics is just one method of identifying constraints to growth; and similarly, there is no single identified methodology for undertaking political economy analysis either. GPEA and “second best” reforms: Participants emphasized that integrating GPEA into growth analysis should not be treated ex-post or as an afterthought to the analysis. Rather, the growth analysis should seek to both understand the governance/institutional arrangements and political-economy dynamics underlying constraints to growth. The country case studies demonstrated that improved understanding of existing and potential institutional arrangements could help in arriving at “second-best institutional reforms”, which in many developing countries may be the most effective ways at ameliorating constraints to growth.1 Similarly, the three examples showed that better politicaleconomy analysis could be deployed to inform assessments of the feasibility of various policy actions intended to address binding constraints. The group recognized that there are often a number of different policy options to alleviate a particular binding constraint, and appropriate methodologies to inform what is most politically and institutionally feasible is crucial. Process issues and parameters: The participants agreed that there were a number of outstanding questions as to how GPEA could be best inserted into a policy dialogue with the government, and wider issues around audience and dissemination of this work. Since all of the three case studies had been undertaken as internal exercises, these issues had yet to be fully tested and explored. In most cases though, judgments about audience and participation should be made at the country-level, according to the specificities of the country context. Participants agreed that the objective was not to second-guess national decision makers or prescribe external views of what was politically feasible. Rather, it was about helping development agencies be more effective interlocutors with governments and other key stakeholders by better understanding their incentives and constraints. Taking the agenda forward: Participants suggested that a useful contribution would be to provide guidance on what practitioners should be focusing on with respect to GPEA issues as part of the growth analysis. The skills and resources brought to these issues should be organized around a particular problem, and responsive to the context and the challenge of arriving at feasible policy actions. Finally, all participants emphasized the 1

See for example Dani Rodrik, (2008): Second-best Institutions: If you think best-practice is the way to go in institutional reform, think again, January 2008 (http://ksghome.harvard.edu/~drodrik/papers.html)

2

need to experiment and be humble in this area. Consequently it was particularly important to find effective ways of working on these issues within and across agencies, including breaking out of organizational silos. (For detailed summary of individual sessions and country case studies see Annex 1) Next Steps The participants agreed that there was a need to deepen current practice in this area. Specifically, it was agreed that:  A follow-up workshop within twelve months should be held to share additional good practice cases, and disseminate further lessons learnt. 

In the interim, the World Bank would revise the survey of CEMs, and provide an update of on-going CEMs being conducted over the next year.



DfID-WB will collaborate on 3-4 country case studies within the broader growth diagnostic framework to inform World Bank and DFID country operations and the emerging agenda/approach of the International Growth Center.



The World Bank plans to deliver a one-day course potentially in the field by the spring, with the key target audience being Bank staff engaged in CEM/growth diagnostic work. DFID staff working on growth issues would also be involved. .



The Bank team will submit an application for Governance Partnership Facility (GPF) funds geared towards strengthening knowledge and learning in this area, including the development of guidance for practitioners and the building of communities of practice, including through the development of a dedicated web portal.

