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 4 References 5 1.0 State roles and state ‘failure’ 7 Section Overview 7 Section Learning Outcomes 7 1.1 State failures and market failures 7 1.2 Sources of state failure 9 1.3 Douglass North on state failure 11 1.4 State activities 12 Section 1 Self Assessment Questions 17 2.0 Introducing political economy 18 Section Overview 18 Section Learning Outcomes 18 2.1 Defining characteristics of political economy analysis 18 2.2 A generic political economy model 21 Section 2 Self Assessment Questions 26 3.0 Policy processes 27 Section Overview 27 Section Learning Outcomes 27 3.1 The traditional model of the policy process 27 3.2 Evidence versus interest in policy-making 29 Section 3 Self Assessment Questions 33 Unit Summary 34 Unit Self Assessment Questions 35 Key Terms and Concepts 36 P527 Political Economy of Public Policy Unit 1 UNIT INFORMATION Unit Overview Many policy analysts, researchers, entrepreneurs, development practitioners and citizens get frustrated by what they see as the failure of the state or its agencies to do what they think it should do. The two main areas in which states are seen to fail are policy design and service delivery. In this unit we review how influential schools of economic thought see the role of the state and explore reasons for so-called state failure. We then introduce 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). The unit concludes with a consideration of how policies are actually formulated and reflects on the relative importance of vested interest versus evidence in policy design. Unit Aims • To review how influential schools of economic thought see the role of the state and explore reasons for so-called state failure. • To present the concept of rents. • To introduce a generic political economy model for analysing the selection of leaders and the formation of policy. • To consider the relative importance of vested interest versus evidence in policy design. Unit Learning Outcomes By the end of this unit, 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 • 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 • assess critically the traditional model of the policy process • analyse the role of evidence in shaping policy Unit Interdependencies The explanation of different types of rents is valuable for the whole module, but will be returned to in greatest detail in Unit 8. © SOAS CeDEP 2 P527 Political Economy of Public Policy Unit 1 KEY READINGS Section 1 Bates R (1989) Beyond the Miracle of the Market: The Political Economy of Agrarian Development in Kenya. Cambridge University Press, Cambridge, pp. 6– 9. This short section from the introduction of Bates’ 1989 book simply and powerfully illustrates the importance of the allocation of property rights to the speed and direction of economic growth. It also underlines the point that the allocation of property rights within an economy is fundamentally a question of politics. The argument is made with reference to the work of Coase (1960), often held up as one of the foundational works of new institutional economics. 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. In this chapter, Khan sets out six types of rents that governments can bestow on firms, individuals and groups within an economy. These rents flow from the allocation of property rights. Khan’s theory is heterodox, drawing on neoclassical economics, new institutional economics and the works of Karl Marx. His central argument is that the wise distribution of some of these types of rents can spur economic growth — thus facilitating development even in apparently highly corrupt environments — whilst others act as a deadweight burden on the economy. The explanation of each type of rent should be readily accessible to all students of this module. Section 2 Drazen A (2008) Is there a different political economy for developing countries? Issues, perspectives and methodology. Journal of African Economies 17(AERC Supplement 1) i23–i31. The overall purpose of Drazen’s paper is to argue that the same general approach can be applied to the analysis of political economy issues in developed and developing countries. In the selected pages, Drazen outlines the key building blocks of a generic political economy model, which (he argues) can be applied to any context. The main elements of his model are political actors, their objectives and the mechanisms by which political decisions are made (ie institutions). As you read this excerpt, think how the ‘building blocks’ might apply within a country with which you are familiar. © SOAS CeDEP 3 P527 Political Economy of Public Policy Unit 1 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. © SOAS CeDEP 4 P527 Political Economy of Public Policy Unit 1 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. © SOAS CeDEP 5 P527 Political Economy of Public Policy Unit 1 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