Schaffner, Julie.

Development Economics: Theory, Empirical Research and Policy

Analysis. John Wiley and Sons. 2014.

Policy, Governance and

Political Economy
Chapter 13
10/2013

1
Introduction
 In the absence of intervention by governments and NGOs,
development outcomes are determined by:
◦ People,
◦ who interact with one another in markets
◦ and in non-market settings,
◦ their interactions governed by private institutions.

 Without intervention, people would make many decisions

that contribute to development, but we have reason to
suspect that development outcomes would be less than ideal.

Introduction 2
Introduction
 Where people make sub-optimal choices (in the absence of
intervention), it is possible that intervention by governments
or NGOs could improve development performance.
◦ The reasons for suspecting sub-optimal choices are called rationales for
intervention.
◦ They arise out of market and institutional failures (i.e. reasons why
markets fail to lead people into ideal choices, and private institutions do
not pick up the slack).

Introduction 3
Introduction

 Policies will improve development performance only if:

◦ policies are well designed
◦ policies are well implemented
◦ policymakers have the necessary capacity and motivation

Introduction 4
Policy design
 Good policy design requires:
◦ Accurate diagnosis of the market and institutional failures that motivate
intervention (i.e. the rationales for intervention)
◦ Design well tailored to the diagnosis
◦ Adequate attention to possible unintended consequences
◦ Careful consideration of complementarities and tradeoffs across
policies

Rationales for intervention and policy design 5

Rationales for intervention
A rationale for intervention is:

 a reason to believe that private actors, guided only by markets and private
institutions, might fail to undertake an activity that is required for ideal
development performance.

 a reason why a private actor’s perception of the benefits and costs of an

action might differ from a “social decision maker’s” perception of the
benefits and costs,
◦ where a “social decision maker” is a hypothetical decision maker who seeks to
maximize achievement of the development objective and is un-hindered by
market and institutional failures.

Rationales for intervention and policy design 6

 Private decisions regarding how
much of an activity to undertake
Pesos Pesos Pesos
MPC
MPC
MPB

MPB MPC
MPB

Q* Q Q* Q Q* Q

Rationales for intervention and policy design 7

Social assessment of the benefits and
costs may differ from private assessment
Pesos

MSB

MPB

MPC=MSC

QP QS Q

Rationales for intervention and policy design 8

Rationales for intervention and
policy design
 public goods problem
 externalities
 common property resource problem
 market power
 weak property rights and contract enforcement institutions
 financial constraints
 coordination failures
 inadequate information
For each, discuss:
 self-control problems and other
• Whatdepartures from
is the nature of theneoclassical
problem?
rationality • In what sense does it lead private actors
to do “too much” or “too little?”
 poverty reduction/equity • Where do we expect to see this problem?
• What types of policy might be useful for
overcomingRationales
it? for intervention and policy design 9
Rationales for intervention and
policy design

 When brainstorming about policy design, we should

remember that a particular development-enhancing activity
may be held back by more than one market and institutional
failure.
o e.g. Farmers may lack both information and financing to support
investment in a new agricultural technology.

Rationales for intervention and policy design 10

Rationales for intervention and
policy design
 The rationales for intervention that should shape a policy may
differ between one-time and on-going phases.
o Some policies are only one-time interventions.
• e.g. one-time information campaign

o Some policies are only on-going interventions

• e.g. on-going subsidization of activities that are thoughts to have positive externalities

o Many others have both one-time and on-going phases.

• e.g. infrastructure programs with one-time construction phases and on-going operation
and maintenance phases

Rationales for intervention and policy design 11

Rationales for intervention and
policy design
 Often program designers assume or hope that, even though
intervention is required during the first phase, no intervention
is required during the second phase.
o If this is true, the organization may exit while leaving in place sustained
improvements in well-being.
• Interventions that generate more sustained benefits for the same one-time
cost contribute more to growth and development.
o But whether it is true in any given context is an empirical question.

Rationales for intervention and policy design 12

Potential for design errors

 The diagnoses regarding underlying market and institutional

failures may be incorrect.
o Design elements may fail to address critical problems (leading to
ineffectiveness).
o Some design elements may be unnecessary (leading to unnecessary
cost).
o Policymakers may be incorrect in assuming that the target activity is
socially desirable.

Rationales for intervention and policy design 13

Potential for design errors

 The intervention may lead to unintended (and undesirable)

consequences.
o The “theory of the second best” reminds economists that if an
intervention corrects one market and institutional failure while leaving
another unchecked, the intervention may do more harm than good.
o e.g. Policies to counter market power may raise an industry’s
production level toward the socially ideal level, but may also impose
serious costs associated with increased pollution (if policies to counter
the associated negative externality are not in place).

Rationales for intervention and policy design 14

Inferring assumed rationales from a policy’s
design and questioning assumptions
Drinking water system project design elements

INVESTMENT PHASE (one-time) OPERATION/MAINTENANCE PHASE

Partial grant/community
contribution required
Institution building
(cooperation)
Provision of blue prints, info on
contractors, etc.
Hygiene education
None (organization exits)
 What assumptions underlie:
o the plan to exit after the investment
phase?
o the inclusion of institution-
building?
o the inclusion of blue prints?
o the inclusion of hygiene education?
o the provision of only a partial grant
(requiring community contribution)?

Rationales for intervention and policy design 15

Inferring assumed rationales from a policy’s
design and questioning assumptions
Drinking water system project design elements

INVESTMENT PHASE (one-time) OPERATION/MAINTENANCE PHASE

Partial grant/community
contribution required
Institution building
(cooperation)
Provision of blue prints, info on
contractors, etc.
Hygiene education
None (organization exits)
 What diagnosis errors might prevent
communities from taking up the
opportunity?
 What diagnosis errors might imply that
the program is spending more than
necessary?