3

Annex 1: Summary of Sessions

Overview of On-Going Activities by Partners Kingsmill (DFID) introduced the workshop by calling for increased joint working between economists and political-scientists in addressing common development challenges. He stressed the need for a step change in growth work to ensure it incorporates political economy analysis. He emphasized the importance of improving the quality of core growth diagnostic work. But this should be complemented with a better understanding of politics and institutions in order to address constraints to growth. We needed to be modest and realistic about external influence on these processes – and ensure our advice is tailored to the needs of country partners. He concluded by stressing the need for a “consequential” output from the workshop and one which would inform future actions around this agenda. Hagan (DFID) presented an overview of the International Growth Center, a facility DfID has just contracted out to a LSE-Oxford consortium. The facility is expected to provide sustained technical advice on growth to developing countries. Support would be based on country requests, with around three countries to be selected in the first year. If there was greater demand for IGC advice (which should itself be seen as a mark of success), priority would be given to DfID priority countries (mainly in East/Anglophone Africa and Asia). Around a third of IGC resources are expected to be devoted to research in priority areas to ensure evidence-based technical advice. Lejarraga (AfDB) underlined increasing interest within the African Development Bank on growth diagnostics. A pilot study will be undertaken in a sub-set of countries in West Africa, which include Cape Verde, The Gambia, Senegal and Mali. She stressed the importance of complementing growth diagnostic work at the national level with a more regional approach, because some constraints to growth lie beyond the boundaries of nation-states, especially small and landlocked countries. Zagha (World Bank) explained how experience has shown varied growth experiences across countries in terms of strategies, policies, and investments. One important lesson from the work of the Growth Commission is that the role of governments and markets change in the course of development, and hence across countries at any point in time. Consequently, there is a significant degree of confusion and diversity of options about what is need in order to achieve growth in a particular country context. One aspect of this proliferation of potential ingredients to growth is that different disciplines seek to push their area/sector as the key to growth (trade people say trade is important, same for education, finance, etc) and confuse what is useful with what is critical for growth. Many things that are useful and have high social value are not necessary for high growth. The “Growth Initiative” at the World Bank was intended to get more discipline and sharpness in how binding constraints were identified in country economic work

4

GPEA in World Bank Growth Analysis Badkoubei presented a review of sixteen recent World Bank Country Economic Memoranda (CEMs), and the extent to which governance and political-economy issues were treated in these documents. Main findings included:   





Different methodologies to growth diagnostics, but increasing use of binding constraints to growth type analysis and prioritization. The coverage of governance and political-economy issues in analyzing growth are varied across CEMs But there are some notable examples of deeper analysis of governance constraints and underlying political-economy drivers e.g. Angola, Benin, Ghana, and Kenya CEMs. In cases where reforms are difficult because of the governance and political economy environment, “second-best” policies can be identified (e.g. Morocco CEM). Examining the links between governance and growth in economic sector work can lead to innovative operational initiatives.

Fritz presented a framework to assess how “problem-driven” GPEA analysis could be applied to growth analysis. This demonstrated how a range of governance and political economy factors could underpin constraint identified through an HRV-type growth diagnostic analysis. Highlights from Case Studies The case study session aimed to illuminate the key substantive and process lessons derived from each case; the value added to economic diagnosis from political-economy analysis; lessons about what donors/ multilaterals need to do differently; and the implications for future operational work. Uganda (DfID/ ODI) How was the study done/ what it sought to achieve?  Focus was on growth therapeutics: how to address constraints to growth (building upon previous growth diagnostic work), given the political economy context of the country.  Developed a framework for understanding political economy issues in the context of growth diagnostics  Created a method for ranking certain policy actions with respect to growth constraints in key sectors. Findings/ value added:  Demonstrated that political incentives/interests had important implications for the likelihood of policy reforms in the three sectors considered

5

Issues raised:  How to compare projects with high impact and low political-economy feasibility with those that have less impact but are more feasible?  Could the judgment on preferred policy options be informed by quantification, implicit or explicit? o Participants thought it was useful to be more explicit about this type of exercise.  Apart from considering constraints to growth, it is also important to understand where the country is performing well and how this might be replicated in other key growth sectors  Could governance and political-economy analysis be written in a way that would allow sharing with the government? o Opinions differed, but it was suggested that in some contexts there might be important benefits from undertaking certain types of stakeholder analysis with partners in order to build a joint understanding of problems/ solutions. Zambia (World Bank) How was the study done/ what it sought to achieve?  Initiated with a binding constraints to inclusive growth study, including a roundtable with the Harvard Growth Lab.  Two separate studies were commissioned in parallel, but with no initial linkage: a growth diagnostic and a governance and political economy analysis of key growth sectors (notably electricity, transport and telecoms).  Ultimately a bridging note was produced bringing together the two pieces of work. with bridging note Findings/ value added:  Case proposed different approaches to integrating the treatment of governance and political-economy depending on if it is a growth analysis to identify binding constraints versus a growth strategy that includes policy responses to identified constraints.  Found that each potential constraint can be better understood by looking at governance and political economy aspects.  While political economy aspects are important to consider for both identifying constraints and analyzing the feasibility of associated reforms, it is important not to place the political economy feasibility filter up-front in order to guard against overlooking key constraints, just because they have no feasible policy solution.  Feasible approaches to governance reforms in electricity and telecoms were found, in light of historical failures around first best reforms, which failed to take into consideration the underlying political-economy. o This revised approach was recently integrated into the World Bank’s new Country Assistance Strategy (CAS). Issues raised:  The two pieces of work – growth analysis and governance/political-economy analysis – were only brought together ex-post. This raised the question of when 6

