Unit 1: the State, Policy-Making and Political Economy

Unit One: The State, Policy-Making and Political Economy

Unit Information 2 Unit Overview 2 Unit Aims 2 Unit Learning Outcomes 2 Unit Interdependencies 2

Key Readings 3

FURTHER READINGS

DFID (2009) Political Economy Analysis: How to Note. DFID Practice Paper, Department for International Development, London, July 2009.

Available from: http://www.odi.org.uk/events/2009/07/23/1929-dfid-note-political- economy-analysis.pdf

This paper illustrates the fact that aid donors are increasingly looking to political economy analysis to inform their country-level strategies and activities. The paper describes a number of practical approaches to political economy analysis at macro, sectoral and policy problem levels.

IDS/KNOTS (2006) Understanding Policy Processes: A Review of IDS Research on the Environment. Institute of Development Studies (IDS), Brighton.

Available from: http://r4d.dfid.gov.uk/pdf/ThematicSummaries/Understanding_Policy_Processes.pdf

This paper distils some of the key insights from Keeley and Scoones (1999) and illustrates how they have been applied within research on policy-making related to environmental and natural resource management by researchers at the Institute of Development Studies. Relevant to Section 3 of this unit.

World Bank (2008) The Political Economy of Policy Reform: Issues and Implications for Policy Dialogue and Development Operations. Report No 44288 GLB, Social Development Department, The World Bank, Washington DC, June 2008.

Available from: http://siteresources.worldbank.org/EXTSOCIALDEV/Resources/The_Political_Economy _of_Policy_Reform_Issues_and_Implications_for_Policy_Dialogue_and_Development_ Operations.pdf

Examines World Bank experience in promoting policy reform in agriculture and the water and sanitation sectors of developing countries from a political economy perspective. Reform is fairly narrowly conceived as pro-market action, but the insights as to who might support or propose reform and why, and how the reform process can be structured so as to gain support and reduce opposition, are useful.

REFERENCES

Bardhan P (1996) Decentralised development. Indian Economic Review XXXI(2) 139–156.

Bates R (1989) Beyond the Miracle of the Market: The Political Economy of Agrarian Development in Kenya. Cambridge University Press, Cambridge, pp. 6–8.

Binswanger H, McIntire J (1987) Behavioural and material determinants of production relations in land-abundant tropical agriculture. Economic Development and Cultural Change 36(1) 75–99.

Clay E, Schaffer B (eds) (1984) Room for Manoeuvre: An Exploration of Public Policy in Agriculture and Rural Development. Heinemann, London.

Coase R (1960) The problem of social cost. Journal of Law and Economics 3(October) 1–44.

Collinson S (ed) (2003) Power, Livelihoods and Conflict: Case Studies in Political Economy Analysis for Humanitarian Action. Humanitarian Policy Group Report No 13, Overseas Development Institute (ODI), London.

Available from: http://www.odi.org.uk/resources/download/241.pdf [Accessed 1 December 2013]

DFID (2009) Political Economy Analysis: How to Note. DFID Practice Paper, Department for International Development, London (DFID), July 2009.

Drazen A (2008) Is there a different political economy for developing countries? Issues, perspectives and methodology. Journal of African Economies 17(AERC Supplement 1) 18–71.

Grossman G, Helpman E (1995) Trade wars and trade talks. Journal of Political Economy 103(4) 675–708.

Keeley J, Scoones I (1999) Understanding Environmental Policy Processes: A Review. IDS Working Paper No 89, Institute of Development Studies (IDS), Brighton.

Khan M (2000) Rents, efficiency and growth. In: Khan M, Jomo K (eds) Rents, Rent- Seeking and Economic Development: Theory and Evidence in Asia. Cambridge University Press, Cambridge, pp. 21–69.

Krueger A, Schiff M, Valdes A (1988) Agricultural incentives in developing countries – measuring the effect of sectoral and economy-wide policies. World Bank Economic Review 2(3) 255–272.

Kydd J (2009) A new institutional economic analysis of the state and agriculture in Sub-Saharan Africa. In: Kirsten J, Dorward A, Poulton C, Vink N (eds) Institutional Economics Perspectives on African Agricultural Development. International Food Policy Research Institute (IFPRI), Washington DC, pp. 429–460.

North D (1990) Institutions, Institutional Change and Economic Performance. Cambridge University Press, Cambridge.

Nyoro J, Kiiru M, Jayne T (1999) Evolution of Kenya's Maize Marketing Systems in the Post-Liberalization Era. Working Paper 2A, Tegemeo Institute of Agricultural Policy and Development, Egerton University, Nairobi, June 1999.

Available from: http://www.aec.msu.edu/fs2/kenya/wp2a.pdf [Accessed 1 December 2013]

Persson T, Tabellini G (2000) Political Economics: Explaining Economic Policy. MIT Press, Cambridge, MA.

Rausser G, Roland G (2009) Special Interests vs the Public Interest in Policy Determination. Agricultural Distortions Working Paper No 78, May 2009, The World Bank, Washington DC.

Available from: http://go.worldbank.org/3QR2ZQFN20 [Accessed 1 December 2013]

Simon H (1957) A behavioral model of rational choice. In: Models of Man, Social and Rational: Mathematical Essays on Rational Human Behavior in a Social Setting. Wiley, New York. van de Walle N (2001) African Economies and the Politics of Permanent Crisis, 1979– 1999. Cambridge University Press, New York.

1.0 STATE ROLES AND STATE ‘FAILURE’

Section Overview

Most students of economics or development would agree that, in some way or other, the performance of the state is critical to development outcomes. Whilst economic theory often portrays the role of the state as being to correct for market failure, technocrats are frequently frustrated by what they see as state failure, ie the failure of governments to design or implement policies that would promote growth, welfare or poverty reduction. In this section we review what neoclassical and new institutional economics tend to see as the role of the state, then explore a number of explanations of state failure. We finish by categorising state activities in a way that will facilitate later political economy analysis. As part of this categorisation we introduce the concept of rents. Allocation of rents is a fundamental political activity, but rents can be allocated in ways that are either beneficial or highly deleterious for economic growth and development.

Section Learning Outcomes

By the end of this section, students should be able to:

• compare alternative explanations as to why states often do not perform the roles that economists and other policy analysts would like them to

• distinguish different types of rents and explain their potential contributions to economic growth and development

1.1 State failures and market failures

Whether you work in the private sector, for a non-governmental organisation (NGO) or within a state (or other public) agency, it would be surprising if you do not have stories about the poor performance of some state agency or other. Your stories may not emanate exclusively from your experience as a professional; you may have stories to tell in your ‘private’ capacity as a citizen and taxpayer. All this is likely to be true whether you live in a so-called developed or in a developing country.

 Reflect briefly on your most poignant stories of state ‘failure’. What did the state or its agency fail to do? What were your expectations as to what it should do?

Perhaps the failure in question relates to choice or design of policy that was inappropriate or downright damaging. Were key stakeholders excluded from deliberations over, or decision-making on, policy design? Perhaps it relates to failure to implement a policy in the way that was intended – or indeed at all! You may have been frustrated or angered by unfair, unresponsive or inefficient delivery of a particular public service. Worse, you may believe that the root cause of the poor service delivery was some kind of corruption within the delivery agency.

