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Contents xiii Foreword xv Acknowledgments xix Abbreviations 1 Overview: World Development Report 2017: Governance and the Law 2 Improving governance to meet today’s development challenges 5 Drivers of effectiveness: Commitment, coordination, and cooperation 12 Levers for change: Contestability, incentives, preferences and beliefs 19 Drivers of change: Elite bargains, citizen engagement, and international influence 29 Rethinking governance for development 32 Navigating this Report 33 Notes 34 References 39 Part I: Rethinking governance for development: A conceptual framework 40 Chapter 1: Governance for development: The challenges 40 Understanding development policy: Proximate factors and underlying determinants 43 Development objectives . . . and constraints 48 Governance for the bottom half 48 Notes 48 References 51 Chapter 2: Enhancing governance for development: Why policies fail 52 Diverse pathways to success: Moving beyond institutional transplants 53 Drivers of effectiveness: Commitment, coordination, and cooperation 58 Policy effectiveness in the presence of power asymmetries 65 Levers for change: Incentives, preferences and beliefs, and contestability 72 A dynamic process: Drivers of change and the role of law 73 Notes 73 References 77 Spotlight 1: Corruption 80 Spotlight 2: The governance challenges of managing risks v 83 Chapter 3: The role of law 84 Law and the policy arena 86 Ordering behavior: The command role of law 91 Ordering power: The constitutive role of law 93 Ordering contestation: The role of law in change 95 Getting to the rule of law 98 Notes 98 References 102 Spotlight 3: How do effective and equitable legal institutions emerge? 109 Part II: Governance for development 110 Chapter 4: Governance for security 110 Can governance solve the problem of violence in society? 111 Security, governance, and power are tightly interlinked 116 Governance can improve security in four ways 123 Conclusion 123 Notes 124 References 130 Spotlight 4: Wartime governance 133 Spotlight 5: Crime 137 Chapter 5: Governance for growth 137 How policy “capture” slows economic growth 138 How governance matters to growth: A microeconomic perspective 141 How policies are affected by undue influence from powerful groups 145 Policy design under risk of capture 146 How the design of public agencies mediates the influence of powerful groups 150 Finding the right approach 152 Notes 153 References 159 Spotlight 6: The middle-income trap 163 Spotlight 7: Public-private partnerships 167 Chapter 6: Governance for equity 170 Two key policy areas that matter for equity: Investing in public goods and expanding opportunities 171 Equity and institutional functions: The role of commitment and cooperation 173 How policies to promote equity can be affected by power asymmetries 178 Leveling the playing field and making governance more responsive to all 182 Improving policy effectiveness by taking into account asymmetries in bargaining power 183 Notes 184 References 189 Spotlight 8: Service delivery: Education and health 195 Part III: Drivers of change 196 Chapter 7: Elite bargaining and adaptation 196 Understanding elite bargains 203 Elite bargains and uneven state capacity vi | CONTENTS 205 Broadening the policy arena to enhance elite power 207 When binding rules for accountability serve as political insurance 208 When elites adapt through rules-based mechanisms 212 Entry points for change through elite adaptation 213 Notes 213 References 217 Spotlight 9: Decentralization 220 Spotlight 10: Public service reform 225 Chapter 8: Citizens as agents of change 226 Bringing change through the ballot box 230 Bringing change through political organization: The role of political parties 234 Bringing change through social organization 239 The role of induced participation and public deliberation 241 Entry points for change: Understanding citizen agency as a collective action problem 241 Notes 242 References 247 Spotlight 11: From transparency to accountability through citizen engagement 252 Spotlight 12: The media 257 Chapter 9: Governance in an interconnected world 257 Transnationalism and the domestic policy arena 259 Transnational rules and regulations: Enhanced cooperation and focal points for change 266 Foreign aid and governance 273 Notes 274 References 278 Spotlight 13: Illicit financial flows Boxes O.1 3 What is governance? O.10 21 Who are elites, and what do they do? O.2 4 Governance for what? Achieving Results from a survey of elites in 12 countries the goals of security, growth, and equity O.11 25 Direct democracy delayed women’s voting rights in Switzerland O.3 8 The idea of power and the power of ideas O.12 28 Domestic resource mobilization, foreign aid, and accountability O.4 10 Why some people see red when they hear “green growth” O.13 30 What does the WDR 2017 framework mean for action? The policy O.5 12 The need to strengthen incentives to effectiveness cycle gather development data O.14 31 Lessons for reformers from the “rules O.6 14 Legal and normative pluralism game”: How is legitimacy ultimately O.7 15 Transitions to the rule of law built? O.8 18 The “rules game”: Paying attention to 1.1 41 What is governance? where the action is 1.2 43 Governance for what? Achieving the O.9 20 Elites and citizens: Who is who in the goals of security, growth, and equity policy arena? 1.3 46 Discontinuities of the state CONTENTS | vii 2.1 53 The microfoundations of commitment, 5.1 143 Why some people see red when they coordination, and cooperation: A hear “green growth” perspective from game theory 5.2 152 Participatory mechanisms in policy 2.2 55 Trust in institutions stems from design: The “Bulldozer Initiative” in delivering on commitments Bosnia and Herzegovina 2.3 59 Game theory and the roots of political 6.1 168 What is equity? power 6.2 169 A vicious cycle: How inequality begets 2.4 60 Who is who in the policy arena: The inequality case of Bolivia’s social policy 6.3 174 Efforts to expand and secure access to 2.5 62 Transaction costs, incomplete contracts, land often lead to capture and political agreements: Why land 6.4 175 Defining and measuring clientelism redistribution policies often fail 6.5 181 Local elites can capture public spending 2.6 63 How capacity and norms influence and despite participatory programs are influenced by power asymmetries 6.6 183 Designing social safety nets to account 2.7 64 The “rules game”: Paying attention to for asymmetries in bargaining power where the action is 7.1 198 Expert survey to identify elites 2.8 65 Factors that make sustaining cooperation over time more likely 7.2 202 When do elites have incentives to introduce rules for contestability and 2.9 66 Voluntary compliance and the building accountability? blocks of legitimacy 7.3 204 Pockets of effectiveness in Nigeria 2.10 67 How an international commission enabled a credible commitment to fight 7.4 211 Female elites and female leaders criminals’ impunity in Guatemala 8.1 236 Social movements and bottom-up 2.11 69 How the introduction of electronic pressures for reform: Right to voting in Brazil reshaped the policy information legislation in India arena and led to more pro-poor policies 8.2 237 The mobilization of women and 2.12 71 The “rules game”: Lessons for reformers promotion of gender-based policies in postconflict settings: The case of Sub- 3.1 84 What is law? Saharan Africa 3.2 85 Legal and normative pluralism 9.1 262 Legitimizing the second-best: 3.3 87 Legal origins: Theory and practice Governance options for global public goods and the Paris Agreement on 3.4 96 Transitions to the rule of law climate change 3.5 97 Understanding the role of law in 9.2 266 Aid as a delivery mechanism for context transnational rules and ideas 4.1 112 How modern governance was born 9.3 270 The impact of aid on domestic resource offers lessons for today’s “fragile” mobilization: What does the evidence countries say? 4.2 114 The persistent links among gender- 9.4 271 Beyond technocratic approaches: based violence, power, and norms Opening the door to considerations 4.3 115 Several factors can cause conflicts, and of politics and power in development they often combine policy Figures O.1 6 Long-term growth is less about how O.5 16 Recruitments of civil servants increased fast one grows than about not tripping exponentially in Tunisia and the Arab along the way Republic of Egypt in the aftermath of O.2 9 A more even balance of power is the Arab Spring uprisings of 2011 associated with positive security O.6 17 Formal avenues for broad-based outcomes participation in regulatory decision O.3 9 The value of political connections: making are limited in low- and middle- Indonesia during President Suharto’s era income countries O.4 11 Principals, agents, and clients: O.7 19 WDR 2017 framework: Governance, law, Accountability for sale and development viii | CONTENTS BO.10.1 21 Elite actors within national ruling 4.1 111 Violence inflicts a high cost on coalitions vary greatly across countries development and over time 4.2 111 Violent conflict is associated with a O.8 24 Electoral democracies are spreading, but reduction in GDP per capita the integrity of elections is declining 4.3 118 An even balance of power is associated O.9 26 After decades of progress, civic space is with positive security outcomes shrinking globally 4.4 119 Constraining state power ensures O.10 27 Aid is a large share of GDP and security government revenue in many 4.5 121 Recruitment of civil servants increased developing countries exponentially in Tunisia and the BO.13.1 30 The policy effectiveness cycle Arab Republic of Egypt in the aftermath 1.1 41 Despite declining under-5 child of the Arab Spring uprisings of 2011 mortality rates, inequality among and S5.1 134 Homicide rates across Europe have within countries is still sizable declined dramatically over the last 800 1.2 45 Economic growth requires security years 2.1 52 Despite similar rules for the 5.1 138 Length of time needed for firms to management of natural resource obtain a construction permit varies revenue in Chile and Mongolia, Chile’s widely expenditure patterns reveal a stronger 5.2 139 Per capita income and governance are commitment to compliance correlated B2.2.1 56 Welfare is higher for citizens under 5.3 140 Medium-term growth and governance commitment in the lab game are not correlated B2.4.1 60 Formal and actual policy networks in 5.4 142 In Indonesia, the stock value of Bolivia, 2010 politically connected firms fell when B2.11.1 69 An electronic ballot made it much easier the connection was jeopardized than a paper ballot for those with little 5.5 149 Formal checks and balances are weaker or no education to cast their vote in in low- and middle-income countries Brazil 5.6 150 Formal avenues for broad-based B2.11.2 70 Electronic voting reduced the number participation in regulatory decision of invalid votes in Brazil making are limited in low- and middle- 2.2 72 WDR 2017 framework: Governance, law, income countries and development S6.1 159 Many countries have not converged S1.1 79 Development accounts for only about toward higher incomes half of the variation in control of S6.2 161 Checks on corruption and corruption accountability institutions improve B3.3.1 87 Changes in investor protection and more in countries that escape upper- creditor rights have little impact on middle-income status to achieve high- economic outcomes income status than in countries that are 3.1 91 Constitutions have become ubiquitous, “non-escapees” but they are often replaced or amended S7.1 164 Private participation in infrastructure 3.2 92 In every country, there is a gap between projects in developing countries the laws on the books and the laws remains limited implemented, but high-income OECD 6.1 168 States can improve equity by countries generally do better than low- intervening in the distribution of final and middle-income countries outcomes through taxes and transfers 3.3 96 The rule of law is strongly correlated and by providing access to basic with high income services S3.1 103 Although high-income OECD countries B6.2.1 169 Capture is associated with lower levels generally have well-functioning legal of commitment institutions, the relationship between 6.2 171 When commitment is low, countries institutional quality and income varies exhibit low compliance (high shadow in developing countries economy) S3.2 105 The correlation is weak between 6.3 172 Fear of sanctions and participation in de jure and de facto measures of judicial decision-making processes promote independence cooperation CONTENTS | ix 6.4 175 A politician can become an agent of the for citizen engagement, dominant provider in clientelist settings parties place de facto limits on electoral 6.5 176 In some countries in the Middle East competition and North Africa, a large proportion of 8.6 231 Programmatic parties perform better citizens believe that connections are as than clientelist parties in improving the important as or even more important quality of public services, especially in than professional qualifications in competitive party systems obtaining a government job 8.7 232 Programmatic parties tend to emerge 6.6 177 Unofficial payments for education at higher levels of development, and health services are widespread in but significant variation exists Europe and Central Asia among countries at similar stages of 6.7 181 Empowering parents with school-based development management training helps lessen 8.8 233 Dominant party systems are less capture (teacher absenteeism) in Kenya likely than competitive systems to B7.1.1 198 Elite actors within national ruling introduce legal provisions for public coalitions vary greatly across countries funding, suggesting efforts to reduce and over time contestability 7.1 200 Preferences of economic elites predict 8.9 234 Political parties are on average the least- policy adoption more than do citizen trusted political institution worldwide preferences in the United States 8.10 235 After decades of progress, civic space 7.2 201 When the cost of losing power is high, is shrinking globally, driven by higher elites are more likely to reject electoral government restrictions on media and results that support the opposition and CSO entry are less likely to move toward rules- 8.11 235 Taking advantage of the digital based contestability and accountability revolution, social movements are B7.2.1 202 The interaction between political increasingly organized across national uncertainty and the cost of losing boundaries power B8.2.1 237 The rate of political participation of 7.3 205 Horizontal and vertical accountability women is higher in countries emerging become more common as party from conflict institutionalization increases B8.2.2 238 In Africa, postconflict countries have 7.4 210 Greater ideological unity among been more likely to integrate women’s elites is associated with greater rights in their constitutions cohesion of the ruling coalition, as well as more institutionalized elite 8.12 240 In Brazil, online voting in participatory interactions budgeting can reinforce existing inequalities 7.5 212 When economic power maps onto political power, there are fewer S11.1 248 Transparency is not enough: Three institutional checks on power conditions for the effectiveness of information initiatives 8.1 227 In Kenya, elections changed the incentives of the ruling elites, reducing 9.1 258 International actors can affect the the scope of ethnic favoritism domestic policy arena by changing the dynamics of contestation, shifting actor 8.2 227 Electoral democracies are spreading, but incentives, or shaping actor norms the integrity of elections is declining 9.2 260 Regulations and legal agreements have 8.3 228 Although citizens value elections proliferated across borders as an important route to economic development, less than half of 9.3 264 The “Rights Revolution” has led to a respondents worldwide have global spread of rights-related norms, confidence in the integrity of elections facilitated and supported by global treaties and agreements 8.4 228 Voter turnout worldwide from 1945 to 2015 indicates unequal citizen 9.4 265 Human rights treaties are spreading, participation and the risk of biased but de facto changes in state representation of policy preferences performance are lagging behind 8.5 231 Although the spread of multiparty 9.5 265 Gender quota laws have spread systems has increased opportunities worldwide since 1990 x | CONTENTS 9.6 268 Aid makes up a large share of GDP and 9.7 268 Low- and lower-middle-income revenue in many developing countries countries vary greatly in the amount of aid received and improvement in GDP per capita Maps 1.1 44 Violence is a major problem in 9.1 267 Aid flows amounted to over US$161 37 countries billion from donor countries to B1.3.1 46 State presence in Bolivia in selected recipient countries in 2014 intervention domains and composite density, circa 2010 Tables O.1 7 Three institutional functions— 2.1 71 Three principles for rethinking commitment, coordination, and governance for development cooperation—are essential to the S11.1 249 Positive and negative outcomes of effectiveness of policies citizen engagement O.2 29 Three principles for rethinking 9.1 261 Transnational actors, instruments, and governance for development mechanisms for influencing domestic B2.1.1 53 Coordination and cooperation as governance through incentives, modeled in game theory preferences, and contestability B2.2.1 55 Sources of trust S13.1 279 Actions generating illicit financial flows B2.3.1 59 Payoffs to cooperation or noncooperation CONTENTS | xi Foreword Leaders, policy makers, and development professionals often worry that well-intentioned policies designed to improve the lives of their communities will fail to deliver results. The global development community needs to move beyond asking “What is the right policy?” and instead ask “What makes policies work to produce life-improving outcomes?” The answer put forward in this year’s World Development Report is better governance—that is, the ways in which governments, citizens, and communities engage to design and apply policies. This Report is being launched at a time when global growth and productivity are con- tinuing to slow, limiting the resources available to help the world’s poorest and most vulner- able. Yet, people’s demands for services, infrastructure, and fair institutions are continuing to rise. Given strained government budgets and development aid, it is vital that resources be used as effectively as possible. We can do this by harnessing the finance and skills of pri- vate businesses, working even more closely with civil society, and redoubling our efforts in the fight against corruption, one of the biggest roadblocks to effective, lasting development. However, coordinating the efforts of this diverse set of groups requires clarity on the roles and responsibilities of each group, along with effective rules of the road to reach and sustain agreements. Without paying greater attention to stronger governance, the World Bank Group’s goals of ending extreme poverty and boosting shared prosperity, as well as the transformational vision of the United Nations’ broader Sustainable Development Goals, will be out of reach. Based on extensive research and consultations conducted in many countries over the past 24 months, this Report draws attention to the importance of commitment, coordina- tion, and cooperation as the three core functions needed to ensure that policies yield their desired outcomes. The Report also offers a helpful framework for approaching and resolv- ing the challenges faced by our partners. Specifically, it explores how policies for security, growth, and equity can be made more effective by addressing the underlying drivers of governance. Moving beyond the traditional concerns about implementation, such as limited state capacity, the Report then digs deeper to understand how individuals and groups with dif- fering degrees of influence and power negotiate the choice of policies, the distribution of resources, and the ways in which to change the rules themselves. As the Report shows, positive change is possible. Although reform efforts must be driven by local constituencies, the international community can play an active role in supporting these endeavors. In particular, we need to ensure that our future development assistance fosters the fundamental dynamics that promote better, more sustainable development. xiii I hope the insights presented in this Report will help countries, their communities, development institutions, and donors succeed in delivering on our shared vision to end extreme poverty and boost shared prosperity. Jim Yong Kim President The World Bank Group xiv | FOREWORD Acknowledgments This Report was prepared by a team led by Luis Felipe López-Calva and Yongmei Zhou. Lead chapter authors were Edouard Al-Dahdah, David Bulman, Deborah Isser, Marco Larizza, Ezequiel Molina, Abla Safir, and Siddharth Sharma. The extended core team was composed of Kimberly Bolch, Lidia Ceriani, Samantha Lach, Bradley Larson, Annamaria Milazzo, and Evgenia Pugacheva. Brónagh Murphy and Jason Victor served as the production and logis- tics team for the Report. Mart Kivine led partner relations and provided strategic advice and support for resource mobilization. Stephen Commins provided consultations support and advice on the “green cover” consultation. The team received excellent research assistance from Yanina Eliana Domenella, Simona Ross, and Hari Subhash. This work was carried out under the general direction of Kaushik Basu, Shanta Devarajan, and Indermit Gill. The team is also grateful for comments and suggestions from Paul Romer. The team received guidance from an advisory panel composed of Pranab Bardhan, Dr. Boediono, Mauricio Cárdenas, Francis Fukuyama, Avner Greif, Rebeca Grynspan, Tarja Halonen, Joel Hellman, Karuti Kanyinga, Karl Ove Moene, Benno Ndulu, James Robinson, Tharman Shanmugaratnam, and Xixin Wang. The team would also like to acknowledge the generous support provided for prepara- tion of the Report by Global Affairs Canada, Finland’s Ministry of Foreign Affairs, Norway’s Ministry of Foreign Affairs, and Sweden’s Ministry of Foreign Affairs, as well as the French Development Agency, German Corporation for International Cooperation (GIZ), Knowledge for Change Program, and Nordic Trust Fund. Consultation events were held in Argentina, Chile, China, Colombia, Estonia, Finland, France, Germany, Ghana, India, Italy, Kenya, Mexico, the Netherlands, Norway, the Philip- pines, Spain, Sweden, Tajikistan, Tanzania, the United Kingdom, the United States, Uruguay, and Vietnam, with participants drawn from many more countries. The team thanks those who took part in all of these events for their helpful comments and suggestions. Bilateral and multilateral consultation events were held with the Asian Development Bank, CAF Development Bank of Latin America, European Commission, French Develop- ment Agency, German Federal Ministry of Economic Cooperation and Development, GIZ, Inter-American Development Bank, International Court of Justice, Norwegian Agency for Development Cooperation, Organisation for Economic Co-operation and Development, Swedish International Development Cooperation Agency, U.K. Department for International Development, United Nations Development Programme, and U.S. Agency for International Development. The team also met with representatives from think tanks and civil society organizations, including the ABA Rule of Law Initiative, Afrobarometer, Berghof Foundation, Centre for Global Constitutionalism, Centro de Estudios Espinosa Yglesias, Civicus, Eurasia Founda- tion, Global Partnership for Social Accountability, Hague Institute for Global Justice, Inno- vations for Successful Societies at Princeton University, InterAction, International Food Policy Research Institute, International Institute for Democracy and Electoral Assistance, xv Latin American Public Opinion Project, Mexican Competitiveness Institute, México ¿Cómo Vamos?, OpenGov Hub, Oxfam-UK, Partnership for Transparency Fund, Peace Research Institute Oslo, Stockholm International Peace Research Institute, Transparencia Mexicana, and Transparency International. The initial findings of the Report were also discussed at several conferences and work- shops, including the 2015 annual meeting of the American Political Science Association; 2015 Annual Bank Conference on Africa: Confronting Conflict and Fragility in Africa, hosted by the University of California at Berkeley; 2015 Annual Bank Conference on Development Economics; XXVIII Annual Congress of the Italian Society of Public Economics, Governance and Development: The Case of Politically Connected Businesses in Europe and Central Asia (in collaboration with the World Bank’s Office of the Chief Economist, Europe and Central Asia Region); Implementing SDG 16: Good Governance Reloaded or New Opportunities for the Support of Democratic Governance? hosted by the German Development Institute; 2016 International Civil Society Week; 2016 International Conference on Inequality: Trends, Causes and the Politics of Distribution, hosted by the Friedrich-Ebert-Stiftung Foundation; 2015 International Policy Workshop on Governance and the Law, hosted by GIZ; 2016 Think- ing and Working Politically Community of Practice, hosted by the Carnegie Endowment for International Peace; WDR 2017 Law Symposium, Cuentas Claras: Governance for Growth and Equity in Latin America (in collaboration with the World Bank’s Office of the Chief Economist, Latin America and the Caribbean Region); 2015 World Bank Law, Justice and Development Week; and 2016 World Justice Project Scholars Conference on the Rule of Law, Non-law, and Social Order, hosted by Stanford University. Several universities sponsored events to provide feedback on the Report, including Ateneo de Manila University, Beijing University, Columbia University, Cornell University, East China University of Political Science and Law, Leiden University, Oxford University, Renmin University, Torcuato Di Tella University (Buenos Aires), University of los Andes (Bogotá), and University of the Republic (Montevideo). A “green cover” consultation was held before submission of the draft Report to the Board of the World Bank. The team made the draft available online and explicitly contacted a set of key partners in the development community to request feedback. The team received and incorporated comments, criticism, and suggestions from members of civil society, aca- demia, and think tanks. Nancy Morrison was the principal editor of the Report. Sabra Ledent copyedited the Report. Bruce Ross-Larson provided editorial guidance. And Kurt Niedermeier was the principal graphic designer. Phillip Hay, Mikael Reventar, Anushka Thewarapperuma, and Roula Yazigi provided guidance on a communication and dissemination strategy. Special thanks are extended to Mary Fisk, Patricia Katayama, Stephen Pazdan, and the World Bank’s Publishing Program. The team would also like to thank Vivian Hon, Surekha Mohan, Dirk Peterson, and Claudia Sepúlveda for their coordinating roles. This Report draws on background papers, notes, and spotlight inputs prepared by Izak Atiyas, Sheheryar Banuri, Paolo Belli, Jürgen René Blum, Carles Boix, Tessa Bold, Alejandro Bonvecchi, Sarah Botton, Laurent Bouton, Juan Camilo Cárdenas Campo, Fernando Carrera, Francesco Caselli, Gonzalo Castañeda, Micael Castanheira, Simon Commander, Aline Coudouel, Manuel Eisner, Thomas Fujiwara, Scott Gates, Garance Genicot, Gaël Giraud, Alfredo González-Reyes, Helene Grandvoinnet, Ruth Guillén, Stéphane Hallegatte, Sébastien Hardy, Michael Jarvis, Patricia Justino, Daniel Kaufmann, Mushtaq H. Khan, Jenni Klugman, Sarwar Lateef, Étienne Le Roy, Andrei Levchenko, Brian Levy, Stéphanie Leyronas, Staffan Lindberg, Anna Lührmann, Ellen Lust, Nora Lustig, Yasuhiko Matsuda, Frédéric Maurel, Valeriya Mechkova, Jonathan Mellon, Alina Mungiu-Pippidi, Hamish Nixon, Ragnhild Nordas, Håvard Mokleiv Nygård, Daniel Oto-Peralias, Tiago Peixoto, Doug Porter, Franck Poupeau, Peter Reuter, Halsey Rogers, Dominique Rojat, Diego Romero, Martin Schmidt, Fredrik Sjoberg, Michael Stanley, Håvard Strand, Shawn Tan, Benno Torgler, Trang Thu Tran, John Wallis, Michael Walton, Leonard Wantchekon, and Michael Watts. xvi | ACKNOWLEDGMENTS The team received expert advice during several rounds of reviews from chapter advisers Carles Boix, François Bourguignon, Francesco Caselli, Deval Desai, Avinash Dixit, Manuel Eisner, Thomas Fujiwara, Patrick Heller, Patricia Justino, Philip Keefer, Herbert Kitschelt, Andrei Levchenko, Brian Levy, María Ana Lugo, Rohini Pande, Doug Porter, Nigel Roberts, Carlos Scartascini, Brian Tamanaha, John Wallis, Leonard Wantchekon, and Michael Watts. The team would like to acknowledge a number of people for their insightful discussions, feedback, and collaboration: Sakuntala Akmeemana, Martin Ardanaz, Omar Arias, Kathleen Beegle, Paolo Belli, Samuel Berlinski, David Bernstein, Robert Beschel, Bella Bird, Jürgen René Blum, Tessa Bold, Laurent Bouton, Miriam Bruhn, James Brumby, Hassane Cisse, Denis Cogneau, Walter Cont, Cristina Corduneanu, Aline Coudouel, Shanta Devarajan, Quy-Toan Do, Eduardo Engel, Peter Evans, Francisco Ferreira, Chloe Fevre, Deon Filmer, Varun Gauri, Tom Ginsburg, Markus Goldstein, Álvaro González, Duncan Green, Zahid Hasnain, Arturo Herrera, Joan Serra Hoffman, Robert Hunja, Ravi Kanbur, Daniel Kaufmann, Asmeen Khan, Mushtaq H. Khan, Stuti Khemani, Rachel Kleinfeld, Stephen Knack, Stefan Kossoff, Aart Kraay, Paul Lagunes, Sylvie Lambert, Ellen Lust, Nora Lustig, Syed A. Mahmood, Martha Martínez Licetti, Magdy Martínez-Solimán, Yasuhiko Matsuda, Sebastián Mazzuca, Nicolas Menzies, Samia Msadek, Gerardo Munck, Alina Mungiu- Pippidi, Kaivan Munshi, Makau Mutua, Roger Myerson, Ambar Narayan, Sara Nyman, Thiago Peixoto, Andre Portela, Gaël Raballand, Vijayendra Rao, Martin Ravallion, Nathaniel Reilly, Bob Rijkers, Daniel Rogger, Joe Saba, Audrey Sacks, Renaud Seligman, Mitchell Seligson, Harris Selod, Giancarlo Spagnolo, Jan Svejnar, Rob Taliercio, Jeff Thindwa, Florencia Torche, Benno Torgler, Dominique van de Walle, Nicolas van de Walle, Andrés Villaveces, Lorena Vinuela, Michael Walton, Deborah Wetzel, and Alan Whaites. Many people inside and outside the World Bank Group provided helpful comments, made other contributions, and participated in consultative meetings. The team would like to thank the following: Sophie Adelman, Om Prakash Agarwal, Yayha Amir, Armando Ardila, Robert Bates, Verónica Baz, Radia Benamghar, Najy Benhassine, Luis Benveniste, Alexandra C. Bezeredi, Deepak Bhatia, Denis Biseko, Helena Bjuremalm, Eduardo Bohórquez, Francesca Bomboko, Sarah Botton, Carter Brandon, Michael Bratton, Chiara Bronchi, László Bruszt, Ruxandra Burdescu, David Calderón, Claudia Calvin, Oscar Calvo-González, Juan Camilo Cárdenas Campo, Enrique Cárdenas, Kevin Carey, Tom Carothers, Michael Chege, Donald Clarke, Roland Clarke, Pedro Conceição, Jill Cottrell, Philipp Dann, Bill Dorotinski, Alain Durand Lasserve, Ute Eckertz, Yara Esquivel, Mike Falke, Frederico Finan, Luis Foncerrada, Harald Fuhr, Bernard Funck, Yash Ghai, Frederick Golooba-Mutebi, Kristóf Gosztonyi, Donald Green, Jane Guyer, Gillian Hadfield, Jeffrey Hammer, Lucia Hanmer, Tazeen Hasan, Finn Heinrich, Hans-Joachim Heintze, Rogelio Gómez Hermosillo, Benjamin Herzberg, Ingrid-Gabriela Hoven, Alan Hudson, William Hurst, Gabriela Inchauste, Edna Jaime, Michael Jarvis, Melise Jaud, Erik Jensen, Melissa Johns, Patrick Keuleers, Anouar Ben Khelifa, Hannah Kim, Francis Kiwanga, Stephan Klasen, Anne-Lise Klausen, Verena Knippel, Matthias Kötter, David D. Laitin, George Larbi, Margaret Levi, Alberto Leyton, Doris Likwelile, Stefan Lindemann, Kathy Lindert, Mariana Llanos, Ernesto López Córdoba, Anna Lührmann, Christian Lund, Bentley MacLeod, Beatriz Magaloni, Alexander Makulilo, Ernest Mallya, Sumit Manchanda, Richard McAdams, David McKenzie, Craig Meisner, Rudolf Mellinghoff, Mauricio Merino, Edward Miguel, Omar Mohamed, Rui Monteiro, María Elena Morera, Fred Mufulukye, Ana María Muñoz, Mike Mushi, Per Norlund, Silas Olang, Virginia Oliveros, Jan Michiel Otto, Juan Pardinas, Haydee Pérez Garrido, Guillermo Perry, Lant Pritchett, Christine Qiang, Balakrishnan Rajagopal, Rita Ramalho, Juan Mauricio Ramírez, Juliana Ramirez, Viridiana Ríos, Christophe Rockmore, Carlos Rodríguez-Castelán, Lourdes Rodríguez-Chamussy, César Rodríguez Garavito, Halsey Rogers, Gérard Roland, Pallavi Roy, Eliana Rubiano, Elizabeth Ruppert Bulmer, Caroline Sage, Indhira Santos, Phillip Shelkens, Animesh Shrivastava, Dumitru Socolan, Michael Stanley, Albrecht Stockmayer, Håvard Strand, Harold Sunguisa, Hani Syed, Miguel Székely Pardo, Attilio ACKNOWLEDGMENTS | xvii Tagalile, Will Taylor, Fletcher Tembo, Katy Thompson, Charles Undeland, Deus Valentine, Ingrid van Engelshoven, Roberto Vélez Grajales, Eric Verhoogen, Andrea Vigorito, Tara Vishwanath, Anya Vodopyanov, Stefan Voigt, George Mukundi Wachira, Waly Wane, Fredrick O. Wanyama, Asbjorn Wee, Barry Weingast, Jennifer Widner, George O. William, Oliver Williamson, Michael Woolcock, World Bank 1818 Society, Kaifeng Yang, Abdulqawi Ahmed Yusuf, and Davide Zucchini. We especially thank Rogier van den Brink for the very useful conversations we had in Manila and for bringing to our attention the work on fiscal management in Mongolia, including the reference to the film Amka and the Three Golden Rules, which we reference in chapter 2. Despite efforts to be comprehensive, the team apologizes to any individuals or organiza- tion inadvertently omitted from this list and expresses its gratitude to all who contributed to this Report. xviii | ACKNOWLEDGMENTS Abbreviations ADR alternative dispute resolution ASEAN Association of Southeast Asian Nations CDD community-driven development CICIG International Commission against Impunity in Guatemala (Comisión Internacional contra la Impunidad en Guatemala) CPA Comprehensive Peace Agreement (South Sudan) CPC Communist Party of China CSO civil society organization DAC Development Assistance Committee (of the OECD) EU European Union FATF Financial Action Task Force FDI foreign direct investment FGM female genital mutilation FRC Financial Reporting Centre (Kenya) GATT General Agreement on Tariffs and Trade GBV gender-based violence GDP gross domestic product GNI gross national income ICAC Independent Commission Against Corruption (Hong Kong SAR, China) ICTs information and communication technologies IFFs illicit financial flows IMF International Monetary Fund MDAs ministries, departments, and agencies MDGs Millennium Development Goals MFA Multi Fibre Arrangement MITI Ministry of Trade and Industry (Japan) NAFDAC National Agency for Food and Drug Administration and Control (Nigeria) NAFTA North American Free Trade Agreement NCPRI National Campaign for Peoples’ Right to Information (India) NGO nongovernmental organization NPM New Public Management (movement) ODA official development assistance OECD Organisation for Economic Co-operation and Development OIRA U.S. Office of Information and Regulatory Affairs OSA Official Secrets Act (India) PPD public-private dialogue PPP purchasing power parity PPPs public-private partnerships PRI Institutional Revolutionary Party (Partido Revolucionario Institucional; Mexico) SAR special administrative region SBM school-based management xix SDGs Sustainable Development Goals SDIs Service Delivery Indicators SEZ special economic zone SOE state-owned enterprise SPC Professional Career Service (Servicio Profesional de Carrera; Mexico) StAR Stolen Asset Recovery Initiative TAI transparency and accountability initiative TFP total factor productivity TVEs Township and Village Enterprises UNFCCC United Nations Framework Convention on Climate Change WDR 2017 World Development Report 2017 WHO World Health Organization WTO World Trade Organization Country and economy codes AFG Afghanistan COM Comoros AGO Angola CPV Cabo Verde ALB Albania CRI Costa Rica ARE United Arab Emirates CYP Cyprus ARG Argentina CZE Czech Republic ARM Armenia DEU Germany AUS Australia DJI Djibouti AUT Austria DNK Denmark AZE Azerbaijan DOM Dominican Republic BDI Burundi DZA Algeria BEL Belgium ECU Ecuador BEN Benin EGY Egypt, Arab Rep. BFA Burkina Faso ERI Eritrea BGD Bangladesh ESP Spain BGR Bulgaria EST Estonia BHR Bahrain ETH Ethiopia BHS Bahamas, The FIN Finland BIH Bosnia and Herzegovina FJI Fiji BLR Belarus FRA France BLZ Belize GAB Gabon BMU Bermuda GBR United Kingdom BOL Bolivia GEO Georgia BRA Brazil GHA Ghana BRB Barbados GIN Guinea BRN Brunei Darussalam GMB Gambia, The BTN Bhutan GNB Guinea-Bissau BWA Botswana GNQ Equatorial Guinea CAF Central African Republic GRC Greece CAN Canada GRD Grenada CHE Switzerland GTM Guatemala CHL Chile GUY Guyana CHN China HKG Hong Kong SAR, China CIV Côte d’Ivoire HND Honduras CMR Cameroon HRV Croatia COD Congo, Dem. Rep. HTI Haiti COG Congo, Rep. HUN Hungary COL Colombia IDN Indonesia xx | ABBREVIATIONS IND India NZL New Zealand IRL Ireland OMN Oman IRN Iran, Islamic Rep. PAK Pakistan IRQ Iraq PAN Panama ISL Iceland PER Peru ISR Israel PHL Philippines ITA Italy PNG Papua New Guinea JAM Jamaica POL Poland JOR Jordan PRT Portugal JPN Japan PRY Paraguay KAZ Kazakhstan ROM Romania KEN Kenya RUS Russian Federation KGZ Kyrgyz Republic RWA Rwanda KHM Cambodia SAU Saudi Arabia KIR Kiribati SDN Sudan KNA St. Kitts and Nevis SEN Senegal KOR Korea, Rep. SGP Singapore KSV Kosovo SLB Solomon Islands KWT Kuwait SLE Sierra Leone LAO Lao PDR SLV El Salvador LBN Lebanon SOM Somalia LBR Liberia SRB Serbia LBY Libya SSD South Sudan LCA St. Lucia STP São Tomé and Príncipe LIE Liechtenstein SUR Suriname LKA Sri Lanka SVK Slovak Republic LSO Lesotho SVN Slovenia LTU Lithuania SWE Sweden LUX Luxembourg SWZ Swaziland LVA Latvia SYR Syrian Arab Republic MAC Macao SAR, China TCD Chad MAR Morocco TGO Togo MDA Moldova THA Thailand MDG Madagascar TJK Tajikistan MDV Maldives TKM Turkmenistan MEX Mexico TLS Timor-Leste MKD Macedonia, FYR TTO Trinidad and Tobago MLI Mali TUN Tunisia MLT Malta TUR Turkey MMR Myanmar TWN Taiwan, China MNG Mongolia TZA Tanzania MOZ Mozambique UGA Uganda MRT Mauritania UKR Ukraine MUS Mauritius URY Uruguay MWI Malawi USA United States MYS Malaysia UZB Uzbekistan NAM Namibia VEN Venezuela, RB NER Niger VNM Vietnam NGA Nigeria VUT Vanuatu NIC Nicaragua YEM Yemen, Rep. NLD Netherlands ZAF South Africa NOR Norway ZMB Zambia NPL Nepal ZWE Zimbabwe ABBREVIATIONS | xxi WORLD DEVELOPMENT REPORT 2017 Overview OVERVIEW | 1 OVERVIEW World Development Report 2017: Governance and the Law The past 20 years have seen enormous progress violence, slowing growth, corruption, and the “natu- around the world in socioeconomic indicators. The ral resource curse,” to name a few—requires rethink- rapid diffusion of technology and greater access to ing the process by which state and nonstate actors capital and world markets have enabled economic interact to design and implement policies, or what growth rates that were previously unfathomable, this Report calls governance (box O.1). Consider some and they have helped lift over 1 billion people out recent cases that have attracted global attention. of poverty. And yet increased flows have also led to State building in Somalia and Somaliland. Somalia, rising inequality, both within and across borders, and one of the world’s most fragile countries, has been to greater vulnerability to global economic trends wracked by violence for more than two decades. and cycles. Indeed, although the global spread of cap- Insurgent attacks and regional conflicts have pre- ital, technology, ideas, and people has helped many vented the emergence of a centralized state with a countries and people move forward, other regions monopoly over the legitimate use of force. Warring and populations appear to have been left behind, and factions, many with their own regional sources of they are still facing violence, slow growth, and limited power, have been unable to reach a credible deal that opportunities for advancement. determines the makeup and responsibilities of the As ideas and resources spread at an increasingly central state. By contrast, in Somalia’s autonomous rapid rate across countries, policy solutions to region of Somaliland, an area with similar tribal and promote further progress abound. However, poli- clan tensions, 20 years of stability and economic cies that should be effective in generating positive development have followed a 1993 clan conference development outcomes are often not adopted, are that brought together leaders from both the modern Ultimately, poorly implemented, or end up backfiring over time. and traditional sectors, successfully institutionalizing confronting Although the development community has focused a these clans and elders into formal governing bodies. the challenges great deal of attention on learning what policies and Confronting corruption and the resource curse in faced by today’s interventions are needed to generate better outcomes, Nigeria. In 2010, just a year after a decade-long bounty developing it has paid much less attention to learning why those of windfall revenues from high oil prices, Nigeria countries requires approaches succeed so well in some contexts but fail was requesting budget support from its develop- rethinking the to generate positive results in others. ment partners. From a long-term perspective, it is process by unclear how much of Nigeria’s oil wealth has been which state and saved to invest in the future, although a Sovereign nonstate actors Improving governance to Wealth Fund was established in 2011 to address these interact to design meet today’s development concerns. According to a former governor of the and implement central bank, the country has lost billions of dollars policies, or what challenges to corruption by the National Petroleum Company. this Report calls Ultimately, confronting the challenges faced by Indeed, 2015 data from the Afrobarometer survey governance. today’s developing countries—poor service delivery, indicates that 78 percent of Nigerians feel that the 2 | WORLD DEVELOPMENT REPORT 2017 Box O.1 What is governance? For the purpose of this Report, governance is the process in the literature to denote organizations and rules) that through which state and nonstate actors interact to design enforce and implement policies. Also depending on the con- and implement policies within a given set of formal and text, state actors will play a more or less important role with informal rules that shape and are shaped by power.a This respect to nonstate actors such as civil society organizations Report defines power as the ability of groups and individ- or business lobbies. In addition, governance takes place at uals to make others act in the interest of those groups and different levels, from international bodies, to national state individuals and to bring about specific outcomes.b institutions, to local government agencies, to community Depending on the context, actors may establish a gov- or business associations. These dimensions often overlap, ernment as a set of formal state institutions (a term used creating a complex network of actors and interests. Source: WDR 2017 team. a. The general definition of governance used in this Report is consistent with the World Bank’s corporate definition, which emphasizes formal institutions and the role of state actors. b. Dahl (1957); Lukes (2005). government is “doing badly in fighting corruption.” been blocked by the actors that benefited from early Ultimately, the institutional context was unable growth and have few incentives to join coalitions for to safeguard natural resource revenues in order to further reforms. Going forward will involve address- reduce fiscal volatility and promote a macroeconomic ing these governance challenges. environment conducive to long-term investment. Slums and exclusion in