the respective activities and skills sets of economist and governance specialists could most effectively be brought together. Cambodia (World Bank) How was the study done/ what it sought to achieve?  The case study was not explicitly tied to a binding constraints to growth analysis, but was intended to inform the upstream preparation of this CEM owing to the teams desire to get a better handle and policy dialogue around these issues. The work was also initiated as part of an initial round-table in February 2008 with the Harvard Growth lab  The approach taken by the analysis was to provide a more systematic analysis of growth in successful (garments) and less successful sectors (rice, livestock) that would otherwise appear to be promising within the context of a weak institutional environment. At one level, it therefore focused on the governance enabling environment, or constraints that appeared to be associated with successful or unsuccessful growth in a particular sector.  Governance issues were unbundled to explain the perceived paradox of high growth despite weak governance and institutional quality. Findings/ value added:  The presentation highlighted that the garment sector had been able to benefit from “good enough governance” to sustain growth in the sector. Key factors which had contributed to high growth in the sector included: o Significant profit/rent opportunities in the sector. o External/international drivers for governance improvements in the sector, including the introduction of third party monitoring for labor standards. o Effective collective action by the domestic sector, in collaboration with government, to continually address challenges in the sector.  The study contrasted this in the rice sector, where this type of success was not yet evident, despite elements of profit opportunities/comparative advantage being in place.  The policy implications however focused on how one could stimulate an enabling environment for growth in the rice sector, to mirror some of the dynamics seen in the garments sector, notably by stimulating the interaction of domestic collective action with international standards.  The presentation sought to draw some implications for policy options, notably potentials for strengthening external drivers for growth (including trade agreements) and better domestic collective actions to strengthen the overall business environment for the sector to further develop. Issues raised:  Value of understanding why certain sectors succeed in a given context. In difficult settings it is often important to learn from those sectors that thrive or things that work (in the spirit of finding hippos and camels)  Comments highlighted the importance of carefully thinking about the identity of entrepreneurs, including those from the diaspora.

7

Discussion and emerging findings Three discussants (Iza Lejarraga, Mick Moore and Kunal Sen) provided in-depth comments on the case studies and issues around bringing together growth analysis and GPEA work. This was then followed by table discussions which focused on the added value and limitations of this work, implications for multilaterals/donors and next steps. Key points were as follows: What are the opportunities and added value of this work?  Governance and political economy issues are inherent to each node and constraint of the growth diagnostic tree and therefore need to be understood better if we wish to remove these constraints  Technical solutions should only be considered technically correct if they are also politically supportable (a point reiterated elsewhere by Dani Rodrik).  GPEA can add value by: i) Moving from growth diagnostics to growth “therapeutics” – finding policy solutions that are politically feasible and can be implemented ii) Identifying “good enough” institutional arrangements likely to deliver growth iii) Improving the quality of policy dialogue with country partners  But there is no single methodology for conducting GPEA analysis What are the main challenges and limitations?  There are limits to the extent to which development agencies should explicitly define what is and is not politically feasible in any given country.  And it is not clear the extent to which political economy analysis can be factored into a dialogue with country governments and other stakeholders  Putting a policy feasibility filter before identifying constraints may lead to overlooking constraints that are binding just because there are no feasible policy options to address them  Experience tends to show that if the government already has a growth agenda it will be receptive to new policy recommendations only to the extent that they are broadly consistent with the existing strategy. Timing is therefore critical in determining the political feasibility of proposed reforms.  Need to pay more attention to constraints at the regional level because neighborhood effects are very important for country growth.  PE/governance constraints to growth vs. shared/inclusive growth can differ and therefore may need to be assessed separately Who is the audience for this work? This is dependent on a number of factors including: 1) Purpose of the analysis (internal learning vs. policy dialogue) 2) Specificities of each context 3) Timing of the analysis (diagnostic vs. therapeutic phase)