These possibilities highlight the fact that states, which are complex ‘organisations’ composed of multiple agencies that are rarely perfectly co-ordinated, both design policies that affect other actors and directly deliver (or fail to deliver) many services. However, basic economic theory tends to abstract from these realities, treating the state as something of a ‘black box’, albeit one with a critical role: to correct for failures in the functioning of markets.

Neoclassical economics

The main focus of basic neoclassical economics is the functioning of the market economy. When information and capital are readily available, markets are contested by multiple players and factors of production move readily from one area to another as opportunities ebb and flow, the well-being of all players in the economy is well served by the free operation of markets.

However, basic neoclassical economics recognises a number of (pervasive) conditions under which markets fail to deliver optimal outcomes. These include:

• markets are monopolistic, rather than competitive, due to economies of scale in production or other barriers to entry (or exit)

• goods or services have public, common pool or toll good characteristics, rather than being the type of rivalrous and excludable private goods that commercial firms are attracted to produce

• the activities of one firm affect those of other firms in a positive or negative way, such that some goods or services are over-produced and others under- produced by firms that respond purely to private profit motives

Where markets ‘fail’, it is hoped that the state can devise policies to correct for the failure – for example, removing barriers to market entry or regulating the activities of monopolies so that they perform more like competitive markets.

New institutional economics

For new institutional economics, the basic point of departure from neoclassical economics is recognition that information is costly to acquire and, therefore, in practice, nearly always imperfect. Economic actors may struggle to acquire adequate information about markets that they wish to participate in, for example, regarding the prices prevailing in those markets. However, even more fundamentally, they often lack reliable information regarding the motives of other actors within those markets, making them vulnerable to various forms of opportunistic behaviour. Sellers may lie about the true quality of a good that they are selling. Workers may shirk their responsibilities if the employer is not monitoring their performance closely.

Recognition of the costliness of information leads new institutional economics to focus heavily on contractual arrangements between economic actors: the processes of search, screening and negotiation that they go through before doing business with each other, and the monitoring and enforcement processes that accompany business transactions.

Costly (imperfect) information also constitutes another source of market failure. Binswanger and McIntire (1987) showed clearly how, in rural areas characterised by low population density and reliance on seasonal rainfall for agricultural production, the costliness of information prevents markets for crop insurance from developing. In

turn, the lack of crop insurance contributes to the failure of seasonal credit markets, as servicing large numbers of small loans under conditions of high risk and uncertainty can be prohibitively costly.

Additional sources of market failure suggest additional reasons for states to intervene in support of market development and functioning. However, recognition of the costliness of information also suggests an important caveat. If markets fail due to imperfect information, the state will only be able to assist in overcoming the failure if it is better informed than the various private market participants, ie if it can access the necessary information at a lower cost than they can.

Negotiating and enforcing contracts becomes particularly costly if the rights of contracting parties to (own, use or benefit from) certain assets are not clearly established and protected by law. Without recourse to efficient (ie fair and low cost) legal mechanisms, only the powerful can enforce contracts – through recourse to economic or social sanctions or perhaps the hiring of private thugs or militias. New institutional economics writings thus also tend to promote the view that two of the primary tasks of government are to protect property rights and to guarantee the rule of law. However, as will be argued below, the allocation of property rights is fundamentally a political issue.

1.2 Sources of state failure

Basic neoclassical and new institutional economics may differ in their emphases regarding the priorities for state intervention to support market development and functioning. However, at least as explained so far, they share one basic premise: that the desirable role for the state is defined by what the market cannot do well. Analysis of market failures thus leads to ‘normative’ prescriptions as to what the state should do to correct for these. It is at this point that technocrats can start to become disillusioned – when the state does not follow their recommendations!

There can be various reasons for why states do not follow the best recommendations of independent policy analysts or researchers. (Let’s assume for now that, if perfectly implemented, these recommendations would maximise economic growth, poverty reduction, welfare or some other public/national objective.) These reasons include the following.

Limited information

We have already noted that states need high-quality information if they are to pursue policies that effectively correct for market failures. Sometimes states can require that private actors supply regulators with information. However, in general, private market participants are better informed about their own intentions, activities, costs and profits than state agencies are and, moreover, often have reasons for wishing to withhold much of this information from the state. This inclination is likely to be compounded in contexts where there is an historic lack of trust between state and private sector. Sometimes, independent policy analysts and researchers can be better informed about the circumstances of the private sector than the government is.

Weak policy-making capacity

Whilst independent policy analysts, researchers or aid donors might generate policy recommendations that they would like a government to follow, actual policy might be devised by civil servants within the relevant ministries. For various reasons, including the fact that salaries are too low to attract the best brains, in-house policy analysts may be less skilled or less well equipped with software or data compared with independent analysts and may, therefore, design ‘sub-optimal’ policies. At the same time, the policy process might not allow external agents to make an effective contribution to policy formulation. This is discussed further below. For now, to keep it simple and focused on the technical capacity issue, let’s assume that the in-house analysts are reluctant to engage with external agents, so as to refine their policy proposals, as this risks opening themselves up to criticism.

It should be clear that this is a deliberately stylised and somewhat naïve explanation of poor policy. However, there may at times be an element of truth in it. Whilst international financial institutions soon abandoned most efforts to reform African state agencies during the structural adjustment era, preferring instead to ‘get the state out’ and let the market take over, they did continue to invest in the technical (policy analysis) capacity of the ministries of finance or other central agencies responsible for delivering macroeconomic stability within several low-income countries. Meanwhile, radical economic reforms in some Latin American countries, including Chile (to take a controversial example), were led by US-trained economists who returned to take up positions within their national governments or civil services.

Poor public sector management

State agencies may be hampered by lack of information or skilled personnel. However, they may also fail to get the most out of what they have. One of the reasons why market enthusiasts like competitive markets so much is that the profit motive – and, conversely, the risk of bankruptcy - provides strong incentives for individual participants to work hard and to innovate in response to opportunities and threats. By contrast, performance incentives within state agencies can be very weak. The agencies themselves are often monopolies in their area – insulated both from competition and from the voices of stakeholders whom they are meant to serve – as well as enjoying an information asymmetry advantage over their political masters who are meant to oversee their performance. Meanwhile, the pay and promotion prospects of individual staff may be related more to whom they know than to how they have performed. Van de Walle (2001) argues that the capacity of most African civil services was undermined in the two–three decades after independence by the politicisation of both hiring and staff rewards, even as the number of trained civil servants increased dramatically.

Poor public sector management can affect policy design, but it is even more likely to affect policy implementation. It can also be associated with corruption. Staff who do not perceive that their career depends fundamentally on high performance of their duties (as viewed by clients or other stakeholders), but rather who believe that they will retain their post as long as they retain the support of a particular political patron, are more likely to engage in corruption than those who see that their conduct is closely monitored and assessed by their superiors.

The private interest state

Basic neoclassical and new institutional economics both assume that there is a public interest that can be reasonably clearly defined and that policy should seek to promote. As noted above, this public interest is generally linked to the correction of market failures in pursuit of economic growth, poverty reduction or general welfare.

There are at least two major critiques of this naïve, public interest view of the state.