India’s cities. Urban devel- Several countries have demonstrated that this kind of opment that stems from coordinated planning and “natural resource curse”—the paradox that countries investment by coalitions of developers, bureaucrats, with abundant natural resources face slower growth citizens, and politicians can lead to cities that are and worse development outcomes than countries centers of growth, innovation, and productivity. without resources—can be avoided through effective Planners can help ensure that infrastructure meets economic and fiscal policies. the demands of investors who seek to maximize land China’s growth performance and growth challenges. rents; businesses that need connectivity to consum- For four decades, China, while increasingly integrat- ers, employees, and other firms; and citizens who ing its economy with the global economy, grew at want access to services and jobs. But many cities fail double-digit rates and lifted more than 700 million to deliver on these promises. In India, massive urban people out of poverty. This successful track record slums—about 49,000 at the latest count, with tens of of economic growth is well known. Yet, according millions of inhabitants—represent failures to align to many frequently used indicators, China’s institu- public investments and zoning with the needs of a tional environment during this period would seem diverse set of urban constituents. Poorly designed not to have changed. Does this imply that institu- cities with misallocated investments have limited tions do not matter for growth? No. Rather, a deeper connectivity among housing, affordable transporta- understanding of China’s development shows what tion, and utilities, driving workers into informal set- these indicators miss: the adaptive policy decisions tlements, often in peripheral areas. Many developers and state capacity that enabled economic success and politicians have exploited the system to generate were facilitated by profound changes to mechanisms rents for themselves, but this uncoordinated urban of accountability and collective leadership. China’s development has prevented cities from achieving experience highlights the need to pay more attention their growth potential, leading to large slums where to how institutions function and less to the specific most citizens are deprived of basic services. form they take. Meanwhile, today China faces a slow- Demanding better services in Brazil. In 2013 the world down in growth. Maintaining rapid growth requires watched when protests erupted in Brazil’s streets political incentives to switch to a growth model based about the quality of public services—transport, edu- on firm entry, competition, and innovation. In many cation, and health—as the FIFA World Cup soccer middle-income countries, this transformation has tournament approached. Brazil had gone through OVERVIEW | 3 12 years of inclusive and sustained growth, which had and political integration is not, however, exclusive lifted more than 30 million people out of poverty and to this region. In countries throughout the world, strengthened the middle class. These same middle populist parties have campaigned against trade and classes that contributed with their taxes to the pro- integration, some of them enjoying unprecedented vision of public services were now demanding better electoral success. These parties often prey on citizens’ quality and coverage, including “FIFA standards” increasing feelings of disenfranchisement and exclu- for their schools. Why did this change come about? sion from decision making, as well as on a growing Brazil’s social contract had historically been weak perception of free-riding by specific groups. Even in and fragmented. The poor received low-quality public countries that have undoubtedly benefited from inte- services, while the upper-middle classes relied on pri- gration, the unequal distribution of such benefits and vate services and were thus unwilling to contribute to perceived ineffectiveness of “voice” have led many the fiscal system. The creation of an expanded mid- citizens to question the status quo, which could have dle class and the reduction of poverty paradoxically consequences for social cohesion and stability. heightened the perceptions of unfairness as the new What do these examples have in common? This middle class expected more than low-quality public Report assumes that all countries share a set of services for its contributions. development objectives: minimizing the threat of “Brexit” and the growing discontent with economic violence (security), promoting prosperity (growth), integration. In June 2016, voters in the United King- and ensuring that prosperity is shared (equity), while dom elected to leave the European Union (EU). The also protecting the sustainability of the development economic consequences for the country in particular process for future generations (box O.2). But poli- and Europe in general have become a source of uncer- cies do not always translate into these development tainty in policy circles. Dissatisfaction with economic outcomes in the expected ways. As the previous Box O.2 Governance for what? Achieving the goals of security, growth, and equity Many aspects of governance are valuable in and of them- aspire to achieving these goals in environmentally sustain- selves—that is, they have intrinsic value—in particular, the able ways. This Report, then, assesses governance in terms notion of freedom. In economic terms, freedom can be seen of its capacity to deliver on these outcomes. as an opportunity set, and development can be seen as “the This approach is consistent with the transition from a removal of various types of unfreedoms” (exclusion from dialogue based on ideology to the dialogue based on ideals opportunities), where these unfreedoms reduce people’s that has transpired in the global development commu- capacity to exercise “their reasoned agency.”a As essential nity over the past few decades. The establishment of the as such an intrinsic value as freedom is, its instrumental Millennium Development Goals (MDGs) in 2000 and the value also matters because of the “effectiveness of freedoms recent ratification of the Sustainable Development Goals of particular kinds to promote freedoms of other kinds.”b (SDGs) by member countries of the United Nations are These positive relationships are what economists call com- examples of the efforts to set common goals for social and plementarities. This Report acknowledges the intrinsic value economic advancement. SDG 16 calls for promoting “peace, of various dimensions of governance, as well as the notion justice and strong institutions,” and it is explicitly related of development as positive freedom, while also recognizing to governance. Nevertheless, as this Report will argue, their instrumental value to achieving equitable development. beyond the intrinsic value of SDG 16, it also has important The analysis in this Report starts from the normative instrumental value because the attainment of the goal will standpoint that every society cares about freeing its aid in the attainment of all the other SDGs. Indeed, the members from the constant threat of violence (security), achievement of all the development goals will require a about promoting prosperity (growth), and about how such solid understanding of governance to enable more effective prosperity is shared (equity). It also assumes that societies policies. Source: WDR 2017 team. a. Sen (1999, xii). b. Sen (1999, xii). 4 | WORLD DEVELOPMENT REPORT 2017 examples illustrate, contradictions occur in the real credible agreements to renounce violence and endow world. Somalia is a fragile state, whereas Somaliland the state with a monopoly on the legitimate use of seems to be doing well. Nigeria has an abundance force? In Somaliland, commitment has been achieved of resources, but it is still a lower-middle-income by establishing institutional arrangements that pro- country. China grew rapidly, even though many of its vide sufficient incentives for all key groups to work fundamental institutions did not change. India has within the rules. The commitment is credible because grown, but it cannot control the propagation of slums. all parties stand to lose if any party reneges on those Brazil has experienced inclusive growth, but it is now arrangements. In Somalia, by contrast, despite several facing widespread protests from the middle class. internationally sponsored efforts at state building, Great Britain had low unemployment, but it voted to polarized groups continue to believe they are better leave the EU. The common thread running through off retaining their own power or forming shifting these contradictions appears to be governance mal- alliances with others than conferring the monopoly functions: ineffective policies persist, effective pol- of violence on a central state. Why? In large part, the icies are not chosen, and unorthodox institutional nature of the agreements and the proposed institu- arrangements generate positive outcomes. So, what tional arrangements had failed to serve as effective drives policy effectiveness? commitment devices. When commitment to deals is not credible, contending sides walk away from the bargaining table and violence prevails: warring fac- Drivers of effectiveness: tions may renege on peace agreements, policy mak- Commitment, coordination, ers may default on promises to transfer resources to and cooperation discontented groups or regions, disputants may fail to abide by court judgments, or the police may abuse Often, when policies and technical solutions fail citizens instead of protecting them. to achieve intended outcomes, institutional failure A credible commitment to pro-growth policies takes the blame, and the solution usually proposed and property rights is also essential to ensure macro­ is to “improve” institutions. But many types of insti- economic stability and enable growth. According tutional arrangements and trajectories can enable to recent evidence, most long-term growth comes development, as examples around the world demon- not from episodes of rapid growth—as is commonly strate, whereas often many other “best practices” fail. believed—but from countries not shrinking in In some cases, rapid progress comes about suddenly, response to an economic crisis or violent conflict seemingly unexpectedly. Because of this diversity (figure O.1). Growth requires an environment in which of paths and perils, it becomes essential to uncover firms and individuals feel secure in investing their the underlying drivers of policy effectiveness. This resources in productive activities. This commitment Report identifies commitment, coordination, and coop- may arise in diverse ways. During China’s take-off eration as the three core functions of institutions that in the 1980s, growth success depended on a pledge are needed to ensure that rules and resources yield to local governments, private enterprises, and rural the desired outcomes.1 farmers that they would be able to keep their prof- its—credible commitment was thus provided, even if Form versus function: Underlying it was still in the early stage of securing the protection Commitment determinants of policy effectiveness of private property rights. By contrast, in Nigeria the enables actors Commitment. Commitment enables actors to rely on institutional context did not provide the commitment to rely on the the credibility of policies so they can calibrate their needed to safeguard revenues from natural resource credibility of behavior accordingly. Consistency over time in pol- extraction in order to support long-term development. policies so they icies is not easy to achieve. Circumstances change, In the Nigerian context, where perceptions of cor- can calibrate policy objectives may extend beyond the political ruption were negative, implementing “best-practice” their behavior cycle, and resources may fail to match, changing the fiscal rules that worked in other contexts did not con- accordingly. incentives to implement previously chosen policies. stitute a credible commitment because government In line with the economic theory of incomplete con- officials were overcome by short-term interests. State tracts, policies require commitment devices to ensure governors, for example, uncertain about whether their credibility. resources would still be there in the future, had incen- Take, for example, security—a foundation of sus- tives to spend them straightaway. tained development. It is premised most basically on Coordination. Credible commitment alone, how- commitment. Are conflicting parties able to reach ever, is not sufficient; coordination is also needed. OVERVIEW | 5 Figure O.1 Long-term growth is less about how fast local politicians has prevented an efficient design of one grows than about not tripping along the way urban areas, hindering many cities from performing their roles in enhancing growth. Frequency of economies’ growing and shrinking years and average rates, b. Long-term growth is less about how fast you grow by GDP per capita Cooperation. Finally, policy effectiveness to achieve than about not tripping along the way equitable development requires cooperation, partic- 100 6 ularly citizens’ willingness to contribute to public 90 goods and not free-ride on others. The extent to 4 which societies can ensure opportunities for all indi- 80 Frequency of years (%) viduals depends on their ability to invest in providing Average rate (%) 70 2 high-quality services such as health, education, and 60 connectivity, and to ensure access to economic oppor- 50 0 tunities. For such investment to take place, resources 40 need to be collected and redistributed. Indeed, no 30 –2 high-income country has achieved improvements in 20 equity without significant taxation and public spend- –4 10 ing aimed at protecting individuals against shocks (such as illness or unemployment) and reducing 0 –6 <2 2–5 5–10 10–20 >20 welfare disparities within and across generations.4 In US$ (thousands) addition, for individuals to realize the returns of such investment, they need access to economic opportuni- Frequency of shrinking years (left axis) Frequency of growing years (left axis) ties in adulthood, especially access to opportunities Average growing rate (right axis) that allow them to use the human capital they have Average shrinking rate (right axis) acquired. For a country to collect the taxes needed to fund investments in public goods, its citizens must Sources: WDR 2017 team, based on Wallis 2016, with data from Penn World Table, version 8.0 (Feenstra, Inklaar, and Timmer 2015). be willing to comply and cooperate. Cooperation is Note: The figure shows real GDP per capita (constant prices: chain series). Countries are first sorted enhanced by commitment because credible and con- into income categories based on their income in 2000, measured in 2005 U.S. dollars. Average annual sistent enforcement of laws is also needed to expand growth rates are the simple arithmetic average for all the years and all the countries in the income category, without weighting. The sample underlying the figure consists of 141 countries, for which data opportunities and level the playing field. are available from at least 1970 onward. Sometimes, societies face a breakdown of coopera- tion. For example, Brazil, whose citizens organized to For investment and innovation, firms and individuals demand higher-quality public services, faced a prob- must believe that others will also invest. Institutions lem common to many countries: the fragmentation can help solve market failures by coordinating both of a social contract. In such cases, the low quality of investment decisions and the expectations of market service provision spurs the upper-middle classes to participants. The insight that a failure to coordinate demand private services, which in turn weakens their investment activity can lead to underdevelopment is willingness to cooperate fiscally and contribute to the decades old.2 Consider the case in which large-scale provision of public goods—a perverse cycle. At other factories are more efficient, but investing in them is times, actors potentially affected by policies may be not profitable for individual firms unless those firms excluded from the design of those policies, thereby invest simultaneously in a group. Perhaps the size of undermining their incentive to cooperate and weak- the market is too small to justify large-scale invest- ening compliance. An induced perception that the EU ments unless all the industries expand together, pro- was engaged in technocratic and exclusionary deci- viding markets for one another. In such a situation, sion making and that some countries were benefiting there are two possible outcomes, or equilibria. The disproportionately from the agreement, was among first is one in which no firms invest in large-scale fac- the reasons that led the United Kingdom to vote for tories, and efficiency levels remain low. The second, a “Brexit”—and led to the rise of populist parties in the better outcome, is one in which firms are able to coor- world that challenge further integration. dinate a simultaneous move to large-scale, efficient Commitment, coordination, and cooperation are production. Such problems of coordination can occur therefore essential institutional functions for mak- in many contexts, ranging from finance and adoption ing policies effective and thereby able to achieve of technology to innovation and industrial clusters development outcomes (table O.1).5 Yet, they are effec- to urban planning.3 In India, the lack of coordination tively fulfilled under only certain conditions. This among urban planners, real estate developers, and Report proposes an analytical framework to advance 6 | WORLD DEVELOPMENT REPORT 2017 Table O.1 Three institutional functions—commitment, coordination, and cooperation— are essential to the effectiveness of policies Function Examples of why these functions matter Commitment • Decision makers may want to spend windfall revenues now instead of saving them for others to spend in the future. • Politicians may resist continuing policies that have been working and prefer to pursue others that are associated with their political group. • Public service providers may push to renegotiate the terms of their contracts to their benefit when they know that the political cost of suspending service is high. Coordination • Investment and innovation are induced when individuals believe others will also invest. • Financial stability depends on beliefs about the credibility of policies; failures involve, for example, bank runs, where everyone believes the rest will rush to withdraw deposits. • Laws serve as a focal point for individuals to behave in certain ways, such as the convention of driving on the right side of the road. Cooperation • People have incentives to free-ride or to behave opportunistically—for example, by not paying taxes while enjoying the public services that other (tax-paying) individuals are funding. • Some actors potentially affected by policies may be excluded from their design, which weakens compliance and leads to fragmentation. Source: WDR 2017 team. understanding of how governance can help achieve levels. They can be formal (parliaments, courts, inter- these functions to promote development outcomes. governmental organizations, government agencies), traditional (council of elders), or informal (backroom When political will is not enough: deals, old boys’ networks). Power, bargaining, and the policy arena Who bargains in this policy arena and how success- This Report argues that institutions perform three fully they bargain are determined by the relative power key functions that enhance policy effectiveness for of actors, by their ability to influence others through development: enabling credible commitment, inducing control over resources, threat of violence, or ideational coordination, and enhancing cooperation. But why are persuasion (de facto power), as well as by and through policies so often ineffective in doing so? A typical the existing rules themselves (de jure power). Power is response among policy practitioners is that the right expressed in the policy arena by the ability of groups policies exist, ready to be implemented, but that what and individuals to make others act in the interest is missing is political will in the national arena. This of those groups and individuals and to bring about Report argues that decision makers—the elites6—may specific outcomes. It is a fundamental enabler of—or have the right objectives and yet may still be unable to constraint to—policy effectiveness (box O.3). implement the right policies because doing so would The distribution of power is a key element of the challenge the existing equilibrium—and the current way in which the policy arena functions. During pol- balance of power. Thus the balance of power in soci- icy bargaining processes, the unequal distribution of ety may condition the kinds of results that emerge power—power asymmetry—can influence policy effec- from commitment, coordination, and cooperation. tiveness. Power asymmetry is not necessarily harm- Ultimately, policy effectiveness depends not only ful, and it can actually be a means of achieving effec- on what policies are chosen, but also on how they are tiveness—for example, through delegated authority. chosen and implemented. Policy making and policy By contrast, the negative manifestations of power implementation both involve bargaining among dif- asymmetries are reflected in capture, clientelism, and ferent actors. The setting in which (policy) decisions exclusion. are made is the policy arena—that is, the space in which different groups and actors interact and bargain over How power asymmetries matter for aspects of the public domain, and in which the result- security, growth, and equity ing agreements eventually also lead to changes in Exclusion. One manifestation of power asymmetries, the formal rules (law). It is the setting in which gov- the exclusion of individuals and groups from the bar- ernance manifests itself.7 Policy arenas can be found gaining arena, can be particularly important for secu- at the local, national, international, and supranational rity (figure O.2). When powerful actors are excluded OVERVIEW | 7 Box O.3 The idea of power and the power of ideas “The ideas of economists and political philosophers,” British economist. . . . But soon or late, it is ideas, not vested economist John Maynard Keynes noted in The General interests, which are dangerous for good or evil.” In the 18th Theory of Employment, Interest and Money, “both when century, Hume’s law established that no normative state- they are right and when they are wrong, are more powerful ment (such as a policy prescription) can be derived from than is commonly understood. Indeed, the world is ruled by a positive one (observation of facts) without a normative little else.”a The notion of how ideas can influence historical idea as an assumption. Policy prescriptions based on facts paths in fundamental ways has long been studied by social still require some normative notion—that is, an idea in the scientists, not only from the perspective of ideology and background. Acknowledging the importance of ideas, this culture but also from the viewpoint of “cultural entrepre- Report discusses the relevance of shaping preferences and neurship.”b It is important, however, to distinguish two beliefs as a means of understanding the policy bargaining specific ways—not exhaustive but fundamental—in which process. ideas influence policy making and effectiveness: ideas as It was Eric Wolf who, in 1999, called attention to the knowledge and ideas as a means of shaping preferences importance of understanding power and ideas as comple- and beliefs. mentary to understanding social dynamics.c Indeed, follow- From the perspective of ideas as knowledge, over the ing Michel Foucault, Wolf argues that the ability to shape past few decades the policy discussion has been influenced other people’s beliefs is a means of eliciting an action by the principles of “capacity building” in the form of from another person—an action the other person would knowledge sharing and dissemination of “best practices.” not otherwise take. The ability to make others act in one Ideas as knowledge undoubtedly play a role in strengthen- actor’s interest or to bring about a specific outcome—the ing the effectiveness of policies and enhancing the capacity definition of power in this Report—is thus closely related to to deliver on specific policy commitments. the notion of ideas as beliefs. But ideas also shape preferences and beliefs. Keynes The dichotomy between ideas (ideology and culture) ended his discussion of ideas by saying that “practical and power as a primary determinant of social dynamics is men, who believe themselves to be quite exempt from any thus a false one. The idea of power cannot be understood intellectual influences, are usually slaves of some defunct without taking seriously the power of ideas. Source: WDR 2017 team. a. Keynes (1936, 383). b. See, for example, Mokyr (2005) for a discussion of the “intellectual origins of modern economic growth.” c. Wolf (1999). See also Barrett, Stokholm, and Burke (2001). from the policy arena, violence may become the pre- of the population based on ethnic background are ferred—and rational—way for certain individuals and more likely to face armed rebellions.9 The existence groups to pursue their interests, such as in Somalia. It of norms that exclude certain groups, such as women can lead to failed bargains between participants in the and minorities, from the bargaining arena where dis- bargaining arena (such as when peace talks between putes are settled tend to reinforce power asymmetries rival factions break down, or when disputants fail to and perpetuate inequitable and insecure outcomes.10 reach an agreement). Capture. A second manifestation of power asym- Exclusion, which can take the shape of lack of metries—the ability of influential groups to “capture” access to state institutions, resources, and services, policies and make them serve their narrow interest— often occurs along identity fault lines. The distribu- is helpful for understanding the effectiveness (or tion of power among ethnic groups, measured by ineffectiveness) of policies in promoting long-term their access to central state power, is a strong predic- growth. In the 1990s, for example, some of Indonesia’s tor of violent conflict at the national level (whether largest industrial groups had strong connections to in the form of repression by the state or rebellion President Suharto.11 Between 1995 and 1997, rumors against the state).8 Cross-country statistical analyses about President Suharto’s health circulated on sev- using the Ethnic Power Relations data set from 1945 eral occasions. During every episode, the closer that to 2005 indicate that states that exclude large portions industrial groups were to the president, the more 8 | WORLD DEVELOPMENT REPORT 2017 Figure O.2 A more even balance of the value of their stock fell (figure O.3). The effects power is associated with positive of capture can be quite costly for an economy. Polit- security outcomes ically connected firms are able to obtain preferential treatment in business regulation for themselves as 4 well as raise regulatory barriers to entry for newcom- Power distributed by social group score ers—such as through access to loans, ease of licensing requirements, energy subsidies, or import barriers. 3 Such treatment can stifle competition and lead to resource misallocation, with a toll on innovation and productivity. Between 1996 and 2002, politically 2 connected firms in Pakistan received 45 percent more government credit than other firms, even though they were less productive and had default rates that were 50 percent higher. Based on the productivity gap 1 between firms, the annual cost of this credit misallo- cation could have been as high as 1.6 percent of the gross domestic product (GDP).12 0 Although it is possible for economies to grow with- 0.2 0.4 0.6 0.8 1.0 out substantive changes in the nature of governance, Order and security score it is not clear how long such growth can be sustained. High-income OECD countries Consider the case of countries apparently stuck in High-income non-OECD countries “development traps.” Contrary to what many growth Upper-middle-income countries theories predict, there is no tendency for low- and Lower-middle-income countries middle-income countries to converge toward high- Low-income countries income countries. The evidence suggests that coun- Sources: World Justice Project, Rule of Law Index 2015, Factor 5, “Order and tries at all income levels are at risk of growth stagna- Security” (consisting of “Crime is effectively controlled”; “Civil conflict is effectively limited”; “People do not resort to violence to redress personal tion. What keeps some countries from transitioning grievances”); V-Dem, version 6 (consisting of “Power distributed by social to a better growth strategy when their existing growth group” in which a score of 0 indicates political power is monopolized by one social group, and a score of 4 indicates that social groups have equal political strategy has run out of steam? With a few exceptions, power). policy advice for these countries has focused on the Note: OECD = Organisation for Economic Co-operation and Development. proximate causes of transition, such as the efficiency Figure O.3 The value of political connections: Indonesia during President Suharto’s era The closer that industrial groups were to the president, the more the value of their stock fell as rumors about the president’s health circulated 2 Indonesian firms (percentage points) Change in stock values of 0 –2 –4 –6 1 2 3 4 5 (Firms least connected) (Firms most connected) Degree of political dependence Suharto illnesses: 1995: Jan. 30–Feb. 1 1996: April 29 1996: July 26 1995: April 21 1996: July 4–July 9 1997: April 1–April 3 Source: Fisman 2001, figure 1. OVERVIEW | 9 of resource allocation or industrial upgrading. The often ineffective. Although pro-equity policies can be real problem, however, may have political roots: pow- potentially beneficial for growth in the medium and erful actors who gained during an earlier or current long run, they can adversely affect the interests of growth phase (such as the factor-intensive growth specific groups, particularly in the short term. Those phase) may resist the switch to another growth model affected by equity-oriented policies may be concerned (such as one based on firm entry, competition, and about losing rents or about seeing their relative influ- innovation in a process of “creative destruction”). ence reduced, and thus they may attempt to under- These actors may exert influence to capture policies mine the adoption or implementation of those poli- to serve their own interests. Box O.4 presents an cies. When societies have high levels of inequality, example of the political challenges in transitioning such inequalities are reflected in the unequal capacity toward a different growth strategy—one that is of groups to influence the policy-making process, related to investment in environmental sustainability. making inequality more persistent. Clientelism leads Clientelism. A third manifestation of power asym- to a breakdown of commitment to long-term pro- metries is clientelism—a political strategy character- grammatic objectives, where accountability becomes ized by an exchange of material goods in return for gradually up for sale. electoral support.13 This strategy is helpful for under- Clientelism can shape the adoption and imple- standing why policies that seek to promote equity are mentation of policies in two main ways. In the first Box O.4 Why some people see red when they hear “green growth” “Green growth is about making growth processes greener approaches, efforts to phase out the subsidy for resource-efficient, cleaner and more resilient without nec- conventional fertilizers could hurt maize farmers for some essarily slowing them.”a For many reasons, environmental years.b conservation is also good for long-term economic growth It could be that the groups who stand to lose from green and development. Economic production depends on the growth policies in the short term have an oversized influ- stock of natural resources and on environmental quality ence over the policy arena, and so they are able to block (“natural capital”). Green growth strategies can increase reforms and undermine commitment. Because the costs are natural capital by preventing environmental degradation. concentrated and many of the benefits from cleaner tech- Environmental protection can also contribute indirectly to nologies are intangible and dispersed, the potential losers growth by correcting market failures. For example, a policy from such reforms are likely better able to organize. They that addresses market failures leading to urban congestion also can form a strong electoral constituency. For example, can improve air quality and increase urban productivity. Malawi’s fertilizer program has been popular among small Greener growth can also improve well-being directly by farmers—an important constituency. At times, switching to improving air and water quality. greener growth strategies can entail losses for influential However, switching to greener growth strategies could groups of consumers and firms. For example, South Africa impose short-term costs on some groups in society. Take announced an ambitious climate change plan in 2010 that the case of organic fertilizer. Smaller and more targeted would reduce the share of electricity generated by coal- doses of fertilizer (a “green” approach) are better for the fired plants in a country in which electricity is in short environment in the long run, but conventional fertilizer is supply and coal is a relatively abundant source. The plan, less costly and easier to use. Malawi faced this problem in despite being watered down a year later, has been opposed 2005 when, to cope with food insecurity, it introduced a by consumers, labor unions, and business interests, partic- fertilizer subsidy for smallholder maize farmers. The inten- ularly those in mining and heavy industry.c As these exam- sive use of conventional fertilizer did lead to an immediate ples demonstrate, the design of green growth policies must increase in farm output. However, because small farmers take into account the potential resistance from those who would not find it easy to adopt more organic fertilizers and will lose in the short term. Sources: Hallegatte and others (2012); Resnick, Tarp, and Thurlow (2012). a. Hallegatte and others (2012, 2). b. Resnick, Tarp, and Thurlow (2012). c. Resnick, Tarp, and Thurlow (2012). 10 | WORLD DEVELOPMENT REPORT 2017 type of clientelistic setting, the relationship between Figure O.4 Principals, agents, and clients: public officials and voters becomes distorted. Instead Accountability for sale of a dynamic in which the official is the agent of the voter, who monitors and sanctions the agent (figure a. Classic case b. Clientelism case 1 c. Clientelism case 2 O.4, panel a), the interaction becomes a bargain in which the politician “buys” votes in exchange for (usually) short-term benefits such as transfers or sub- Citizens O cials Citizens sidies (figure O.4, panel b).14 These bargains tend to be more frequent when individuals have a higher time Principal preference for the present with respect to the future. The poor and disadvantaged are particularly vulner- able to this sort of exchange because their pressing needs make their discount rates for the present higher than those of the better-off. In the second type of clientelistic setting, politicians become responsive to those groups that wield greater influence—for example, favoring the interests of teachers’ unions Agent over those of students (figure O.4, panel c). This hap- O cials Citizens O cials pens when public officials become dependent on the support of certain groups for their political survival, Sources: WDR 2017 team, extending World Bank 2003 and Khemani and others 2016. including the providers of public services. Note: Arrows indicate who is responsive to whom. The costs of this malfunction can be high. In exchange for their political support, service providers may extract rents through the diversion of public Capacity, often considered a prerequisite for policy resources, or withhold their effort in the form of effectiveness, is certainly important, and in many absenteeism or low-quality provision, or engage in cases it is even an overriding constraint. At a given corrupt practices, hampering the delivery of services point in time, it can be thought of as a stock. How such as education, health, or infrastructure. When and where to use such capacity, however, are also the groups in charge of providing services capture poli- product of a bargaining process. Even if physical and ticians, monitoring and sanctioning these providers administrative capacity exists, policies may still be are no longer credible, leading to a weak commitment ineffective if groups with enough bargaining power to service delivery. A policy experiment in Kenya have no incentives to pursue implementation. An illustrates this point. It compared the impact of con- example is the low investment in statistical capacity tract teachers in interventions managed by nongov- in Africa, which limits the ability to monitor policy ernmental organizations (NGOs) and interventions effectiveness (box O.5). In addition, the existing run by the government. Test scores increased only power structures may be reinforced by the prevailing in the intervention run by NGOs, indicating that social norms, which are persistent shapers of behav- NGOs were more credible in implementing sanc- ior.17 Such norms may reinforce or undermine policy tions—through firing—than the government.15 When effectiveness. commitment breaks down systematically, it can erode Thus investing in capacity may not be enough. people’s incentives to cooperate, and some groups Designing policies to improve security, growth, and may opt out by demanding private services and look- equity requires understanding the balance of power ing for ways to avoid contributing to the provision of among different actors. In the presence of powerful public goods.16 In clientelistic settings, states tend to actors who can block or undermine policies, optimal have low tax revenues and provide few public goods, policies from a strict economic standpoint (first-best undermining economic activity and future taxation. policies) may not be the optimal implementable pol- icies (second-best but feasible). Even when feasible, Best practice or best fit? Revisiting implementing what seem like first-best economic the notion of “first-best” through the policies from a static perspective can lead to worse bargaining lens outcomes for society when such policies negatively The development community has largely focused its affect the power equilibrium. For example, where reform attempts on designing best-practice solutions governments are captured by firms and there is high and building the capacity needed to implement them. inequality, unions may be the only way for workers OVERVIEW | 11 Box O.5 The need to strengthen incentives to gather development data For years, the development community has invested heav- capacity. Some elites in African countries consider high- ily in developing statistical capacity in Africa through eco- quality data systems a tool that the opposition could use nomic resources as well as technical expertise. The results, to audit their performance. Thus these elites have incen- however, have been disappointing.a Many countries in the tives to establish either weak statistical offices or partisan region still lack the data to monitor socioeconomic condi- ones, staffed with political supporters rather than technical tions such as poverty, inequality, and service delivery. As experts.b But, of course, this practice is not unique to Africa. a result, demands are growing for more money and more The argument for using existing capacity is as valid as it is capacity building to solve this problem. And yet, forgotten for building such capacity. In Latin America, a region well is that to develop statistical capacity, countries need the known for its capacity for data collection, there are several political incentives to do so. examples where the political dynamics led to a weakening of In many countries, political incentives lead those in the credibility of official statistics.c power to avoid investing in capacity or to actively undermine Source: WDR 2017 team. a. Devarajan (2013). b. Beegle and others (2016). c. Economist (2012); Noriega (2012); Roitberg and Nagasawa (2016). to solve their collective action problem,18 even if rep- by the Gini coefficient) based on individuals’ market resentation is not perfect. In such cases, passing a law income is 0.47 for developed countries and 0.52 for to make labor contracts more flexible may undermine developing countries. After the effects of taxes and union membership and lead to more inequality, which transfers are taken into account, the corresponding in turn can perpetuate the power of the wealthy.19 coefficients drop to 0.31 and 0.50, respectively. If the effect of publicly provided services (in particular, education and health) is also included, inequality falls Levers for change: further: to 0.22 in developed countries and to 0.42 in Contestability, incentives, developing countries.21 The quantifiable redistribu- tive capacity of these countries can be interpreted in preferences and beliefs different ways. It can be interpreted as the relative From the perspective of power asymmetries, efforts ability of different actors to influence and contest to strengthen the ability of institutions to effectively decisions about how resources are distributed in a enable commitment, coordination, and cooperation given country. It can be interpreted as the incentives of call into question many traditional practices of the governments to commit to the collection of taxes and development community. Anyone seeking to design allocation of spending—more checks and balances on more effective policies may find it helpful to recog- power are associated with more redistribution.22 Or it nize how the distribution of power in the policy arena can be interpreted as the preferences for redistribution could affect policy design and implementation and in a given country. to consider how the policy arena can be reshaped to Contestability. Who is included and who is excluded expand the set of policies that can be implemented. from the policy arena are determined by the relative Reshaping the policy arena occurs when changes power of the competing actors, as well as by the barri- are made in who can participate in decision-making ers of entry to participation (that is, how contestable processes (the contestability of the policy arena), when the process is). A more contestable policy arena is one incentives to pursue certain goals are transformed, and in which the actors or groups who have reason to when actors’ preferences and beliefs shift.20 As an illus- participate in the decision-making process have ways tration, consider how countries are more or less effec- to express their interests and exert influence. Because tive at redistributing income through the fiscal sys- contestability determines who is included and who tem. The average measure of inequality (as captured is excluded from the bargain, it is closely linked to 12 | WORLD DEVELOPMENT REPORT 2017 the notion of inclusion. However, it also emphasizes to promote accountability, and also to change the the barriers to participation. Although the inclusion rules of the game to foster more equitable