8

What may donors/ multilaterals need to do differently? What are the next steps?  Multilaterals/donors should draw on different disciplinary strengths to address common problems around growth  Develop further guidance and information sharing around these issues  Establish a community of practice/virtual network of different specialists working on growth issues  Undertake more case studies and disseminate examples of where governance and growth analysis worked well together.

9

Annex 2: Agenda 8.45 - 9.10 9.10 - 9.35

Arrival and coffee Welcome and Introduction William Kingsmill Why we are here and key objectives for the day Stefan Kossoff

9.35 -10.10

Individual introductions Analysis and Policy Dialogue for Growth; Agency Updates

Chair: Stefan Kossoff

Brief highlights of general growth worth in the AfDB, WB and DFID, and how they are taking forward applying growth diagnostics in different country settings.

Presenters: Harry Hagan, DFID Growth Team Roberto Zagha, World Bank Iza Lajarraga, AfDB

10.10 – 10.40

COFFEE

10.40 – 11.25

Governance and PE Understanding in Recent World Bank Country Economic Work The presentation will provide a framework for thinking about the analysis of constraints to growth, governance/institutional arrangements, and underlying PE dynamics in informing the country economic policy dialogue and offer the results of a review of 16 recent WB Country Economic Memoranda.

11.25 – 12.50

12.50 – 14.15

14.15 -15.30

Chair: Ajay Sharma Presenters: Verena Fritz and Shah Badkoubei Plenary discussion and Q&A

Country Case Studies, Part 1

Chair: Stefan Kossoff

Uganda Zambia Cambodia

David Booth Susanna Lundstrom Kai Kaiser

Key questions for the 3 case studies include:  What were the key substantive and process lessons from the work?  How did it add value to the economic diagnosis?  What does it tell us about what donors/ multilaterals need to do differently?  What are the implications for future operational work? LUNCH Potential implications of the global financial crisis: a brief reflection from Roberto Zagha Country Case Studies, Part 2

10

Chair: Sam Gibson Kunal Sen Mick Moore Iza Lejarraga

Discussants + plenary discussion/ Q&A

15.30 – 16.00

COFFEE

16.00 -17.30

Synthesis and next steps What have we learnt today? (What is the value added by this approach, what are the limits of this approach, who is the audience for this work?)

Chair/facilitator: Sam Gibson Small groups Plenary discussion

What does the evidence tell us about how we work, e.g. what donors/ multilaterals need to do differently? What are next steps for guidance and learning? Reflections