• It is hard, if not impossible, to define a single ‘public interest’ in a complex world of multiple actors, interests and imperfect markets. What is good for one group may be less good or even disadvantageous for another. Decisions have to be taken about competing interests and claims on scarce resources. Note that equity considerations do not appear explicitly in basic neoclassical economic models: as long as no one can be made better off without simultaneously making someone else worse off, an equilibrium is considered ‘Pareto optimal’, ie efficient. Distribution of starting assets is taken as given and actors stoically accept whatever final distribution of incomes the interplay of market forces generates. In reality, equity and distributional considerations are fundamental to politics and to what states do.

• Whilst economic theory assumes that private market actors are self-seeking individuals, it assumes that public servants exist to work for the public interest. As Elinor Ostrom has joked, ‘Are civil servants supposed to be selected from a different gene pool to the rest of society?’

These criticisms give rise to the notion of the private interest state. Particular individuals and groups seek to capture power or to influence the decisions of those in power so as to generate benefit streams for themselves and fellow group members – not necessarily for the whole of society. Some of the decisions taken by those in power, influencing the allocation of resources in this way, are perfectly legal; others are not and may be considered under the heading, Corruption.

The four sources of state failure just outlined are not an exhaustive list. You may be able to think of others. However, they point towards different solutions – (technocratic) capacity building, managerial and political reforms. The notion of the private interest state points us towards the political economy literature that will be the main focus of this module.

1.3 Douglass North on state failure

We noted above that new institutional economics writings, in a similar way to the work of neoclassical economists, often lead to prescriptions as to what the state should do to overcome market failures. In his 1990 book, Institutions, Institutional Change and Economic Performance, Nobel Prize winning new institutional economic historian Douglass North argued that the key to economic development is to reduce the transaction costs associated with increasingly complex and long-distance trade, so as to gain the wealth-creation benefits that flow from specialisation and economies of scale in production. Establishing clear property rights is part of this story, but so too is the design of institutions that facilitate the acquisition of information and the efficient enforcement of contracts. Some of these institutions are privately established, but many – especially those for the enforcement of contracts – rely at least in part on state legislation and/or action.

North observed that some societies have been remarkably successful in pursuing this transaction cost reduction agenda and, as a result, have secured high average incomes. However, others have not, leaving many of their members trapped in poverty.

The big question, therefore, is why some societies have been more successful than others. North’s answer focuses on political elites, as these are the people who ultimately determine national policy. North argues that elites tend to set policies that serve their own interests first and foremost. If these policies also benefit poorer and less powerful groups, well and good; if not, tough – as long as those groups do not threaten to revolt as a result. North observes that, historically, some elite groups have seen their interests as being advanced by the expansion of trade. This could be because they themselves have invested in trading enterprises or because they realise that tax revenues are maximised when trade expands. By contrast, other elite groups have made their wealth by taxing productive activity in such a way that the growth of such activity has been discouraged. The elite have accumulated wealth, but total economic activity has remained insufficient to raise the majority of the population out of poverty.

 How satisfying do you find this explanation? What questions does it leave unanswered? Answer North’s explanation recognises that elites are self-seeking and, therefore, that states do not pursue a simple vision of the public interest. It illustrates in very general terms how the private interests of elites can coincide with those of poorer members of their societies, but also how the two can clash. On the other hand, the existence of elites is taken as given: there is no theory as to how they come to power in the first place or what they have to do to retain power, other than to avoid provoking revolution. It is thus at best a partial explanation of state success/failure.

As you work through this module, you might like to reflect on the accuracy or otherwise of North’s basic insight: that elites tend to set policies that serve their own interests first and foremost. You should also gain greater insight into why policy- makers and hence states behave as they do.

1.4 State activities

Before we examine political economy as a discipline that can shed light on why states function as they do, it is worth thinking a little more about what states do. So far we have touched on both the design and implementation of policy (including service delivery) and noted a number of objectives that policy might seek to pursue.

Fundamentally, state policies may be thought of as pursuing one (or both) of the following broad objectives.

Provision of public goods

Basic economic theory highlights the correction of market failure as the most important role of government. Depending on the nature of the market failure, policies to correct for it could take the form of:

• regulation of private market activity, for example, to correct for monopoly power or externalities

• provision of public goods or services, either directly or by contracting commercial or NGO suppliers. Examples of such goods and services include: health and education services; roads, telecommunications and other infrastructure; agricultural research, extension and irrigation investment

• the establishment of institutions to facilitate information exchange, assist contract enforcement and protect property rights

Whilst we specifically labelled the second of these policies as ‘Provision of public goods or services’, in fact all of these functions of the state can be thought of as the provision of public goods in a broader sense, as regulation and institutions that support market transactions are themselves public goods.

Political economy analysis of developed economies tends to focus more on redistribution – our second category below – than on the provision of public goods and services. This may be because policies for redistribution are easier to model than the provision of public goods or because political economy theories based on interest groups generate particularly clear hypotheses regarding policies for redistribution. It is also, in part, because so much public expenditure in developed economies with large welfare states is redistributive in nature.

On the other hand, at the early stages of development, and hence income, effective demand for commercial services tends to be low. Thus, public provision of basic goods and services assumes a greater importance than it does later on. Public investment, for example, in roads and telecommunications infrastructure, may also have leverage in private investment, for example, in transport services or agricultural marketing services. Efficient regulation and institutions to support private market activity are also important.

There is, however, a paradox: effective state interventions are arguably the most critical to development efforts at precisely those early stages of development when state capacity to deliver them might be expected to be lowest (Kydd 2009).

Smallholder agricultural growth, seen by the course authors as critical to the early stages of economic development in many countries, is heavily dependent on the development of effective (public and private) support services. Unlike commercial farms, with their larger capital bases and larger volumes, individual smallholder farmers cannot intensify production without effective services delivered close to their farm gate. We thus pay particular attention to the political economy conditions that have supported or discouraged investment in public goods in support of smallholder agricultural growth.

Redistribution of assets or incomes

Redistribution of assets may be achieved by the reassignment of property rights, for example, to land, from one individual or group to another. Redistribution of incomes may be achieved through taxation or subsidy. Trade policy instruments can achieve similar ends, with tariff protection giving similar support to subsidies for producers of selected goods. It is relatively easy to identify the immediate beneficiaries of such policies, which is attractive to political economists who wish to model the determinants of policy intervention.

In 1988 an influential World Bank study by Krueger et al assessed the extent to which macroeconomic and sectoral policies in 18 developing countries subsidised or taxed agricultural activities. It found that poorer countries tended to tax their agricultural sectors more heavily than less poor countries, through both direct taxation (including export taxes) and indirect means (principally overvalued exchange rates and tariff support for import-substituting industries). This was despite the fact that agricultural growth was very important to the development prospects of the poorest countries. Meanwhile, rich countries tend to provide the greatest subsidies to their farmers, despite the fact that their farmers represent only a small proportion of national economic activity. At the time of writing, a second major World Bank project – the Distortions to Agricultural Incentives project – has recently revisited the questions first researched by Krueger et al 20 years previously. Whilst general levels of taxation of agricultural activities in developing countries have fallen, it still remains true that poorer countries tax their agricultural sectors more heavily than less poor countries. Some Asian countries are now beginning to subsidise their agricultural sectors, rather as many OECD countries do, as national incomes rise.

So far we have talked about the establishment and (re)distribution of property rights as if they were two different things, with the former having more of a public good and market development function and the latter being redistributive. However, in reality, the establishment and distribution of property rights often occur simultaneously, which makes for interesting political economy analysis.