bargain- A more of more actors in the decision-making process is not ing spaces. Effective laws are those that are able to contestable policy necessarily a guarantee of better decisions, a more shape bargaining spaces that increase contestability arena tends to be contestable policy arena tends to be associated with by underrepresented actors; that provide incentives associated with higher levels of legitimacy and cooperation. When by changing payoffs to lower the cost of compliance higher levels of procedures for selecting and implementing poli- (or increase the cost of noncompliance); and that shift legitimacy and cies are more contestable, those policies tend to be preferences by enhancing substantive focal points cooperation. perceived as “fair” and to induce cooperation more around which coordination can occur. State law, When procedures effectively. however, is but one of many rule systems that order for selecting and Incentives. The incentives that actors have to com- behavior, authority, and contestation. Such legal and implementing ply with agreements are fundamental to enabling normative pluralism (box O.6) is neither inherently policies are more commitment in the policy arena. Credible commit- good nor bad: it can pose challenges, but it can also contestable, those ment requires consistency in the face of changing generate opportunities. policies tend to be circumstances. Incentives for actors to commit to Law can play a role in making the policy arena perceived as “fair” agreements are thus crucial for effective policy more contestable. Enhancing the contestability of the and to induce design and implementation. Stronger incentives to arena encompasses both ex ante procedures (which cooperation more hold policy makers accountable can also strengthen relate to the means by which law is made and the effectively. voluntary compliance because repeatedly delivering extent to which it is participatory and transparent) on commitment helps build trust in institutions. and ex post ones (the extent to which law is applied Preferences and beliefs. The preferences and beliefs consistently and fairly). If various actors believe the of decision-making actors matter for shaping process is exclusionary or reflects only the interests whether the outcome of the bargain will enhance of certain groups, they may not comply, or they may welfare and whether the system is responsive to the outright oppose it. Public hearings, stakeholder con- interests of those who have less influence. Aggre- sultations, social audits, and participatory processes gating preferences, for example, can increase the are some examples of instruments that can make latter’s visibility. Because the preferences and beliefs the policy arena more contestable.23 In this case, law of actors shape their policy goals, an important con- serves as a tool to promote accountability, change the dition for policy effectiveness is the coordination of rules of the game, or both. This function is embod- actors’ expectations. ied, for example, in the advocacy to adopt right-to- This Report explores in depth how changes in information laws. contestability, incentives, and preferences and beliefs Law can play a role in shaping the incentives of can enhance policy effectiveness for security, growth, actors to comply with agreements by, for example, and equity. Depending on the primary functional providing a credible threat of punishment or a cred- challenge—that is, whether a policy needs to enable ible commitment to delivering the reward for com- commitment, coordination, or cooperation—these pliance. Law orders behavior through rules ranging entry points may be different. Because the functional from prohibiting bribery, to establishing licensing challenges are interdependent, the entry points act as fees and business registration, to banning child complements. marriage, as well as through the means to enforce these rules. Following Hart’s classic legal theory, laws The role of law in shaping the policy arena induce particular behaviors of individuals and firms Law is a powerful instrument for reshaping the policy through coercive power, coordination power, and arena. Although laws generally reflect the interests legitimating power.24 of those actors with greater bargaining power, law Law can effectively reshape preferences and coor- has also proven to be an important instrument for dinate expectations about how others will behave, change. By its nature, law is a device that provides serving as a focal point. In this way, law can act as a a particular language, structure, and formality for signpost—an expression—to guide people on how to ordering things, and this characteristic gives it the act when they have several options, or (in economic potential to become a force independent of the initial terms) in the presence of multiple equilibria.25 Law powers and intentions behind it. Law, often in combi- provides a clear reference in the midst of diverging nation with other social and political strategies, can views. People comply with the law because doing so be used as a commitment and coordination device facilitates social and economic activities. OVERVIEW | 13 Box O.6 Legal and normative pluralism The phenomenon of “legal pluralism”—the coexistence A further source of normative pluralism is the less visi- of multiple legal systems within a given community or ble but highly influential social norms—generally accepted sociopolitical space—has existed throughout history and rules of behavior and social attitudes within a given social continues today in developing and developed countries grouping. A vast literature documents how social norms alike. Modern forms of legal pluralism have their roots in derived from communal and identity groups, professional colonialism, through which Western legal systems were associations, business practices, and the like, govern the created for colonists, while traditional systems were vast majority of human behavior.a Social norms are a fun- maintained for the indigenous population. As is well doc- damental way of enabling social and economic transactions umented, that traditional or customary law still dominates by coordinating peoples’ expectations about how others social regulation, dispute resolution, and land governance will act. Social sanctions, such as shame and loss of repu- in Africa and other parts of the developing world. In some tation, or, in some cases, socially sanctioned violence, are a cases, customary law, including a variety of traditional and powerful means of inducing cooperation to prevent what is hybrid institutional forms of dispute resolution, is formally regarded as antisocial and deviant behavior.b recognized and incorporated into the legal system, such Yet another source of normative pluralism is generated as in Ghana, South Africa, South Sudan, the Republic of by today’s globally interconnected world in which a mul- Yemen, and several Pacific Island states. In other cases, titude of governmental, multilateral, and private actors such forms continue to provide the primary means of social establish and diffuse rules about a wide range of transac- ordering and dispute resolution in the absence of access to tions and conduct (see chapter 9). Increasingly, local expe- state systems that are perceived as legitimate and effective, riences of law are informed by these broader interactions such as in Afghanistan, Liberia, and Somalia. Customary covering topics such as trade, labor, environment, natural legal systems reflect the dominant (yet evolving, not static) resources, financial institutions, public administration, values and power structures of the societies in which they intellectual property, procurement, utility regulation, and are embedded, and as such are often seen to fall short of human rights. These interactions can take the form of basic standards of nondiscrimination, rights, and due pro- binding international treaties and contracts (hard law) cess. The extent to which they are considered legitimate or voluntary standards and guiding principles (soft law). and effective by local users is an empirical question and a These rules may reinforce, complement, or compete with relative one in light of the available alternatives. state law to govern public and private spaces.c Source: WDR 2017 team. a. Ellickson (1991); Sunstein (1996); Basu (2000); Posner (2000); Dixit (2004). b. Platteau (2000b). c. Braithwaite and Drahos (2000); Halliday and Shaffer (2015). Ultimately, the rule of law—the impersonal and bolster the effectiveness of development policies can systematic application of known rules to government ultimately move countries on a trajectory toward a actors and citizens alike—is needed for a country stronger rule of law. to realize its full social and economic potential. But as Gordon Brown, the former prime minister of the Enhancing policy effectiveness for United Kingdom, noted, “In establishing the rule of security, growth, and equity: Entry points law, the first five centuries are always the hardest.” The for reform ideal of the rule of law emerges from a home-grown How can strengthening the role of law to change (endogenous) process of contestation that shapes contestability, incentives, and preferences and beliefs societies’ adherence to the principles of the rule of enhance policy effectiveness for security, growth, law over time—sometimes a very long time. Box O.7 and equity? Take the case of security. Whether for- discusses the challenging process of transitioning mally or informally, institutions of governance can to the rule of law. Pragmatic policy design that takes solve commitment and cooperation problems in into account how these different roles of law can ways that create incentives to not use violence. Four 14 | WORLD DEVELOPMENT REPORT 2017 Box O.7 Transitions to the rule of law Compared with the extensive literature on transitions to normative framework that makes elites respect the law as democracy, a surprisingly small amount of systematic such. Subsequent respect for law depends heavily on the work has been done on transitions to a modern rule of law. degree of independence maintained by legal institutions History reveals three separate types of transitions which that persist even after their normative foundations have one can learn from, while other paths might be possible: disappeared. (1) the shift from a customary, informal, and often highly Finally, as for the importation of foreign legal systems, pluralistic system of law to a unified modern one; (2) how perhaps the most important variable determining success powerful elites come to accept legal constraints on their is the degree to which indigenous elites remain in control power; and (3) how countries successfully adapt foreign of the process and can tailor it to their society’s own tradi- legal systems to their own purposes. tions. Thus Japan experimented with a variety of European The shift from a customary or pluralistic system (or systems before settling on the German civil code and both) to a codified modern one is usually motivated, at Bismarck constitution at the end of the 19th century. Later, base, by actors who view a single formal system as better in the 20th century, China, the Republic of Korea, and other serving their interests, particularly their economic interests Asian countries similarly adapted Western legal systems in expanded trade and investment. Scale matters: at a to their own purposes. In other countries and economies, certain point, the personal connections that characterize such as Hong Kong SAR, China, India, and Singapore, the customary systems become inadequate to support trans- colonial power (Great Britain) stayed for a long time and actions between strangers at great remove. However, the was able to shape the local legal norms in its own image. transition costs are high, and the customary rules are often Even so, India today practices a far higher degree of legal preferred by the existing stakeholders. Therefore, political pluralism than does the United Kingdom itself as part of power is critical in bringing about the transition. the process of local adaptation. Less successful were coun- Formal law is usually applied first to nonelites (“rule tries in Sub-Saharan Africa, where customary systems were by law”); the shift to “rule of law” occurs when the elites undermined by colonial authorities but not replaced by themselves accept the law’s limitations. Some have argued well-institutionalized modern systems. that constitutional constraints become self-reinforcing Much more research is needed on the question of legal when power in the system is distributed evenly and elites transitions. It is clear that a fully modern legal system is not realize that they have more to gain in the long term through a precondition for rapid economic growth; legal systems constitutional rules.a What this theory does not explain, themselves develop in tandem with modern economies. however, is why these same elites stick to these constraints It may be that the necessary point of transition from a when the power balance subsequently changes and one customary to a formal legal system occurs later in this group is able to triumph over the others. Similarly, inde- process than many Western observers have thought. But pendent courts are always a threat to elite power; why do relatively little is known about the historical dynamics of rulers come to tolerate them when they have the power to that transition, and thus there is too little by way of theory manipulate or eliminate them? This finding suggests that to guide contemporary developing countries as they seek constitutionalism needs to be underpinned by a powerful to implement a rule of law. Source: Francis Fukuyama for WDR 2017. a. See North, Wallis, and Weingast (2009). main governance mechanisms matter for improving guarantee the representation of all factions—can security outcomes: power sharing, resource redis- reduce the incentives to engage in the use of force tribution, dispute settlement, and sanctions. Power by raising the benefits of security. Power-sharing sharing and resource redistribution are highlighted arrangements are especially relevant for societies in the illustrations that follow. divided along ethnic and religious identity lines, Power sharing and resource redistribution can reduce such as in Bosnia and Herzegovina, Northern Ire- exclusion and the incentives to engage in violence. Just land, Kenya, Lebanon, and South Africa, but also in as exclusion may lead to violence, mechanisms that countries in which the conflict is a legacy of opposing encourage power sharing—such as legislatures that ideologies. Power-sharing bargains that lead to peace OVERVIEW | 15 and security typically take place between elites. Such than second-best ones. Adopting an implementable bargains encourage cooperative behavior by provid- second-best design could therefore be more effective ing elite groups with the incentives to compromise than choosing the seemingly first-best policy prone with one another and to inspire inclusion among to capture. Moreover, when considering alternative their followers, and by offering alternative avenues policy designs, the possibility of future capture can be for contesting power. reduced by anticipating the possible effects of a pol- Mechanisms to redistribute resources can also icy on the balance of decision-making ability among reduce violence by reordering power and changing the actors involved. incentives. Redistributive arrangements include The experience of the Russian Federation and budget allocation, social transfers, and victim com- eastern European countries in their transition to pensation schemes. Some government interventions market economies is illustrative.26 Compelled by the to reduce urban crime in Latin America follow a then-dominant economic argument that the pri- common pattern of increasing security by reducing vatization of state-owned enterprises (SOEs) was of poverty and inequality. Employment in the public first-order importance in enhancing economic effi- sector could also bring about stability by ensuring ciency, Russia and many eastern European countries the loyalty of key constituencies. An example is the focused on rapid, large-scale privatization of their dramatic increase in the numbers and salaries of SOEs. Although this approach may have made sense public employees following the uprisings in the on purely economic grounds, the way in which the Arab world in 2011 (figure O.5). Although this kind of privatization wave was implemented created a new political patronage can solve the first-order problem class of oligarchs that resisted the next generation of of violence, it can also lead to corruption and can pro-competition reforms. As a result, many of these have ruinous effects on budgetary sustainability and economies are still struggling with inefficient, oligop- administrative efficiency. olistic industries. This is consistent with the view that Implementable policies can help reduce capture, enhanc- reforms that create an initial concentration of gains ing growth. Security is a precondition for prosperity, may engender strong opposition to further reform but it is not enough; economic growth must follow. from early winners.27 By contrast, Poland chose to When it comes to growth, if the possibility of capture focus first on reforms that made it easy for new firms looms large, policies that are first-best on the basis to enter, and to privatize the existing firms more grad- of economic efficiency may be less implementable ually. This sequencing created a class of young firms Figure O.5 Recruitments of civil servants increased exponentially in Tunisia and the Arab Republic of Egypt in the aftermath of the Arab Spring uprisings of 2011 a. Tunisia, 2000–14 b. Arab Republic of Egypt, 2000–14 Tenured government employees (millions) 50,000 20,000 6.4 6.2 Total/civil servants recruited 40,000 15,000 6.0 Workers recruited 5.8 30,000 10,000 5.6 5.4 20,000 5,000 5.2 Arab Spring 5.0 Arab Spring 10,000 0 4.8 2000 2005 2011 2014 2000 2005 2011 2014 Total recruited (left axis) Civil servants recruited (left axis) Workers recruited (right axis) Sources: Tunisia: Brockmeyer, Khatrouch, and Raballand 2015; Arab Republic of Egypt: Bteddini 2016, based on figures from Egypt’s Central Agency for Organization and Administration (CAOA). 16 | WORLD DEVELOPMENT REPORT 2017 that were collectively interested in further reforms, Mechanisms that control clientelism can enhance while preventing the sudden emergence of an influ- equity by making commitment to long-term objec- ential group of large firms that could block reforms.28 tives credible in the political arena. At times, the incen- Better design of public agencies can help expand tives of elites may be aligned with taxation and public the set of implementable policies. How public officials spending reforms in favor of the poor. For example, are selected for service, for example, and the incentive the first antipoverty programs in 19th-century Great structure they face within their organizations matter, Britain were pushed by the top 1 percent of landed as does accounting for existing norms of behavior. elites. Against the backdrop of the French Revolution, Establishing and maintaining greater accountability and possible fear of revolts, these programs aimed in public agencies can also help in balancing influ- to keep labor in the countryside and prevent it from ence in the policy arena. Mechanisms that help give migrating to urban areas.29 At other times, an increase less powerful, diffuse interest groups, for example, a in the participation of disadvantaged groups is needed bigger say in the policy arena could help balance the to help change the incentives of actors who bargain influence of more powerful, narrow interest groups. over policies. Increasing the direct representation of However, participatory mechanisms in regulatory disadvantaged individuals in legislative assemblies institutions are still relatively uncommon in low- and and other political bodies can improve policy makers’ middle-income countries (figure O.6). commitments to reforms that improve equity. Direct Private interests can at times undermine policy participation in decision making can also improve effectiveness, but capture is not an inevitable out- cooperation. For example, in Ghana, when businesses come of close business-state ties. As long as influence are involved in the design of tax policies they are more and incentives are balanced through robust public likely to pay their taxes.30 Greater transparency and agency design and accountability mechanisms, firms better information can also help to change incentives and business groups can have a positive influence on by monitoring the actions of political elites and ser- policies aimed at economic growth. Contemporary vice providers. For example, an intervention designed case studies suggest that business associations have to strengthen local accountability and community- helped governments improve various dimensions of based monitoring in the primary health care sector in the business environment—such as secure property Uganda was remarkably successful in improving both rights, fair enforcement of rules, and the provision health services and outcomes in the participating of public infrastructure—through lobbying efforts or communities.31 However, reforms are often complex better monitoring of public officials. and involve frequent setbacks. Controlling clientelism can help solve commitment Over time, policies that effectively improve equity problems related to delivering on redistributive policies. also reduce power asymmetries, making the policy Figure O.6 Formal avenues for broad-based participation in regulatory decision making are limited in low- and middle-income countries Percentage of citizens participating 100 75 50 25 0 East Asia Europe and Latin America Middle East High-income South Asia Sub-Saharan and Pacific Central Asia and the and OECD Africa Caribbean North Africa countries Provide impact assessments Publish notice Publish regulations Request comments Report results Source: WDR 2017 team, using data from the World Bank’s citizen engagement in rulemaking data. Note: OECD = Organisation for Economic Co-operation and Development. OVERVIEW | 17 arena more contestable. After a period of inclusive of game theory. The discussion highlights how devel- growth with greater income mobility, the growing opment reform involves playing “games” at two dif- middle class in Latin America began demanding ferent levels, and actors in the quest for change often better-quality services and demonstrating in the tend to neglect the game that really matters. streets for better governance.32 Conversely, inequit­ Figure O.7 synthesizes the conceptual framework able growth and the concentration of wealth in the presented in this Report. It illustrates the dynamic hands of a few led to consolidation of power and a interaction between governance and development. At perception of unfairness, and thus to weaker incen- its center is the policy arena, the space where actors tives for cooperation and coordination by those bargain and reach agreements about policies and excluded from the benefits of development. It is thus rules. Given a set of rules, the right-hand side of the necessary to understand how existing inequalities framework shows how commitment, coordination, can be modified by reforms. and cooperation among actors lead to specific devel- The nature of the policy arena is crucial to gaug- opment outcomes (the outcome game in box O.8). But ing whether actors will be able to reach and sustain actors can also agree to change the rules, which is agreements to enact welfare-enhancing policies. The illustrated in the left-hand side of the framework (the actions that a proposed reform will trigger from other rules game in box O.8). Both changes in development players in the arena are particularly important. The outcomes (such as the composition of growth or the process of how reforms take place is embedded in the concentration of wealth) and changes in rules (both framework of the World Development Report 2017 (WDR formal and informal) reshape the power asymmetries 2017) and is discussed in box O.8 from the perspective manifested in the policy arena. Box O.8 The “rules game”: Paying attention to where the action is The framework described in this Report uses game the- way to specify the ultimate goal of development, it is an ory—the branch of social sciences that studies strategic insufficient guide to understanding the actual process of behavior—to understand the dynamics of power, policy, development. Mechanism design suggests that a reform and reform. Although policy makers may not consciously is a once-and-done jump that takes place when someone think in terms of game theory, they play strategy games imposes the “ideal” rules. It ignores the second-level rules every day, and their actions can be understood using the game, the diversity of preferences and incentives, and the precision and objectivity of game theoretic models. The fact that different actors can have very different influences framework laid out in this Report aims at understanding in the rules game. Moreover, in the process of reform and how governance affects development over time. For that development, the rules game is where the action is. purpose, the framework involves games played at two lev- Indeed, the rules game is where power asymmetries are els. The first-level game (the outcome game) takes place manifested, whereby some actors have more direct influ- when, given a certain set of rules and policies, actors react ence (elites) and others have only indirect influence such by making decisions about investing, consuming, working, as through voting (citizens). It has long been recognized paying taxes, allocating budgets, abiding by the rules, and that power is an important determinant of how a society so on. Those decisions lead to the realization of outcomes functions and how the gains of economic activity are (security, growth, equity). The framework suggests that shared within and across nations. With game theory, one there is, in addition, a second-level game (the rules game) is able to formalize some of these difficult concepts and, in in which actors bargain to redefine the policies and rules particular, the idea that, in the end, power depends on the that shape subsequent reactions by actors in future reali- circumstances, beliefs, and mores of ordinary people. zations of the games.a A key lesson that emerges from this approach is that In the abstract, the rules and policies chosen should rules that let players commit, coordinate, and cooperate lead to the socially desired outcomes. Economists refer to tend to enhance efficiency in the outcome game. Ultimately, the case in which someone can pick the ideal rules for the commitment devices allow actors to transform the game so outcome game as the “mechanism design” approach, and that their incentives are aligned. To achieve coordination, the rules selected are those that a “benevolent dictator” policies need to create common knowledge that everyone or “social planner” would pick. Although this is a useful will take the desirable action. Sometimes, this requires (Box continues next page) 18 | WORLD DEVELOPMENT REPORT 2017 Box O.8 The “rules game”: Paying attention to where the action is (continued) providing incentives for some actors to take the desirable improves the efficiency of the outcome game by letting action first so others will follow. To induce cooperation, players commit to specific future actions.b When actors policies need to put forth a credible mechanism of reward agree to a contract voluntarily, the result of a noncooper- or penalty conditioned on players’ actions to prompt other ative interaction can lead to better outcomes for all. This actions yielding the jointly preferred outcome. analysis is also closely related to the concept of a “social Over time, repeated play of the rules game can lead to contract” that goes back to ancient Greek thinkers. Social the establishment of a government that is better able to contracts that induce actors to abide by the rules volun- enforce the rules impersonally—for example, by employing tarily tend to be more efficient and sustainable. Underlying legislators, judges, and police officers who can administer a all stable societies is some form of social contract, which formal legal order, in particular by administering a system enables individuals to anticipate the behavior of others and of contract law. Contract law is a system of formal rules that react accordingly. Source: WDR 2017 team. a. In the WDR 2017 framework depicted in figure O.7, the right-hand side of the figure refers to the outcome game and the left-hand side to the rules game. b. In a small social group, an informal system of rules can also encourage commitment. For example, if actor 1 does not follow through on an agreement with actor 2, actor 2 can punish actor 1 by gossiping about how actor 1 cheated. Drivers of change: Figure O.7 WDR 2017 framework: Governance, law, and development Elite bargains, citizen engagement, and Power asymmetries Power asymmetries international influence Changes in contestability, incentives, and preferences and beliefs are the key levers for correcting power asymmetries in the policy arena, leading more effec- Rules Policy Development arena outcomes tively to commitment, coordination, and cooperation. But how can these changes be brought about? This Report identifies three encouraging drivers for bring- ing about significant changes conducive to develop- ment: elite bargains (which take the distribution of Commitment Commitment power in the policy arena as a given); citizen engage- Coordination Coordination Cooperation Cooperation ment (which tries to change the distribution of power in the policy arena); and international interventions Source: WDR 2017 team. (which indirectly affect the distribution of power in Note: Rules refers to formal and informal rules (norms). Development outcomes, in the context of this Report, refers to security, growth, and equity. The actors in the policy arena can be grouped into elites, the policy arena)—see box O.9. citizens, and international actors. All countries, regardless of their level of economic and institutional development, are subject to elite outcome of favorable bargains in the policy bargaining bargains. Change is unlikely to occur unless powerful process. Moreover, governance does not occur solely actors—elites—in the country agree to that change. within the boundaries of nation-states. Although When influential actors resist change, suboptimal pol- international actors cannot engineer development icies and governance institutions that are detrimental from the outside, these transnational actors play an to development tend to persist. Under certain circum- important role in influencing the domestic bargaining stances, however, elites may voluntarily agree to limit dynamics by strengthening (or weakening) local coa- their influence in their own self-interest. Citizens litions for reform. can also organize to bring about change, playing an Change occurs over time as coalitions are formed important role in applying pressure to influence the among different actors, but this is often a long and OVERVIEW | 19 Box O.9 Elites and citizens: Who is who in the policy arena? Participants in the policy arena can be grouped into elites even though the presidents change, the guests are always and citizens, according to their relative degree of influence the same.” in the policy-making process. What distinguishes elites Certainly, the dichotomy between elites and citizens is from citizens is elites’ ability to directly influence the design imperfect because it does not account for different degrees and implementation of a certain policy. Elites can vary from of relative power among individuals within those groups one policy to another. For example, a group that is an elite (elites or citizens), nor does it capture how their relative in the area of health care may not be an elite in the area power differs from one policy to another. As Stephen Jay of crime control. The source of elites’ ability to influence Gould notes in his classic text Time’s Arrow, Time’s Cycle: policy comes not only from formal rules such as delegated Myth and Metaphor in the Discovery of Geological Time, authority (de jure power), but also from other means such “Dichotomies are useful or misleading, not true or false. as control over resources (de facto power). Thus even if They are simplifying models for organizing thought, not the government changes, those who are able to influence ways of the world.”a The reality is much more complex and decisions may stay the same; they keep their seat at the nuanced. table. A few years ago, an entertainment magazine in a This Report views individuals as being on a continuum Latin American country captured this dynamic in an inter- with respect to their position of power in the policy arena, view with an unlikely political observer, the chef of the and thus its definition of elites and citizens is a positive presidential residence. After a tight election, the new pres- (rather than a normative) one. Elites are not necessarily ident and his family had just moved into the residence. The bad or self-interested, and citizens are not necessarily good interviewer asked the chef whether it was difficult for him and public-spirited. Both groups exercise their influence to adjust the menu to the new presidential family’s tastes. as people do in other spheres of life. Understanding their “It is really not that problematic,” he reflected, “because motivations is what matters to anticipating their conduct. Source: WDR 2017 team. a. Gould (1987, 8–9). self-determining “endogenous” process. For example, political parties to participate openly in Spain’s polit- success at achieving security in Somaliland arose ical life. To the surprise of many, the Cortes Genera- from the collective action of a wide range of tribal les—Spain’s parliament, which was led by members and clan leaders. Sharing power among these actors appointed by Franco—allowed this referendum, even helped reduce the incentives for violence by raising though it would surely constrain their power and the benefits of security. In Nigeria, Muhammadu likely imply the end of the existing regime. Analysts Buhari won the 2015 election by creating a broad coa- have argued that members of the Cortes accepted the lition through a campaign platform focused on tack- referendum because it was within the existing legal ling corruption, potentially indicating an enhanced setting, which they had to protect. Gen. Pita Da Veiga, ability to overcome corrupt vested interests that a conservative, minister of the navy, and personal benefit from oil rents. And in India, the Right to Infor- friend of Franco, publicly declared, “My peace of mation and Right to Education Acts, pushed through conscience is rooted in the fact that the democratic by grassroots coalition movements over many years, reform is being made within the Franquista legality.”33 have helped poor citizens demand better services and However, the Franquista legality he was praising was education for their children, improving living condi- coming to an end precisely because of that reform, tions within slums. which received overwhelming public support: 97.4 percent of Spaniards voted in favor, with a turnout of Elites may adopt rules that constrain their 77 percent of registered voters. own power Just as in the Spanish transition, elites frequently In December 1976, a year after the death of Gen. Fran- choose to constrain their own power. Changes to the cisco Franco, who had been in power since the late “rules of the game” often reflect bargaining outcomes 1930s, a referendum was held in Spain to introduce a that result from elites acting in their own interests political reform that would allow previously banned (box O.10). While seemingly counterintuitive, reforms 20 | WORLD DEVELOPMENT REPORT 2017 Box O.10 Who are elites, and what do they do? Results from a survey of elites in 12 countries All social science disciplines and development practitioners The survey reveals that the identity of the influential recognize the importance of elite actors in determining actors within a ruling elite coalition that decides policy at development outcomes—from Aristotle’s “oligarchy,” to the national level differs greatly over space, time, and issue early 20th-century “elite theorists,”a to recent ambitious area. For example, although national chief executives are theories of economic and institutional coevolution.b The part of the elite ruling coalition in all 12 countries surveyed international community is increasingly looking at the con- as of 2015, the other actors vary greatly in both number sequences of different “political settlements,” which can and representativeness (figure BO.10.1, panel a). With the be understood as elite bargaining equilibria that emerge exception of the Russian Federation, Rwanda, and Turkey, at critical junctures in a country’s development.c Yet, the where the national chief executive monopolizes decision set of conceptual research tools available to scholars of making, the ruling coalition in the other countries surveyed elite bargaining and to development practitioners remains is quite varied. For example, in Bolivia the ruling coalition limited, as does agreement on exactly who are elites. consists of legislators, party elites, local governments, labor To help fill this gap, as part of the World Development unions, and civil society organizations. Report 2017, the World Bank, in collaboration with the Ruling elites also differ within countries over time. In the V-Dem Institute, has conducted expert surveys to generate Republic of Korea, during the Park regime (1963–79), the cross-national indicators that enable comparison of who bargaining strength of military actors, bureaucratic actors, holds bargaining power and how they wield this influence. and economic actors was relatively high (figure BO.10.1, The surveys cover more than 100 years of data in 12 coun- panel b). The transition to democracy after 1987 resulted tries across six regions. The data help identify how the in greater strength for new actors, particularly political par- distribution of elites maps onto the national structure of ties, legislators, and the judiciary, but economic and bureau- bargaining power and the formulation and implementation cratic actors remained highly empowered. By contrast, of laws governing the exercise of power. Brazil has experienced much more volatility in empowered elites, particularly before the 1990s (figure BO.10.1, panel c). Figure BO.10.1 Elite actors within national ruling coalitions vary greatly across countries and over time a. Twelve-nation comparison of number of groups in ruling coalition, 2015 6 5 Number of elite groups 4 3 2 1 0 Brazil Indonesia Korea, Rep. Rwanda Sri Lanka Turkey Bolivia India Kenya Russian Spain Tunisia Federation National chief executive Local government leaders Civil society organizations National legislators Bureaucratic actors Media Judicial actors Economic actors (national) Foreign governments Political party elites Organized labor unions International economic actors and organizations (Box continues next page) OVERVIEW | 21 Box O.10 Who are elites, and what do they do? Results from a survey of elites in 12 countries (continued) Figure BO.10.1 Elite actors within national ruling coalitions vary greatly across countries and over time (continued) b. Relative strength of elite actors in the Republic of Korea, 1900 –2015 4 Elite actor relative strength 3 2 1 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 c. Relative strength of elite actors in Brazil, 1900–2015 4 Elite actor relative strength 3 2 1 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 National chief executive National legislators Judicial actors Political party elites Local government leaders Bureaucratic actors Military actors Economic actors (national) Civil society organizations Media Foreign governments International economic actors and organizations Source: WDR 2017 team. Note: In this figure, relative strength is measured on a 0–4 scale, ranging from 0 (no power to influence decision making) to 4 (group has a lot of power to influence decision making on many issues). Panel a shows the number of elite groups that have relative strength greater than 3. For more information on specific variables and survey methodology, see World Bank and V-Dem (2016) and Coppedge and others (2015). Source: WDR 2017 team. a. See Michels ([1911] 1966); Pareto ([1927] 1971); and Mosca (1939). b. See North, Wallis, and Weingast (2009) and Acemoglu and Robinson (2012). c. Di John and Putzel (2009); Khan (2010); Parks and Cole (2010). 