7: Policy Lecture

Dr Ali Cheema moderated a policy lecture focusing on state effectiveness and research. Dr Tim Besley of the LSE, spoke via Skype on state effectiveness, political institutions and the role research can play in policy making.

When studying state effectiveness, Dr Besley argued that political institutions are key because they can constrain power and they play a large role in how people acquire positions of responsibility and power. In economics, researchers see economically effective autocratic regimes and ineffective democracies, and vice versa. What is more important is how governments create the context in which the economy operates. Dr Besley stated that he sees two criteria for effective government: 1) selection and 2) incentives. Selection underscores the fact that we care who holds power. People have different competencies, levels of honesty and purpose. There is a historic trend in many countries of power becoming concentrated in political elites with strong networks. If selection is an important factor in political institutions’ effectiveness, a key issue is how to refresh these networks? Here we see a trend towards quotas in places like India, as well as programmes which support new entrants.

Incentives are key in two ways: determining effective institutional oversight and ensuring broad-based policies. If institutions constrain politicians, they need to create incentives that change the cost-benefit analysis of politicians towards better decisions. This can also be done through a judicial system which enhances the rule of law, and whose independence is rewarded.

Institutions also need to encourage government interest in broad based policies, which put the good of society over benefits to a narrowly defined group. So why do political institutions and state effectiveness matter to economics? Firstly, better political institutions often lead to better policy making, both in cost-benefit analyses and in responses to shocks. Also there are more incentives for better political institutions to invest in state capabilities which are important for building longer run economic improvement. This includes fiscal capacity, infrastructure, collective capacity, and legal capacity such as property rights and effective regulation.

Since political institutions clearly matter to economics, it is important to look at government architecture: how government is structured and how it carves out areas of responsibility. There are several broad dimensions within this topic; firstly, the role of autonomous government institutions, like the central bank, courts and regulators. Here the selection aspect of political institutions is key. Another dimension is the competition between government branches, which sets up incentive structures. Decentralization plays a role in this—creating information on comparative performance between different branches to encourage better performance, allowing the mobility of humans and capital, encouraging innovation, and creating career concerns for politicians.

Finally, the context of political institutions changes their effectiveness—social mores, culture, history, etc. all have an effect. Economists are frequently suspicious of cultural explanations, but when contracts are highly incomplete culture can play a large role in determining outcomes. In government, politicians often have huge amounts of discretion to make decisions on the behalf of their countrymen and very few contractual obligations which constrain or incentivize their choices. Thus, social norms interact with personal incentives and influence policy outcomes.

Subsequently, Dr Cheema opened up the floor to questions. First, Assistant Professor Nazia Malik of NUST asked about how Dr Besley thought incentive structures in the Pakistani government have changed with the decentralization of expenditures to provinces and the continued centralization of tax collection in the central government. She also asked him if he thought that a lack of institutional capacity in some provincial governments would cause them to lag behind other regions. Dr Besley agreed that these are large issues which are applicable to many country contexts. The capacity of the central government is always better than the provincial level, but if money is raised locally it sharpens accountability. These two competing issues need to be weighed, and a system of rules and grants to pass funds down from the central to the provincial level needs to be transparently created.

The second question was from Dr. Zafrullah Chowdhry, founder of Gonoshasthaya Kendra. He asked Dr Besley if he was promoting effective autocratic governments over ineffective democracies, and stated that he felt there was a lack of emphasis on election commissions in the lecture. Dr Besley denied any preference for autocracies, and stated that he feels the debate obscures issues rather than shedding light. More important are the checks and balances which lead to accountability in governments. China may be autocratic, but it has strong accountability mechanisms. He also agreed that elections are important—they chose the ruling class—but election commissions are only part of the government system. Then democracies fail, it is often because there has been too much focus on elections and not enough on creating accountability for the people who gain power.

Dr Shaibal Gupta, co-director of the IGC India-Bihar office, asked about how democracy can co-exist with family oligarchies. Dr Besley pointed out that this is not limited to the developing world, when you look closely at the USA, UK and other established democracies, leaders tend to come from political dynasties. The question is whether it is whether it is damaging. To some extent, Dr Besley feels this question is a sideshow; the issue should be taken seriously but its less of a concern if there are other forms of institutional arrangements which create accountability.

Finally Mari Oye, IGC Country Economist in Myanmar asked Dr Besley to give thoughts to the IGC on the role of research and use of evidence in the contexts of rapid institutional change, rather than countries which may only be seeking to tweak existing policies. Dr Besley said that unless research is able to say something about the mechanisms through which evidence is working, its impossible to project findings to other contexts. The big challenges in political economy right now are mechanisms—the mechanism of political selection, of incentives for policy makers. When researchers understand them, we gain a sense of the relative strength of findings in different contexts. It’s no good to make policy recommendations on highly contingent results; researchers must look for broadly applicable findings in data if they wish to give robust policy advice.

By Kyla Reid, Coordinator, IGC London