Operational Responses - Why does Political Economy of reform work matter for Operations ?

1. Operational Responses - Why does Political Economy of reform work matter for Operations ? Social Development Sector Week 2009 Political Economy Training Ruslan Yemtsov, MNSED

2. Outline Using as examples ECA and MENA cases to illustrate i) why PE work matters for operational work, (ii) how PE work is used (iii) what challenges we face in • conducting PE analysis and • in using PE analytical findings to design projects.

3. General remarks • Why PE matters? • Our world is a world of second and third best • How losses and gains are distributed • Problem of collective action • When one can do without PE? • When counterparts take it on • When solutions are politically feasible (informal PE) • When the proposals are not meant for implementation

4. Why PE work matters for operational work: example of Russia targeted social aid • Problem: Russia spends too little on targeted social assistance and what is spent is very badly targeted. This stalled the progress in reforming public spending • Action: since 1990s the Bank was involved in several project and major studies to identify strategies to improve targeting and adequacy of aid • These attempts have not resulted in visible improvement of the situation, and social policy dialogue has dried out • Source: (i) the force of the “non-deserving” group that had to bear the cost of reform was constantly underestimated, (ii) the direct gainers had no political weight • Alternatives were possible, but were never considered because a radical reform worked in other EE countries. • Conclusion: too many cases like this tell us that in addition to assessing economic and welfare impacts, it is also important to consider power relations/dynamics in order to identify solutions that are politically acceptable

5. How PE work is used: example of wheat subsidy reform in Morocco • Background: Agriculture subsidies – in the focus of ag policy debate in late 1990s early 2000s; considered a source of distortions and an impediment to greater openness of the economy. • Problem: Attempts to reform the system since 1980s have not resulted in removal of subsidies. • Action: major study of the key stakeholders of the sector in 2004-6 resulted in identification of specific interest groups who were benefiting from the current system and their dynamics. • Outcome: This study was used in policy dialogue. It was conducted as open analysis disclosed with client (never published), but its key impact was on the Bank’s own strategy and resulted in a much more nuanced policy dialogue. Avoiding wasting energy and money - but scaling up when the right moment comes (?).

6. What challenges we face in conducting PE analysis: example of Djibouti food crisis aid • Background: country fully dependant on imported food badly hit by food prices crisis of 2007-8. No cash transfer program in place. All assistance from GF TF went into filling in for a shortfall in the budget due removal of import tax on food staples- largely insufficient. • Problem: all attempts to convince the government to deploy targeted cash assistance (C or U) failed. • Difficulty: this is portrayed as a “cultural” problem (dependence on aid is inacceptable) or “paternalistic” concern (all cash handed over will be spent on qat). Many invisible issues that are difficult to tackle: illegal immigration, social disparities, donor politics. No time and no money to do a serious PE study. • Result: even the pilots that will address the concerns are still discussed. Current strategy – conduct extended study.

7. What challenges we face in using PE to design operations: example of Jordan energy subsidies • Background: Jordan started subsidy reform in 2005. Meanwhile detailed PSIA focused on welfare impact. Deep insights into PE: experienced team with a knowledge of local politics, power relations and societal perceptions. Focused on the ways to compensate the poor. It was shown that the ‘price” to pay for reform is helping the urban middle class and “motivating” special interest groups (e.g. farmers). • Problem: By 2008- major steps in reform of energy prices accompanied by compensatory measures which handed over surprisingly large give–always to public servants, urban middle class and agriculturalists. Was it necessary? Will GoJ be capable to scale those back? • Causes of the problem: even though it was clear that package of reforms should include compensatory measures to middle class, not clear how to target such measures. Fierce bargaining and ad-hoc splitting. All analytics went into setting up the system to protect the poor. There was no consensus that it is the poor who shall be protected.

8. In lieu of conclusions • PE was always a part of successful reform programs – but not always “documented” • PE is not always necessary- can be replaced by real ownership. Client is better positioned to do it (but not always – Jordan). • PE most of the time used to avoid mistakes, not to propose solutions • This is because • it is costly and time consuming to do a good PE analysis • its operational use is not always direct and immediate • and it is unusual to focus it on the policies aimed at the middle class. • But PE can be very useful in making PSIAs more operational and realistic.