22 | WORLD DEVELOPMENT REPORT 2017 that limit the arbitrary exercise of power today may in the subsequent period.36 Fiscal transparency, for be necessary for elites to maintain or enhance their example, ties not only the hands of current elites but power or to provide insurance against a loss of power also those of successors. This is consistent with the tomorrow. Formal institutions—moving from deals to actions of certain states in Mexico: although access to rules—can enhance the credibility of commitments, information and transparency laws was strengthened overcome coordination challenges among elite actors, at the federal level after the political change in 2000, and strengthen the stability of elite bargains. In cases and more recently in 2016, such laws were more likely of long-term successful transformation, elite actors to be passed at the state level when opposition parties have adapted to changing circumstances by gener- were stronger and when there was greater executive ating more capable, contestable, and accountable office turnover.37 institutions, and these institutions themselves have Leaders can also spur elite-driven change by solv- helped enable further development. ing coordination challenges or by transforming the To maintain their own power and influence, preferences and beliefs of followers. Transactional coalitions of decision makers may have incentives leaders use an array of bargaining tactics and strategies to broaden the policy arena, including adding new to promote coordination among elite actors and reach actors to formal decision-making bodies and increas- positive-sum outcomes (win-win solutions). These ing accountability to other elites (horizontal account- leaders change the incentives of other elites by taking ability). Despite a preference for keeping coalitions into consideration who wins and who loses over time. small, elites may choose to broaden them to improve By overcoming information and coordination chal- stability when the potential for conflict rises. Bringing lenges through political strategy, they can help find new actors into credible institutions for contestation areas of agreement among conflicting parties with- may be less costly than repressing them, and expand- out necessarily shifting norms or preferences. In the ing the formal accountability space may help provide 1960s, U.S. president Lyndon Johnson’s deals, trades, internal commitments that facilitate agreement. threats, and ego stroking—political strategy—helped Institutionalizing accountability to citizens (vertical the U.S. Congress overcome a natural aversion to risk accountability)—for example, through the introduction and pass civil rights legislation, a clear example of of elections or electoral reforms—may also be a rational transactional leadership. Transformational leaders can, elite strategy to maintain privilege, particularly in the in addition, actually change elite preferences or gain face of rising demands from the opposing elite. When following by shaping beliefs and preferences. They are splits develop among elite actors, the introduction of entrepreneurial in coordinating norms and can effect vertical accountability mechanisms can enhance the large changes in society by changing the environment bargaining power of one faction. Moreover, when in which politics plays out, often by reducing the bottom-up citizen movements threaten elite interests, polarization of elites. In the 1990s Nelson Mandela elites may choose to introduce preemptive vertical provided a vision for South Africa based on charisma accountability mechanisms to respond to societal and moral persuasion, using powerful symbols to demands before such pressure reaches a tipping motivate and inspire his fellow citizens during the point. In Europe in the 19th century, the extension of transition away from the country’s apartheid policies. suffrage was heralded by the threat of revolution and social upheaval in the form of revolutionary activity Agency and collective action: Citizens in neighboring countries34 and strikes in the home influence change by voting, organizing, Although elites country.35 and deliberating often choose rules Although elites often choose rules to maintain Individual citizens may not have the power to influ- to maintain their their position of power, sometimes—when acknowl- ence the policy arena to generate more equitable position of power, edging threats to their continued dominance—they development on their own. However, all citizens have sometimes—when may adopt rules to constrain their own influence as a access to multiple mechanisms of engagement that acknowledging type of political insurance. The hope is that those rules can help them overcome collective action problems— threats to their will bind not only them but also their successors. The to coordinate and cooperate—by changing contest- continued adoption of cohesive and constraining institutions ability, incentives, and preferences and beliefs. Modes dominance—they increases with the likelihood that the incumbent of citizen engagement can include elections, political may adopt rules government will be replaced. This is an institutional organization, social movements, and direct participa- to constrain their variation on American philosopher John Rawls’s “veil tion and deliberation. Because all of these expressions own influence as of ignorance”: design institutions without knowing of collective action are imperfect, they complement, a type of political whether you will be subject to or master of them rather than substitute for, one another. insurance. OVERVIEW | 23 Elections are one of the most well-established around a well-defined agenda of policy priorities—are mechanisms available to citizens to strengthen associated with a higher likelihood of adopting and accountability and responsiveness to their demands. successfully implementing public sector reforms.40 When effective, they can help improve the level and However, ordinary citizens and marginalized groups quality of public goods and services provided by the sometimes find political parties unwilling to repre- state by selecting and sanctioning leaders based on sent and articulate their demands, acting instead as their performance in providing these goods.38 This “gatekeepers” to protect vested interests and existing effect can be particularly strong at the local level, power structures. This may help explain the disen- where voters might be better able to coordinate and chantment of citizens with political parties, which shape the incentives of local politicians to deliver— rank globally as the least trusted political institution. including by curbing corrupt behavior. For example, Social organization can also help solve collective evidence from Kenya suggests that multiparty elec- action problems by mobilizing citizens around spe- tions successfully constrained the ability of leaders to cific issues. This mobilization can bring new demands divert public resources for partisan goals.39 However, and interests into the bargaining space, reshaping the elections alone are an insufficient mechanism to preferences of actors and expanding the boundaries of produce responsive and accountable governments. the policy arena around previously neglected issues. Although they have become the most common mech- Box O.11 explains how pressure from social organiza- anism to elect authorities around the world, elections tion by international and domestic women’s groups are increasingly perceived as unfair (figure O.8), and contributed to the achievement of female suffrage they are a limited instrument of control. in Switzerland, which led in turn to other important Political organization can serve as a complemen- policy changes for gender equality. Actors in civil tary mechanism to represent and articulate citizens’ society and the media can play a key role in foster- collective interests, aggregate their preferences, and ing policies that strengthen transparency and more channel their demands in the policy-making process. widely disseminate information. Increasing the avail- For example, through parties, political organization ability of reliable information—such as generating can help solve citizens’ coordination problems and evidence on the performance of public officials—and integrate different groups into the political process, increasing the accessibility of that information—such encouraging a culture of compromise. According to as strengthening the independence of media outlets the evidence, programmatic parties—those organized or aligning the targeting and timing of information with the political process—can be fundamental first Figure O.8 Electoral democracies are steps toward promoting greater accountability and spreading, but the integrity of elections government responsiveness.41 However, global trends is declining reveal that after its continual expansion over the past decades, civic space has shrunk in the past few years 100 (figure O.9). Many governments are changing the institutional environment in which citizens engage, 90 establishing legal barriers to restrict the functioning of media and civic society organizations and reducing Number and percent 80 their autonomy from the state. Although social organization may succeed in giv- 70 ing voice to powerless groups and putting pressure on public authorities, trade-offs can be associated with 60 the proliferation of competing interests in the policy arena. Public institutions may be quickly overloaded 50 with multiple pressures, undermining the coherence and effectiveness of public policies. Moreover, not 40 all social organization is necessarily motivated by a 1985 1990 1995 2000 2005 2010 2015 vision of a more equal and just society. In some cases, social organization can be used by narrow interest Number of electoral democracies Percentage of elections that are free and fair groups for exclusionary or violent purposes. Public deliberation—spaces and processes that Sources: WDR 2017 team, based on Center for Systemic Peace, Polity IV (database), various years (for number of electoral democracies), and Bishop allow group-based discussion and weighing of alter- and Hoeffler 2014 (for free and fair elections). native preferences—can also help level the playing 24 | WORLD DEVELOPMENT REPORT 2017 Box O.11 Direct democracy delayed women’s voting rights in Switzerland Most European countries enfranchised women during the study notes.a The mandatory national referendum took first decades of the 20th century. However, it was not until place in 1959 when 69 percent of the entirely male elec- 1971 that Swiss women were first allowed to vote in fed- torate voted against the constitutional amendment. Still, eral elections, 65 years after the first country in Europe— women gained the right to vote on cantonal affairs in three Finland—did so. And yet Switzerland has had a tradition Swiss cantons (Geneva, Vaud, and Neuchâtel) in 1959–60. of direct democracy for centuries. What explains the late It was not until 1971 that the majority of Swiss men voted enfranchisement of Swiss women? in favor of women’s suffrage. Reform coalitions among To change the constitution, the political system required many actors played a significant role in bringing about this a national referendum in which only men were allowed to change, including international influence and domestic vote. Several petitions and motions initiated by women’s action by women’s groups such as the Swiss Association for groups in the first half of the 1900s were unsuccessful in Women’s Suffrage. achieving women’s suffrage. Who participated in the pro- The change in female suffrage in Switzerland made it cess to change the rules was thus an important determinant possible for new actors—women, in this case—to partici- of which rules persisted. But so were the existing social pate in the process of policy design and implementation, norms and the lack of incentives for change. Reflecting changing the incentives of politicians to be responsive to those deeply held norms, Switzerland also lagged behind their preferences and interests. It also reflected a change most Western countries in removing other legal gender in societies’ norms with respect to women’s rights. This inequalities, notably those preserving the legal authority led to further important policy changes in the 1980s. An of the husband. amendment to the constitution to guarantee equal rights of Under heightened international pressure, Switzerland all Swiss men and women was approved in a referendum in was close to a breakthrough in guaranteeing women’s rights 1981. A few years later, in 1985, women were granted equal in 1957, when, for the first time, the Swiss Federal Council rights in marriage to men, eliminating legal requirements called for a national referendum on women’s suffrage. “If such as wives’ need to have their husbands’ permission to Switzerland had not been a direct democracy, women’s work outside the home, or to initiate legal proceedings, or right to vote would have taken effect immediately,” one to open a bank account.b Sources: Stämpfli 1994; World Bank, Women, Business, and the Law (database), 2015. a. Stämpfli (1994, 696). b. World Bank (2016a). field in the policy arena. Citizens’ participation in local voters; online voters were more likely to be male, governance can be instrumental in improving the university-educated, and wealthier.44 quality of deliberation and the legitimacy of decisions Ultimately, all expressions of citizens’ collective by clarifying the needs and demands of local constit- action, including voting, political parties, social move- uencies. However, participatory approaches to devel- ments, civic associations, and other less conventional opment sometimes fail to consider the possibility of spaces for policy deliberation, are imperfect. There- civil society failures in which, in weakly institutionalized fore, citizens, to strengthen their influence in the environments, the poor are less likely to participate, policy arena, need to engage through multiple mech- and participatory mechanisms can be captured by anisms designed to solve collective action problems. local elites.42 Such failures are not necessarily ame- This strategic combination can maximize the chances liorated by the availability of new technologies. As to effectively bring about changes in contestability, discussed in WDR 2016 on the digital divide,43 infor- incentives, and preferences and beliefs. mation and communication technologies might actu- ally reinforce socioeconomic inequalities in citizens’ Change with outside support: International engagement. In Brazil, for example, the use of internet actors enter the domestic policy arena voting on municipal budget proposals revealed stark The dynamics of governance do not occur solely demographic differences between online and offline within the boundaries of nation-states. Countries OVERVIEW | 25 Figure O.9 After decades of progress, labor standards. And they can serve as focal points civic space is shrinking globally for domestic actors to shift preferences and improve coordination by changing ideas and diffusing norms. International agreements on economic integra- 3.0 tion can provide credible commitments that domestic actors will follow through on economic reforms. The 2.5 success of the European Union integration process demonstrates the power of these types of induce- Average score 2.0 ments. Prospective member countries must change domestic rules to abide by the 80,000 pages of reg- ulations in the EU’s acquis communautaire. For the 1.5 countries that decided to undergo these changes, the potential economic benefits of joining the EU out- 1.0 weighed any loss of domestic autonomy in specific areas, and the benefits of accession were used by 0.5 elites to overcome domestic resistance to the required reforms. Moreover, for member countries, accession 0 10 20 30 40 50 60 70 80 90 00 10 20 0 20 19 19 19 19 19 19 19 19 19 19 20 20 helped change elite incentives by changing the rela- Government censorship effort (media) tive power of domestic actors because some parties CSO entry and exit benefited much more than others. Meanwhile, EU Source: WDR 2017 team, using data from V-Dem (database), 2016. membership contributed to the institutional con- Note: The average is based on a sample of 78 countries for which there is solidation of former dictatorships in the European consistent data for all years presented. The “CSO entry and exit” variable periphery, such as Greece, Portugal, and Spain in the is measured on a 0–4 scale, ranging from 0 (more constrained) to 4 (less constrained). The “government censorship effort (media)” variable is 1980s. It also played a role in the transition in central reversed and measured on a 0–4 scale, ranging from 0 (less censorship) and eastern Europe after the elimination of the com- to 4 (more censorship). More information on specific variables and survey methodology can be found in World Bank and V-Dem (2016) and Coppedge munist regimes in the 1990s and 2000s. and others (2015). CSO = civil society organization. Since the end of World War II, official develop- ment assistance (ODA) or “foreign aid” has been one today face an interconnected, globalized world char- of the most prominent policy tools used by advanced acterized by a high velocity and magnitude of flows economies to induce security, growth, and equity of capital, trade, ideas, technology, and people. The outcomes in developing countries.45 Although the world nowadays is very different from the one in literature on aid effectiveness is voluminous, it tends which today’s developed countries emerged: in those to be inconclusive. Ultimately, the literature suggests days, cross-border flows were low; the countries that aid is neither inherently good nor inherently received no aid; and they were not subject to a prolif- bad for development; what matters is how aid inter- eration of transnational treaties, norms, and regula- acts with the prevailing power relations and affects tory mechanisms. For developing countries, the era of governance. globalization and “global governance” presents both In some cases, donor engagement supports the opportunities and challenges. emergence of more accountable and equitable gov- As the flows across borders expand, so too do erning arrangements that become embedded in the instruments and mechanisms that are used to the domestic context. For example, evidence from manage these flows. To influence domestic policies a community-driven reconstruction program in and governance, international actors can introduce Liberia suggests that introducing new institutions at transnational rules, standards, and regulations (here- the local level can have an effect on social cooperation after referred to as transnational rules). These rules can that will persist beyond completion of the program.46 help induce credible commitment to domestic reform In other cases, aid can undermine the relationship through trade and regional integration incentives. between the state and its citizens by making the They also can help achieve international cooperation state less responsive to their demands. For example, on global goods by changing incentives—such as pre- the more that states rely on revenues from the inter- venting races to the bottom when countries compete to national community, the fewer incentives they have attract investment and gain access to markets, leading to build the public institutions needed to mobilize to reductions in corporate tax or environmental and domestic revenues through taxation. And the less 26 | WORLD DEVELOPMENT REPORT 2017 Figure O.10 Aid is a large share of GDP and government revenue in many developing countries a. Low-income countries b. Lower-middle-income countries c. Upper-middle-income countries 20 100 18 90 16 80 % of government revenue 14 70 12 60 % of GDP 10 50 8 40 6 30 4 20 2 10 0 0 I L ZW GO MD ETH A BE OD IN FA MB A MO WI DI F LE D LV B A Y GD BO KR MM WZ MA NM RM GH MR ND C GE AO EN MR MB MD SO EN GZ TLS S ME RA KM I R R OM CO ZE US A AB B MK AM UN BIH G R ER CR NP CA PE BL JO MY UZ SR EG IN TZ I RW LK W NI N R S Z B L S N G F A K U I B B L M Y G R M O K A S V K T L R A V C B G Z G B X T A H D T A C G L N N B M L S T R V O D M B D M E G G D M A N M TJK IRN A U Y IRQ ML HT R PH ZA NE LB GN AL PR LB PA CI KS TC SS EC UG NG DZ AF CO PN SD LB SY AG KH GT YE JA ODA (% of GDP, left axis) ODA (% of government revenue, right axis) Sources: WDR 2017 team. Official development assistance (ODA) data: Organisation for Economic Co-operation and Development; government revenue data: IMF, World Economic Outlook, various years. Note: The graphs show ODA from all donors to all recipients in low- and middle-income countries with a population of at least 1 million. Figures for ODA (percent of GDP) are capped at 20 percent of GDP for the sake of visualization. The underlying uncapped data are Afghanistan, 24.1 percent; Central African Republic, 35.4 percent; Liberia, 37.0 percent; and Malawi, 21.8 percent. Figures for ODA (percent of government revenue) are capped at 100 percent for the sake of visualization. The underlying uncapped data are Afghanistan, 105.2 percent; Central African Republic, 260.6 percent; Liberia, 126.0 percent; and Sierra Leone, 143.2 percent. that states rely on their domestic tax base, the more an equilibrium that sustains the outcome the inter- state-citizen accountability erodes.47 vention attempted to change. These situations can Currently, aid represents more than 10 percent arise from interventions that do not take into account of GDP for half of all low-income countries and over the existing power balance. 30 percent of total revenues for 26 countries (figure Such development assistance challenges are O.10). The empirical evidence linking aid flows to not unavoidable or intractable. Like market failures decreased taxation is mixed (box O.12). Aid has thus and government failures, they can be addressed. been likened to a natural resource curse: a windfall Development assistance can be more effective when of unearned income that may enable inefficient donor engagement supports the emergence of more government spending, unconstrained by the kind of accountable and equitable governing arrangements state-citizen social contract that engages citizens in that become embedded in the domestic context—for policy discussions and makes the policy arena more example, by making relevant information available contestable.48 to citizens to strengthen their capacity to hold polit- For a long time, the need for intervention was jus- ical leaders accountable.50 When and how these pos- tified on the basis of classic market failures in which itive effects emerge, however, is difficult to predict governments intervene to produce socially desirable in advance because of the web of intersecting and outcomes that cannot be achieved by relying solely on evolving factors that determine how donor initiatives markets. Later, the literature revealed the existence of engage with local political dynamics. government failures in which government interven- The development community has recently been tions also failed because of lack of capacity, informa- engaging in efforts to “think politically” about aid. tional asymmetries, or distorted incentives.49 One of However, many of the operational imperatives the issues that this Report analyzes is the difficulties that arise from greater attention to development faced by the international community when trying assistance challenges—such as the need to increase to influence change in the presence of government flexibility of implementation, tolerate greater risk failures. Indeed, many times well-intentioned inter- and ambiguity, devolve power from aid providers to ventions become ineffective because they reinforce aid partners, and avoid simplistic linear schemes for OVERVIEW | 27 Box O.12 Domestic resource mobilization, foreign aid, and accountability There is a growing consensus that increasing domestic and tax evasion, consumption taxes are the most likely resource mobilization can enhance accountability, partic- to be effective, but also the most likely to be regressive. ularly if such efforts are explicitly linked to the provision Frequently in these cases, domestic resources are mobi- of public goods. If ruling elites need to depend on broad- lized in ways that may increase poverty—for example, based taxation, they are more likely to include citizens by increasing consumption taxes—without enacting and other elites in policy bargains. But does foreign aid specific offsetting mechanisms of compensation for the undermine domestic resource mobilization—and thus poor. Indeed, based on household survey data for 2010, accountability to citizens? fiscal policy itself increased the US$2.50 per day poverty Studies testing that hypothesis initially showed a neg- headcount ratio in 9 out of 25 countries analyzed.e In other ative correlation between the two.a More recently, these words, more poor people were made poorer through the studies have been refuted by the adoption of different data taxing and spending activities of governments than bene- setsb or different econometric techniques.c Although the fited from those activities. behavioral effect of aid flows undermining accountability Notwithstanding the importance of mobilizing domes- has been tested and isolated in experimental settings,d tic resources to expand responsiveness and accountability in reality the relationship is more complex and seems to citizens, many countries may be too poor to have the to depend on three factors: the type of aid (for example, capacity to collect enough revenues to address important whether grant or debt, budget support, or project-specific); development goals; they may harm the poor in the process the contemporaneous effects of conditional policies asso- of collecting domestic resources; or they may be politically ciated with the aid; and, more important, the governance unable to pass reforms to increase revenues. In countries setting specific to each country. Moreover, even if aid were in which poverty rates are higher than 65 percent (mainly to reduce incentives to mobilize domestic resources, the in Sub-Saharan Africa), for example, there is no feasible removal of aid may result in societally suboptimal taxation redistribution scheme that allows eradicating poverty only policies to raise revenues, leaving the poor worse off. by transferring resources domestically from the rich to the The effects of domestic resource mobilization on poor.f Moreover, in many developing countries poor individ- accountability depend on how domestic funds are mobi- uals are often impoverished by the fiscal system when both lized. Many available taxes may not have the capacity to government taxation and spending are taken into account.g enhance accountability, such as resource taxes, or may Finally, political power might be concentrated in the hands have strong distortionary effects, such as trade taxes. of a few rich individuals whose interests collide with those International corporate tax competition and trade liberal- of the poor. In such instances, where there is need to mobi- ization have also diminished states’ capacity for domestic lize a larger set of individuals to counterweigh the political resource mobilization (a race to the bottom). In settings influence in the hands of the few, domestic resource mobi- with low savings rates or the potential for capital flight lization might be very difficult to achieve.h Source: WDR 2017 team. a. Most notably, Gupta and others (2004). b. Morrissey and Torrance (2015). c. For example, Clist and Morrissey (2011) invalidate the contemporaneous negative correlation found in Gupta and others (2004) by introducing a lagged effect of aid and taxation. They conclude that the relationship is negligible. d. Paler (2013); Martin (2014). e. Lustig (2016). f. Ravallion (2010); Ceriani, Bolch, and López-Calva (2016). g. Lustig (2016). h. Ceriani, Bolch, and López-Calva (2016). measuring results—run up against long-established beyond technocratic approaches and learning how bureaucratic structures, practices, and habits. The to take into account the openings and constraints way forward may require a more adaptive or agile presented by shifting politics are key to the ability of approach in which strategies are tried out locally foreign aid to induce and sustain governance reforms and then adjusted based on early evidence. Moving that promote development. 28 | WORLD DEVELOPMENT REPORT 2017 Rethinking governance for action problems that stand in the way of pursuing further development. development More than 70 years after the Bretton Woods Confer- Three guiding principles ence that launched the World Bank and the Interna- The WDR 2017 proposes three simple principles to tional Monetary Fund, the international community guide those thinking about reform. First, it is import- continues to recognize that promoting sustained ant to think not only about what form institutions development requires taking seriously the underly- should have, but also about the functions that insti- ing determinants related to governance. Future prog- tutions must perform—that is, think not only about ress will require a new framework and new analytical the form of institutions but also about their functions. tools to harness the growing evidence on what has Second, it is important to think that, although capacity worked and what has not. building matters, how to use capacity and where to Policies do not occur in a vacuum. Rather, they invest in capacity depend on the relative bargaining take place in complex political and social settings in powers of actors—that is, think not only about capacity which individuals and groups with unequal bargain- building but also about power asymmetries. Third, it is ing power interact within changing rules as they important to think that in order to achieve the rule of pursue conflicting interests. This Report shows that law, countries must first strengthen the different roles taking into account how the distribution of power in of law to enhance contestability, change incentives, the policy arena enables or constrains institutions to and reshape preferences—that is, think not only about effectively promote commitment, coordination, and the rule of law but also about the role of law (table O.2). cooperation is critical to ensuring progress toward When one is facing a specific policy challenge, achieving security, growth, and equity. what do these principles mean in practical terms? Past World Development Reports have shed light on This Report identifies four key insights. Box O.13 how to solve some of the most challenging problems offers a simple diagnostic road map for bringing in key areas of development, such as jobs, gender these insights more concretely into development pro- equality, and risk management. This WDR is part of gramming in an effort to enhance effectiveness. a trilogy of recent reports, alongside Mind, Society, and The first challenge is to identify the underlying Behavior (2015) and Digital Dividends (2016), that exam- functional problem. Diagnostic approaches should ine how policy makers can make fuller use of behav- home in on the specific commitment, coordination, ioral, technological, and institutional instruments to and cooperation problems that stand in the way of improve state effectiveness for development. This achieving socially desirable outcomes, and on the Report starts by acknowledging that policies such as ways that power asymmetries in the policy arena con- those to strengthen labor markets, overcome gender strain these functions. In addition to constraints that barriers, or prepare countries against shocks are often are typically considered—such as physical and admin- difficult to introduce and implement because certain istrative capacity—policies may still be ineffective if groups in society who gain from the status quo may groups with enough bargaining power have no incen- be powerful enough to resist the reforms needed to tives to pursue adoption or implementation. Taking break the political equilibrium. Successful reforms into account power asymmetries means focusing on thus are not just about “best practice.” They require implementable (if not necessarily ideal) policies that adopting and adjusting institutional forms in ways can generate incremental progress toward inclusive that solve the specific commitment and collective growth and equitable development. Table O.2 Three principles for rethinking governance for development Traditional approach Principles for rethinking governance for development Invest in designing the right form of institutions. Think not only about the form of institutions, but also about their functions. Build the capacity of institutions to implement policies. Think not only about capacity building, but also about power asymmetries. Focus on strengthening the rule of law to ensure that Think not only about the rule of law, but also about the those policies and rules are applied impersonally. role of law. Source: WDR 2017 team. OVERVIEW | 29 Box O.13 What does the WDR 2017 framework mean for action? The policy effectiveness cycle This Report argues that policy effectiveness cannot be Step 1. Diagnose. Identify the underlying functional prob- understood only from a technical perspective; it is also lem (commitment, coordination, cooperation). necessary to consider the process through which actors Step 2. Assess. Identify the nature of power asymmetries bargain about the design and implementation of policies in the policy arena (exclusion, capture, clientelism). within a specific institutional setting. The consistency and continuity of policies over time (commitment), the align- Step 3. Target. Identify the relevant entry point(s) for ment of beliefs and preferences (coordination), as well reform (contestability, incentives, preferences and beliefs). as the voluntary compliance and absence of free-riding Step 4. Design. Identify the best mechanism for interven- (cooperation) are key institutional functions that influence tion (R1, R2, R3). how effective policies will be. But what does that mean for specific policy actions? Step 5. Implement. Identify key stakeholders needed to Figure BO.13.1 presents a way to think about specific poli- build a coalition for implementation (elites, citizens, inter- cies in a way that includes the elements that can increase the national actors). likelihood of effectiveness. This “policy effectiveness cycle” Step 6. Evaluate and adapt. begins by clearly defining the objective to be achieved and then following a series of well-specified steps: Figure BO.13.1 The policy effectiveness cycle 1. Diagnose 2. Assess 6. Evaluate and adapt Exclusion Capture Clientelism Development objective 5. Implement 3. Target International actors Preferences and beliefs 4. Design First-level rules (R1) Mid-level rules (R2) Higher-level rules (R3) Source: WDR 2017 team. Source: WDR 2017 team. 30 | WORLD DEVELOPMENT REPORT 2017 The second challenge is to identity the different helpful to consider three “levels” of rules.51 First-level levers of change that can help reshape the policy rules, or R1, refer to specific policies (for example, the arena to expand the set of policies that can be imple- percentage of budget allocated to health care). Mid- mented. Instead of taking the existing policy-making level rules, R2, refer to organizational forms—such as environment as a given, reformers would analyze the independency of the judiciary and central bank. how to lift the existing constraints to expand the Higher-level rules, R3, relate to “rules about chang- space of what is politically feasible. Different levers ing rules”—namely, constitutional and electoral law. of change can contribute to this shift. In looking The “form” of policies is certainly not to be ruled out, at the contestability of the policy arena, reformers but it is also crucial to think about their “function.” would take into account that incentives, as well as For example, beyond what a fiscal rule looks like, is the preferences and beliefs of actors, are instrumental commitment to the rule credible? Some functional to understanding what agreements are feasible. challenges may require a combination of reforms The third challenge is to identify the relevant at all three rule levels. Finally, when designing and interventions or changes in rules that best solve evaluating policies, anticipating opposition and con- the specific functional challenges. When thinking sidering potential unintended consequences must about potential reforms of policies, actors will find it be part of the process (box O.14). Particularly when Box O.14 Lessons for reformers from the “rules game”: How is legitimacy ultimately built? This Report encourages reformers to pay attention to acceptance of the rules and compliance with them. The cit- the details of the rules game so they can avoid two basic izens of a nation may be willing to delegate enough power mistakes. to their government to make it a dominant player in the First, an act of reform undertaken by one player in a rules game for the nation, but only as long as they feel that rules game can backfire if the player does not consider the the government’s use of that power is legitimate. actions the reform will trigger in other players. For exam- The functional approach in this Report allows a clearer ple, an outsider might advise the legislature on the benefits understanding of the concept of legitimacy. The legiti- of contract law. In response, the legislature might pass a macy of a government can be derived from three sources. law that tells the courts to enforce contracts; the executive Repeated commitment builds legitimacy in terms of head of government might promise to promote judges who outcomes.a When a government repeatedly delivers on follow the executive’s instructions to favor some people its commitments, it legitimizes itself, such as by reliably in court cases; wealthy elites might pay the executive to providing public services. Legitimacy can also come from receive special treatment in the courts; the executive might a perception of fairness in the way in which policies and use the money from the elites to finance an upcoming polit- rules are designed and implemented—that is, process ical campaign; and, as a result, citizens might not trust the legitimacy. Finally, legitimacy can also be relational, where courts to enforce contract law. Ultimately, this reform did sharing a set of values and norms encourages individuals not produce the anticipated benefits, and it may have made to recognize authority. Outcome, process, and relational matters even worse. The courts, which previously offered legitimacy form the three types of legitimacy identified in equal protection under criminal law, may no longer be able this Report. Legitimacy matters for cooperation and coordi- to punish wealthy offenders who commit crimes. nation because it implies voluntary compliance with an act Second, even if it produces better payoffs today, a of authority. Even if a government delivers on its commit- reform could also backfire if it generates worse outcomes ments and is able to coerce people into complying, there for the rules game that will be played in the future. This may be “legitimacy deficits” if the process is perceived can be particularly important in terms of what political as unfair and people may not be willing to cooperate and scientists call legitimacy, whose manifestation is voluntary would rather opt out of the social contract. Source: WDR 2017 team. a. Outcome legitimacy is related to the notion of trust, which is defined in this Report as the probability that an actor assigns to other actors of delivering on their commitment, conditional on their past behavior. OVERVIEW | 31 thinking about evaluation, it must be understood that may nevertheless struggle to adapt to growing citi- trajectories may not be linear and thus assessment zen demands. Regimes may lose legitimacy when requires complex methods. Anticipating the chang- decision-making processes are insufficiently inclu- ing balance of power around the reform process and sive, even when other development outcomes appear adopting an adaptive approach, such as building coa- successful. For example, even effective growth pol- litions in anticipation of the reform, can reduce the icies may alienate the population if public voice is risk of reversal. Driving sustainable change requires lacking in the policy process. Overcoming delegitimi- considering the potential opportunities presented by zation necessitates greater inclusion in the political elite interests, the opportunities for citizen collective process. action, and the role of international influences. A focus on creating conditions, like those dis- cussed in this Report, that prepare societies to adapt Creating conditions for adaptability as their needs and demands change over time is crit- When can meaningful changes be made in the nature ical to ensuring inclusive and sustainable develop- of governance? The development path is bumpy: ment progress. Traditional development orthodoxy shocks (such as terms of trade shocks and natural has so far emphasized the centrality of three assump- disasters) and gradual developments (such as urban- tions in improving governance for development: the ization or a growing middle class) alter the bargaining form of policies, the capacity to implement them, influence and preferences of actors, often benefiting and the impersonal application of the rules. These one at the expense of another. In the face of these assumptions have shaped the conventional solutions changes, governance arrangements that cannot of the international community to the problem of accommodate new actors or demands may collapse. policy failure in developing countries: first, invest For example, violence traps are unstable bargains in in “good” laws and policies; second, build organiza- which elites are highly polarized and the costs of los- tional and technical capacity to implement them; ing control are great—when the stakes are sufficiently and third, strengthen the “rule of law.” This Report high—leading to violent conflict. Middle-income traps moves beyond these approaches and emphasizes are situations in which interest groups, currently that, although it is important to look at forms that benefiting by extracting rents, have incentives to have worked in other contexts, gauge what capacity is oppose new economic conditions and thus prevent needed, and stress the importance of the rule of law, efficiency-oriented reforms from happening, leading these aspects are not enough. to an unproductive equilibrium. And inequality traps are a vicious cycle in which a high concentration of wealth translates into a disproportionate ability of Navigating this Report those at the top of the distribution to influence the policy process in their favor and weakens the percep- Part I. Rethinking governance for tion of fairness of those at the bottom of the distribu- development: A conceptual framework tion, who decide to opt out and not to contest in the Part I of this Report presents a conceptual framework policy arena.52 for rethinking the role of governance and law in devel- Adaptability to Adaptability to changes in the relative bargaining opment. Chapter 1 motivates by unpacking critical changes in the power, incentives, and preferences of different actors questions facing the development community today: relative bargaining matters. Although the conditions that determine in particular, what are the underlying determinants power, incentives, whether countries will adapt in ways that allow for of policy effectiveness? Chapter 2 proposes a new and preferences more security, growth, and equity are contingent on analytical approach to answering these questions, of different actors history and are highly specific to context, there are using a game theoretic approach to argue that the matters. a few circumstances that make such adaptability functional role institutions play in ensuring credible more likely. In particular, when elites have reasons commitment, inducing coordination, and enhancing to find common ground, bargains can expand and cooperation is fundamental to the effectiveness of adapt. When national institutions produce more policies to promote development. The framework effective leaders, countries are more capable of presented in the chapter explores how the unequal long-term development. When countries have more distribution of power in society (power asymmetry) balanced, diversified, and organized business inter- is a key factor underpinning the effectiveness of ests, they may be more capable of reforming insti- these functions. Chapter 3 approaches the conceptual tutions to adapt to changing economic conditions. framework from the perspective of law, explaining Bargains that can adapt to evolving elite interests the different roles that law plays in shaping and 32 | WORLD DEVELOPMENT REPORT 2017 reshaping the policy arena in which actors bargain 3. Hoff (2000) reviews models of coordination failures over policy design and implementation. in a wide range of contexts, including social norms and corruption. Cooper (1999) reviews macro­ Part II. Governance for development economic models of coordination failures, and Rodríguez-Clare (2005) reviews microeconomic Part II of this Report applies the framework presented models of coordination failures. in part I to better understand three core development 4. Barr (2001); Lindert (2004). outcomes: security (chapter 4), growth (chapter 5), and 5. Including at the subnational level. Preventing crime, equity (chapter 6). Commitment, coordination, and for example, can be explained from the functional cooperation fundamentally underlie the effectiveness perspective as part of what local governments pro- of policies to promote these outcomes, but the unequal vide for the public, as shown in part II of this Report. distribution of power can constrain policy effective- 6. What distinguishes elites from citizens in this ness. Moreover, characteristics of development itself— Report is their ability to directly influence the design such as the composition of growth or the level of and implementation of a certain policy. In this way, elites are defined in a positive (as opposed to a nor- inequality—influence the relative bargaining power of mative) sense. See box O.9 for further detail. certain actors. Enhancing contestability in the policy 7. A similar approach has been developed in a pioneer- arena, effectively changing incentives, and reshaping ing work, The Politics of Policies, in the context of Latin the preferences and beliefs of different actors—for America (IDB 2005). example, through leadership—can make development 8. However, lack of access to state power is not the only policies more effective in achieving their objectives. determinant of violence; the capacity to mobilize against governments also matters (Cederman, Wim- Part III. Drivers of change mer, and Min 2010), as does the opportunity to mobi- Part III of this Report explores the dynamics of how lize. On the former, see Fearon and Laitin (2000). 