Bates (1989) neatly illustrates the importance of the distribution of property rights for both the direction and the speed of economic growth. He takes as his point of departure the classic case of the railway and the trackside farmers discussed by Coase (1960). There is an externality, in that sparks from the (steam) railway may cause the farmers’ crops or trees to catch fire. Should the railway compensate the farmers for their loss or does the presence of the crops so close to the line constrain the railway’s freedom to run trains? Which way compensation should flow depends on the assignment of property rights. Bates (1989) argues that, in a poor agrarian economy, a general practice of assigning property rights in favour of ‘capital’ is likely to result in an inegalitarian development path characterised by the production of luxury goods and services, which employs relatively few people. By contrast, the assignment of property rights in favour of smallholder farmers will tend to favour a much more egalitarian development path, as millions of poor households accumulate modest amounts – enough in turn to stimulate large amounts of business for semi- skilled artisans and labour-intensive manufacturing enterprises.

Khan (2000) also sees redistribution as central to development policy. His focus is on rents – the super-normal returns (in excess of opportunity costs) that an individual or firm obtains from a particular activity as a result of a particular policy intervention. Rents can arise from a favourable allocation of property rights (for example, the provision of high quality land in an accessible or well-serviced area, or the granting of a legal monopoly to supply a particular good or service to a particular market) or from receipt of some form of public transfer or subsidy. Khan (2000) distinguishes six types of rents.

• Monopoly rents, which are generally considered bad things, but which may be unavoidable in certain circumstances and which can be accompanied by conditions that encourage welfare-enhancing behaviour

• Natural resource rents, which flow from the (property) right to harvest or exploit a resource. Some assignment of property rights is generally considered necessary to encourage sustainable or measured exploitation of a resource – the alternative being ‘open access’

• Transfer rents, which are generally considered to contribute little to growth, but carry a deadweight cost when funded out of taxation due to both the costs of levying the taxes and their disincentive effect on the affected economic activity. A possible exception is where transfer rents facilitate what Marx called ‘primitive accumulation’ – the accumulation of sufficient capital by privileged groups to permit investment in productive activities characterised by high fixed costs or economies of scale

• Schumpeterian rents, which reward innovation (ex post). Patent protection is the most obvious example here, the principal policy challenge being to provide protection for long enough to encourage innovation, but no so long that consumers are unduly penalised through higher prices

• Learning rents, which are similar to Schumpeterian rents, except that they are intended to encourage learning from global leaders and adaptation to local conditions (rather than cutting edge innovation) and they are offered ex ante (with appropriate conditionality) rather than ex post. Khan (2000) argues that wise administration of learning rents lay at the heart of the South Korean industrialisation strategy in the 1960s–1980s, but that a highly disciplined state is required if such rents are indeed to encourage learning. The alternative is that recipients establish a cosy relationship with the relevant state agency, such that they continue to receive rents without ever delivering the desired outcomes for national industrial strategy

• Rents (rewards) for good management, flowing from its ability to overcome asymmetric information problems related to labour motivation

Khan (2000) argues that smart development policy allocates rents in such a way that they leverage desirable private sector activity, for example, innovation or learning. In this way, growth can occur even in the midst of fairly high levels of corruption and rent-seeking, as was the experience in parts of Asia in the second half of the 20th century. On the other hand, where powerful interest groups (commercial or political) secure rent flows without generating growth in return, the overall result is economic stagnation and persistent poverty.

A note on local public goods

The discussion so far has implicitly assumed that most policy-making occurs at a national level. However, most nations have multiple tiers of government. In large countries such as China, India or the US, the only way for government to be at all effective is if there is a significant devolution of policy-making responsibility to state, provincial or district governments. Meanwhile, smaller countries exhibit considerable variation in the extent to which central government has devolved responsibility for policy-making and implementation to local government. Such differences may reflect differences in ethnic diversity, history or simply where an influential President has come from and whether (s)he perceives the best means of increasing the resource flows to his/her region as being through centralised decisions or the granting of a larger share of national budgets to local government.

In this light, Rausser and Roland (2009) argue that the 2-fold distinction between public good provision and redistributive policies just presented is inadequate and that a further distinction should be made between national and local public goods. They argue that, from a political economy perspective, provision of local public goods has more in common with redistributive policies than with the provision of national public goods.

 Can you see why this might be? Answer Local public goods may actually favour particular groups over others (a school or road built to serve village A, rather than village B). Rausser and Roland thus argue that their allocation is subject to the same sorts of lobbying and rent-seeking activities as national redistributive policies, albeit on a smaller scale. Some support for this view comes from the literature on decentralisation. For example, Bardhan (1996) argues that local elites often ‘capture’ decentralised policy-making processes, as poor groups are rarely organised at local level. However, at times, poor groups are able to lobby effectively if they concentrate all their scarce resources on one national campaign. If so, policy outcomes may be more egalitarian under centralised, rather than decentralised, decision-making.

Section 1 Self Assessment Questions

uestion 1

True or false?

Evidence of market failure is a necessary and sufficient condition for state intervention.

uestion 2

Which of the following explanations for state failure is most closely associated with political economy analysis?

(a) imperfect information

(b) poor public sector management

(d) weak policy-making capacity

uestion 3

Which of the following types of rents are inherently conditional on the recipients exhibiting certain desired behaviours (even if the conditionality is at times applied rather laxly)?

(a) monopoly rent

(b) natural resource rent

(d) Schumpeterian rent

(e) learning rent

(f) rent for good management

2.0 INTRODUCING POLITICAL ECONOMY

Section Overview

Political economy analysis helps us to understand why states, in particular, perform as they do. It explores the interaction of political and economic processes within a society, examining how policy-makers acquire power and the implications that this has for subsequent policy-making. In turn, economic outcomes affect the relative wealth of different groups, with implications for the distribution of political power and the direction of policy in the future. This section introduces political economy analysis and what it sets out to do. It then presents a generic political economy model that can help us to identify the key drivers of observed policy outcomes in a wide range of social, political and economic settings.

Section Learning Outcomes

By the end of this section, students should be able to:

• explain the basic objectives of political economy analysis

• describe the main building blocks of a basic political economy model and explain the importance of each

2.1 Defining characteristics of political economy analysis

According to Collinson (ed) (2003):

‘Political economy analysis is concerned with the interaction of political and economic processes within a society: the distribution of power and wealth between different groups and individuals, and the processes that create, sustain and transform these relationships over time.’

Source: Collinson (ed) (2003) p. 3.

As the name suggests, political economy is concerned with how political forces influence the economy and economic outcomes. However, the interactions run both ways and political economy is interested in both. Thus, it is economic activity that generates the resources that are required to sustain political activity, for example, election campaign expenses. Moreover, whilst policy might lead to a certain economic activity prospering, this success in itself can generate a political constituency with an interest in maintaining the economic activity, because a sizeable number of people now benefit from it.

As was noted above, the distribution of benefits from economic activity tends to be a neglected aspect of much pure economic analysis. However, within political economy analysis it takes centre stage. Political economists are very interested in who gains and who loses from a particular policy. This is likely to provide important clues as to which groups or individuals support the continuation of the policy, as well as to which groups might be drawn into a coalition seeking to change it.