17.20 – 17.30

Mark Robinson, Harry Hagan, Roberto Zagha, Brian Levy Closing

11

Kai Kaiser

Annex 3: Participants DFID 1) William Kingsmill, Director for Policy and Research Division [email protected] 2) Mark Robinson, Head of Governance and Social Development [email protected] 3) Harry Hagan, Head of Growth Team, Growth and Investment Group (GIG) [email protected] 4) Rachel Phillipson, Economic Adviser, GIG [email protected] 5) Max Everest-Phillips, Senior Governance Adviser, GIG [email protected] 6) Paul Healey, Senior SD Adviser, GIG [email protected] 7) Malcolm Smart, Senior Economist, GIG [email protected] 8) Stefan Kossoff, Senior Governance Adviser, Politics and the State Team, (PST) [email protected] 9) Ben Latto, Governance Adviser and Deputy Team Leader, PST [email protected] 10) Ajay Sharma, Economic Adviser, PST [email protected] 11) Jane Hobson, Social Development Adviser, Equity and Rights Team [email protected] World Bank 12) Susanna Lundstrom, Senior Economist, PREM Economic Policy and Debt Dept (PREM ED) [email protected] 13) Verena Fritz, Governance Specialist, PREM Public Sector (PREM PS) [email protected] 14) Kai Kaiser, Senior Economist, PREM PS [email protected] 15) Brian Levy, Adviser, PREM PS [email protected] 16) Roberto Zagha, Senior Economic Adviser, PREM VP [email protected] 17) Piet Van Heesewijk, Senior Operational Office, Governance Partnership Facility, [email protected] 18) Shahrooz Badkoubei, Consultant, World Bank [email protected] Other agencies 19) Claudia Pieterse, Dutch Ministry [email protected] 20) Nicolas Meisel, AFD [email protected] 21) Mohammed Ehsan Khan, AsDB [email protected] 22) Iza Lejarraga, AfDB [email protected] External resources 23) David Booth, Overseas Development Iinstitue (ODI) [email protected] 24) Dirk Willem te Velde, ODI [email protected] 25) Mick Moore, Institute of Development Studies, Sussex (IDS) [email protected] 26) Mushtaq Khan, School of Oriental and African Studies (SOAS) [email protected] 27) Pallavi Roy, SOAS [email protected] 28) Soumya Gupta, London School of Economics (LSE) [email protected] 29) Gerard Padro i Miquel, LSE [email protected] 30) Alex Duncan, Policy Practice [email protected] 31) Dermot Shields, Consultant, [email protected] 32) Kunal Sen, Manchester University [email protected] 33) Sam Gibson (facilitator), [email protected]

12

Annex 4: DFID-WB Organisations and Units Involved in the Workshop DFID’s Politics and the State Team (PST): The Politics and the State Team is the key team in DFID’s Policy and Research Division responsible for delivering on the DFID White Paper 3 commitments around Making Governance Work for the Poor. This has involved policy development and knowledge sharing on building “capable, accountable and responsive states” to promote better governance in the countries where we work. The current agenda of PST consists of six key workstreams focussed on governance and political analysis; governance and growth; governance and service delivery; democracy and accountability; fragile states; and state-building. Our future focus is likely to include the challenges facing fragile states, in particular how countries can become less fragile. Fragile states are expected to account for 60% of DFID’s bilateral programme by 2011 (up from around 30% in 2006). The emphasis going forward is also to support the Secretary of State’s call to up our game on “working politically”. DFID’s Growth Team: The main thrust of the Growth Team (GT) work-plan is to take for forward the actions and priorities set out in ‘Growth a Step-change’ agreed by the SOS at the end of 2007. The four key areas for our work are:  Setting-up and launch the International Growth Centre (IGC)  Support Country offices to develop new partnerships and support to growth  Develop policy around climate change and growth  Develop evidence and policy around inclusive growth. We have recently incorporated the work of the Investment Climate team into our work and have added three new areas:  Tax and Tax administration  Competition and Competition Policy  Regulation and regulatory reform The World Bank’s Poverty Reduction and Economic Policy and Debt Network (PREM): The PREM Network is the Bank’s focal point on issues such as trade, aid, debt, corruption, gender, and macroeconomic policy – all of which are drivers of shared growth. Our mission and overarching objective is to integrate the Bank’s poverty reduction efforts at the country level and provide policy advice to the Bank’s clients during the formulation and implementation of policies and programs. The Bank’s Poverty Reduction and Public Sector Management Department (PRMPS): PRMPS is the department within the Bank’s PREM Vice Presidency dealing with public sector reform. PRMPS also includes the secretariat for the implementation of the Governance and Anti-Corruption Strategy (GAC) of the WB. The Bank’s Economic Policy and Debt Department (PRMED): PRMED is also part of the PREM Vice Presidency. PRMED supports the needs of economists within the PREM Network, and serves as the secretariat to the Economic Policy Sector Board. PRMED coordinates work on strategy, knowledge management, and partnerships in economic policy.

13