9. Wimmer, Cederman, and Min (2009). change occurs from the perspective of elite bargains 10. Platteau (2000a). (chapter 7), citizen engagement (chapter 8), and 11. Suharto was the second president of Indonesia. He international influences (chapter 9). As discussed in held the office for 31 years, from the ousting of the part II, to improve policy effectiveness and ultimately first president, Sukarno, in 1967 until his resignation expand the set of implementable policies, it is neces- in 1998. sary to reshape the policy arena where actors bargain. 12. Khwaja and Mian (2005). This can be accomplished by enhancing contest- 13. Stokes (2009). ability—that is, by enabling new actors to enter the 14. Khemani and others (2016). bargaining space, by changing the incentives of the 15. Bold and others (2012). actors involved, or by reshaping their preferences and 16. Ferreira and others (2013). 17. World Bank (2015). beliefs. Although the dynamics of governance can be 18. Collective action problems include those solved very persistent and are highly endogenous, change is through coordination (the coordinated actions possible over time. In the end, change is manifested among actors based on a shared expectation about by bringing about new formal rules that reshape what others will do) and cooperation (the coopera- de jure power. tive behavior among actors, whereby opportunistic behavior—free-riding—is limited). Throughout this Spotlights Report, the term collective action problems refers to This Report contains 13 spotlights, which apply the these two different types of problems. conceptual framework described in the Report to key 19. Acemoglu and Robinson (2012). 20. Social norms are the beliefs shared by a group or policy areas of interest, ranging from service delivery community. In this way, norms can be understood as to corruption and illicit financial flows. “commonly shared beliefs.” 21. See Aaberge, Langørgen, and Lindgren (2010) and Notes Lustig (2015). 22. See Besley and Persson (2014). 1. The chapters of this Report focus on the specific 23. The evidence for how some of these mechanisms question of policy effectiveness for achieving these lead to better outcomes, however, is mixed, as fur- outcomes. The framework, however, can be used to ther discussed in chapter 8. address broader questions about social dynamics. 24. Hart (1961). 2. See Rosenstein-Rodan (1943). Murphy, Shleifer, and 25. Basu (2015); McAdams (2015). Vishny (1989) model a more recent version of this 26. Roland and Verdier (1999). idea. 27. Hellman (1998). OVERVIEW | 33 28. Jackson, Klich, and Poznanska (2005). Barr, Nicholas. 2001. The Welfare State as Piggy Bank: 29. Lindert (2004). Information, Risk, Uncertainty, and the Role of the State. 30. Joshi and Ayee (2009). Oxford, U.K.: Oxford University Press. 31. Björkman and Svensson (2009). Barrett, Stanley R., Sean Stokholm, and Jeanette Burke. 32. Ferreira and others (2013). 2001. “The Idea of Power and the Power of Ideas: A 33. Preston (2003). Review Essay.” American Anthropologist 103 (2): 468–80. 34. Aidt and Jensen (2014). Basu, Kaushik. 2000. Prelude to Political Economy: A Study of 35. Kim (2007). the Social and Political Foundations of Economics. Oxford, 36. Rawls (1971) proposes that citizens in an original U.K.: Oxford University Press. position behind a Kantian “veil of ignorance,” igno- ————. 2015. “The Republic of Beliefs: A New Approach rant of their lot in life—such as class, race, social sta- to ‘Law and Economics.’ ” Policy Research Working tus, distribution of assets, gender—would opt for a Paper 7259, World Bank, Washington, DC. society that maximizes the level of welfare achieved Beegle, Kathleen, Luc Christiaensen, Andrew Dabalen, by the worst-off person in society (Maximin princi- and Isis Gaddis. 2016. Poverty in a Rising Africa. Wash- ple) as the accepted social contract. ington, DC: World Bank. 37. Berliner and Erlich (2015). Berliner, Daniel, and Aaron Erlich. 2015. “Competing 38. Khemani and others (2016). for Transparency: Political Competition and Institu- 39. Burgess and others (2015). tional Reform in Mexican States.” American Political 40. Keefer (2011, 2013); Cruz and Keefer (2013). Science Review 109 (1): 110–28. 41. Khemani and others (2016). Besley, Timothy, and Torsten Persson. 2014. Pillars of Pros- 42. Devarajan and Kanbur (2012); Mansuri and Rao perity: The Political Economics of Development Clusters. (2013). Princeton, NJ: Princeton University Press. 43. World Bank (2016b). Bishop, S., and A. Hoeffler. 2014. “Free and Fair Elec- 44. WDR 2017 team, based on Spada and others (2015). tions—A New Database.” CSAE Working Paper 45. Foreign aid refers to official development assis- WPS/2014-14, Centre for the Study of African Econo- tance as defined by the Organisation for Economic mies, Oxford, U.K. Co-operation and Development (OECD). Björkman, Martina, and Jakob Svensson. 2009. “Power to 46. Fearon, Humphreys, and Weinstein (2009). the People: Evidence from a Randomized Field Exper- 47. Moore (2004). iment on Community-Based Monitoring in Uganda.” 48. 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Nobel Laure- ate Angus Deaton labels this achievement “the great Understanding development escape”: “the story of mankind’s escaping from depri- policy: Proximate factors vation and early death, of how people have managed to make their lives better, and led the way for others to and underlying determinants follow” (Deaton 2013, ix). Explanations of such vast disparities in development Such a positive performance hides, however, great performance typically focus on proximate factors—for heterogeneity within and among countries and regions example, the provision of health services, connectiv- in important aspects of the quality of life. Extreme ity infrastructure, or access to finance. “The intensive poverty is still a reality for about 1 billion people, or study of the problem of economic development,” 14 percent of the total global population. Inequalities Hirschman (1958, 1) noted almost six decades ago, are striking—and in many cases increasing. This per- “has had one discouraging result: it has produced sistent disparity in social and economic achievement an ever-lengthening list of factors and conditions, of has long concerned policy makers, academics, and obstacles and prerequisites.” This Report argues that, Although development practitioners, particularly in today’s although proximate factors such as access to finance proximate factors world, where the links among countries are stronger or the provision of health services are indeed crucial such as access and technology diffusion can be fast and cheap. for development, the adoption and implementation to finance or Consider, for example, the under-5 child mor- of successful pro-development policies often depend the provision of tality rate. This indicator is regarded as one of the on deeper underlying determinants. Ultimately, con- health services most significant measures of how a society is doing fronting the challenges faced by today’s developing are indeed crucial in addressing the needs of its population because it countries—to name a few, poor service delivery, vio- for development, reflects the quality and incidence of service provi- lence, slowing growth, corruption, and the sustain- the adoption and sion (Buckley 2003; Andrews, Hay, and Myers 2010). able management of natural resources—requires a implementation Despite substantial improvements over the last rethinking of the process by which state and nonstate of successful 45 years, developing countries still lag many years actors interact to design and implement policies— pro-development behind the rate in developed countries for this indi- that is, what this Report calls governance (box 1.1). policies often cator. For example, the child mortality rate in Sierra An understanding of governance as an underlying depend on Leone matches Portugal’s rate 58 years ago (figure 1.1, determinant of development is useful in examining deeper underlying panel a). Moreover, within countries individuals at cases of the successful and unsuccessful adoption determinants. the bottom of the income distribution systematically and implementation of policies in pursuit of secu- lag behind those at the top. For example, the poorest rity, growth, and equity, and helps explain apparent 40 | World Development Report 2017 Figure 1.1 Despite declining under-5 child mortality rates, inequality among and within countries is still sizable a. Child mortality rates in developing countries b. Child mortality rates of the poorest and the and regions compared with the trajectory of richest 20 percent in India compared with Portugal since 1955 the national average since 1950 150 Under-5 mortality rate (per 1,000 live births) Under-5 mortality rate (per 1,000 live births) 320 ne Leo rra Sie 280 li Ma p. Re m. De 240 o, ng 100 Co nis tan ha Afg itania ur n 200 Ma kista Pa go To 160 Portugal 50 ia Ind wan a 120 ds Poorest 20 percent, 2005–06 Bo ts lan n ll Is bb ea ha rs ua ari Ma q rag go e C Ira a N ica Toba d th n ud a 80 eri nd a a arb AlgNiue ad a eric s dB nid Am evi a an land Tri atin s N u a L isia do and ntig Ze Tunarba Kitts ait A New 40 B St. uw ia in K Latv hra Richest 20 percent, 2005–06 Ba 0 0 1955 1965 1975 1985 1995 2005 2015 1950 1960 1970 1980 1990 2000 2010 2020 Source: WDR 2017 team, using data from UN Inter-agency Group for Child Sources: WDR 2017 team, using data from UN Inter-agency Group for Child Mortality Estimation (IGME). Mortality Estimation (IGME) and on India’s Demographic and Health Survey (DHS) for data by quintile. Note: Data for all comparator countries are from the most recent year available (circa 2015). Box 1.1 What is governance? Governance is the process through which state and non- and rules) that enforce and implement policies. Also state actors interact to design and implement policies depending on the context, state actors will play a more or within a given set of formal and informal rules that shape less important role with respect to nonstate actors such and are shaped by power.a This Report defines power as the as civil society organizations and business lobbies. In ability of groups and individuals to make others act in the addition, governance takes place at different levels, from interest of those groups and individuals and to bring about international bodies, to national state institutions, to local specific outcomes (Dahl 1957; Lukes 2005). government agencies, to community and business associa- Depending on the context, actors may establish a gov- tions. These dimensions often overlap, creating a complex ernment as a set of formal state institutions (organizations network of actors and interests. Source: WDR 2017 team. a. This general definition is consistent with the World Bank’s corporate definition, which emphasizes formal institutions and the role of state actors. contradictions in the development trajectories of over the legitimate use of force. Warring factions, countries around the world. Some recent cases have many with their own regional sources of power, have attracted global attention. been unable to reach a credible deal to determine the State building in Somalia and Somaliland. Somalia, makeup and responsibilities of the central state. By one of the world’s most fragile countries, has been contrast, in Somalia’s autonomous region of Somali­ wracked by violence for more than two decades. Insur- land, an area with similar tribal and clan tensions, 20 gent attacks and regional conflicts have prevented years of stability and economic development have the emergence of a centralized state with a monopoly followed a 1993 clan conference that brought together Governance for development: The challenges | 41 leaders from both the modern and traditional sectors, Slums and exclusion in India’s cities. Urban devel- successfully institutionalizing these clans and elders opment that stems from coordinated planning and into formal governing bodies. investment by coalitions of developers, bureaucrats, Confronting corruption and the resource curse in Nige- citizens, and politicians can lead to cities that are ria. In 2010, just a year after experiencing a decade- centers of growth, innovation, and productivity. long bounty of windfall revenues from high oil prices, Planners can help ensure that infrastructure meets Nigeria was requesting budget support from its the demands of investors who seek to maximize development partners. From a long-term perspective, land rents, businesses that need connectivity to their it is unclear how much of Nigeria’s oil wealth has been consumers, and citizens who want access to services saved to invest in the future, although a Sovereign and jobs. But many cities fail to deliver on these prom- Wealth Fund was established in 2011 to address these ises. In India, massive urban slums—about 49,000 concerns. According to a former governor of the cen- at the latest count, with tens of millions of inhabi- tral bank, the country has lost billions of dollars to cor- tants—represent failures to align public investments ruption by the National Petroleum Company. Indeed, and zoning with the needs of a diverse set of urban according to 2015 data from the Afro­barometer survey, constituents. Underinvestment in housing and inac- 78 percent of Nigerians feel that the government is cessible or unaffordable transportation options have “doing badly in fighting corruption.” Ultimately, the driven workers into informal settlements, often in institutional context was unable to safeguard natural peripheral areas. Although many developers and poli- resource revenues in order to reduce fiscal volatility ticians have exploited the system to generate rents for and promote a macroeconomic environment condu- themselves, this uncoordinated urban development cive to long-term investment. Several countries have has prevented cities from achieving their growth demonstrated that the “natural resource curse”— potential, leading to large slums where most citizens the paradox that countries with abundant natural are deprived of basic services. resources face slower growth and worse development Demanding better services in Brazil. In 2013 the world outcomes than countries without resources—can be watched when protests erupted in Brazil’s streets, avoided through effective economic and fiscal policies. with citizens complaining about the quality of public China’s growth performance and growth challenges. services—transport, education, and health—as the 2014 For four decades, China, while increasingly integrat- FIFA World Cup soccer tournament approached. Brazil ing its economy with the global economy, grew at had gone through 12 years of inclusive and sustained double-digit rates and lifted more than 700 million growth, which had lifted more than 30 million people people out of poverty. This successful track record out of poverty and strengthened the middle class. of economic growth is well known. Yet, according But these same middle classes that contributed with to many frequently used indicators, China’s institu- their taxes to the provision of public services were tional environment during this period appears not now demanding better quality and coverage, includ- to have changed. Does this imply that institutions do ing “FIFA standards” for their schools. Why did this not matter for growth? No. Rather, a deeper under- change come about? Brazil’s social contract has histor- standing of China’s development shows what these ically been weak and fragmented. The poor received indicators miss: the adaptive policy decisions and low-quality public services, while the upper-middle state capacity that enabled economic success were classes relied on private services and thus were less facilitated by profound changes to mechanisms of willing to contribute to the fiscal system. The creation accountability and collective leadership. China’s of an expanded middle class and the reduction of experience highlights the need to pay more attention poverty paradoxically heightened the perceptions of to how institutions function and less to the specific unfairness as the new middle class expected more than form they take. Meanwhile, today China faces a low-quality public services for its contributions. slowdown in growth. Maintaining rapid growth and “Brexit” and the growing discontent with economic avoiding a “middle-income trap” require the polit- integration. In June 2016 voters in the United King- ical will to switch to a growth model based on firm dom elected to leave the European Union (EU). The entry, competition, and innovation. In many middle- economic consequences for the country in particular income countries, this transformation has been and Europe in general have become a source of uncer- blocked by the actors that benefited from early growth tainty in policy circles. Dissatisfaction with economic and have mixed incentives to join coalitions for fur- and political integration is not, however, exclusive ther reforms. Going forward will involve addressing to this region. In countries throughout the world, these governance challenges. 42 | World Development Report 2017 populist parties have campaigned against trade and unemployment, but it voted to leave the EU. The com- integration—some of them enjoying unprecedented mon thread running through these contradictions electoral success in both developing and developed is governance, which helps explain why ineffective economies. These parties often prey on citizens’ policies persist, why effective policies are often not increasing feelings of disenfranchisement and exclu- adopted or implemented, and why unorthodox insti- sion from decision making, as well as on a growing tutional arrangements may nevertheless generate perception of free-riding by specific groups. Even in positive outcomes. In other words, governance drives Governance countries that have undoubtedly benefited from inte- policy effectiveness. This is the main theme of this drives policy gration, the unequal distribution of such benefits and Report. effectiveness. perceived ineffectiveness of “voice” have led many citizens to question the status quo, which could have consequences for social cohesion and stability. Development objectives . . . As these examples illustrate, contradictions and constraints occur in the real world. Somalia is a fragile state, while Somaliland seems to be doing well. Nigeria This Report assumes that all countries share a set has an abundance of resources, but it is still a lower- of development objectives: minimizing the threat of middle-income country. China grew rapidly, even violence (security), promoting prosperity (growth), though many of its fundamental institutions did and ensuring that prosperity is shared (equity), while not change. India has grown, but it cannot control also protecting the sustainability of the development the propagation of slums. Brazil has experienced process for future generations (box 1.2). But policies inclusive growth, but it is now facing increasing do not always translate into these development out- demands from the middle class. Great Britain had low comes in expected ways. Box 1.2 Governance for what? Achieving the goals of security, growth, and equity Many aspects of governance have intrinsic value, in par- prosperity is shared (equity). It also assumes that societies ticular the notion of freedom. In economic terms, freedom aspire to achieving these goals in environmentally sustain- can be seen as an opportunity set, and development can able ways. This Report, then, assesses governance in terms be seen as “the removal of various types of unfreedoms” of its capacity to deliver on these outcomes. (exclusion from opportunities), where these unfreedoms This approach is consistent with the transition from a reduce people’s capacity to exercise “their reasoned dialogue based on ideology to the dialogue based on ideals agency” (Sen 1999, xii). As essential as such an intrinsic that has transpired in the global development commu- value as freedom is, its instrumental value also matters nity over the last few decades. The establishment of the because of the “effectiveness of freedoms of particular Millennium Development Goals (MDGs) in 2000 and the kinds to promote freedoms of other kinds” (Sen 1999, recent ratification of the Sustainable Development Goals xii). These positive relationships are what economists call (SDGs) by member countries of the United Nations are complementarities. This Report acknowledges the intrinsic examples of the efforts to set common goals for social and value of various dimensions of governance, as well as the economic advancement. SDG 16 calls for promoting “peace, notion of development as a positive freedom, while also justice, and strong institutions,” and it is explicitly related recognizing their instrumental value to achieving equitable to governance. Nevertheless, as this Report will argue, development. beyond its intrinsic value, the SDG 16 goal also has import- As noted, the analysis in this Report starts from the nor- ant instrumental value because its attainment will aid in the mative standpoint that every society cares about freeing its attainment of all the other SDGs. Indeed, achievement of all members from the constant threat of violence (security), the development goals will require a solid understanding of promoting prosperity (growth), and ensuring that such governance to enable more effective policies. Source: WDR 2017 team. Governance for development: The challenges | 43 The first condition that societies want to establish 2015). At the end of 2014, 57.7 million persons world- in the pursuit of development is security—that is, peo- wide were displaced (UNHCR 2015). As these figures ple are safe from violence and the threat of violence. regrettably reflect, policies to achieve security are too It is a fundamental dimension of well-being and a often ineffective; indeed, certain policies and their first-order characteristic of development (UNDP 1994; poor implementation can cause or exacerbate the Sen 1999). societal problems contributing to violence. More secure Yet, in 2014 more than 1.4 billion people lived in More secure societies are also more prosperous societies are also countries affected by violence (OECD 2015, 31). Vio- (figure 1.2, panel a). Most of the relatively faster growth more prosperous. lence is a major problem in 37 countries (map 1.1).1 of higher-income countries between 1950 and 2011 The list includes not just fragile low-income states resulted not from experiencing faster growth but such as Afghanistan, Somalia, and South Sudan, but rather from shrinking less—and less often—from crises also rising economic giants such as Brazil, Mexico, or wars than lower-income countries (figure 1.2, panel and South Africa. More than 740,000 people die b). In the even longer run, annual data on 14 European each year as a result of armed violence. Remarkably, countries and the United States starting in 1820 show the majority of these deaths—about 490,000—occur a sharp reduction in the frequency of the shrinking in countries not affected by ongoing wars (Geneva of economic growth after 1950—the period following Declaration Secretariat 2015). Homicides claimed an World War II, which was the last mass-scale episode of average of 377,000 lives between 2007 and 2012.2 Civil organized violence in these countries (Wallis 2016). wars, rebellions, and other forms of political violence Security, however, is not sufficient to achieve caused 101,400 fatalities in 2014 alone (UCDP/PRIO growth. In their quest for prosperity, countries Map 1.1 Violence is a major problem in 37 countries Violent deaths per 100,000 residents per year, 2008–12 79.0 26.5 13.4 9.5 6.8 4.8 3.4 2.0 1.4 1.0 0.3 No data IBRD 42495 | SEPTEMBER 2016 Sources: WDR 2017 team, based on World Bank 2011; Pennsylvania State University, Correlates of War Project (COW), 2015; Geneva Declaration Secretariat 2015. Note: Violent deaths comprise organized violence and homicide deaths. 44 | World Development Report 2017 require sustained improvements in efficiency and Figure 1.2 Economic growth requires security investment to spur economic growth. Low-income a. Countries with fewer episodes of violence are more prosperous countries tend to grow as surplus labor is reallocated from agriculture to industry. Once the gains from 30,000 this early industrialization process are exhausted, however, new sources of growth are needed. Eco- nomic growth arises from accumulation—such as the GDP per capita (PPP) a. Countries with fewer episodes of violence are more prosperous 10,0000 mobilization of savings for industrial investment— and efficiency—how well inputs are being put to 30,000 use. And yet, many middle-income countries appear incapable of achieving gains in either accumulation 3,000 GDP per capita (PPP) or efficiency, becoming stuck instead in low-growth 10,0000 traps. Indeed, in contrast to the predictions of several growth theories, there is no evidence that low- and 1,000 middle-income countries tend to converge toward high-income ones (Jones 2015). 3,000 1960 1970 1980 1990 2000 2010 Several countries have managed, though, to escape Number of coups by year this middle-income trap. How? The evidence suggests High-income OECD countries Lower-middle-income countries that the continual reallocation of resources across High-income 1,000 non-OECD countries Low-income countries sectors and firms is a substantial source of efficiency Upper-middle-income countries (total factor productivity, or TFP). In a dynamic set- 1960 1970 1980 1990 2000 2010 Sources: WDR 2017 team, based on data from Archigos database (Goemans, Gleditsch, and Chiozza ting in which new companies enter the market while 2009) forb. High-income number of coups andcountries Number Penn World are better Table, of coups versionoff by 8.1 (Feenstra,year not because Inklaar,they grow2015), for and Timmer uncompetitive firms exit, inputs reallocate between level of GDP per capita. faster when they grow, but because they shrink less frequently High-income OECD countries Lower-middle-income countries firms, giving way to innovation, competition, and Note: The size of theand High-income at circles ona slower each non-OECD rateisthan time series low-income relative to the numbercountries of coups per country for Low-income countries each income group in a given year. GDP =countries gross domestic product; OECD = Organisation for Economic productivity. Countries that escape the low-growth Upper-middle-income countries Co-operation and Development; PPP = purchasing power parity. 100 6 trap also tend to have a diversified export base in which coordination between domestic companies 90 b. High-income countries are better off not because they grow 4 and governments contributes to shaping industrial 80 faster when they grow, but because they shrink less frequently of years (%) investment. Indeed, the literature and policy forums and at a slower rate than low-income countries Average rate (%)Average rate (%) 70 2 are filled with discussions about the right sets of pol- 60 100 6 icies that can enable efficient resource allocation and 50 90 0 Frequency investment upgrading. Nevertheless, as the persistent 40 80 4 stagnation of many middle-income countries around (%) 30 –2 the world reflects, very often these policies are not 70 Frequency of years 2 20 adopted or fail to achieve the expected results. 60 –4 In addition to seeking prosperity, societies care 10 50 0 about being equitable. In the United States, the Occupy 0 40 –6 <2 2–5 5–10 10–20 >20 movement’s slogan, “We are the 99%,” denounced the 30 –2 US$ (thousands) concentration of wealth among the top 1 percent. As 20 these and other movements around the world reflect, Frequency of shrinking years (left axis) –4 10 Frequency of growing years (left axis) concerns about increasing inequality are growing. The evidence indicates that these concerns are not 0 Average growing rate (right axis) –6 <2 5–10 2–5 shrinking Average 10–20 rate (right axis) >20 without foundation. Even though there are signs US$ (thousands) that global income inequality is falling, inequality within countries is on the rise, and the concentration Frequency of shrinking years (left axis) Frequency of growing years (left axis) of income at the top has increased over recent years Average growing rate (right axis) (World Bank 2015). In addition to normative concerns, Average shrinking rate (right axis) a more equitable distribution of income is associated with positive outcomes, including stability and eco- Sources: WDR 2017 team, based on Wallis 2016, with data from Penn World Table, version 8.1 (Feenstra, Inklaar, and Timmer 2015). nomic growth. So how do countries become more Note: The figure shows real GDP per capita (constant prices: chain series). Countries were first sorted equitable? into income categories based on their income in 2000, measured in 2005 U.S. dollars. Average annual Inequality and growth are structurally linked. growth rates are the simple arithmetic average for all the years and all the countries in the income category, without weighting. The sample underlying the figure comprises 141 countries, which have data Making growth more equitable involves policies that available from at least 1970 onward. GDP = gross domestic product. Governance for development: The challenges | 45 look at the bottom half of the income distribution. groups of people relying on agricultural activities— Consider the differences in the structure of eco- but rather heterogeneous public services—connec- nomic activity and public services in low- compared tivity is uneven, and the availability and quality of with high-income countries. Traveling across a low- services such as education and health vary dramati- income country, one frequently observes a pattern of cally from the rural to urban sectors (box 1.3). Quality homogeneous economic activity—for example, large and access are much lower for low-income people. Box 1.3 Discontinuities of the state Distribution of income is not the only factor associated with (O’Donnell 1993, 2003). When some regions or social groups the heterogeneous coverage and quality of the provision of are systematically neglected, geography becomes a prom- services and public goods. Circumstances such as gender, inent dimension that reflects inequities. State discontinuity ethnicity, and location are also associated with the differ- can be approximated by a measure of the unequal density ential capacity of groups to influence the distribution of of the presence of the state in the different geographical resources and the design of policies to address their needs. regions of a country. Location, in particular, is an important dimension because In Bolivia, a subnational analysis of the country’s nine of its correlation with other circumstances. As Kanbur and departments (departamentos) reveals that a few regions Venables (2005, 3) note, “Spatial inequality is a dimension are systematically affected by a low state presence, as mea- of overall inequality, but it has added significance when sured in terms of public services provided in that specific spatial and regional divisions align with political and ethnic area. Map B1.3.1 shows the level of the state presence in tensions to undermine social and political stability.” health, education, and basic services (panels a, b, and c, In this sense, the state can be said to be discontinuous respectively), for each region, ­and the composite density of in terms of its presence and therefore its ability to respond the state (panel d) for these indicators—that is, the average effectively to the needs of citizens in specific territories presence across dimensions. The departments of Santa Map B1.3.1 State presence in Bolivia in selected intervention domains and composite density, circa 2010 a. Health b. Education PA NDO PA N D O BENI BENI LA PA Z L A PA Z LA PAZ LA PAZ COCHA BA M BA SA NTA CRU Z CO CH A B A MB A S A N TA CRU Z OR UR O O RU RO POTOSÍ POTOSÍ CHUQUI SA CA CH U Q U ISA CA TA RI JA TA RIJ A IBRD 42499 | SEPTEMBER 2016 IBRD 42500 | SEPTEMBER 2016 (Box continues next page) 46 | World Development Report 2017 Box 1.3 Discontinuities of the state (continued) Map B1.3.1 State presence in Bolivia in selected intervention domains and composite density, circa 2010 (continued) c. Access to water d. Composite density PAN D O PA N D O BENI BENI LA PAZ L A PA Z LA PAZ LA PAZ C O CHA BA M BA SA NTA CR UZ CO CH A B A MB A S A N TA CRU Z ORURO O RU RO P O T OSÍ POTOSÍ CHUQUI SA CA CH U Q U IS A CA TA RI JA TA RIJ A IBRD 42501 | SEPTEMBER 2016 IBRD 42502 | SEPTEMBER 2016 Sources: WDR 2017 team elaboration based on data from Bolivia’s National Statistical Institute (census, 2012) for education and access to water and on data from the Demographic and Health Survey Program (2008) for health. Note: The indicators for assessing the level of state presence are under-5 child mortality (health), share of literate adults (education), and share of households with access to piped water inside their homes (access to water). The degree of shading indicates the degree of coverage of services. The darker purple shading (panels a–c) represents a higher presence for that dimension (a better outcome or a higher coverage). State density (panel d) is the composite indicator of the different layers of state presence or coverage. The darker orange shading represents higher state density. Cruz and Potosí are at the opposite ends of the density local resources (for example, with GDP per capita). Such spectrum: Santa Cruz has the highest state density, Potosí differences in regional development could be a result of the lowest. However, in Bolivia the overall discontinuity of the uneven responsiveness of the state, most likely over the state has decreased over time. Using a measure of the a long period of time, to different geographical areas and inequality of the density across regions, the analysis finds socioeconomic groups. In Bolivia, for example, the least that the presence of the state across regions in Bolivia has dense region (Potosí) is also the region with the highest become more homogeneous over time.a incidence of indigenous population, who historically have The level of state density in different regions is posi- been underrepresented in state institutions and in policy tively, although not perfectly, correlated with the level of making until the recent past.b Source: WDR 2017 team, based on Ceriani and López-Calva (2016).  DR 2017 team estimates, based on data from Bolivia’s National Statistical Institute for education (census, 1992 and 2012) and access to water (census, a. W 2001 and 2012) and on data from the National Survey on Demography and Health (1994) and Demographic and Health Survey (2008) for health. b. According to Bolivia’s latest census (2012), Castellano was not the main language spoken in Potosí by 54 percent of the population, 6 years and older, as opposed to, for example, 15 percent in Santa Cruz and 8 percent in Tarija. Governance for development: The challenges | 47 Indeed, a low commitment to providing quality pub- regardless of their circumstances. Even though power lic services is one of the main characteristics of the is distributed unequally in every society—an inev- most inequitable countries in the world. The opposite itable fact—promoting governance for the bottom half tends to be true in advanced countries, where one means promoting a process through which develop- finds a more diversified economic structure and a ment dividends can still be equitably distributed. rather homogeneous coverage and quality of public goods and services, independent of individuals’ cir- cumstances. The quest for development could thus Notes be summarized as the transition toward more diver- 1. This is the number of countries in the first quintile of sified economic opportunities and a more homoge- map 1.1, where the incidence of violence is measured neous response of public services to all individuals. by the number of deaths in armed conflict, in addition The provision of public goods and services as a to the number of homicides. way to level opportunities and to reduce poverty is 2. WDR 2017 team, based on the Global Burden of Armed Violence Report 2015: Every Body Counts (Geneva Declara- undisputed. These and other social policies allow tion Secretariat 2015). These figures are for intentional individuals to increase their stock of assets and the homicides. The number rises to 3,864,000 if unin- opportunity to use them, and they protect the most tentional homicides are included. The World Health vulnerable. Fiscal policies enable the public spending Organization (WHO) defines homicide as “injuries behind these social transfers through taxation and inflicted by another person with intent to injure or help reshape the distribution of resources. Yet, policies kill, by any means.” to achieve equity are often not adopted, or they fail. References Governance for the Andrews, Matthew, Roger Hay, and Jerrett Myers. 2010. bottom half “Governance Indicators Can Make Sense: Under- Five Mortality Rates Are an Example.” HKS Faculty Why do best-practice policies to achieve security, Research Working Paper Series, RWP10-015, John F. growth, and equity so often fail to produce the desired Kennedy School of Government, Harvard University, outcomes? Why are so many potentially transfor- Cambridge, MA. mative policies not adopted? And what makes some Buckley, C. 2003. “Children at Risk: Infant and Child unlikely policies succeed? As revealed in this Report, Health in Central Asia.” William Davidson Institute the answers to all of these questions have to do with Working Paper No. 523, University of Michigan, Ann how policies affect the interests of the actors who Arbor. have the power to block them, whether actors who Ceriani, L., and L. F. López-Calva. 2016. “State Disconti- would benefit from policies are able to influence nuity.” Background Note, WDR 2017, World Bank, Washington, DC. the decision-making process, and whether rules and Dahl, R. A. 1957. “The Concept of Power.” Behavioral Science norms sustain the existing equilibrium. In the follow- 2: 202–10. ing chapters, we propose a framework for thinking Deaton, A. 2013. The Great Escape: Health, Wealth, and the about these questions in pursuit of a larger objective: Origins of Inequality. Princeton, NJ: Princeton Univer- how policies for security, growth, and equity can be sity Press. made more effective by taking governance seriously. Feenstra, Robert C., Robert Inklaar, and Marcel P. Tim- The analysis in this Report calls for paying par- mer. 2015. “The Next Generation of the Penn World ticular attention to understanding the implications Table.” American Economic Review 105 (10): 3150–82. for those groups who tend to have less power to Version 8.1, http://www.rug.nl/ggdc/productivity/pwt For sustained influence the decision-making process because of /pwt-releases/pwt8.1. their economic or social circumstances. Groups that Geneva Declaration Secretariat. 2015. Global Burden of progress in Armed Violence 2015: Every Body Counts. Cambridge, development, are typically marginalized from the policy arena— U.K.: Cambridge University Press. governance such as those at the bottom of the income distribu- Goemans, Henk E., Kristian Skrede Gleditsch, and needs to be tion—should have the same access to opportunities Giacomo Chiozza. 2009. “Introducing Archigos: A responsive to all as all others. This is an essential pillar of progress in Dataset of Political Leaders.” Journal of Peace Research groups in society, development. 46 (2): 269–83. regardless of their For sustained progress in development, gover- Hirschman, Albert O. 1958. The Strategy of Economic Devel- circumstances. nance needs to be responsive to all groups in society, opment. New Haven, CT: Yale University Press. 48 | World Development Report 2017 Jones, Charles I. 2015. “The Facts of Economic Growth.” Pennsylvania State University. Various years. Correlates NBER Working Paper 21142. National Bureau of of War Project (COW). State College, PA, http://www Economic Research, Cambridge, MA. Forthcoming .correlatesofwar.org/. in John B. Taylor and Harald Uhlig, eds. Handbook of Sen, Amartya K. 1999. Development as Freedom. Oxford, Macroeconomics, Vol. 2. Amsterdam: Elsevier. U.K.: Oxford University Press. Kanbur, Ravi, and Anthony J. Venables. 2005. “Spatial UCDP/PRIO (Uppsala Conflict Data Program/Peace Inequality and Development.” In Spatial Inequality and Research Institute Oslo). 2015. Armed Conflict Development, edited by Ravi Kanbur and Anthony J. Dataset Version 4-2015 (1946–2014). Uppsala Univer- Venables, 3–11. Oxford, U.K.: Oxford University Press. sity, Sweden, http://www.pcr.uu.se/research/ucdp Lukes, Steven. 2005. Power: A Radical Review. London: /datasets/ucdp_prio_armed_conflict_dataset/. Palgrave Macmillan. UNDP (United Nations Development Programme). 1994. O’Donnell, Guillermo. 1993. “On the State, Democratiza- Human Development Report 1994: New Dimensions of tion and Some Conceptual Problems: A Latin Amer- Human Security. New York: UNDP. ican View with Glances at Some Postcommunist UNHCR (United Nations High Commission on Refu- Countries.” World Development 21 (8): 1355–69. gees). 2015. UNHCR Global Trends: Forced Displacement — —— —. 2003. “Democracia, Desarrollo Humano y Dere- in 2014: World at War. Geneva: UNHCR. chos Humanos.” In Democracia, Desarrollo Humano y Wallis, John. 2016. “Governance and Violence.” Back- Ciudadanía: Reflexiones sobre la Calidad de la Democracia ground paper, WDR 2017, World Bank, Washington, en América Latina, edited by G. O’Donnell, O. Iazzetta, DC. and J. Vargas Cullel, 25–148. Rosario, Santa Fe, World Bank. 2011. World Development Report 2011: Conflict, Argentina: Homo Sapiens. Security, and Development. Washington, DC: World Bank. OECD (Organisation for Economic Co-operation and ————. 2015.  Global Monitoring Report 2014/2015: Ending Development). 