Using economic tools to examine political phenomena

Another characteristic of political economy analysis is that it uses economic tools to examine political phenomena. As in economics, a characteristic of political economy analysis is the assumption that individual (political) agents are both self-seeking and rational. Economics examines how rational individuals use the resources at their disposal (capital, labour, land etc) to maximise some utility function (for example, maximising profits, income or consumption) by producing goods and services and participating in markets. In a similar vein, political economy examines how such individuals maximise their utility by participating in political activity. Again they have capital and labour (time) at their disposal and they can use these to influence political processes so as to generate policy outcomes that benefit them (most notably, by generating rents for them).

DFID (2009) thus sees political behaviour as being shaped by:

• Interests: those with the ability to influence policy do so in such a way as to further their own economic and/or political interests. Those outside of government may be particularly concerned with economic outcomes. Those inside government might have their own private economic interests, as earlier discussions highlighted. However, they also have political interests, most obviously to retain their positions of power.

• Ideas: ideology remains an important driver of policy, alongside direct economic or political interests. Where individuals are constrained by bounded rationality, such that they cannot reliably assess all the possible outcomes from all the different (policy or voting) choices open to them, ideology gives them a (more or less accurate) guide as to what they should do in order to remain consistent with their basic beliefs and values in life. Incorporating ideas or ideology into political economy models also allows for the fact that some political action is motivated by factors other than pure self-interest. Some people do genuinely enter politics because they want to make the world a better place, although whether that remains their guiding motivation throughout their political career is another question!

• Institutions: as explained by North (1990), institutions are the formal or informal ‘rules of the game’ that structure human behaviour. Generally, there are formal political rules, including a constitution, that define matters such as how leaders are chosen and how a new policy can be introduced. In practice, informal norms and ways of doing things might be as influential in shaping actual outcomes. All these rules help to structure the incentives facing political actors.

Levels and choices

DFID (2009) describe tools of political economy analysis that are relevant to three levels:

• Macro-level or country analysis: at this level one can understand how the big decisions, for example, with respect to the selection of political leaders or the allocation of budgets, are made. One would expect the most powerful interest groups – whether they be industrial, ethnic or otherwise – to be visible at this level. Macro analysis might also consider how the highest level political institutions function: what are the rules of the game facing top political

players? One might also expect a country’s history to shape prevailing ideologies and ideas about how things should work and why.

• Sector-level analysis: this examines in more depth the forces shaping policy formation and decision-making at the level of an individual sector or industry. The more important and prominent the sector is within the national economy, the greater one would expect the influence of national level forces to be over decision-making within the sector. However, the possibilities facing all sectors are to some extent constrained by the broader macro context, including budget, macro-economic policy etc. Meanwhile, one would expect actors who do not feature in high-level political debates and events nevertheless to exert influence over outcomes in their particular sector. Moreover, sectoral and local rules will be critical to outcomes and hence fiercely contested by the relevant players.

• Problem-driven analysis: this is a highly practical approach that starts from a particular problem that needs solving and proceeds to examine all the forces (actors and interests, ideas, institutions) that have a bearing on it. According to DFID (2009) the World Bank developed this approach to understand situations where policy reforms that were desirable from a growth or poverty reduction perspective seemed to be continually blocked.

By way of illustration, 2.1.1 suggests generic questions that a sector-level political economy analysis might investigate. Note that these questions reflect the particular interests of an aid donor in a given sector.

2.1.1 Sample questions for conducting sector-level political economy analysis ‘Roles and responsibilities: Who are the key stakeholders in the sector? What are the formal/informal roles and mandates of different players? What is the balance between central/local authorities in provision of services? Ownership structure and financing: what is the balance between public and private ownership? How is the sector financed (eg public-private partnerships, user fees, taxes, donor support)? Power relations: to what extent is power vested in the hands of specific individuals/groups? How do different interest groups outside government (eg private sector, NGOs, consumer groups, the media) seek to influence policy? Historical legacies: what is the past history of the sector, including previous reform initiatives? How does this influence current stakeholder perceptions? Corruption and rent-seeking: Is there significant corruption and rent-seeking in the sector? Where is this most prevalent (eg at point of delivery, procurement, allocation of jobs)? Who benefits most from this? How is patronage being used? Service delivery: who are the primary beneficiaries of service delivery? Are particular social, regional or ethnic groups included/excluded? Are subsidies provided and which groups benefit most from these? Ideologies and values: what are the dominant ideologies and values which shape views around the sector? To what extent may these serve to constrain change? Decision-making: How are decisions made within the sector? Who is party to these decision-making processes? Implementation issues: Once made, are decisions implemented? Where are the key bottlenecks in the system? Is failure to implement due to lack of capacity or other political economy reasons?

Potential for reform: Who are likely to be the “winners” and “losers” from particular reforms? Are there any key reform champions within the sector? Who is likely to resist reforms and why? Are there “second-best” reforms which might overcome this opposition?’ Source: DFID (2009) p. 12, itself drawing on work by ODI and World Bank.

In a similar way, we can think of basic types of decisions or sets of choices that political economy analysis investigates. The two basic types of decisions, both of which will be explored in this module, are:

• How are political leaders chosen and held accountable? In democratic systems, this relates to the rules and practice of electoral politics.

• Which policies are selected and why? We consider the policy process – how policies are made – in a little more detail in the final section of this unit. Formal and informal rules shape this process. However, the outcomes – the actual policies that are selected – are influenced heavily by the interests of the various actors involved and, driven by this, by their engagement in the policy process.

 The two sets of choices – selection of leaders and policies – are linked, albeit imperfectly. Can you explain what the linkage is and why it is imperfect? Answer Irrespective of who selects them, leaders are selected at least in part on the basis of the policies that they are expected to pursue if they are given power. However, there are a number of possible reasons why the selection of leaders does not fully determine the selection of policies that are subsequently pursued. These include the fact that those who select the leaders only have imperfect information regarding the policy decisions that those leaders take once they are in power. Hence, leaders are only partially accountable for their policy decisions. Those who select leaders care more about some policies than others. Thus, leaders’ decisions on key policies might be scrutinised carefully, whereas they might enjoy considerable freedom to set policies in other areas – and in these areas be open to the influence of interest groups who were not critical to their original selection as leaders. In addition, circumstances can change during a term of office and/or new information can come to light, such that leaders change their view on the appropriate policy to be followed.

2.2 A generic political economy model

Drazen (2008) argues that all political economic systems can be analysed with reference to the same basic political economy model. This is not meant in any way to deny the distinctive historical, cultural or economic features that are undoubtedly present in any given context. Rather, it argues that the way that these influence the selection of leaders and policies can be analysed using the same ‘toolkit’ for all countries.

Consistent with the material that we have presented above, Drazen’s model has three main building blocks:

• political actors

• their interests or objectives

• the political mechanisms and constraints (ie institutions) that are in place

Political actors

Drazen (2008) distinguishes four groups of actors within a political economy system, although, as you will note, two of these are sub-groups that are nested within a third.

• Policy-makers: exactly who makes policy varies from country to country. They may or may not have been elected and they may or may not have to get their proposals approved by members of an elected legislature or parliament (which gives the latter a role in shaping policy). Almost inevitably, actual policy will also be shaped by those who are tasked with implementing it, which often means members or agencies of the bureaucracy or civil service.

