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, 2011aGrindle 2011b,) Sue Unsworth’s ‘upside down view of governance’ (IDS, 2005IDS, 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 2008Booth, 2011).

DFID's how to note aims to bring together the diverse literature and tools on political economy analysis within a short and accessible document.

'Good enough governance' refers to the minimal conditions of governance necessary to allow political and economic development to occur, contrasting with the long and growing list of normative requirements included in the traditional good governance agenda.

In this recent commentary Merilee Grindle highlights the recent shift away from prescriptive, 'one size fits all', best practice modes of development intervention towards more context specific and situationally determined responses to specific problems.

This report joins in the criticism of the 'good governance' agenda, stressing that donor prescriptions for institutional change have been unrealistic in their excessive expectations of poor countries and have failed to examine the deep-seated causes for bad governance.

Many governance programmes fail because they focus solely on strengthening formal, rules-based institutions and ignore the connections between the public and private spheres of life.

This and other entries on Brian Levy's World Bank blog argue strongly for an approach to supporting governance based on 'best fit' to local conditions rather than 'best practice'.

This article examines what -- in contrast to development through the good governance agenda informed by Western practices -- development processes based on shared habits and widely understood practices in Africa means, i.e. development "going with the grain of African ways of doing things".

The APPP starts from the assumption that the "forms of governance that might work better for development under the specific conditions yielded by African history and geography are not known."

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.

This paper argues that existing political economy approaches lack the analytical tools needed to grasp the inner politics of development.

Grindle examines why, despite conventional wisdom that social sector reforms would be unlikely to happen in Latin America, certain reforms have succeeded seemingly “against the odds.”

Rodrik argues in favour of a renewed focus on ideas as key in defining interests and, as such, they can be used to relax political constraints.

This paper argues that attempts to mainstream political thinking in most donor agencies have used a political economy analysis (PEA) approach, and yet this has been largely ineffective.

Under what conditions does an understanding of political economy strengthen aid-supported development efforts?

Andrews et al respond to the perceived failures of a ‘best practice’ reform approach, which they argue focuses largely on superficial changes that in fact discourage the development of state capabilities.

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. 2002North, 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, 2010Bates 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.

Why are there huge differences in average incomes between the world's richest and poorest countries?

Douglas North is often credited with being the father of New Institutionalism in economics. Institutionalist scholars seek to explain differences in market performance and overall economic development in terms of differences in the institutional framework within which markets operate.

Echoing North (2003), Rodrik maintains that desirable, market-supporting institutions provide security of property rights, enforce contracts, and stimulate entrepreneurship, among other functions; however, each of these ends can be achieved in a large number of different ways.

In this paper, Bates and Galiani reflect on the nature and influence of institutions, and ultimately their value in promoting economic development.

Andrews et al respond to the perceived failures of a ‘best practice’ reform approach, which they argue focuses largely on superficial changes that in fact discourage the development of state capabilities.

This volume analyzes the function of informal institutions in Latin America and how they support or weaken democratic governance.

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.

This paper aims to clarify the key concepts related to "political settlements" thinking and provide ideas on how to operationalise this line of thought at the policy and programme level.

This paper aims to give advice to development practitioners about how to use a political settlements approach (PSA) as a diagnostic tool, bearing in mind that PSA has potential to provide if not a road map then some compass bearings for policy.

Economic and political development requires a long-term shift towards open access orders. However, there are risks inherent in this transition where political and economic reforms can disrupt the processes of rent-creation and sharing that are instrumental to peace and social stability.

Since the mid-2000s, North and associates have adopted a new framework for interpret problems of development. This paper is one of a succession of works outlining this revised approach.

This article distinguishes between 'market-enhancing' and 'growth-enhancing' governance approaches to achieving development in poor countries.

This book engages in the debate on growth versus economic transformation and the importance of industrial policy, presenting a comprehensive framework for explaining the politics of industrial policy.

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.

This article examines whether democracy is necessary for development (as opposed to being preferable for a host of other reasons), and hence the relationship between markets, states, and democracies in developing countries.

This paper identifies and explains systematic performance differences between younger and older democracies: younger democracies are more corrupt; exhibit less rule of law, lower levels of bureaucratic quality and lower secondary school enrollment; and spend more on public investment and government workers.

This edited volume describes and explains different forms of clientelistic politics. Its observations are in direct contrast to the usual assumptions of programmatic political competition whereby parties compete for citizen's votes by offering alternative policy platforms.

This paper identifies and explains systematic performance differences between younger and older democracies: younger democracies are more corrupt; exhibit less rule of law, lower levels of bureaucratic quality and lower secondary school enrollment; and spend more on public investment and government workers.