2015. States of Fragility 2015: Meeting Poverty and Sharing Prosperity. Washington, DC: World Post-2015 Ambitions. Paris: OECD Publishing. Bank. Governance for development: The challenges | 49 CHAPTER 2 Enhancing governance for development: Why policies fail Amka and the Three Golden Rules (2014) is a beautifully reserve fund (Chimeddorj 2015). Thus no matter how crafted film about a Mongolian child, Amka, whose well policy makers designed the future generations life turns into a nightmare after he finds a golden coin fund, unless the interests of the powerful groups in and hops onto a path of overspending, abandoning society were to change, the commitment to a policy of family duties and taking on unmanageable levels of fiscal prudence would continue to fail and the coun- indebtedness. Under pressure to repay his debts, he try would remain in debt. The process to reach and runs away, through the astounding Mongolian land- sustain agreements among decision makers on these scape, to settle with an eccentric uncle who teaches policies had not created the conditions for people to him the three golden rules of life. be willing to cooperate and coordinate actions around The Mongolian newspaper UB Post noted in 2014 specific long-term goals. that “the story is in many ways a symbol of how Mon- The parallels between Mongolia’s state of affairs golia must decide its own fate” to manage its grow- and the story portrayed in the movie were not a coin- ing levels of debt.1 Indeed, as the movie was being cidence. The metaphor in Amka’s tale was a deliberate released, the country was undergoing a third attempt attempt, supported by opinion leaders and artists, to establish the rainy-day Future Heritage Fund to to create awareness in Mongolian society about Policy making manage its windfall from mining revenues (mining is the importance of prudence in the management of does not take the country’s largest source of revenue). The attempt resources (in Amka’s story, the golden coin). The movie place in a vacuum. to transplant the design of a “future generations was viewed as an instrument to reinforce people’s val- It is the result of a fund” from international best practices had already ues of prudential management of wealth in an effort bargaining process failed twice. to coordinate support for the pursuit of the long-term among actors, Experts from around the world had visited Mon- goal of fiscal sustainability in Mongolia. who frequently golia over the previous decade, providing advice on As this example illustrates, policy making does have diverse and the best existing rules for the distribution and man- not take place in a vacuum. It is the result of a bar- even opposing agement of revenues from natural resources. Tech- gaining process among actors, who frequently have preferences and nical solutions were available, and political will was diverse and even opposing preferences and interests. interests. palpable among several state actors. Yet, since 2007, More important, the bargaining power of those actors attempts to establish rules for the use of mining reve- differs, derived from a variety of sources such as the nues had been thwarted by political pressures. Hard- existing formal rules, informal norms, their ability fought parliamentary elections prompted Mongolia’s to represent and mobilize other groups in society, or political parties to promise to increase spending on their control over resources. The complex process in programs such as cash allowances, untargeted social which actors bargain over the design and implemen- benefits, and investments in specific regions in order tation of policies, in a very specific social, historical, to garner support. However, such promises could be and economic context, is what in this Report is called fulfilled only by depleting the resources going into the governance. Enhancing governance for development: Why policies fail | 51 Diverse pathways to success: of fiscal policy to manage volatility has been viewed as a key role of institutions seeking to promote long- Moving beyond institutional term development, the form that those institutions transplants took in Mongolia was not enough to affect outcomes (Gill and others 2014). Political constraints, pressures For decades, academics as well as practitioners from interest groups, existing social opinions about have acknowledged the importance of institutions— organizations and rules—to development. Countries the need to accelerate progress in specific areas, and that are more secure, prosperous, and equitable tend to historical inertia had eroded the credibility of the rank higher on the existing indicators that emphasize commitment to prudential management of mining certain institutional forms. This pattern has created resources. a perception that certain types of institutions unam- Contrast Mongolia with those countries viewed biguously determine higher levels of development, as examples of effective management of natural and it has led many well-intentioned policy makers resources such as Chile and the Netherlands. Chile and and development agencies to promote institutional Mongolia have the same institutional forms for the reforms that aim at achieving those institutional allocation of revenues from the extractive industry— standards—often referred to as institutional transplants. Mongolia followed the Chilean example—but very In other words, in acknowledging that governance different outcomes. Fiscal spending in Mongolia is matters for development, one implicitly accepts the considerably more procyclical in spite of having the fact that the effects of governance are determined by same rules (see figure 2.1, panel a). Meanwhile, Chile the characteristics of formal institutions. and the Netherlands have very different institutional However, institutional forms are not enough. Con- forms, but they are similarly effective in managing sider the challenge that Mongolia faced in following resources (for Chile, see panel b). What do the Chil- its own “golden rules.” The Mongolian government ean and Netherlandic cases have in common? Many decided to adopt international best practices to man- factors determine effectiveness, but certainly the fact age fiscal revenues from natural resource extraction, that actors are willing to accept and follow the rules, but it failed to administer them with a long-term per- or act collectively, is one of them. In Chile, political spective. Although the countercyclical management agreements since the return to democracy in the Figure 2.1 Despite similar rules for the management of natural resource revenue in Chile and Mongolia, Chile’s expenditure patterns reveal a stronger commitment to compliance a. Procyclical management in Mongolia b. Countercyclical management in Chile Steeper regression line reveals a weaker Flatter regression line reveals a stronger commitment to complying with rules commitment to complying with rules 60 60 40 40 Expenditures (% change) Expenditures (% change) 20 20 0 0 −20 −20 −20 0 20 40 60 −20 0 20 40 60 Exports (% change) Exports (% change) Sources : Mongolia: Mongolia Statistical Information Services, monthly data, 2005–15; Chile: World Bank, World Development Indicators (database), 1960–2014. 52 | World Development Report 2017 1990s have included a long-term perspective on eco- Drivers of effectiveness: nomic management, a principle accepted by all actors in the political spectrum. In the Netherlands, the basic Commitment, coordination, principles of fiscal management have been broadly and cooperation accepted within the Netherlandic political culture for years, reinforced by the experience of living through This Report identifies commitment, coordination, and a period of mismanagement and the so-called Dutch cooperation as the three core functions of institutions disease in the second half of the 20th century.2 that are needed to ensure that rules and resources Often, when policies and technical solutions fail yield the desired development outcomes. Policy effec- to achieve the intended outcomes, blame falls on tiveness can be explained by whether and how well institutional failure, and the proposed solution is to institutions are performing these functions. Commit- “improve” institutions. But development can occur ment is about supporting consistent policies over time under a wide variety of institutional trajectories, as to ensure that promises are delivered. Coordination is examples around the world and throughout history about shaping expectations to enable complementary demonstrate. Thus it then becomes essential to action. And cooperation is about limiting opportunis- uncover the underlying drivers of policy effective- tic behavior to prevent free-riding. Coordination and ness. What makes some policies work while others cooperation imply voluntary compliance—that is, the fail? In addition to the type of institutions that matter, preferred social action is the one that individuals are it is relevant to ask what those institutional forms are actually willing to take. Box 2.1 discusses the ways in trying to achieve, or what functions they are meant to which commitment, coordination, and cooperation perform. can be understood from the perspective of game Box 2.1 The microfoundations of commitment, coordination, and cooperation: A perspective from game theory The framework of this World Development Report (WDR) action A when actor 1 does as well. In the top right gray highlights commitment, coordination, and cooperation as cell, the first number (0) is actor 1’s payoff when that actor the key institutional functions that shape the effectiveness decides to take action A, but actor 2 decides against it. of policies for development. Those terms come from game The second number (x) is actor 2’s payoff when that actor theory and are better explained using its language.a Table decides not to take action A, but actor 1 decides to take it. B2.1.1 presents an example. The actors’ payoff values can be read in the other scenarios in The table can be read in the following way. The top the same way. According to the matrix of payoffs, the value left gray cell symbolizes the net benefits (payoffs) for of x will determine whether the game is a coordination or a actors when both of them decide to take action A such as cooperation one. Both are collective action problems. mobilize, pass a law, or monitor a provider. The first num- ber (2) is the payoff of actor 1 when that actor decides to Coordination take action A and actor 2 does the same. The second num- If x < 2, the actors are engaged in a coordination game. ber (2) is actor 2’s payoff when that actor decides to take In this game, the actors’ incentives are aligned, but their Table B2.1.1 Coordination and cooperation as modeled in game theory Actor 2 Take action A Do not take action A (A) (NA) Take action A 2, 2 0, x (A) (A, A) (A, NA) Actor 1 Do not take action A x, 0 1, 1 (NA) (NA, A) (NA, NA) (Box continues next page) Enhancing governance for development: Why policies fail | 53 Box 2.1 The microfoundations of commitment, coordination, and cooperation: A perspective from game theory (continued) actions depend on their expectations about what the other the group payoff. In game theory, this is referred to as a will do. Both of them prefer to take the same action; both prisoner’s dilemma game, where the collective gain would outcomes—(A, A) and (NA, NA)—are equilibria of this be greater if the actors could cooperate, but each actor game. The problem is how to achieve the equilibrium that is individually has a greater incentive to free-ride (take action efficient and yields the highest payoff (A, A) because each NA). To induce cooperation, policies would have to put forth actor is unsure about what the other one will do. In game a credible mechanism of reward or penalty conditioned on theory, this game is known as the assurance game, where it players’ actions in order to prompt actions yielding the is in each actor’s own interest to take a particular action (Y) jointly preferred outcome. if there is assurance that everyone else is also taking action Y. To achieve coordination, policies need to create common Commitment knowledge that everyone will take the desirable action. Commitment refers to the ability of actors to enforce Sometimes, this requires providing incentives for some agreements. For example, if the actors were allowed to actors to take the desirable action first so others will follow. communicate with one another, they would have incentives to promise to take the action that maximizes the group’s Cooperation payoff. However, because there are no mechanisms to If x > 2, the actors are engaged in a cooperation game. In enforce those agreements (commitment devices), it is still this game, actors’ incentives are not aligned. In equilibrium, in the interest of the actors to renege on their promises. both of them do not take action A—(NA, NA)—which is Commitment devices allow actors to transform the game the worst outcome from the point of view of maximizing so that their incentives are aligned. Source: WDR 2017 team. a. Example adapted from Weber (2008) and reprinted in Bartolini (2013). theory. Although policy makers may not think in policies must include commitment devices to ensure terms of game theory, they play these games every their credibility. Commitment devices help ensure day, and the models lend precision and objectivity to the credibility of policies over time, even in the face understanding their actions. of changing circumstances. In this sense, institutions can be thought of as technologies that allow society Commitment: Backing consistent policies and individuals to engage in the pursuit of long-term over time to ensure promises are delivered goals, even in the face of changing circumstances. Policies are not spot transactions such as buying a In all countries, but mainly in low-income or book or using a taxi; they require consistency over fragile contexts, commitment is a fundamental con- time. However, reaching and sustaining agreements dition to prevent the escalation of conflict to violence. can be difficult because economic and political con- Whether conflicting parties are able to reach credible ditions may change, and the incentives for policy agreements to renounce violence and endow the state makers to deviate from established goal-oriented with a monopoly on the legitimate use of violence is policies can be strong. To promote sustained devel- a crucial condition to prevent escalation (see chapter opment, it is particularly important to ensure that 4). When commitment to deals is not credible, con- those in power can credibly deliver on promises made tending sides tend to walk away from the bargaining to citizens beyond the political cycle. Imagine that a table and violence prevails: warring factions may worker would like to save for retirement by contrib- renege on peace agreements, policy makers may uting funds to a pension. If that worker does not default on promises to transfer resources to discon- believe the government can credibly commit to not tented groups or regions, disputants may fail to abide expropriating those funds and returning them in the by court judgments, or police officers may abuse future, he or she will likely choose not to save. In line citizens instead of protecting them. The influence of with the economic theory of incomplete contracts, commitment is not exclusive to security. Economic 54 | World Development Report 2017 growth requires an environment in which firms and coordinate, following rules in response to the belief individuals feel secure in investing their resources in that others will follow as well. Theoretically, deliver- productive activities. Credible commitment to pro- ing on commitments builds trust in institutions over growth policies and property rights is, in this way, time and strengthens voluntary compliance (box 2.2). also essential to ensure macroeconomic stability and Empirical results from lab experiments carried out for to enable growth. this Report are consistent with this notion, whereby People’s perception of the credibility of com­ binding commitments lead to greater cooperation mitments can also increase their willingness to and more redistribution of resources among players cooperate—say, through tax compliance—and to (Banuri and others 2016)—see box 2.2. Box 2.2 Trust in institutions stems from delivering on commitments Trust is a central aspect of strengthening governance and Institutional trust refers to society’s trust in orga- delivering on development. Trust is related to positive out- nizations, rules, and the mechanisms to enforce them. comes in terms of economic growth,a as well as government Institutional trust can arise from elements based on rela- performance (Putnam 1993; La Porta and others 1997). But tionships, or it can be a function of repeated commitment what exactly is trust, where does it come from, and why (table B2.2.1). This Report focuses on institutional trust, does it matter? This Report defines trust as the probability built by repeatedly delivering on commitments, such as that an actor assigns to other actors of delivering on their by enforcing contracts or not defaulting on pledges and commitment, conditional on their past behavior. In the obligations. This type of trust is important because it game theory literature, this is known as reputation. The strengthens the capacity to commit (outcome legitimacy), literature distinguishes between two key kinds of trust: and ultimately it enables cooperation and coordination by interpersonal trust and institutional trust. inducing voluntary compliance (box 2.9). Interpersonal trust refers to trust among individuals. It The importance of trust for enabling collective action can arise from their relationships such as shared ties, or it can be illustrated in the context of game theory. In the can be present as a social norm (table B2.2.1). The notions traditional prisoner’s dilemma game, even though it would of bonding social capital and bridging social capital are be in the best interest of both prisoners to cooperate— relevant to interpersonal trust (Putnam 2000). Bonding refusing to confess—the inability to trust that the other social capital—the horizontal ties within communities and party will indeed cooperate means that the outcome for among organizations—can bring about a sense of purpose purely rational prisoners is to defect, betraying each other and identity, encouraging social cohesion. Bridging social (in a one-off game). Game theory predicts that cooperation capital consists of the cross-cutting ties that breach social comes into play in repeated games. Axelrod (1984) finds divides, such as economic class, ethnicity, and religion. If that the most successful strategies in the basic prisoner’s the bridging of social capital is missing, it can lead to bal- dilemma game are related to mutual trust, engendered kanized societies in which strong ties within communities from paying support with support and defection with actually work against the collective interest, holding back defection. This finding is supported by a lab game played development (Portes and Landolt 1996). for this Report (figure B2.2.1). Table B2.2.1 Sources of trust Type of trust Institutional trust Interpersonal trust Source of trust Relationships Relationships Commitment Norms Source: WDR 2017 team, based on Lach and López-Calva 2016. (Box continues next page) Enhancing governance for development: Why policies fail | 55 Box 2.2 Trust in institutions stems from delivering on commitments (continued) Figure B2.2.1 Welfare is higher for citizens under commitment in the lab game a. Citizens b. Policy makers 60 60 50 50 40 40 Earnings Earnings 30 30 20 20 10 10 0 0 Baseline Cheap talk Binding talk Baseline Cheap talk Binding talk Experiment type Experiment type Source: Banuri and others 2016. Note: In preparation for the World Development Report 2017, a series of lab experiments was carried out to explore the behavioral responses of agents in terms of cooperation and redistribution under different protocols. In the basic lab game are three citizens and one policy maker. The citizens provide resources for a group account, which the policy maker is in charge of distributing. The policy maker observes the total amount in the group account and can then distribute the resources in any manner he or she sees fit. The game is repeated over 20 periods. In the “cheap talk” treatment, the policy maker makes public the intended distribution rule prior to citizens’ contributions, but the rule is not binding and can be modified after citizens make their contributions. In the “binding talk” treatment, the policy maker again makes public the distribution rule prior to citizens’ contributions, but in this case the policy maker cannot amend the rule after citizens make their contributions. In this second case, there is a credible commitment because the public announcement is binding. Significance levels: ** = significantly higher earnings of citizens in binding talk compared with baseline ( p < .05), but not compared with cheap talk (and cheap talk is not different from the baseline). *** = significantly lower earnings of policy makers in binding talk ( p < .01) relative to both the baseline and cheap talk ( p < .01). Cheap talk is not significantly different from the baseline ( p = .133). Source: WDR 2017 team. a. Knack and Keefer (1997); Whiteley (2000); Zak and Knack (2001). Coordination: Shaping expectations to actions can lead to better outcomes for all. Since the enable complementary action classic work on the problems of industrialization in What makes people choose to coordinate to reach Eastern Europe by Rosenstein-Rodan (1943) and the socially preferred outcomes? The answer to this idea of the “big push” formalized by Murphy, Shleifer, question is at the heart of understanding development and Vishny (1989), coordination has been viewed as a progress. As Douglass North contends, “The disparity central issue in both the economic and noneconomic in the performance of economies and the persistence realms. of disparate economies through time have not been Particularly in middle-income countries, coordi- satisfactorily explained by development economists. nation is required to induce investment and innova- . . . What has been missing is an understanding of tion. Both depend on firms and individuals believing the nature of human coordination and cooperation” that others will also invest. Institutions can help (North 1990a, 11). By shaping beliefs3 and coordinat- solve market failures by coordinating investment ing expectations, institutions can push societies on decisions and the expectations of market partici- favorable paths toward better development outcomes. pants. Indeed, the insight that a failure to coordinate When actors are uncertain about what others will investment activity can lead to underdevelopment is do, they may not make decisions that could induce decades old.4 Consider the case in which large-scale socially preferred outcomes. By contrast, in the pres- factories are more efficient, but investing in them is ence of strategic complementarities, coordinated not profitable for individual firms unless carried out 56 | World Development Report 2017 as a group. Perhaps the market size is too small to in the grassland, the grass increasingly fails to grow justify large-scale investments, unless all industries back fast enough, ultimately depleting it until it is of expand together, providing markets for one another. no use to anyone. The notion is that rational individu- In such a situation, there are two possible outcomes, als acting independently, according to their own self- or equilibria. The first is one in which no firms invest interest, will deplete a shared resource, even if it is in large-scale factories, and efficiency levels stay low. contrary to the best interest of the group. This type The second, better outcome is one in which firms are of problem is common in situations in which agents able to coordinate a simultaneous move to large-scale, immediately benefit from their actions and do not efficient production. experience the losses from the impacts of their actions Such problems of coordination can occur in until later. A key notion behind cooperation problems, many contexts, ranging from finance and adoption which differentiates them from coordination prob- of technology to innovation and industrial clusters.5 lems, is that the preferable action from a social point Consider a country that wants to invest in green of view is not necessarily an equilibrium. In coordi- technologies such as electric cars to improve the nation problems, multiple equilibria exist, and policy environmental sustainability of its growth process. is a matter of helping make the jump to the optimal Such an initiative would require the complementary one. Solving cooperation problems, by contrast, typi- investment of car manufacturers, battery producers, cally requires credible rewards or penalties to prompt electricity providers, and city planners. If each actor actions that lead to the jointly preferred outcome. is unsure of the willingness of the others to invest, the In all countries, but particularly those that have electric cars may never be produced. However, if insti- achieved higher levels of prosperity, the degree to tutions are able to reduce that uncertainty by creating which prosperity is shared requires cooperation, par- common knowledge that other firms will also invest, ticularly citizens’ willingness to contribute to public or by providing incentives to first movers, they can goods and not free-ride on others. The extent to which help coordinate investment across firms and push the societies can ensure opportunities for all individuals adoption of greener technologies (World Bank 2012). relies on their ability to provide high-quality services, Infant industry protection and other industrial poli- such as health, education, or connectivity, and to cies are ways—not always effective—in which gov- ensure access to economic opportunities, especially ernments have provided these types of incentives to access to markets that allow individuals to use the avoid being trapped in a situation in which everyone assets acquired. Collecting the taxes needed to fund waits for others to invest first.6 The kinds of instru- investments in public goods depends on individuals’ ments policy makers have to coordinate expectations willingness to cooperate. Lack of cooperation is a and lead societies to socially preferred outcomes will typical cause of segregated outcomes: for example, very much depend on the kinds of complementarities differential treatment of different ethnic groups. One involved. group may not be willing to contribute to the provi- sion of public goods if a different group will benefit. Cooperation: Limiting opportunistic Willingness will emerge, however, if the commit- behavior to prevent free-riding ment to the provision of public goods is credible— Another basic type of collective action problem that regardless of which group is in control of the institutions solve is cooperation, or reducing oppor- resources. Such a credible commitment can be tunistic behavior. By limiting free-riding, institutions achieved by, for example, constraining the power can help build more cohesive societies and turn zero- of those to whom authority is delegated or sharing sum games with no winners into positive-sum games power in decision-making bodies. in which all parties gain (win-wins)—see Ostrom Sometimes, societies face a breakdown of coopera- (1990). Cooperation problems are often observed in tion, and people opt out or exit, failing to comply with the provision of public goods (such as collecting taxes the rules or to contribute to the provision of public to fund public schools or hospitals) or solving environ- goods (Hirschman 1970). Cooperation becomes more mental concerns related to the overuse of a common difficult to achieve as the number of people involved resource pool (such as overexploitation of natural increases if there is less information on and greater resources). Perhaps the most well-known example of uncertainty about others and when the interaction a cooperation problem is the tragedy of the commons is finite. Inequality may also matter for sustaining (Hardin 1968). In this example, all herdsmen can graze cooperation. In theory, the relationship between their animals in open grassland—the “commons”— wealth inequality and the successful provision of a without restrictions. As more and more cattle graze common resource pool can be ambiguous. Consider a Enhancing governance for development: Why policies fail | 57 society in which there is high wealth inequality. On only on what policies are chosen but also on how they the one hand, a few dominant members of that society are chosen and implemented, the relative degree of may reap enough benefits from having a public good bargaining power of different actors may condition that they have incentives to provide and maintain it the kind of commitment, coordination, and coopera- independently, even if other less wealthy individuals tion that results (box 2.3). free-ride on it (Olson 1965). On the other hand, some individuals with better outside options (often the Inside the policy arena: Policy bargaining rich) may not want to contribute to the provision of and the distribution of power the public good. Thus there may be higher costs for The processes of policy making and policy implemen- enforcing cooperation, thereby nurturing distrust tation entail a bargaining process among different that the other(s) will pay and undermining cooper- actors. The policy arena can be thought of as the set- ative behavior.7 For example, Brazil, where citizens ting in which (policy) decisions are made; different organized to demand higher-quality public services, groups and actors interact and bargain over aspects faced a problem common to many other countries: the of the public space; and the resulting agreements fragmentation of the social contract. In these cases, eventually lead to changes in the formal rules (law). the upper-middle class responds to the low quality It is the setting in which governance manifests itself.8 of service provision by demanding private services, Policy arenas exist at the local, national, and interna- which in turn weakens its willingness to cooperate tional levels. They can be formal (parliaments, courts, fiscally and contribute to the provision of public intergovernmental organizations, government agen- goods—a perverse cycle (Ferreira and others 2013). cies), traditional, or informal (backroom deals, old Although commitment, coordination, and cooperation boys’ networks). Policy arenas are issue-specific. For make up core institutional functions that contribute example, the policy arena for defense policy may not to the effectiveness of policies to achieve develop- be the same as that for health or infrastructure policy. ment outcomes, these functions are fulfilled effec- Who bargains in this policy arena and how suc- tively under only certain conditions. cessfully they bargain are determined by the relative power of the actors. Power is expressed in the policy arena as the ability of groups and individuals to make Policy effectiveness in others act in their interest and to bring about specific the presence of power outcomes. It is the “production of intended effects” (Russell 1938). Actors can exercise their power by asymmetries setting the agenda, by vetoing specific options, or by As just described, in this Report effective policies are influencing other actors’ preferences. Agenda-setting those that perform three key functions to improve power refers to actors’ abilities to influence the alter- development: enabling credible commitment, inducing natives from which decision makers choose (Persson coordination, and enhancing cooperation. But why are and Tabellini 2000). Veto power, by contrast, refers to policies so often ineffective at doing so? The failure the abilities of actors to block a change from the status of policies that are good on paper to perform their quo (Tsebelis 2002). In all cases, it is about restricting intended function and the persistence of bad ones the effective choices of other actors.9 are often not the result of policy makers’ lack of The policy arena is shaped by both de jure and de Who bargains resources, will, or knowledge. Consider a society run facto power. De jure power refers to power that is con- in this policy by a bene­ volent social planner who cares about secu- ferred on the actors by the formal rules. For example, arena and how rity, growth, and equity. The planner will choose pol- what the electoral rules are, whether there is a pres- successfully icies that maximize these three objectives. However, idential or a parliamentary system, whether there they bargain are as soon as that society deviates—as they do in real is an independent judiciary, or whether the central determined by the life—from the ideals of this monolithic planner, fail- bank is autonomous—all are formal rules that confer relative power of ures to commit, coordinate, and cooperate might take de jure power on different actors. De facto power refers the actors. it far from the social optimum. Where such a society to the actual power to influence other actors. It has will end up will depend on the depth of these failures. many sources, including control over resources, con- One of the key—though not the sole—contributing trol over coercive instruments, ideational persuasion, factors to determining policies and the resulting equi- or the capacity to mobilize. Often, the formal de jure libria is the unequal distribution of power in society. rules that confer power on actors in the policy arena This Report refers to such a distribution as a power do not necessarily translate into de facto power rela- asymmetry. Because policy effectiveness depends not tions (box 2.4). 58 | World Development Report 2017 Box 2.3 Game theory and the roots of political power It has long been recognized that power is an important In the full game, each citizen first decides whether to determinant of how a society functions and how the gains of display loyalty to the dictator before interacting among economic activity are shared within and across nations. The themselves. Suppose it is a common belief that if citizens early writings on power were imprecise as social scientists are not loyal to the dictator, others will not cooperate with grappled for ways to express these embryonic ideas (Dahl them. It is now entirely possible to become locked into a 1957). But such imprecision began to wane with the rise of societal equilibrium in which everybody displays loyalty to game theory. Social scientists are now able to formalize the dictator and plays cooperatively among themselves. some of these difficult concepts and, in particular, the idea Their net return or payoff is 15—that is, 20 from the assur- that, in the end, power depends on the beliefs and mores ance game and –5 from loyalty (or obsequiousness) to the of ordinary people. Václav Havel expressed this notion dictator, which props up the dictator’s power. beautifully in a paper smuggled out of the prison where All citizens would prefer not to be loyal to D, but they he was locked up for dissenting against Czechoslovakia’s fear that, if they dissent, others will not cooperate with post-totalitarian state in the early 1980s. He argued that, them. It is this “triadic interaction” that props up power in modern dictatorships, it is not always easy to separate (Basu 2000). The behavior just described is a Nash equi- the perpetrators from the victims. In his aptly titled essay librium—but it is actually more than that. It is what in game “The Power of the Powerless” he argued that many of the theory is called a “subgame perfect equilibrium,” which is oppressed are complicit in propping up the power of such a Nash equilibrium supported by credible threats. Dictators regimes (Havel 1991). may not know what a subgame perfect equilibrium is, but This idea can be formally expressed with game theory. they do know how to create an atmosphere of mutual fear Consider a society with one dictator, D, and two citizens, that props up the regime. 1 and 2. These two citizens are expected to provide some This example illustrates how power can be modeled beck-and-call service and display their loyalty to D. without bringing any extraneous assumptions into the Expressing this loyalty costs each citizen 5. The loyalty of analysis. A pure economic analysis can lead to manifesta- both to D is what gives D power. tions of power through the interplay of beliefs. But if one But why will people show loyalty to a dictator when goes a step further and brings behavioral economics—in it comes at a high cost? The answer lies in the nature of particular, the idea of “stigma”—into the analysis, many interaction among the citizens themselves. This can be other phenomena can be modeled, from political mass captured by assuming that citizens can be cooperative (C) movements to child labor (López-Calva 2003). or noncooperative (N). The payoffs from such behavior are This analysis is closely related to the concept of the described in table B2.3.1. “social contract,” which goes back to ancient Greek think- This game, labeled the assurance game by Sen (1967), is ers. Underlying all stable societies is some form of social often also called the coordination game (see box 2.1). Keep contract, which enables individuals to anticipate the behav- in mind that the assurance game has two equilibria—both ior of others. The analysis just described can yield insights players choosing C and both players choosing N. into societal uprisings, such as those in the Arab world in 2010–11, which can be viewed as shifts in societal equilibria Table B2.3.1 Payoffs to cooperation or (Devarajan and Mottaghi 2015). noncooperation The analysis is a warning that, because these mani- festations of power arise from the beliefs and behavior of N C ordinary people, all societies, even democracies, run the 10, 10 5, 0 risk of having to confront them. The McCarthy era in the N (N, N) (N, C) early 1950s in the United States and the Emergency in India 0, 5 20, 20 (1975–77) are illustrations. C (C, N) (C, C) Source: Kaushik Basu. Note: C = cooperation; N = noncooperation. Source: Prepared by Kaushik Basu for WDR 2017. Enhancing governance for development: Why policies fail | 59 Box 2.4 Who is who in the policy arena: The case of Bolivia’s social policy The divergence between the formal rules and the actual the ministries and their deputies. In the figure, the size of practice of formulating and implementing social policy is each circle represents the importance of the actor in the clearly illustrated by the process of making social policy in policy-making process. Bolivia. Officially, ministries are designated as the policy The policy-making dynamics uncovered by this social initiators in Bolivia because ideas and information flow network analysis reveal two main factors that significantly from them to CONAPES (National Council for Economic shape the features of social policies. The first factor is that and Social Policy), to the Council of Ministers, and to the social policy-making units are technically weak: they are president (figure B2.4.1, panel a). However, studies of the typically staffed not by specialists but by political sup- actual process of social policy making in the country, based porters who are subject to frequent turnover and do not on social network analysis, reveal a strikingly different necessarily possess the adequate skills. For example, the picture (panel b). In the actual policy-making network, average tenure of the interviewees in the Bolivian study coordination is vertically exercised by the president, min- was 14 months, and 22 percent of them had no prior expe- istries interact very little, and grassroots organizations rience in any social policy-making capacity. The second are key actors in the policy arena. Ideas and information factor is that the actors do not have incentives to coordi- for policy formulation flow not from the ministries to the nate and cooperate with one another. Rather, they compete Council of Ministers and the president, but from the grass- to influence policy making, often hindering the coherence roots organizations that constitute the electoral bases of and coordination of policy design as well as the quality of the government party to the president, and only then to implementation. Figure B2.4.1 Formal and actual policy networks in Bolivia, 2010 a. Formal policy network b. Actual policy network President Source: WDR 2017 team, based on Bonvecchi 2016. Note: CONAPES = National Council for Economic and Social Policy; UDAPE = Analytical Unit for Social and Economic Policies; “grassroots organizations” refers to Unified Central Union of Peasant Workers of Bolivia (CSUTCB), National Coordination for Change (CONALCAM), and Movement toward Socialism (MAS); “IFIs [international financial institutions] and international aid” refers to Latin American Development Bank (CAF), World Bank, Inter-American Development Bank (IDB), United Nations Children’s Fund (UNICEF), and cooperation agencies from several industrialized countries. Source: WDR 2017 team, based on Bonvecchi, Johannsen, and Scartascini (2015). See also Bonvecchi (2016). 