• Citizenry: an initially unexpected feature of the model is that the citizens, as citizens, do not exert any influence over decision-making. However, policy- makers are assumed to take their preferences into account (to a greater or lesser degree) when designing policy.

• Selectorate: citizens only exert influence over decision-making if they are also part of the selectorate. This is arguably the key component of Drazen’s model. The selectorate are ‘the group who actually selects leaders or who control the instruments of power that enable a leader to remain in office’ (Drazen 2008 p. 24). Thus, in a pure democracy, this equates to the electorate. However, in most real world democracies, some people are more equal than others. Thus, certain individuals and groups – for example, media barons and powerful interest groups – exert particular influence over the choice of leaders and policies, due to their ability to finance political campaigns or to influence voting behaviour in other ways. At the other end of the spectrum, in dictatorships, the selectorate is the powerful individuals and groups (often quite small in number, but likely to include the heads of the armed forces and security services) that keep the dictator in power or, alternatively, have the capability of removing him if they are not sufficiently rewarded by his rule.

• Coalition: the selectorate are all those who can exert an influence over the choice of leader or policy. However, in practice, the leader does not need the support of all of these; just sufficient of them to keep him in power or to approve a particular policy. This ‘sufficient’ subset Drazen calls the leader’s coalition. In a democracy, the coalition is the electoral majority required to vote the government or leader in, plus the interest groups or other financiers required to fund the election campaign. In a dictatorship, the coalition and the selectorate are likely to be quite similar; dictators have a habit of getting rid of influential individuals who fall outside their trusted circle.

 Consider a country with which you are familiar. Note down actors or groups who you believe form the selectorate and the coalition within the country. How confident are you that you have produced fair lists, ie that you really understand how leaders are able to attain and retain power in your chosen country? As you get the opportunity, discuss your lists with friends or colleagues who also think about the politics of the country, with any experts that you know, and perhaps with fellow students.

Political actors’ interests

Consistent with an economistic approach, actors’ interests and objectives can be specified in terms of utility functions. According to Drazen, the utility functions of political leaders are likely to include general societal welfare, ideological preferences for particular outcomes and their own private interests. Their primary private interest is generally assumed to be the acquisition and/or retention of power, as this is the key to enjoying the ‘perks’ of office, whether these perks are prestige, power for its own sake or the financial benefits that can flow from being in office.

Political leaders are individual human beings, so the relative weightings that they attach to societal welfare, ideological preferences and their own private interests will vary from individual to individual. One would expect that a leader who attached greater weight to the pursuit of societal welfare and less to their own private interests would generate better policy outcomes for the majority of people in his/her country. However, Grossman and Helpman (1995) do present a model that generates the alternative, counter-intuitive outcome.

An important question, but one to which there may not be a ready answer, is: what determines the relative weightings that political leaders attach to the various components of their utility functions? Drazen rejects suggestions that policy outcomes are poorer in low-income countries (causing them to remain poor) because political leaders attach greater weight to their own private interests than do their counterparts in developed economies. Instead he suggests that differences in policy choices and outcomes should be sought in other components of the model, namely the demands made on leaders by the selectorate and the quality of the rules governing leaders’ actions.

 Drazen recognises that this is a controversial position. What is your view on this? Answer At first glance the observation that many leaders in low-income countries are extremely rich, whilst the majority of their populations remain poor, seems to challenge Drazen’s position. However, it is hard to make a case that human beings in one part of the world are systematically more selfish than others. For example, most religious faiths would claim that the human condition (ie sin) is universal. Moreover, one does not have to go too far back in history in, say, the UK, to reach times where a tiny aristocratic elite lived in luxury whilst extracting heavy taxation from a mass of impoverished peasants. In the intervening period, the selectorate has become larger and more inclusive, hence modifying the demands that they impose on leaders, and the rules governing the behaviour and accountability of leaders have been dramatically tightened. These points tend to support Drazen’s position.

If it is the selectorate that is the key component of Drazen’s model, then it is the interests and objectives of the selectorate that drive policy outcomes. This is because political leaders have to keep enough of the selectorate happy in order to retain power.

As with political leaders, Drazen conceives of a utility function for selectorate members that is made up of multiple components. The two main components are:

• Personal consumption of private and public goods, which is clearly influenced by government taxes and transfers plus investment in public goods. Thus, members of the selectorate should choose leaders whom they expect will implement policies that benefit them

• The utility that comes from particular policy outcomes being realised (even if these do not personally benefit them). This links back to our discussion of the importance of ideology.

Of course, the selectorate is not homogeneous and nor is the coalition. Thus, a key issue in political economy is how the preferences of diverse members are aggregated to generate policy priorities and designs.

Finally, Drazen observes that there may be some competition between members of the selectorate to be included in the coalition. This is because selectorate members expect to be better off from being in the coalition than being excluded from it, in which case their policy priorities are unlikely to be realised. (Note that this competition is unlikely to be observed amongst individual voters, but it could be where interest groups are concerned, where multiple parties have to form a coalition government or in non-democracies.) Under such circumstances, the leader or top leadership gains some bargaining power relative to coalition members and may not have to give them as much (in terms of private benefits) as would have been the case in the absence of such competition.

Political mechanisms and constraints

Following the line of argument that there are two basic types of political economy decisions, there are two main sets of institutional mechanisms and constraints that political economists need to study: those that set the ‘rules of the game’ for the selection of leaders and those that structure the process by which policies are made.

With regard to the selection of leaders, the mechanisms include not just the formal rules governing voting, but also the informal mechanisms that candidates use to garner support, including promising policies that will benefit particular supporter groups or political constituencies and (where they can get away with it) the direct giving of gifts in exchange for votes. Constraints include the formal rules that govern and control such behaviour. The effectiveness with which these rules are enforced must, of course, also be considered!

We will consider the policy process more closely in the next section. Here, the notion of constraints is closely linked to the accountability that policy-makers face for their actions. To what extent are past policy decisions or voting behaviour taken into account when a leader or candidate stands for re-election, for example?

In recent years there has been an upsurge of interest in how detailed institutional mechanisms and constraints influence policy outcomes. Persson and Tabellini (2000) have been pioneers in this area. They have examined differences in policy outcomes between presidential and parliamentary systems and between majoritarian and proportional voting systems. They find, for example, that parliamentary and proportional voting systems are likely to deliver a higher level of public good provision (as opposed to redistributive policies) than presidential and majoritarian systems, respectively.

In parliamentary systems, the government can be voted out at any point by a vote of no confidence attached to a particular piece of legislation – something that is not possible in a presidential system. The threat of a vote of no confidence tends to encourage cohesion within the government coalition within parliament, which in turn is conducive to (and benefits from) medium–long-term investment in national public goods. By contrast, in presidential systems – at least, in those presidential systems where the legislature has a fair degree of independence from the executive – voting coalitions are more likely to form on a case-by-case basis. Individual legislators tend to be more willing to break from their party line in order to defend or promote the particular interests of their constituents. This encourages redistributive policy-making and an emphasis on local public goods, as ‘concessions’ are regularly built into legislation to ensure a voting majority.