Rationales for intervention and policy design 16

Discussion of Kremer and Miguel
(2007)*
Anti-Worm Approaches
ONE-TIME ON-GOING
(1) On-going free drug distribution – positive
externality (on-going cost)
(2) On-going drug sale – Not so much
externality, plenty of private benefit (lower
on-going cost)
(3) Hygiene education (3) Exit

 Approach 1 is known to improve children’s health and school

performance, but it required significant on-going subsidy.
 Approaches 2 and 3 are more “sustainable.”
 What do we learn about the desirability of the more sustainable
approaches from this study?
*Kremer and Miguel, 2007, “The Illusion of Sustainability,” Quarterly
Journal of Economics, August, p. 1007-1065. Rationales for intervention and policy design 17
Good governance of policy
implementation
 Policymakers must implement policies through agents.

 Policymakers would like to guide agents into making good

implementation choices by creating institutions that provide
the agents with good governance.

Governance of policy implementation 18

Good governance of policy
implementation
 Symptoms of poor governance (and implementation-related
reasons for careful evaluation):
o corruption
o poor service quality
o poor service design
o imbalance across regions, communities and facilities

Governance of policy implementation 19

Good governance of policy
implementation
 Policymakers would like to achieve good implementation outcomes.
◦ High quality services
◦ Little diversion of resources
◦ Careful application of program rules, etc.
◦ Decentralized policy design choices that are well suited to localities and to
policymakers’ aims

 Implementation outcomes are influenced by the choices of policy

implementing agents:
◦ Central government bureaucrats
◦ Local government officials
◦ Community committees
◦ Private contractors
◦ Frontline service providers

Governance of policy implementation 20

Good governance of policy
implementation
 Inputs to good implementation choices
o motivation
o local information
o resources
o capacity
o coordinating oversight

Governance of policy implementation 21

Good governance of policy
implementation
 Policymakers make governance structure design choices,
hoping to bring the right combinations of the inputs to the
various implementation decisions:
o allocation of decision-making authority across agents
o rules for allocating expenditure and collecting revenue
o criteria for selecting employees, contractors, and partners
o capacity-building services
o accountability mechanisms

Governance of policy implementation 22

Good governance of policy
implementation
 Accountability mechanisms:
o performance contracts (holding agents accountable to superiors)
o mechanisms rendering agents accountable to clients, involving
• local democratic elections of agents
• incorporation of local feedback into performance contracts
• more subtle direct rewards and punishments by clients
• competition

Governance of policy implementation 23

Good governance of policy
implementation
 Now that we are familiar with the governance structure design
choices, let’s return list of “inputs” to good policy
implementation choices and identify at least two ways (i.e.
through two kinds of governance structures) that policy makers
might hope to provide for this input:
o motivation
o local information
o resources
o capacity
o coordinating oversight

Governance of policy implementation 24

Good governance of policy
implementation
 Governance reforms (i.e. changes in the governance structure
design choices) tend to bring both benefits and costs.

 Whether their net effect on the quality of implementation will

be positive is an empirical question.

Governance of policy implementation 25

Good governance of policy
implementation
 Types of governance reform:
o decentralization
o increased community participation
o introduction of performance contracting
o introduction of private sector competition
 For each type of governance reform, discuss:
o Within the broad category of reforms that fall under this label, what are
some differences in the nature or design of the reform?
o This type of reform is often motivated by the desire to increase which
“inputs” to good implementation choices?
o What are some reasons why the desired increases in targeted inputs to
good decision making might not materialize?
o How might the reform cause deterioration in other inputs to good
implementation choices? Governance of policy implementation 26
Political economy
 Knowing how to design and implement good policies isn’t
enough to guarantee that policymakers will do so.

 Policy makers must have:

o the authority to enforce the policies throughout their territory, and
o the motivation to pursue good policies rather than policies that serve
selfish or unhelpful political purposes.

 This motivates interest in politics and in the political

institutions that govern policymakers’ choices.

Political economy 27
Political economy
 In their book Why Nations Fail, Acemoglu and Robinson
suggest that policymakers will put development-enhancing
policies into place only when:
o they have a strong state with consolidated power
• i.e. a state that is beyond civil war and the threat of coups, and is able to
enforce rules, levy taxes, provide services and ensure stability to investors.
o they are governed by political institutions that constrain them to use
that power in development-enhancing ways
• not just formal political institutions (e.g. parliamentary democracy)
• but a balance of political power among diverse groups that have sufficient
economic power and are sufficiently well organized to hold policymakers
accountable

Political economy 28
Political economy
 In their view, today’s rich countries are rich because at some critical turning
point in the past, coalitions of non-elite groups cooperated in overthrowing
the extractive elite, and putting into place political institutions that prevent
any one of the allied groups from becoming an extractive elite.
o e.g. Diverse groups that had gained economic power through the opening of
Atlantic trade won the Glorious Revolution of 1688 in England.

o This put into place a new constitution that greatly limited the monarch’s
power, and

o opened the way for improvements in economic institutions that made the
Industrial Revolution possible.

o Interestingly, the allied “non-elite” groups were a pretty well-off and small
fraction of society.

Political economy 29
Political economy
 This view raises difficult questions for the international development
community:
o Should more resources be devoted to college education and improvements
for small and medium-sized enterprises (rather than to primary education
and poverty reduction)?
 It may be the college educated and (upper) middle class business people who
are the most likely to create the coalitions that can overthrow extractive elites.

o Might foreign aid diminish development performance?

 By providing extractive elites with financing, it may weaken their accountability
to other (potential tax paying) groups.

Political economy 30