60 | World Development Report 2017 Actors in the policy arena can be grouped into instances, actors use informal mechanisms to sustain elites and citizens according to their relative degree short-term transactions among themselves, but they of influence. This Report defines elites in a positive are unable to achieve long-lasting agreements. Poli- (as opposed to a normative) sense in that what distin- cies in these cases will tend not to be consistent or guishes them from citizens is their ability to directly coherent over time, but rather to reflect which group influence the design and implementation of a certain has more power at a given moment, deeply under- policy.10 Thus elites are not necessarily bad or self- mining the institutional function of commitment. interested, and citizens are not necessarily good and Countries in which violent conflict is ongoing and public-spirited. Both groups act as people do in other groups are fighting for control over territory, such as spheres of life: understanding their motivations is in South Sudan, are a compelling illustration of why important to anticipating their conduct.11 The clas- power gets in the way of the commitment needed sification of elites and citizens is not intended to be to sustain mutually beneficial agreements. The out- a strict dichotomy, but rather a spectrum in which look for the groups involved in such violent conflict different actors have different degrees of influence.12 is far from favorable. At best, they are looking at a The relative degree of power of actors to influence costly victory, only to inherit a shattered economy. policy design or policy implementation may vary by An agreement to put a stop to such violent conflict, issue. For example, although large export firms in encourage productive investment, and share its some societies may have the power to influence trade benefits in proportion to the power that each group policy and thus are an elite in this area, they may not currently holds is mutually desirable. So why are such be an elite in the areas of security or health policy. agreements rarely reached? The reason is a commit- ment difficulty known as the political hold-up problem. When power gets in the way: Exclusion, Consider a situation in which the violent groups in capture, and clientelism control of different territories agree to allow those The distribution of power in the policy arena can be with business skills to make efficient investments in a fundamental enabler of—or constraint to—policy their territories in exchange for a “fee.” Such an agree- effectiveness. Unequal distributions of power in soci- ment could maximize the size of the benefits while ety (power asymmetries) are not necessarily harmful, redistributing them in proportion to the strength of and they can actually be a means of achieving effec- these violent groups. But for this policy to be credible tiveness—for example, through delegated authority. to potential investors, the violent groups would need However, in the presence of transaction costs to reach to give up some power and establish, among other political agreements, it becomes increasingly diffi- things, a system of impartial courts.15 But the fear of cult to mediate power asymmetries effectively (box not receiving a return to their “investment” makes it 2.5).13 If powerful actors fear that the outcome may hard for violent groups to give up power. reduce their relative power now or in the future, they A second manifestation of power asymmetries, may attempt to block the adoption or undermine the ability of influential groups to capture policies and the implementation of policies that could enhance make them serve their narrow interests, is helpful welfare.14 This tendency has especially significant for understanding the effectiveness (or ineffective- implications for households at the bottom of the ness) of policies in promoting long-term growth. income distribution and other marginalized groups For example, if a powerful interest group derives its because their bargaining power tends to be more power from being the most productive firm, it will limited. Power asymmetries, in these cases, can lead advocate policies that allow it to continue to be pro- to harmful consequences for society. Some common ductive and reach new markets. On the other hand, if Some common manifestations—though not the only ones—of how those groups with power have the coercive capacity manifestations— power asymmetries can negatively impact policy to cause economic and social disruption and are in though not the effectiveness are exclusion, capture, and clientelism. the least productive sector of the economy, they will only ones—of The exclusion of individuals and groups from the advocate policies that protect their economic power how power policy arena can have particularly important implica- and block competition. The effects of capture can be asymmetries tions for security outcomes (see discussion in chapter widespread and detrimental to the well-being of soci- can negatively 4). When powerful actors are excluded from the policy ety (see discussion in chapter 5). impact policy arena, violence may become the preferred—and ratio- Consider the case of regulatory capture in the effectiveness are nal—way for certain individuals and groups to pur- building sector, which can undermine the implemen- exclusion, capture, sue their interests, thereby leading to failed bargains tation of safety standards and risk-sensitive construc- and clientelism. between participants in the policy arena. In these tion. This is illustrated by the situation in Turkey after Enhancing governance for development: Why policies fail | 61 Box 2.5 Transaction costs, incomplete contracts, and political agreements: Why land redistribution policies often fail Land distribution schemes have been tried—and have land.b Not only will owning the land increase Surekha’s failed—repeatedly around the world. Why? Consider the control over contingencies, but it may also give her special case of Surekha, a farmer who owns a large plot of land and social status or political power to control other transactions must decide whether to lease it to smaller farmers or buy the (Bardhan 2005). For example, Surekha could threaten her necessary equipment and hire employees so she can farm employees—and if they do not accept her conditions, she the land herself. If the economies of scale are not significant will influence the village merchants not to trade with them and there are no transaction costs,a Surekha would be better (Basu 1986). off dividing the land and leasing it to famers, who would be Suppose a local leader in Surekha’s country proposes to willing to pay more than she would earn if she farmed it by redistribute landholdings—including compensating current herself because they would be more productive. This is a landowners for the value of the land—to increase the overall classic problem in economics. In the absence of transaction productivity of the economy. Why has this type of policy costs, the initial allocation of property rights should have no failed so often and in so many places? It is because in the effect on the efficient operation of an economy (Coase 1960). presence of transaction costs and incomplete contracts, the However, in the real world transaction costs abound as economic and political value of the land for Surekha is higher institutions do not always allow parties to effectively commit, than the fair compensation. Surekha’s bargaining power coordinate, and cooperate. Because transaction costs exist— would be reduced if land were redistributed. As a result, she and because individuals have a limited cognitive capacity to will have an incentive to block or undermine the policy. process every possible contingency (bounded rationality)— Like economic agreements, political agreements are contracts will always be incomplete. When there is room for not independent of the distribution of power and are the interpretation—and renegotiation—of a contract, the nature result of a bargaining process among a wide set of actors. of the relationship between the parties changes because they For example, state institutions emerged in history not as a need to cooperate over time to enforce the contract. The pro- voluntary contract between society members (such as pro- cess of bargaining, then, never really ends because parties to a ducers willing to pay taxes in exchange for protection from contract will be continually adjusting their actions in response the local bandits), but rather because some groups imposed to changing circumstances (Epstein and O’Halloran 1999). their coercive power on others (see chapter 4). As a result, In the presence of high transaction costs, Surekha would institutions and the outcomes of the bargains within those rather hire labor and buy her own equipment to farm the institutions reflect the power structure in a given society.c Source: WDR 2017 team.  world void of transaction costs is one in which there are no costs to specify, monitor, or enforce contracts between the parties (Dixit 1996). Thus the a. A owner and the renters can foresee all possible contingencies, such as the probability of a drought or a war. It also means that a third party can observe and verify that both parties are honoring the contract and can act to enforce it in a dispute. b. When transaction costs are high, Surekha would rather do the work herself, buying the machinery and hiring employees because ownership of the assets gives her more bargaining power over her employees when disputes arise than if she just leases the land (Hart and Moore 1990). c. See Carneiro (1970); Tilly (1985); Boix (2015); and De la Sierra (2015). See also Boix (2016). the 1999 Kocaeli earthquake, when the government disadvantage current professionals and translate into was unable to implement a number of innovative higher marginal costs for new construction. building control regulations because of the strong A third manifestation of power asymmetries is influence exerted by powerful interest groups. The clientelism, the exchange of goods and services for new regulations would have introduced higher stan- political support. Clientelism can shape the adoption dards for building controls, including higher qualifi- and implementation of policies in two main ways. cation requirements for building designers, certified First, in clientelistic settings commitment to long- private construction supervision of building design term objectives is hamstrung by the lack of account- and code compliance, and mandatory 10-year profes- ability of those to whom authority is delegated (see sional liability insurance for building designers. How- discussion in chapter 6). Accountability is gradually ever, implementation was undermined by the strong put up for sale. In addition, when commitment breaks opposition of the building and real estate industries, down systematically, it can erode people’s incen- which believed that the new requirements could tives to cooperate, and some groups may opt out by 62 | World Development Report 2017 demanding private services and avoiding contribu- policy effectiveness.16 Capacity is certainly important tions to the provision of public goods (Ferreira and at a given point in time and can explain differences in others 2013). In clientelistic settings, states tend to performance across countries (Fukuyama 2014), but it have low tax revenues and provide few public goods, does interact with—and can be explained by—power. undermining economic activity and future taxation. At a given point in time, capacity can be thought of as a stock. Although in many cases capacity is an overrid- Best practice or best fit? Reconsidering ing constraint, it is also a proximate cause because it the notion of “first-best” through the is an outcome of a bargaining process in which actors bargaining lens decide how and where to invest (or not) in building Efforts to strengthen the ability of institutions to such capacity. Even in the presence of existing phys- effectively enable commitment, coordination, and ical and administrative capacity, policies may still be cooperation, viewed from the perspective of power ineffective if groups with enough bargaining power asymmetries, call into question many traditional have no incentives to pursue implementation. An practices of the development community. example is the low investment in statistical capac- That community has largely focused its reform ity in Africa that limits the ability to monitor policy attempts on designing best-practice solutions and effectiveness (box 2.6, case 1). Furthermore, prevail- building state capacity to implement them. In this ing norms, understood as socially accepted rules of sense, capacity is often considered a prerequisite for behavior, can reinforce existing power asymmetries Box 2.6 How capacity and norms influence and are influenced by power asymmetries Case 1. The need to strengthen incentives to gather Case 2. The reinforcement of existing power asymmetries development data through norms For years, the development community has invested heavily— Sometimes, norms reinforce existing power asymmetries— in both economic resources and technical expertise—in and they can constrain the effectiveness of interventions. developing statistical capacity in Africa, but the results have For example, in Ghana’s small-scale fisheries, men (Fish been disappointing (Devarajan 2013). Many countries in the Papas) and women (Fish Mamas) have historically had region still lack the data to monitor socioeconomic conditions different roles in fishing. Because women are not allowed such as poverty, inequality, and service delivery. As a result, to fish at sea—a norm that has been in place for over 200 demands are growing for more money and more capacity years and is respected to this day—men fish while women building to solve this problem. This view, however, neglects smoke, dry, and cook the fish for sale. Fish Mamas tradition- the fact that for countries to develop statistical capacity, they ally buy the fish directly from the men and exercise control must muster the political incentives to do so. over the local market by setting prices and selling the day’s In many countries, political incentives push those in catch (Overå 1993). power to avoid investing in capacity or to actively under- A well-intentioned project by the government of Ghana mine capacity. Some elites in African countries consider supported by the World Bank attempted to improve wom- high-quality data systems a tool that the opposition could en’s livelihoods by making the harvesting and processing use to audit their performance. Thus these elites have of fish more sanitary and efficient. In particular, they built a incentives to establish either weak statistical offices or facility where all fish can be processed and sold. However, partisan ones, staffed with political supporters rather than by pooling the catch in one place and making it easier to with technical experts (Beegle and others 2016; Hoogeveen process the fish, the project undermined the Fish Mamas’ and Nguyen 2016). But, of course, this practice is not unique power to set the prices because it made it easier for men to to Africa. The argument for the use of existing capacity do both the fishing and selling of the catch. As a result, men is as valid as the argument for building such capacity. In began selling the fish themselves, thereby reducing wom- Latin America, a region well known for its capacity for data en’s engagement in fisheries management. This project, collection, there are examples where the political dynamics which aimed at improving women’s role in the value chain, led to a weakening of the credibility of official statistics.a ended up undermining their livelihood (World Bank 2015). Source: WDR 2017 team. a. Economist (2012); Noriega (2012); Roitberg and Nagasawa (2016). Enhancing governance for development: Why policies fail | 63 and further undermine the effectiveness of capacity- and demand better service—were left with the same building interventions (box 2.6, case 2). low-quality education. In the end, the government In the presence of powerful actors who can block spent scarce budget resources on a policy that did or otherwise undermine a policy, optimal policies not improve learning outcomes. Therefore, as this from a strictly economic standpoint (first-best poli- example illustrates, the best technical solution was cies) may not be the optimal implementable policies not necessarily the best-fit solution to enact change in (second-best but feasible policies). Consider the case view of the distribution of power in the policy arena. of Kenya’s recent education reform. Based on rigorous Even when feasible, implementing what seem to evidence on best practices (Duflo, Dupas, and Kremer be first-best economic policies from a static perspec- 2015), the government introduced a new policy in tive can lead to worse outcomes for society because 2009 to allow 18,000 contract teachers to be hired. It they affect the dynamics of power. For example, when was thought that contract teachers, as opposed to civil governments are captured by firms and there is high servant teachers, would have greater incentives to per- inequality, unions may be the only way for workers to form well because they were on short-term contracts solve their collective action problem, even if represen- that, in principle, would be renewed only if their per- tation is not perfect. If so, passing a law that makes formance was satisfactory. Yet, experimental evidence labor contracts more flexible undermines union from 64 government-run schools showed that learn- memberships and may lead to more inequality, which ing outcomes did not improve (Bold and others 2015). in turn can perpetuate the power of the wealthy A central explanation for why the policy failed is (Acemoglu and Robinson 2013). that despite the introduction of short-term contracts, The nature of the policy arena is crucial to gaug- there was no credible commitment in practice to ing whether actors will be able to reach and sustain sanction underperforming teachers. Once the newly agreements to enact welfare-enhancing policies. contracted teachers were in place, leaders of the teach- The actions that a proposed reform will trigger in ers’ union successfully mobilized to convert those other players in the arena are particularly important. new teachers into civil servants under permanent This process of how reforms take place (which is contracts, thereby undermining the reform. The chil- embedded in the framework) is discussed in box 2.7 dren attending those schools and their families—who from the perspective of game theory. The discussion had little say and found it more difficult to organize highlights how, even though reform involves playing Box 2.7 The “rules game”: Paying attention to where the action is The framework described in this Report aims at explaining In the abstract, the rules and policies chosen should how governance affects development over time. For that lead to the socially desired outcomes. Economists refer to purpose, the framework involves games played at two lev- the case in which someone can pick the ideal rules for the els. The first-level game (the outcome game) takes place outcome game as the “mechanism design” approach, and when, given a certain set of rules and policies, actors react the rules selected are those that a “benevolent dictator” by making decisions about investing, consuming, working, or “social planner” would pick. Although this is a useful paying taxes, allocating budgets, abiding by the rules, way to specify the ultimate goal of development, it is an and so on. Those decisions lead to the realization of out- insufficient guide to understanding the actual process of comes (security, growth, equity). The framework suggests development. Mechanism design suggests that a reform that there is, in addition, a second-level game (the rules is a once-and-done jump that takes place when someone game) in which actors bargain to redefine the policies and imposes the “ideal” rules. It ignores the second-level rules rules that shape subsequent reactions by actors in future game, the diversity of preferences and incentives, and the realizations of the game. The rules game is where power fact that different actors can have very different influences asymmetries are manifested, whereby some actors have in the rules game. Moreover, in the process of reform and more direct influence (elites) and others have only indirect development, the rules game is where the action is. influence—for example, through voting (citizens). Source: WDR 2017 team. 64 | World Development Report 2017 Box 2.8 Factors that make sustaining cooperation over time more likely Stability of actors’ bargaining power. When the actors that Actors’ certainty about the distributional effects of pol- interact in the policy arena change frequently, it is more icies. When there is uncertainty about who will benefit and difficult to sustain cooperation. There are two reasons for who will lose from a policy, it is more difficult to sustain this: first, actors will be less able to punish those that devi- cooperation. Faced with this uncertainty, actors cannot ate from an agreement, and, second, building a reputation establish a compensation mechanism (Fernandez and for honoring agreements becomes less valuable when the Rodrik 1991). interactions with the same actors are not frequent. Actors’ structural links. When they bargain on many Low probability of shocks. In cases in which a high different policy issues, actors interact repeatedly, which frequency of shocks requires continued policy adaptations, facilitates cooperation in two ways: first, by increasing cooperation will be harder to achieve. For example, it is eas- the likelihood that there will be some overlapping interest ier to sustain cooperation on regulating a commodities mar- over a set of policies, and second, by reducing the cost of ket than a technology market. Because of the rapid innova- punishment because actors can use bargains on various tion in the technology market, regulations must constantly other policies to punish those that deviate in any one of adapt to obtain the desired objective. Moreover, shocks may the agreements. create losers and winners, thereby creating competing and Enforcement technologies. Some policy issues have shifting interests that make cooperation over time (inter- multiple enforcement technologies. Therefore, actors can temporal cooperation) more difficult to sustain. choose the one they trust the most, and thus the set of Transparency. An inability to observe or verify whether issues over which they can cooperate increases. Recent actors have honored or will honor the agreement makes experience in Guatemala shows that importing a court, the cooperation more difficult to sustain (Stigler 1964; Green International Commission against Impunity in Guatemala and Porter 1984). For example, in agreements between (CICIG), can be a way to increase the commitment to voters and politicians, if citizens cannot observe politicians’ enforcing the rules and, as a result, increasing the coop- efforts and must rely on outcomes to infer their actions, eration of potential witnesses, at least in the short term cooperation will be more difficult to sustain. (box 2.10). Source: WDR 2017 team. two “games” at different levels, actors in the quest for understand what agreements are feasible in the pol- change often neglect the game that really matters. icy arena and how the policy arena can be reshaped Certain factors can make sustaining cooperation to expand the set of policies that can be implemented. more likely. For example, it may be more difficult to The policy arena can be reshaped when changes are reach lasting agreements in contexts in which the rel- made in the incentives that actors have to pursue cer- ative bargaining power of actors often shifts, causing a tain goals, in actors’ preferences and beliefs, and in who high turnover of actors entering and exiting the policy can participate in the decision-making processes (the arena, or in which the short-term benefits of reneging contestability of the policy arena). on promises are high, compared with the benefits of Depending on the primary functional challenge— maintaining a reputation for honoring agreements. that is, whether the institution needs to enable com- Box 2.8 describes several factors that influence the mitment, coordination, or cooperation)—the entry likelihood that agreements will be sustained.17 point may be different. Because these functional challenges are interdependent, these entry points act as complements to one another. In all cases, for the Levers for change: entry points to be effective they must lead to changes Incentives, preferences and that induce voluntary compliance from actors. This beliefs, and contestability process of inducing voluntary compliance can be thought of as an expression of what the literature To more effectively enable commitment, coordi- calls legitimacy, which is related to the voluntary nation, and cooperation, it is important that one acceptance of an act of authority (box 2.9).18 Enhancing governance for development: Why policies fail | 65 Box 2.9 Voluntary compliance and the building blocks of legitimacy Three principal types of legitimacy matter for the effec- to how the content of the law reflects people’s own social tiveness of interventions: outcome legitimacy, relational norms and views of morality. In these cases, the law can be legitimacy, and process legitimacy. considered irrelevant because people comply for reasons Outcome legitimacy is derived from delivering on com- independent of its existence. mitments, such as those to provide public services, protect Process legitimacy is derived from a perception of property rights, or respect term limits in elections. It is fairness in the way that decisions, policies, or laws are related to the degree to which individuals feel that they can designed and implemented. It is related to the degree trust institutions (see box 2.2 for an extended discussion to which individuals feel represented in the policy arena. on the notion of trust). In this way, incentives are aligned When procedures for selecting and implementing policies between government and citizens. A public officer will are more contestable, those policies tend to be perceived deliver on her promises because citizens will vote for her, as “fair” and to induce cooperation more effectively. and citizens will vote for her because they trust that the Process legitimacy can exist to the extent that people officer will deliver on her promises. Trust is in this way a feel they are represented, independent of the outcome. building block of outcome legitimacy (the capacity to com- When individuals believe that the process has followed the mit). An important way to enhance outcome legitimacy is rules, compliance with the law is higher, even if the out- to enhance ex post accountability, so that actors will face comes are not always those that favor them (Tyler 1990; consequences if they do not deliver the outcomes of a Tyler and Huo 2002). The opposite—exclusion from the promised policy or action. Enhancing ex post accountability process—leads to lack of legitimacy. Enhancing ex ante to bring about adverse consequences for not delivering on accountability to enable a more participatory or inclusive the outcomes of a promised decision is a critical entry point decision-making process can play a key role in strengthen- for strengthening outcome legitimacy: such accountability, ing process legitimacy. in effect, acts as a negative reward system. Ultimately, legitimacy is a combined function of out- Relational legitimacy is derived from the alignment come, relational, and process legitimacy. However, although between the beliefs held by specific individuals or groups governments cannot always control outcomes directly and the normative content of the rules—both formal and or change beliefs quickly, they can control processes. informal—governing the power relationship in question. It Investing in strengthening process legitimacy may induce is related to the degree to which individuals share beliefs more voluntary compliance and enable governments to either about the qualities of the power holder or the degree deliver on commitments more effectively. Delivering on to which the power arrangement serves a recognizable commitments feeds in turn back into building trust in general interest (Nixon, Mallett, and McCullough 2016). In institutions and strengthening outcome legitimacy. Thus certain extreme cases, even if a process is not fair, a constit- investing in process legitimacy is an important foundation uency could be willing to accept a government’s authority of igniting positive dynamics between governance and because it shares its values. This arrangement is related development over time. Source: WDR 2017 team. Solving commitment problems: Sirens’ luring song, Ulysses has his sailors bind him The role of incentives to the ship’s mast to remove the option of jumping The incentives that actors have to comply with agree- overboard. To understand why powerful actors would ments are fundamental to enabling commitment in tie their own hands in this way and whether that the policy arena. What types of institutional arrange- agreement will be credible, one has to examine the ments can provide the right incentives to help ensure context of a specific set of actors, rules, and poten- credible commitment? How can those in power bind tial incentives to break the agreement. For example, themselves in such a way that their promises become granting independence to the central bank is a mech- credible, even when it is in their short-term interest anism that governments use to tie their hands in an to break them? attempt to gain credibility that they will not use infla- Think of Ulysses in Homer’s Odyssey. In order to tion to finance public expenditures (Cukierman and resist the short-term temptation to succumb to the Lippi 1999). Similarly, anticorruption agencies play an 66 | World Development Report 2017 important role in constraining the use of public office changed society’s perception about its capacity to hold for private gain. However, these institutions will be powerful actors accountable (box 2.10). ineffective if they are unable to alter the existing Often, commitment devices at a certain level may incentive structure in a way that makes it credible need to be complemented by devices at another level to enforce the new regulations and the underlying for the commitment to be taken seriously by mar- contract of the new agency (Acemoglu and others ket players. For example, international and bilateral 2008). Spotlight 1 provides a more detailed discussion agreements, such as multilateral trade agreements on corruption from the perspective of the WDR 2017 and bilateral investment agreements, can be a com- framework. mitment device.19 However, the mere presence of Around the world, different institutional forms such agreements may not lead to a strong commit- have been established to make commitment credible. ment, as demonstrated by the numerous examples In Guatemala, for example, in the aftermath of the of violations of the provisions of bilateral investment peace agreements of the 1990s and after an increase in agreements. Thus complementary arrangements may the political violence that raised concern among many be needed to provide a stronger signal about commit- actors, an agreement was reached to turn to interna- ment. An example is the existence of mechanisms that tional actors and create the International Commission systematically capture investor grievances, especially against Impunity in Guatemala (CICIG), which has those related to violations of investment agreements, Box 2.10  How an international commission enabled a credible commitment to fight criminals’ impunity in Guatemala “If you are watching this message, it is because I was assas- Fighting impunity meant dismantling these criminal sinated by President Álvaro Colom, with help from Colom’s organizations and eradicating their corrupting power within private secretary Gustavo Alejos.” The release of a YouTube state institutions, which were protecting them from being video in 2009, in which Rodrigo Rosenberg makes this effectively prosecuted. Three of the greatest strengths of statement accusing the president of Guatemala of his mur- the CICIG’s mandate were its independent capacity for der, precipitated a political crisis in the country. The oppo- criminal investigation; its prosecution capacity through a sition to the president asked for his immediate resignation, specific fiscalia a of the Office of the Attorney General (AG), and only a rapid and effective independent investigation of which allowed it to investigate even in the face of internal the situation prevented an escalation of political instability opposition within the AG; and its independent voice in rela- in Guatemala. The investigation revealed that the hitman tion to the mass media. These arrangements enabled the who had killed Rosenberg was not hired by the president, CICIG to credibly commit to prosecuting impunity. but was in fact hired by Rosenberg himself: Rosenberg had Since 2007, the CICIG has had a deep impact on the ordered his own assassination. capacity of the Office of the Attorney General to credibly The investigation was conducted by the International prosecute criminal networks, even leading to the peaceful Commission against Impunity in Guatemala (CICIG), and it resignation of the president in 2015 after the discovery of provided the credibility needed to resolve this crisis in a peace- his involvement in “La Linea,” a criminal network linked to ful manner. The CICIG, backed by the United Nations, was customs fraud. Moreover, national security forces, judges, approved in 2007 by Guatemala’s Congress of the Republic. It and members of the congress have been empowered in was mandated to help Guatemala’s judicial authorities in their their public roles, and the renewed commitment to pros- fight against illegal criminal organizations that had infiltrated ecution has increased pressure to reduce participation the state’s security and judicial institutions. The approval in illegal activities. The CICIG’s political power today is came after a broad wave of homicides that infuriated citizens’ well beyond that originally conceived for an international organizations and the mass media. The growing perception organization, which raises both concerns and enthusiasm was that the national authorities had lost any capacity to cred- in Guatemala. ibly prosecute large and powerful criminal networks. Source: Carrera 2016. a. A fiscalia is a district attorney or public prosecutor. Enhancing governance for development: Why policies fail | 67 and help resolve them. The effective working of such of more actors in the decision-making process is not mechanisms gives investors comfort and strengthens necessarily a guarantee of better decisions, a more the commitment that governments make when they contestable policy arena tends to be associated with sign investment agreements. Here, the important higher levels of process legitimacy and cooperation. thing is the effective working of the grievance mech- The ability of elites and citizens to reach and sus- anism rather than the particular form it takes. tain agreements is critical to policy effectiveness. In agreements, actors reach policy compromises that can Preferences and Solving coordination problems: be enforced, meaning that actors can ensure that the beliefs play an The role of preferences and beliefs other actors will fulfill their part of the agreement. important role Preferences and beliefs play an important role in To reach and sustain agreements in the policy arena, in coordination. coordination. Coordination can help to understand citizens and elites rely on two types of mechanisms. Coordination can phenomena ranging from discrimination, to corrup- In deals-based mechanisms, personal relations or mech- help to understand tion, to technological revolutions, to tax compliance anisms such as rent distribution are used to carry out phenomena (Tirole 1996; Mokyr 2013). For example, when Italian agreements. In rules-based mechanisms, formal laws ranging from prime minister Silvio Berlusconi said publicly he con- and legal institutions are used to enforce agreements. discrimination, sidered the tax burden and tax enforcement for entre- Deals-based mechanisms can take many forms, from to corruption, preneurs to be excessive, he was sending a signal that, gossip and stigmatization, to informal threats, to to technological as long as he was in charge, tax enforcement would physical injury—even execution (Boix 2015). When the revolutions, to tax be weaker, actually leading to lower tax compliance size of the community and its heterogeneity increase, compliance. by businesses (Raitano and Fantozzi 2015). By con- it becomes more difficult to use relation-based trast, when citizens of the United Kingdom received mechanisms to enforce agreements and hold actors letters informing them that most of their neighbors accountable. As social distance increases, societies had already paid their taxes, tax compliance increased tend to move toward rules-based mechanisms such (BIT 2012). as courts, legislatures, and political parties to enforce Consider a society with a significant degree of agreements. Although deals-based mechanisms can political corruption. The higher the incidence of cor- function well for smaller and more homogeneous ruption, the lower is the cost of being corrupt in terms groups, rules-based mechanisms become necessary of damage to the public’s perceptions of politicians. In to facilitate cooperation in larger and more heteroge- such a situation, where corruption has become a norm, neous groups (Li 1999; Dixit 2003, 2004). policies to deter corruption will be less effective or Removing barriers to entry to the policy arena can will require high and potentially unfeasible sanctions help to enhance contestability. For example, in Brazil (Tirole 1996). However, policies to induce coordination the replacement of paper ballots with electronic bal- can help countries break free from path dependence lots effectively shifted the balance of power toward and are often needed only as a temporary interven- previously disengaged illiterate voters, reducing the tion. For example, as Tirole (1996) points out, it may barriers to their participation and increasing contest- be possible for a temporary anticorruption program ability (box 2.11). The electronic ballots made it much to move an economy from a high-corruption equilib- easier for those with little or no education to cast rium (based on expectations of high corruption) to a their vote, thereby de facto enfranchising more than low-corruption equilibrium (based on expectations of 10 percent of the Brazilian electorate and ultimately low corruption with respect to the behavior of others). affecting spending on public health care. Participation and ownership in the design of rules Solving cooperation problems: can increase voluntary compliance. Consider the case The role of contestability of managing local water resources in India. In the Who is included and who is excluded from the policy southeastern Indian state of Tamil Nadu, cooperation arena are determined by the relative power of the to manage public irrigation systems at the commu- competing actors, as well as by the barriers to par- nity level is crucial to avoid free-riding and inefficient ticipation—that is, the contestability of the process. A water use. A large survey conducted in Tamil Nadu more contestable policy arena is one in which actors was used to study the determinants of cooperation in or groups who have reason to participate in the these communities. The empirical analysis looked at decision-making process have ways to express their the effects of institutional, socioeconomic, and topo- interests and exert influence. Contestability is closely graphic factors on cooperative behavior, measured linked to the notion of inclusion, but it emphasizes by how well the systems are maintained, the absence the barriers to participation. Although the inclusion of conflict, and the extent of violations of rules. 68 | World Development Report 2017 Box 2.11 How the introduction of electronic voting in Brazil reshaped the policy arena and led to more pro-poor policies In many developed countries, the act of filling in a ballot of voters—often more than one-quarter of the votes were may appear to be a trivial task. One reason is the level of deemed invalid and not counted. However, that situation education of the average citizen. The same may not be true changed in 1996 with the introduction of electronic voting of many illiterate or poorly educated citizens in rural and devices. Their simple interface allowed voters to select the other areas of the developing world. In Brazil, illiterate cit- number of their candidate, and a picture of the candidate izens were not legally allowed to vote until 1985. A process appeared on the screen before voters validated their vote that began in 1986 led to enfranchising these groups in the (figure B2.11.1, panel b). This simplification of the voting 1988 constitution. However, until 1996 the system involved procedures greatly reduced the number of invalid votes a complex paper ballot. Because of the country’s electoral and effectively enfranchised more than 10 percent of the rules, hundreds of candidates commonly run for state leg- Brazilian electorate, whose votes previously had not been islatures, making it impossible to list candidates in paper counted. ballots. Voters were thus asked to write the name (or num- Figure B2.11.2 shows the effect of electronic voting on ber) of the candidate on the ballot (figure B2.11.1, panel a). valid votes. The analysis exploits the fact that in 1994 all At the time, roughly one-quarter of Brazilians were Brazilian municipalities used paper ballots. In the 1998 not functionally literate. Thus these complex paper ballots election, smaller towns still used paper ballots, but munic- led to the de facto disenfranchisement of a large fraction ipalities with more than 40,500 voters had switched to Figure B2.11.1 An electronic ballot made it much easier than a paper ballot for those with little or no education to cast their vote in Brazil a. Paper ballot b. Electronic ballot Source: Thomas Fujiwara, “Voting Technology, Political Responsiveness, and Infant Health: Evidence from Brazil,” Econometrica 83, no. 2 (2015): 429. Printed with permission of The Econometric Society. Further permission required for reuse. (Box continues next page) Enhancing governance for development: Why policies fail | 69 Box 2.11  How the introduction of electronic voting in Brazil reshaped the policy arena and led to more pro-poor policies (continued) Figure B2.11.2 Electronic voting reduced the number of invalid votes in Brazil 100 x x x x x x x x x x x x x x x x x x x x x x x x x 90 x x x x x x x x x x x x Valid votes (%) x x 80 70 60 0 20 40 60 80 100 Number of registered voters (thousands), 1996 x Electronic voting, 2002 Paper ballots, 1998 x Electronic voting, 1998 Paper ballots, 1994 40,500 voter threshold Source: Thomas Fujiwara, “Voting Technology, Political Responsiveness, and Infant Health: Evidence from Brazil,” Econometrica 83, no. 2 (2015): 435. Adapted with permission of The Econometric Society. Further permission required for reuse. Note: Graph shows valid votes/turnout—local averages and parametric fit. Each marker represents the average value of the variable in a 4,000-voter bin. The continuous lines are from a quadratic fit over the original (“unbinned”) data. electronic voting. By the 2002 election, electronic voting voters had substantial consequences on policy making and was the sole method of voting in Brazil. development outcomes. The effects of the transition are illustrated by the towns These newly enfranchised voters chose more pro- of Altamira and Paracatu, which were otherwise similar. gressive legislators for the state assemblies, which then Because Altamira had 40,461 registered voters—39 less increased spending on public health care by 34 percent than the threshold of 40,500 for electronic voting—the from 1998 to 2006. In Brazil, public health care is largely municipality used paper ballots for the 1998 election, a pro-poor policy because the better-off citizens rely on whereas Paracatu, just over the threshold with 40,917 private health services. This additional spending then registered voters, used electronic voting. The electronic increased access to prenatal health care and had an impact voting led to a significant difference in valid votes: 79 on health outcomes. Fujiwara (2015) estimates that elec- percent of registered voters in Altamira versus 90 percent tronic voting was responsible for lowering the prevalence in Paracatu. Multiplied across many towns in Brazil, this of low birth weights (a common measure of infant health) de facto enfranchisement of millions of previously excluded among mothers without primary schooling by 6.8 percent. Source: Prepared by Thomas Fujiwara for WDR 2017. The results from the analysis highlight the impor- Actors marginalized from the decision-making tance of being involved in the crafting of the rules. process have fewer incentives to comply with the pol- The study found that when a farmer believes rules icy. In Tyler’s classic study, individuals comply with have been created jointly (along with the elite or the law primarily not out of fear of punishment (deter- government), the farmer is more likely to have a pos- rence) but because they believe it to be fair (Tyler 1990). itive perception of both the allocation system and the Tyler and Huo (2002) have looked at the role that being compliance of other farmers with the rules. Similarly, treated fairly plays in individuals’ acceptance of the elites violate water allocation rules less when they are legal system. Based on a survey of citizens in Los Ange- the ones who crafted the rules (Bardhan 2005). les and Oakland, California, who have been in contact 70 | World Development Report 2017 Table 2.1 Three principles for rethinking governance for development Traditional approach Principles for rethinking governance for development Invest in designing the right form of institutions. Think not only about the form of institutions, but also about their functions. Build the capacity of institutions to implement policies. Think not only about capacity building, but also about power asymmetries. Focus on strengthening the rule of law to ensure that those Think not only about the rule of law, but also about the role of law. policies and rules are applied impersonally. Source: WDR 2017 team. with judges, prosecutors, or the police, they found that incentives, reshape preferences and beliefs, and members of minority groups who perceive that they enhance contestability—that is, think not only about have been treated unfairly are less likely to trust the the rule of law, but also about the role of law (table 2.1). subsequent decisions of law enforcement authorities In practical terms, these principles mean that and to cooperate. Being treated with respect and dig- diagnostic approaches should zoom in on the specific nity and believing that the process has followed the commitment, coordination, and cooperation issues rules lead to higher compliance with the law, even if that limit the attainment of socially desirable out- the outcomes do not always favor individuals. comes and on the ways in which power asymmetries in the policy arena obstruct these functions. Iden- Three guiding principles tifying the different levers of change—incentives, First, it is important to think not only about what preferences and beliefs, and contestability—can help form institutions should have, but also about the to reshape the policy arena to expand the set of pol- functions that institutions must