The logic for majoritarian versus proportional voting systems is as follows. In majoritarian voting systems, each constituency returns one representative. The candidate gaining the most votes (not necessarily a majority) in a constituency wins, after which the party with the most successful candidates is generally invited to form a government. Under such systems a party can achieve a large majority of representatives in parliament without obtaining a majority of the total votes cast by voters. Moreover, election results can depend crucially on the outcomes in a few ‘marginal’ constituencies, in which candidates compete vigorously to gain the votes of a minority of ‘swing’ voters. This sort of focus can encourage redistributive policy- making and an emphasis on local public goods. By contrast, proportional voting systems tend to have larger constituencies, each of which returns multiple representatives, such that the distribution of representatives returned to the parliament is closer to the proportion of total votes received by each party. To obtain a majority in parliament, a party thus has to propose policies that appeal to the ‘average’ voter in the country. National public goods are assumed to be the cheapest way of achieving broad-based benefits, which is helpful, given that voters also dislike paying tax.

Of course, some political systems are parliamentary and majoritarian (for example, UK), so the two effects just described can, to some extent, cancel each other out.

Section 2 Self Assessment Questions

uestion 4

True or false?

Identifying who wins and who loses from a particular policy is one of the central concerns of economic analysis.

uestion 5

Fill in the missing word/phrase.

The two basic sets of choices that political economy analysis investigates concern the selection of (1) political leaders and (2) ______.

uestion 6

In Drazen’s model, which of the following groups decides which leader acquires or retains power?

(a) citizens

(b) selectorate

3.0 POLICY PROCESSES

Section Overview

The final section of this unit considers the process by which policy is made. The ‘traditional’ model of the policy process sees it as a linear process, proceeding from design to implementation, and as a largely technocratic process, in which evidence is central to decision-making. Reality is often much messier! The section emphasises that there are opportunities for a range of stakeholders to influence policy-making. It also questions what the role of evidence is in policy-making in a political economy world.

Section Learning Outcomes

By the end of this section, students should be able to:

• assess critically the traditional model of the policy process

• analyse the role of evidence in shaping policy

3.1 The traditional model of the policy process

Traditionally, policy-making has been conceived as a linear process, albeit one with important feedback loops, as illustrated in the figure in 3.1.1.

3.1.1 The traditional model of the policy process

problem identification

policy formulation

policy implementation

feedback

policy evaluation

Source: previous module

According to this simplified model:

• policy is formally devised first, then implemented

• there is a recognised and fairly standardised process by which this happens

• evidence plays a large role, perhaps the dominant role, in policy development, which is essentially a technocratic process. The progression from the identification of a problem to the development of a policy to tackle it suggests this. However, it is the inclusion of policy evaluation – with feedback loops back to all the previous stages – that really underlines that policy-making is seen as an evidence-based process.

Realists have long recognised that careful policy evaluation too often gets squeezed out. However, this is only one component of a much more thorough-going critique of the simplified model shown above.

What is policy?

According to Keeley and Scoones (1999):

‘The traditional starting point for defining policy is that policy constitutes the decisions taken by those with responsibility for a given policy area, and these decisions usually take the form of statements or formal positions on an issue, which are then executed by the bureaucracy.’

Source: Keeley and Scoones (1999) pp. 3–4.

In some cases this is indeed what happens. However, often it is not. Thus, Clay and Schaffer (1984) delivered the following verdict on policy-making:

‘The whole life of policy is a chaos of purposes and accidents. It is not at all a matter of the rational implementation of the so-called decisions through selected strategies.’

Source: Clay and Schaffer (1984) p. 192.

 What departures from the formalised view of policy (explained by Keeley and Scoones) can you think of? Answer The formalised view suggests that the government is very much in control of events. However, often governments have to react to unanticipated developments or shocks. Sometimes, they have no formal policy in place and formal policy tries to play ‘catch up’ with social, technological or market developments. In these circumstances, ‘policy’ is the sum of the ad hoc actions and reactions of the government to unfolding events. In other cases, a government agency produces and ratifies a formal policy document, but never implements it. There is then a disconnection between its official policy position and actual policy as practised by civil servants at various levels of the bureaucracy. It is even possible for two or more government agencies to have official policy positions relating to the same area or issue and for these positions to be in conflict.

Departures from this formalised view of policy tend to recast policy more along the lines of ‘whatever governments choose to do or not to do’. They recognise that members of the bureaucracy often have considerable leeway in ‘interpreting’ formal policy positions in the particular circumstances that they find themselves in and sometimes in making up ‘policy’ where no formal policy position exists. Thus, the clear distinction made in the simple linear model between the formulation and implementation of policy becomes blurred.

Multiple sources of policy

Even if we restrict ourselves to ‘statements or formal positions on an issue’ emanating from policy-makers, it is clear that there are multiple routes through which these emerge – not just one fairly standardised process.

Some policies need the backing of legislation. There is indeed then a recognised set of stages that policy development has to go through before a bill can be presented to parliament. This can take some time and is likely to involve (formal or informal) consultation with concerned stakeholders before the bill is drafted. The bill may also be amended by legislators, providing additional avenues by which interested parties can influence its content.

In some countries, there is also scope for ‘private members’, ie individual legislators, to introduce legislation. There are generally rules on how many such bills can be introduced and who gets to propose legislation of this nature, and the rules may also impose restrictions on the content of such legislation (eg no new taxation or revenue raising can be introduced in a private member’s bill). However, such bills can by-pass many of the stages that policy development normally undergoes.

Other policy does not require legislation: approval by Cabinet (or equivalent senior policy-making organ) is enough. Once again, there is generally a recognised set of stages that policy development has to go through before a formal policy proposal is tabled for discussion by the Cabinet.

However, sometimes policy-making by-passes all such stages. On occasion, a President or Prime Minister makes an impromptu policy announcement without any formal consultation with senior policy-making colleagues, let alone the responsible bureaucratic agency or other concerned stakeholders. This may be observed during election campaigns or in response to disasters – when the temptation to impress particular groups of listeners is high and when the press are in attendance!

Of course, this is not an exhaustive list of possible channels by which policy emerges. However, note the different opportunities for stakeholders to influence policy-making that each channel offers.

3.2 Evidence versus interest in policy-making

An important topic of debate – not least for academics and researchers – concerns the role of evidence within policy-making. The traditional model of the policy process portrays policy-making as essentially evidence-based. However, many researchers feel frustrated that their research findings do not translate into policy. Part of the reason for this may be because they do not know how to communicate their findings effectively so as to feed them into the various policy processes just described.

However, it is also now recognised that policy is not determined by the objective balance of available evidence alone.

 Reflect on what you have learnt about political economy so far in this unit. What are the logical implications of what you have learnt for the role of evidence in policy-making? Answer If policy is made purely to satisfy influential interests (eg to generate benefit streams for the ruling political coalition), rather than to pursue national goals, then evidence is a second order consideration in policy-making. It might, for example, be used to devise the most cost-effective ways of satisfying the interests of the coalition. However, we have also noted that ideas do remain important in political life. Research findings and other information can thus be used to shape discourse and to build or to challenge ideologies. As the powerful do not have a monopoly on ideas, especially in the internet age, we might also expect one of the objectives of powerful groups to be to seek to influence or control the flow of ideas around a particular policy issue, so that their favoured policy position is seen to have some support. Companies or trade bodies might fund research, for example, not just to ensure that the findings are favourable (although this almost certainly does happen), but also to gain the chance to influence which questions are investigated – and which, therefore, are neglected.

