Stefan Dercon, Chief Economist, of UK’s DFID gave a thought-provoking talk about Aid Is Politics last week, and he made the point that much of what passes as political economy analysis is pessimistic or refuses to make policy suggestions. However, people who work in development do not have that luxury. They are in a country to act, to make a contribution.
Dercon quoted Esther Duflo, “We can do lots of bad policies in good institutional settings, and lots of good policies in bad institutional settings.” He continued, “Development policy as well as aid is still about doing the ‘right things’ and not the ‘wrong things’.” What we need to admit is that the process is political. Development actions are constrained by politics today and will affect politics tomorrow.
By acting, we’re taking a stand. Therefore, we better get some of the things right. And to do that properly, we must take into account the power structures and politics that are endogenous to a particular place. We should think through economic advice based on what tomorrow will bring. This won’t be easy, but we can push for this, and by so doing, gain a better political equilibrium in the countries we advise.
There were some interesting examples shared. He noted that poppy has a value chain that’s unbeatable and that we believe we can solve this by finding a new crop. However, this solution won’t work if we don’t take into account the deeply vested interests in the value chain. He mentioned a country where tax and stamps for coffee export have become a source of revenue and reclaimed VAT is higher than the VAT collected. Dercon’s point: You need to consider these sorts of outcomes if you’re doing tax reform. Mobile communications is another area where politics matter. In some places, senior leaders in government end up owning majority shares in the mobile phone companies and capturing this lucrative market.
Despite the tough challenges, he mentioned a few examples where policies that were structured to the political realities were successful. In one conditional cash transfer scheme, the IMF worked with the Central Bank of a country to deposit money into 90% of all accounts and to freeze them until an energy subsidy removal was passed in Parliament. In another country, only international firms were allowed to bid on the telecommunications contract. This allowed independent private companies to enter the market.
The upshot: We can do more political thinking and political influencing than we do right now. And instead of giving “second best” policy advice based on “political constraints,” strive to give the best advice in difficult political environments and use political influence to get a better political equilibrium.
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Photograph, "Women of the Tung-Teiya Shea Butter Extraction Women's Association" by Jonathan Ernst via World Bank Photo Collection