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1. Conceptual underpinnings

1.1 What is political economy analysis?

Political economy analysis (PEA) refers to a wide body of theory and practice concerned with the interaction of political and economic processes, and how these influence continuity and change in development outcomes. A useful starting point explaining basic definitions and concepts in DFID’s how-to note on political economy analysis (DFID, 2009). Many of the basic ideas of PEA can be linked to a critique of the normative assumptions of the ‘good governance’ agenda, and the increasing recognition that development agencies must be more sensitive to local context and local politics. This critique is particularly associated with Merilee Grindle’s writings on ‘good enough governance’ (Grindle, 2011a; Grindle 2011b,) Sue Unsworth’s ‘upside down view of governance’ (IDS, 2005; IDS, 2010), Brian Levy’s call for a shift from ‘best practice’ to ‘best fit’ (Levy 2011), and the Africa Power and Politics Programme’s ideas on ‘going with the grain’ (Kellsall 2008; Booth, 2011).

1.2 A rapidly evolving discipline

Over the past decade political economy analysis has undergone rapid development, and has evolved in response to an assessment of the results of early analysis and vigorous debate on the utility of the approach. An influential paper by Hudson and Leftwich, 2014 criticises early PEA for failing to analyse adequately the ‘inner politics of development’, meaning power, interests, agency, ideas, political manoeuvring to build and sustain coalitions and take advantage of opportunities created by events. This paper helpfully focuses attention on how change can happen, countering the tendency of some early PEA studies to limit the analysis to explaining why reforms are blocked by vested interests. This echoes earlier work by Merilee Grindle on successful social sector reforms in Latin America, which show how change agents have manoeuvred around political barriers (Grindle, 2002). A recent paper by Dani Rodrik also challenges the notion that vested interests are fixed and well-defined, and focuses on the key role of ideas in defining interests and changing actors’ interpretations of their interests (Rodrik, 2014).

Approaches to PEA have also evolved in response to the recognition of the limited value of treating PEA as a separate analytical activity that is focussed on discrete studies (Marquette and Fisher, 2014). There has been a noticeable shift towards promoting PEA as a means to ‘think and work politically’ as an activity that is mainstreamed within development practice. Booth et al. (2016) situate this transition within a broader shift in development practice towards Problem-driven Iterative Adaptation (PDIA) (Andrews et al., 2013). Recent practice has shown how PEA is an essential element of the PDIA approach because it enables development actors to become more problem-driven, more self-aware about their own interests, more realistic about their level of influence, more tactical in exploring the room for manoeuvre to promote change, and more interested in learning and adaptation.

1.3 Institutions matter

Political economy analysis draws on a well-developed literature on the key role of institutions in shaping development (Rodrik et al. 2002; North, 2003). While asserting the primacy of institutions, this literature stresses the need to avoid a deterministic and normative view of “best practice” institutional forms, and to recognise that development can be served by a variety of institutional arrangements, which may often appear second-best (Rodrik, 2008). There has been a shift towards more nuanced analysis of how institutions actually function, and how they are shaped by particular actors (IPPG, 2010; Bates and Galiani, 2014). Andrews et al. (2013) draw attention to the problem of ‘isomorphic mimicry’, whereby developing country governments attempt to comply with ‘best practice’ by undergoing superficial changes in institutional form, while failing to reform the way that institutions actually function.

In response to these insights, political economy analysis has become increasingly focussed on the workings of institutions, and in particular, the relationship between formal institutions (codified laws and officially sanctioned rules) and informal institutions (rules that are created, communicated, and enforced outside of officially sanctioned channels and often through personal, social and ethnic ties). Helmke and Levitsky (2006) provide an analytical framework for interpreting the interaction between formal and informal institutions and the implications for democracy in Latin America.

1.4 The political settlement

Political economy analysis has become increasingly concerned with questions about how societies establish order and subsequently develop. Drawing on the literature on statebuilding and fragility, political economy analysis has sought to analyse the nature of the political settlement or bargain amongst elites and non-elite groups in the sharing of power and resources (Parks and Cole 2010).Kelsall (2016) identifies three broad dimensions of the political settlement: (1) exclusivity/inclusivity, (2) elite cooperation based on common purpose/spoils, and (3) bureaucracy governed by impersonal norms/patron-client relations.

An influential paper (North et al. 2007 see also Gray, 2016). This has moved beyond simplistic assertions of the growth benefits of increased economic and political competition, to an understanding that under certain conditions limited access orders can deliver strong growth. Much depends on how the economic rents generated by limited access orders are deployed and are reinvested in technology acquisition and productivity enhancement (Khan, 2006).

Khan (2010) argues that so-called “good governance” is neither necessary nor achievable in developing countries; rather, development can be realised through a productive sharing of rents between a ruling coalition and an emerging class of capitalist investors. Whitfield et al. (2015) analyse political settlements in African countries, and highlight critical factors that have supported or undermined industrial policy. These include the distribution of power within the ruling coalition, whether it is more centralised or fragmented, as well as between the ruling coalition and a rival elite.

1.5 Effects of political competition

Political competition and its effects on development outcomes has been another important focus of political economy analysis. Khan (2005) finds that there is no difference globally between democracies and autocracies in their development outcomes. Other studies find significant variation between different types of democratic system with young democracies tending to act in less developmental ways that well established democracies(Keefer 2005). In seeking to understand better the mechanisms by which political competition affects development outcomes, analysts have pointed to the effects of entrenched patron-client relationships in many developing countries. Kitschelt and Wilkinson (2009) explore different forms of clientelism, which they collectively define as “a transaction involving the direct exchange of a citizen’s vote in return for direct payments or continuing access to employment, goods, and services.” Keefer and Khemani (2005) identify mechanisms by which electoral competition can reinforce patronage politics. They analyse this in terms of ‘political market imperfections‘ (incomplete information, social divisions and credibility gaps) that create incentives for politicians to deliver narrowly targeted private goods rather than public goods that are required for development and whose benefits are more widely shared.