Sectoral differences in evidence-based policy

Government insiders and experienced policy analysts can often point to particular sectors or policy issues where the presentation of persuasive new evidence has a big impact on policy, but also contrast these with sectors or policy issues where prevailing policy has flown in the face of the balance of research evidence for many years – continuing despite multiple changes of government!

Indeed, we might distinguish at least three policy contexts:

• in some areas, powerful economic interests seem to dominate the policy- making process. Critics of international trade policy argue that this is one such area: multinational companies and other powerful interest groups (for example, the US farm lobby?) prefer to lobby policy-makers behind closed doors, rather than to engage in open public debate on policy

• some areas of policy are primarily value-driven. Reproductive health is sometimes cited as an area where research findings can be dismissed, because key decision-makers have strong a priori views about abstinence versus condom use, for example. Similarly, in the UK, law and order policy is sometimes cited as an area where the consensus of academic research – arguing, for example, for efforts to ‘restore’ to society people who have committed crimes, rather than long, punitive sentences for those caught – is neglected by policy-makers. Interestingly, the explanation given here is that the popular media view any emphasis on restoration as being ‘soft on crime’ and policy-makers of both major parties have been afraid to provoke the media on this issue

• in other areas, policy is led largely by the evolving balance of objective evidence

 What would you expect the characteristics of these final areas or sectors to be? Answer A somewhat pessimistic answer to this question is that these are likely to be areas where there are few major economic interests directly at stake. Thus, in the past decade the UK has reoriented its anti-poverty policy towards efforts to break inter-generational poverty by expanding the range of interventions targeted at disadvantaged families with pre-school children. This was informed by evidence (mainly from Scandinavia) that, if children start school with lower levels of socialisation and other development indicators than their peers, they will not catch up throughout their lifetime. It is hard to think of major economic interests that would oppose this change of policy. We may also consider the nature of stakeholders in a sector. Where there are numerous, small players, they can find it difficult to organise in order to champion their interests effectively, even if the potential rents available through policy intervention are large.

3.2.1 Kenyan maize policy and the Rift Valley producers’ lobby Bates (1989) describes how the scale and scope of activities of the parastatal National Cereals and Produce Board (NCPB) were stepped up in response to a famine in Kenya in 1980. NCPB purchased maize from the surplus Rift Valley province of the country and delivered it to major towns and deficit regions. This popular action cast new President Moi in a favourable light as a decisive leader in time of crisis. However, it also created large rents for the medium—large scale maize farmers in Rift Valley province, who from then on could sell their crop at local NCPB buying posts at heavily subsidised prices. Moi’s own constituency of Nandi was one of the main beneficiaries of the expansion in NCPB buying posts during this famine, whilst the majority of surplus maize farmers in the province came from his Kalenjin tribe. A guaranteed market and remunerative buying prices have encouraged further intensification of maize production in Rift Valley province. Nyoro et al (1999) found that just four districts from this province accounted for 70% of all maize sales across the country. Meanwhile, Kenya is chronically in maize deficit. Whilst high maize prices (sustained by both high NCPB buying prices and tariffs on imported maize) ensure profitability of maize production in the Rift Valley, they also raise the price of maize for deficit households. These include both urban dwellers (rich and poor alike) and the majority of rural households in all other regions of the country (most of whom are poor). Since 1980 the medium—large scale maize farmers of Rift Valley province have emerged as a powerful lobby group determined to protect the rents that they derive, in particular, from their privileged access to NCPB. For most of the past 20 years, despite one major change of government and numerous reshuffles, they have ensured that either the Minister of Agriculture or his deputy has come from Rift Valley. Moreover, through high profile media interactions with ministers, they have sought to keep national maize policy focused on supporting those farmers who are producing a marketed surplus of the country’s staple food in a context in which the nation as a whole is in deficit. Support to deficit producers in these other regions has thus been neglected. Nyoro et al (1999 p. 42) thus comment: ‘The interests of commercial maize-surplus farmers have typically weighed prominently in the formation of cereal policy in Kenya, and have been reflected in various attempts over decades to support maize prices, with the assumption [which Nyoro et al seriously question] that this would contribute to rural income growth’. Source: unit author

Crises as windows of opportunity

3.2.1 illustrates how powerful interests can seek to control policy debates, so as to secure or maintain desired outcomes. It also illustrates the importance of times of crisis, in this case the 1980 famine, in triggering policy change.

When crises come, the arguments in support of existing policies are critically reviewed, as those policies are seen to have failed in some way. Perhaps equally importantly, the power of existing vested interests temporarily falls away (although it can gradually return or new vested interests can establish themselves if policies are changed). Witness, how banks and bankers were on the defensive in public debate for much of 2009.

Economic crises can thus create windows of opportunity for policy change. As you will see, this will be a recurring theme.

Section 3 Self Assessment Questions

uestion 7

True or false?

In the traditional model of policy-making, those responsible for implementing a policy have little influence over its design or practical interpretation.

uestion 8

Match the following approaches to policy-making with the most likely context.

Approach Context

(a) evidence-based (1) strong ideological or moral positions surrounding the issue

(b) values-based (2) policy intervention is key to large economic rents

uestion 9

Give two reasons why economic crises can provide windows of opportunity for policy change.

UNIT SUMMARY

This unit began by reviewing how influential schools of economic thought see the role of the state, then explored reasons for so-called state failure. It introduced basic elements of political economy analysis, which examines the interaction of political and economic processes within a society and can shed some light on why states actually act as they do (and why they formulate the policies that they do). Finally, it considered how policies are actually formulated and reflected on the relative importance of vested interest versus evidence in policy design.

UNIT SELF ASSESSMENT QUESTIONS

uestion 1

Outline the link between property rights and rents, according to writers such as Bates or Khan.

uestion 2

Explain the importance of the identity and preferences of the selectorate within Drazen’s model.

uestion 3

How and why might influential groups seek to influence the information (evidence) that is available to inform a particular policy issue?

KEY TERMS AND CONCEPTS

bounded rationality originally attributed to Simon (1957), bounded rationality recognises that there are limits to the ability of individuals to take rational decisions and hence to behave in a fully rational way, even if this is what they would like to do. Simon argued that there are limits to the ability of individuals to process all the information available to them, hence to work out the consequences of all possible courses of action, so as to choose the ones that maximise their utility. We also note that, despite at times being deluged with information, individuals still rarely possess perfect information executive branch of government with responsibility for the daily administration of the state bureaucracy, hence implementation of policy. The executive may propose legislation, but legislation is passed (and finally shaped) by the legislature legislature branch of government with responsibility for passing legislation normative economics a branch of economics focusing on what ‘ought to’ happen. It implies the use of subjective or value judgements. As opposed to positive economics, which studies actual economic phenomena and tries to describe and explain the reality rents the super-normal returns (in excess of opportunity costs) that an individual or firm obtains from a particular activity as a result of a particular policy intervention rent seeking activities by individuals or firms that are designed to capture economic rent through manipulation of the process of policy- making or implementation. These are often contrasted with ‘productive’ activities that generate income through production and trade. Note that even Khan (2000), whose basic thesis is that rent-seeking and growth can coincide when rents are managed in such a way that they encourage productive activities, treats rent-seeking activities by potential beneficiaries as a deadweight cost selectorate ‘the group who actually selects leaders or who control the instruments of power that enable a leader to remain in office’ (Drazen 2008 p. 24)