perform—that is, icies that can be implemented. This includes taking think not only about the form of institutions, but also into account the relevant interventions or changes about their functions. Second, it is important to think in rules, at different levels, to solve the specific func- that, although capacity building matters, how to use tional challenges. Anticipating the potential opposi- capacity and where to invest in capacity depend on tion and taking into account the potential unintended the relative bargaining powers of actors—that is, consequences are also a central aspect of the process think not only about capacity building, but also about of designing and assessing policies (box 2.12). power asymmetries. Third, it is important to think that Figure 2.2 synthesizes the conceptual framework in order to achieve the rule of law, countries must presented in this Report. It illustrates the dynamic first strengthen the different roles of law to change interaction between governance and development. Box 2.12 The “rules game”: Lessons for reformers This Report encourages reformers to pay attention to the courts to enforce contract law. Ultimately, this reform did details of the rules game so that they can avoid two basic not produce the anticipated benefit, and it may even have mistakes. First, an act of reform taken by one player in a made matters worse. The courts, which previously offered rules game can backfire if the player does not consider the equal protection under criminal law, may no longer be able actions the reform will trigger in other players. For exam- to punish wealthy offenders who commit crimes. ple, an outsider might advise the legislature on the benefits Second, even if it produces better payoffs today, a of contract law. In response, the legislature might pass a reform could also backfire if it generates worse outcomes law that tells the courts to enforce contracts; the executive for the rules game that will be played in the future. This head of government might promise to promote judges who can be particularly important in terms of legitimacy. The follow the executive’s instruction to favor some people citizens of a nation may be willing to delegate enough in court cases; wealthy elites might pay the executive to power to their government to make it a dominant player receive special treatment in the courts; the executive might in the rules game for the nation. But they may be willing to use the money from the elites to finance an upcoming polit- do so only as long as they feel the government’s use of that ical campaign; and, as a result, citizens might not trust the power is legitimate. Source: WDR 2017 team. Enhancing governance for development: Why policies fail | 71 Figure 2.2 WDR 2017 framework: Governance, law, which power at a point in time was in the hands of and development a few have managed to develop into ones that are Power Power more open, more prosperous, and more secure (Dea- asymmetries asymmetries ton 2013; Boix 2015). Political pressure for reform can come from the top-down (elite bargains) or from the bottom-up (citizen engagement), and often it is the result of coalitions between elites and citizens. Elites Policy Development and citizens are also influenced by international fac- Rules arena outcomes tors, which can play a role in influencing the local bar- gaining dynamics. Although external actors cannot engineer domestic development, they can play a role in strengthening or weakening the relative power of Commitment Commitment different actors. Part III of this Report will explore Coordination Coordination these dynamics. Cooperation Cooperation Moreover, governance and development dynam- Source: WDR 2017 team. ics are a two-way street: the process of development Note: “Rules” refers to formal and informal rules (norms). “Development outcomes” refers to security, is constantly reallocating resources, conferring new growth, and equity. The actors in the policy arena can be grouped into elites, citizens, and international actors. de facto power on actors, and shifting norms over time.20 This process includes external (exogenous) At its center is the policy arena, the space where shocks (such as a regional or worldwide financial actors bargain and reach agreements about policies crisis) and internal (endogenous) structural changes and rules. Given a set of rules, the right-hand side of (such as a demographic shift) or norm-based changes the framework shows how commitment, coordina- (such as changes in gender roles). This feedback tion, and cooperation among actors lead to specific process alters the distribution of power and in turn development outcomes (the outcome game in box 2.7). affects the ability of different groups of citizens and But actors can also agree to change the rules, which is elites to solve their collective action problems and illustrated in the left-hand side of the framework (the influence the policy arena. rules game in box 2.12). Both changes in development Law is a powerful instrument to reshape the policy outcomes (such as the composition of growth or the arena because it is the tool through which policies are concentration of wealth) and changes in rules (both codified and implemented, as well as the tool through formal and informal) reshape the power asymmetries which power is allocated and contested. Although manifested in the policy arena. law generally reflects the interests of those actors with greater bargaining power, it also has proven to A dynamic process: be an important instrument for change. By its nature, law is a device that provides a particular language, Drivers of change and the structure, and formality for ordering things, and this role of law characteristic gives it the potential to become a force When can meaningful changes occur in the nature independent of the initial powers and intentions of governance? Overcoming harmful power asymme- behind it. Law, often in combination with other social tries by adopting rules that change incentives, reshape and political strategies, can be used as a commitment preferences and beliefs, or enhance contestability and coordination device to promote accountability, may be difficult because those currently in power and also to change the rules of the game to foster have incentives not to introduce reforms that would more equitable bargaining spaces. Effective laws are limit their power. Moreover, even dramatic shifts in those that are able to change incentives by changing who has power in the policy arena may not be enough payoffs to lower the cost of compliance (or increase if the new elites, once in power, have incentives to use the cost of noncompliance), change preferences by the same mechanisms to extract rents from society enhancing substantive focal points around which that were used by the previous elites (Acemoglu and coordination can occur, and shape bargaining spaces Robinson 2008). to increase contestability by underrepresented actors. However, despite the difficulties, history has The next chapter looks at these various roles of law in shown that change can happen; many societies in greater depth. 72 | World Development Report 2017 Notes 13. The problem of sustaining cooperation in transac- tions or agreements is known in the economics and 1. “Movie Review: Amka and the Three Golden Rules | political science literature as transaction costs. The The UB Post,” http://ubpost.mongolnews.mn, April term originated with Coase (1960) and Williamson 16, 2014. (1989), and was later expanded to politics by North 2. The importance of fiscal prudence is embedded (1990b) and Dixit (1996). in the Netherlandic value system, as much as the 14. This is usually called the social conflict view. It importance of an open debate about policies that emphasizes that policies arise not because they are involve the use of public resources. Nicolaas Gerard efficient but because of their distinct distributional Pierson, the Netherlands’ minister of finance and consequences (Bardhan 1989; Knight 1993; Acemo- one of the most respected economists in the world glu and Robinson 2006). This section builds on the toward the end of the 19th century, said more than work of these as well as other scholars, including 120 years ago that taxes should be invested wisely or Buchanan and Tullock (1962); Weingast and Mar- they would not be justified, and that opportunities shall (1988); Dixit (1996); Acemoglu (2003); Spiller for investments should be taken when “a concur- and Tommasi (2003); IDB (2005); Stein and others rence of favorable circumstances generates a tempo- (2007); North, Wallis, and Weingast (2009); Besley rary budget surplus e.g. abundant harvests leading to and Persson (2011). extra tax revenues” (Pierson 1890). 15. Klein, Crawford, and Alchian (1978) note that the 3. Social norms are beliefs that are shared by a group or level of specific investments in a contractual rela- community. In this way, norms can be understood as tionship depends on the expectation of obtaining “commonly shared beliefs.” a fair rate of return on that investment. In this 4. See Rosenstein-Rodan (1943). Murphy, Shleifer, and case, the investment refers to the fact that violent Vishny (1989) model a more recent version of this groups will need to give up power to pursue growth- idea. enhancing policies. However, once they give up 5. Hoff (2000) reviews models of coordination fail- power, they fear not obtaining a fair return on their ures in a wide range of contexts, including social investment. Dixit (1996) extended the reasoning to norms and corruption. Cooper (1999) reviews political transactions. macroeconomic models of coordination failures, 16. This includes material (physical and financial) while Rodríguez-Clare (2005) reviews microeco- resources and technical ability. nomic models of coordination failures. 17. See Ivaldi and others (2003) and Spiller and Tommasi 6. See Hoff and Stiglitz (2001) for several other (2003, 2007). examples of coordination problems that are key to 18. The importance of process legitimacy is captured development. by Levi (2003, 88): “[C]itizens are willing to go along 7. Examples of the cohesion and inequality-conflict with a policy they do not prefer as long as it is made cycle are found in Esteban and Ray (2011) and Gintis according to a process they deem legitimate, and (2000). Bardhan (2005) discusses cooperation in the they are less willing to comply with a policy they like context of scarcity and conflict. if the process was problematic.” 8. A similar approach has been developed in a pioneer- 19. See Tornell and Esquivel (1997). Also see ing work, The Politics of Policies: The Role of Political Pro- González-Reyes (2016) for a discussion of the North cess in Successful Public Policies, in the context of Latin American Free Trade Agreement (NAFTA) in the America (IDB 2005). early 1990s. 20. Hirschman (1958); Streeten (1959); Ray (2010). 9. Lukes (1986) presents an extensive discussion of the concept of power from different perspectives, as summarized in the definition used in this Report. Referencesa 10. The term elite is frequently used in popular writing Acemoglu, Daron. 2003. “Why Not a Political Coase and in academic literature, but it is often not defined. Theorem? Social Conflict, Commitment, and Politics.” A search of the word elite returned 913,000 results in Journal of Comparative Economics 31 (4): 620–52. Google Scholar, while a search in the writings rarely Acemoglu, Daron, Simon Johnson, Pablo Querubin, and reveals a clear definition. James A. Robinson. 2008. “When Does Policy Reform 11. In the literature of public choice tradition, this has Work? The Case of Central Bank Independence.” been described as “politics without romance.” See Brookings Papers on Economic Activity 2008 (1): 351–418. Buchanan and Tullock (1962) and Mueller (2003). 12. 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Although in performing their intended function, which is to the short term corruption may be able to “grease the ensure the credible commitment of those in power to wheels of the economy,” in the long term it negatively not abuse that power for private gain. These under- affects growth by diverting resources from more lying reasons are related to systemic features in the productive uses and negatively affects equity by dis- policy arena such as entrenched power structures or proportionately benefiting those in power. Moreover, social norms. Consequently, corruption is less about it undermines legitimacy because it affects public individual transactions and more about networks of perceptions of the fairness of the decision-making actors (Schmidt 2016). Thus changes in formal rules process (Rose-Ackerman 2016). and anticorruption strategies are likely to be effec- The first generation of high-income member tively enforced only when they are aligned with the states of the Organisation for Economic Co-operation interests of powerful actors in a country and are able and Development (OECD) has achieved significant to trigger broader changes in social expectations. control of corruption through development processes and institutional forms that many other countries Corruption and social order: around the world have since tried to replicate without achieving the desired results. These anticorruption Is corruption inescapable? strategies often wrongly assume that aggregate lev- The first step in rethinking corruption is to recognize els of corruption can be reduced through a top-down that corruption is not a social “malady” or “disease” combination of policies that improve enforcement of to be eradicated, but rather a built-in feature of gov- the rule of law, change the expected returns to corrup- ernance interactions. Countries today are on a contin- tion (for example, through bureaucratic pay increases, uum of governance between a system in which rules greater transparency, or harsher punishments), and are applied by virtue of personal status and one in simplify procedures to reduce the opportunities for which they are applied impersonally. Unfortunately, corruption. These strategies have generally delivered assuming that a particularistic system is the exception modest reductions in corruption in contexts in which and an impersonal system is the norm is not histor- the configuration of social power does not support ically accurate. In fact, the public-private separation the enforcement of generalized rule-following behav- in public affairs and the complete autonomy of state ior (Khan 2016). from private interests are relatively recent. All societ- ies start from being “owned” by a few individuals who control all resources. As states develop historically, WDR 2017 team, based on inputs from Alina Mungiu-Pippidi individual autonomy grows, but so too do the material and Mushtaq H. Khan. resources available for spoiling (Mungiu-Pippidi 2016). Corruption | 77 In less-developed societies, powerful groups are which established the principle that public officials fewer in number and less dependent on competitive- should be chosen on the basis of merit, was passed ness and market transactions for their revenues. They by Congress. can feasibly interact with each other in informal or As the incentives of powerful actors change deals-based ways and generate rents through political throughout the process of development, they can connections. If the most powerful groups in a coun- feed back into changing social norms, which rein- try do not want the enforcement of formal rules, it force the existing dynamics of corruption. In this is unlikely that the rule of law will emerge through sense, corruption can become an equilibrium because enforcement efforts from above. Policy makers corrupt systems make it very costly for individuals and political parties in these countries may be able to behave honestly. For example, if the majority of to raise significant revenues only in informal and government bureaucrats favor their in-group or take deals-based ways because powerful groups prevent bribes, individuals who do not do so will be criticized the implementation of formal rules to raise taxation. by their in-group and lose out on an often indispens- As a result, the most feasible way for policy makers able source of additional income. Thus entrenched and political parties to reward their supporters is to corruption may lead to a higher tolerance for corrupt allow them to violate rules. A common manifestation behavior. Because governance interventions affect is when parties buy political support in exchange development outcomes, which in turn affect gover- for jobs in the public sector, often undermining a nance constraints, one is confronted with a complex, commitment to a merit-based performance evalua- coevolutionary transition process that does not fol- tion. In general, it is difficult for political leaders to low a predictable path and requires continual adap- exercise the political will to enforce rules when their tive interventions. tenure depends on doing otherwise (Khan 2016). If the demand for control of corruption is poor because spoils are used efficiently to buy off certain strategic What can be done? groups, then collective action becomes impossible to The development process plays an important role achieve and the equilibrium remains, with particular- in reducing corruption by redistributing power and ism as the norm. changing norms in the policy arena, but development Countries become more advanced when they have explains only about half of the variation in control a more diverse set of productive organizations in dif- of corruption (Mungiu-Pippidi 2015). An analysis of ferent sectors and activities. As an economy becomes a large sample of countries reveals how some coun- more productive, corruption becomes more costly tries overperform and others underperform in their because it restricts the functioning of the market. As expected levels of controlling corruption given their they pay more taxes, fund political parties, and employ levels of development as measured by the Human more people, business elites have an increasing inter- Development Index (figure S1.1). This heterogeneity est in the enforcement of the formal rules required in progress suggests that reform is possible, even in to conduct complex business and transactions (Khan countries with lower levels of development. In con- 2016). Moreover, as countries develop, emergent texts in which levels of development and political socioeconomic classes can strengthen coalitions to arrangements do not yet allow the effective enforce- demand better governance. In particular, larger mid- ment of formal rules, anticorruption strategies should dle classes have historically played an important role sequentially attack corruption at critical points where in pressuring governments to deliver better public anticorruption measures are both feasible and would services, such as education and health. These forces have a high impact on development. are illustrated by the shift of the U.S. political system Anticorruption priorities will depend on the coun- in the 19th century away from patronage toward mer- try and on the sectors and processes that are most itocracy (Fukuyama 2014). As economic development important for accelerating development progress. A advanced, the emerging industrial urban elites began common error is to equate the impact of corruption to demand more efficient government services. with the magnitude of bribes. An activity with rela- Moreover, the business elites found an ally against tively small bribes can have a big impact on develop- corruption in the emerging civil society, with a better- ment if, for example, the bribes prevent the enforce- educated middle class. When newly elected presi- ment of regulations on food adulteration. Other dent James A. Garfield was assassinated in 1881 by activities characterized by significant bribes may be a would-be office seeker, this coalition of new social profit-sharing transfers to politicians with a lower groups was ready to mobilize, and the Pendleton Act, impact on development if the corruption does not 78 | World Development Report 2017 Figure S1.1 Development accounts and to enhance contestability by engaging actors in for only about half of the variation in civil society and the media. Increasing constraints, control of corruption for example, by promoting freedom of the media and freedom of the internet, is key to strengthening an Predicted control of corruption scores based on Human Development Index scores, selected countries enabling environment for reform (Mungiu-Pippidi 2016). One particularly promising avenue of action is Best 3.0 to take advantage of technology. Digitalization helps DNK transparency and rationalization of fiscal manage- 2.5 NZL FIN CHE NOR LUX SWESGP NLD ISL DEUAUS ment on the government side, and it creates empow- 2.0 Absence of Corruption JPN CAN ARE AUT BEL GBR ered citizens on the society side. Internet media in 1.5 URY CHL EST BTN GEO general and social networks in particular are now 1.0 BWA indispensable components of citizen empowerment 0.5 VUT NAM LSO ITA CZE and collective action. 0 SEN SLB BRN BFA MWI SWZ HRV GRC ROU International actors, such as aid donors, also 0.5 PER PAN MNG ECU BLR BGR LBR ETH ALBMEXKAZ ARG ERI MOZ MDV PRYDOM ARM SRB TTO RUS play a key role in the local fights against corruption, –1.0 AZELBN KHM SYR UZB IRQ LBY UKR and they should ensure that they do not increase –1.5 resources for corruption. Meaningful international –2.0 Worst 0.3 anticorruption efforts should coordinate and engage 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Worst Best with actors outside the state, including local commu- HDI score nities, nongovernmental organizations, and multi- Sources: WDR 2017 team, based on data from the United Nations Develop- national businesses, to support domestic anticorrup- ment Programme (Human Development Index–HDI scores) and WDR 2017 tion reforms through tools such as the provision of Governance Indicators for Absence of Corruption, based on Mungiu-Pippidi 2015. information (reform evaluations and cross-country Note: Only outliers are labeled. Beige dots above (below) the line represent data) or legal mechanisms (international treaties and countries that overperform (underperform) on control of corruption given arbitration)see Rose-Ackerman (2016). their level of development. distort policy. A high-impact anticorruption approach References therefore has to assess anticorruption priorities, but it Fukuyama, Francis. 2014. Political Order and Political Decay: also has to be feasible. It has to gauge whether strat- From the Industrial Revolution to the Globalisation of egies can be designed to make enforcement easier by Democracy. New York: Farrar, Straus and Giroux. aligning with the interests of important stakeholders Khan, Mushtaq H. 2016. Background note on corruption, or by developing new coalitions (Khan 2016). WDR 2017, World Bank, Washington, DC. Although this way of looking at corruption con- Mungiu-Pippidi, Alina. 2015.  The Quest for Good Gover- nance: How Societies Develop Control of Corruption. Cam- trol does not allow for rigid, straightforward policy bridge, U.K.: Cambridge University Press. prescriptions, it is possible to identify a series of key ————. 2016. Background note on corruption, WDR 2017, strategies in countries that have managed in recent World Bank, Washington, DC. times to make progress in controlling corruption. Rose-Ackerman, S. R. 2016. Corruption and Government. To reduce corruption, reform coalitions will need Cambridge, U.K.: Cambridge University Press. to change incentives to limit the payoff of corrupt Schmidt, M. 2016. Background note on corruption, WDR officials through increased accountability of elites 2017, World Bank, Washington, DC. Corruption | 79 SPOTLIGHT 2 The governance challenges of managing risks Tackling environmental and sustainability challenges borne by U.S. households in the 2000s than in the depends on the availability of commitment mecha- 1970s and 1980s, increasing their vulnerability to nisms to address natural hazards and to protect the shocks such as illness, unemployment, and retire- environment and resources for future generations, ment. In western European countries, by contrast, who are not represented in the policy arena. When there is a tendency for governments to bear some of it comes to natural resources—and their links to the risks and protect households from shocks, which risk management—cooperation is also challenging also has implications for the fiscal sustainability of because opportunistic overexploitation of resources that social contract, particularly because of the cur- is the norm in many societies. rent demographic trends (World Bank 2014). Defining an acceptable level of risk is difficult What is an acceptable level because of the complexity of the process for deter- mining its distribution and because of the wide of risk? differences in preferences, values, and beliefs. Some Many natural risks are systemic—and therefore col- individuals are more risk averse than others and may lective—by nature, and governments play a key role prefer a more cautionary approach. Defining a social in the management of such risks (World Bank 2014). level of acceptable risk is also difficult because of dif- For example, individuals cannot protect themselves ferences in sensitivity—for example, people have very against floods independently, and thus they must rely different sensitivity to local air pollution. In the pres- on what is put in place at the collective level. This is ence of such heterogeneity, designing homogeneous particularly true in high-density population areas regulations is challenging and highly dependent on with geographically concentered (agglomerated) considerations of equity (especially when sensitivity infrastructure. Despite regular claims that “disasters is correlated with other social factors). The selected are unacceptable,” removing all risks would be prohib- regulation is also unlikely to satisfy all individuals itively costly to governments. Thus a certain amount and may require compensatory action, which requires of risk must be accepted. Decisions on the acceptable a process to decide who deserves compensation and level of risk that individuals must bear should be to ensure that compensation is proportional to the made through a collective political process. What losses and does not create long-term irreversible costs. risks are mitigated through markets and what risks— and whose risks—are dealt with through public action are therefore governance-related decisions. How can risk be allocated In The Great Risk Shift, Jacob Hacker (2006) across households and describes how a larger share of economic risks were over time? Stéphane Hallegatte, based on World Bank (2014) and Fay and When risks are borne by households, existing inequi- others (2015). ties can be manifested and reinforced. For example, 80 | World Development Report 2017 when a big snowstorm in the Washington, D.C., area exercise carried out using data from developing coun- leaves many roads blocked and public transportation tries shows that subtracting $100 from fossil fuel sub- disrupted for two weeks, the option of removing the sidies and redistributing the money equally through- snow in order to get to work is open only to those who out the population would on average transfer $13 to can afford to pay for it. Less well-off people are left the bottom quintile of the income distribution and not only unable to leave their homes, but also unable take away $23 from the top quintile. Redistribution to generate income because of the lack of mobility, has been shown to significantly increase the odds that deepening the effects of the shock on their welfare. reforms will succeed. A review of reforms in the Mid- Risk is distributed not only across households but dle East and North Africa classifies all reforms with also over time. Even more complicated are cases in cash and in-kind transfers as successful, as opposed which the benefits of risk management extend over to only 17 percent of those without (Sdralevich and the very long term. For example, for climate change others 2014). the beneficiaries are not even born yet to protect their Another factor in the success of reforms is the interests. Dispersed—or unrepresented—interests are alignment of incentives in the policy arena in such a classic issue leading to government failures. a way that the commitment to a long-term objective can be credible. Returning to the example of climate change policies, consider the role of carbon pricing. How can political will for risk Carbon prices are critical for the efficiency of the tran- management be generated sition toward the zero carbon emission economy that in the face of dispersed is required to stabilize climate change. However, a car- bon price alone is unlikely to provide enough incen- benefits? tive to invest in new, radically different technologies Even when they agree on an acceptable level and allo- or to change long-term investment because the long- cation of risk, politicians may be reluctant to devote term price signal is hardly predictable and credible. financial and political capital to risk management Given the expected lifetime of power plants, a credible efforts because the costs tend to be immediate, con- carbon price pathway would have to be announced centrated, and observable, whereas the benefits are at least three decades in advance to spur the optimal longer term, distributed more broadly, and often less amount of investment in low-carbon power plants. visible. For example, when prohibiting development But doing so is difficult because governments have a in flood zones, decision makers impose a cost on land- very limited ability to commit over such long periods owners who will naturally tend to oppose this new (Helm, Hepburn, and Mash 2003; Brunner, Flachsland, regulatory constraint. On the other hand, the people and Marschinski 2012). Thus to reduce emissions protected by the regulation—for example, future through investments with long-term consequences buyers of apartments in the newly developed flood- (such as infrastructure, research and development, prone areas—are often not aware that the regulation and long-lived capital), additional regulations, norms, may eventually protect them and therefore rarely take or direct investments are needed. Policy makers action to support it. could, for example, kick-start the transition either by To garner political support, policy packages need temporarily supporting investments in low-carbon to be socially acceptable and thus consistent with technologies (Acemoglu and others 2012) or by impos- a country’s social objectives, such as protecting the ing additional regulations or performance standards poor. What does this mean in practice for designing (Rozenberg, Vogt-Schilb, and Hallegatte 2014). policies that are more likely to succeed? Consider The lack of well-accepted indicators for risk makes countries seeking to adopt climate change policies. it difficult to measure the performance of decision Although the poor are expected to benefit in the long makers and to make them accountable for their run from mitigation policies because they are the choices in terms of risk management. However, evi- most vulnerable to climate change, these types of pol- dence from environmental issues such as asbestos, icies are not necessarily pro-poor in the short run. It is lead paint, and tobacco use reveals that increasing therefore critical to use the savings or new proceeds transparency and providing a voice to dispersed generated by climate policies to compensate poor interests help avoid capture by interest groups and people, promote poverty reduction, and boost safety improve policy decisions. Contributing factors, such nets. One way to do that is by recycling revenue from as when civil society organizations are able to develop carbon pricing instruments through tax cuts and by independent expertise and freely communicate their increasing transfers to the population. A modeling conclusions through the media, internet, and social The governance challenges of managing risks | 81 networks, as well as when there is free access to data Hacker, Jacob. 2006. The Great Risk Shift. New York: and some legal protection for whistle-blowers, can Oxford University Press. help to strengthen the effectiveness of risk manage- Helm, D., C. Hepburn, and R. Mash. 2003. “Credible ment policies. Carbon Policy.” Oxford Review of Economic Policy 19: 438–50. Rozenberg, Julie, Adrien Vogt-Schilb, and Stéphane References Hallegatte. 2014. “Transition to Clean Capital, Acemoglu, D., P. Aghion, L. Bursztyn, and D. Hemous. Irreversible Investment, and Stranded Assets.” 2012. “The Environment and Directed Technical Policy Research Working Paper 6859, World Bank, Change.” American Economic Review 102 (1): 131–66. Washington, DC. Brunner, S., C. Flachsland, and M. Marschinski. 2012. Sdralevich, Carlo, Randa Sab, Younes Zouhar, and “Credible Commitment in Carbon Policy.” Climate Giorgia Albertin. 2014. Subsidy Reform in the Middle Policy 12 (2): 255–71. East and North Africa: Recent Progress and Challenges Fay, Marianne, Stéphane Hallegatte, Adrien Vogt- Ahead. Washington, DC: International Monetary Schilb, Julie Rozenberg, Ulf Narloch, and Tom Fund. Kerr. 2015. Decarbonizing Development: Three Steps to World Bank. 2014. World Development Report 2014: Risk a Zero-Carbon Future. Climate Change and Develop- and Opportunity—Managing Risk for Development. ment Series. Washington, DC: World Bank. Washington, DC: World Bank. 82 | World Development Report 2017 CHAPTER 3 The role of law Long before the Code of Hammurabi set the law for sometimes they are impossible to implement. Gov- ancient Mesopotamia, people subjected themselves— ernments may be unable to enact “good laws”—that sometimes by cooperative agreement, sometimes is, those reflecting first-best policy—or “good laws” under threat of force—to rules that would enable may lead to bad outcomes. And law itself may be used social and economic activities to be ordered. As soci- as a means of perpetuating insecurity, stagnation, eties evolved from close-knit kinship groups to larger and inequality. For example, for decades South Africa and more diverse communities with more complex sustained a brutal system of apartheid rooted in law. activities, the need for more formal rules increased It also has become common for political leaders in (Fukuyama 2010). In modern states, law serves three illiberal regimes to legitimize nondemocratic rule critical governance roles. First, it is through law and through changes to the constitution, such as amend- legal institutions that states seek to order the behavior ments that extend term limits. Every day, actions of individuals and organizations so economic and that exert power over others, such as displacing the social policies are converted into outcomes. Second, poor from their land, detaining dissidents, and deny- law defines the structure of government by ordering ing equal opportunities to women and minorities, power—that is, establishing and distributing authority are taken within the authority of the law. In well- and power among government actors and between documented cases, laws intended to secure prop- the state and citizens. And third, law also serves to erty rights have served to privilege powerful actors order contestation by providing the substantive and by allowing them to seize land and register it at the procedural tools needed to promote accountability, expense of rural farmers, or to perpetuate class sys- resolve disputes peacefully, and change the rules. tems and power relations.2 It has long been established that the rule of law— Law can be a double-edged sword: although it may which at its core requires that government officials serve to reinforce prevailing social and economic rela- and citizens be bound by and act consistently with the tions, it can also be a powerful tool of those seeking to The mere law—is the very basis of the good governance needed resist, challenge, and transform those relations.3 At the existence of formal to realize full social and economic potential. Empirical local, national, and global levels, states, elites, and citi- laws by no means studies have revealed the importance of law and legal zens increasingly turn to law as an important tool for leads to their institutions to improving the functioning of specific bargaining, enshrining, and challenging norms, poli- intended effects. institutions, enhancing growth, promoting secure cies, and their implementation. By its nature, law is a In many countries, property rights, improving access to credit, and deliv- device that provides a particular language, structure, laws remain ering justice in society.1 and formality for naming and ordering things, and unimplemented, or As everyday experience makes clear, however, the this characteristic gives it the potential to become a they are selectively mere existence of formal laws by no means leads to force independent of the initial powers and intentions implemented, or their intended effects. In many developing countries, behind it, even beyond the existence of independent sometimes they the laws on the books are just that; they remain unim- and effective legal institutions. Law is thus simulta- are impossible to plemented, or they are selectively implemented, or neously a product of social and power relations and implement. The role of law | 83 a tool for challenging and reshaping those relations. ordering, requires state-backed coercion, and encom- Law can change incentives by establishing different passes notions of justice (box 3.1). payoffs; it can serve as a focal point for coordinating This Report sidesteps these philosophical debates preferences and beliefs; and it can establish procedures and uses the term law or formal law in its most conven- and norms that increase the contestability of the policy tional sense to mean positive state laws—that is, laws arena. that are officially on the books of a given state—at the national or subnational level, whether they were passed by a legislature, enacted by fiat, or otherwise Law and the policy arena formalized. Law here means the de jure rules. The Like policy, law does not live in a vacuum. Following operation of law requires a legal system composed the discussion in chapter 2, the nature and effective- of actors and processes whose function it is to make, ness of laws are primarily endogenous to the dynam- interpret, advocate, and enforce the law. This system ics of governance in the policy arena. The ability of includes legislatures, judicial and law enforcement law—“words on paper”—to achieve its aims depends institutions, administrative agencies, as well as the on the extent to which it is backed up by a credible legal profession, advocates, and civil society groups. commitment in order to coordinate expectations In all societies, state law is but one of many rule about how others will behave and to induce cooper- systems that order behavior, authority, and contes- ation to promote public goods. This ability in turn is tation. These rule systems include customary and shaped by the interests of elites and by the prevailing religious law, cultural and social norms, functional social norms. normative systems (rule systems developed for the The task of defining law has captured the minds common pursuit of particular aims such as sports of legal scholars, philosophers, and sociologists for leagues or universities), and economic transactional centuries. H. L. A. Hart (1961, 1) observed that “few normative systems (Tamanaha 2008). Such legal and questions concerning human society have been asked normative pluralism (box 3.2) is neither inherently with such persistence and answered by serious think- good nor bad: it can pose challenges, but it can also ers in so many diverse, strange and even paradoxical generate opportunities. ways as the question ‘What is law?’ ” Theorists have Plural normative systems can complement state debated the essence of law for centuries, including laws by providing order where state institutions are the extent to which law refers to custom and social not accessible, by alleviating the burden on state Box 3.1 What is law? Countless theorists have attempted to define law. The those rules are made (secondary rules), without regard definitions generally fall into one of three categories, which for the justness of the law. Under this approach, evil legal were initially set forth two millennia ago in the Platonic systems count as law, but customary law and international dialogue Minos: (1) law involves principles of justice and law, which lack centralized enforcement systems, are not right; (2) law is an institutionalized rule system established considered fully legal. The third category is represented by governments; and (3) law consists of fundamental cus- by anthropologists and sociologists such as Eugen Ehrlich toms and usages that order social life. Adherents of the first and Bronislaw Malinowski, who focus on customary law or category are natural lawyers such as Thomas Aquinas, who living law. They reject the notion that law must consist of assert that the defining characteristic of law is its moral- an organized legal system and instead recognize that the ity, justice, and fairness. Evil legal systems or evil laws are central rules by which individuals abide in social interac- disqualified as law in this view. The second category aligns tions count as law. Three key fault lines run across these with H. L. A. Hart and other legal positivists, who base their conceptions of law: the first regarding the normative value definition on the existence of a legal system that consists of of law, the second the systematic form of law, and the third substantive laws (primary rules) and laws governing how the function of law. Source: Brian Tamanaha, Washington University in St. Louis. 84 | World Development Report 2017 Box 3.2 Legal and normative pluralism The phenomenon of “legal pluralism”—the coexistence A further source of normative pluralism is social norms— of multiple legal systems within a given community or generally accepted rules of behavior and social attitudes sociopolitical space—has existed throughout history and within a given social grouping. Although they may be less continues today in developing and developed countries visible than codified laws, they are highly influential. A alike. Modern forms of legal pluralism have their roots in vast literature documents how social norms derived from colonialism, through which Western legal systems were communal and identity groups, professional associations, created for colonists, whereas traditional systems were business practices, and the like govern the vast majority of maintained for the indigenous population. That traditional human behavior.a Social norms are a fundamental way of or customary law still dominates social regulation, dispute enabling social and economic transactions by coordinating resolution, and land governance in Africa and other parts peoples’ expectations about how others will act. Social of the developing world is well documented. In some sanctions, such as shame and loss of reputation, or at cases, customary law, including a variety of traditional times socially sanctioned violence, are a powerful means and hybrid institutional forms of dispute resolution, are of inducing cooperation to prevent what is regarded as formally recognized and incorporated into the legal sys- antisocial and deviant behavior (Platteau 2000). tem, such as in Ghana, South Africa, South Sudan, the Yet another source of normative pluralism is generated by Republic of Yemen, and several Pacific Islands states. In today’s globally interconnected world, in which a multitude others, such forms continue to provide the primary means of governmental, multilateral, and private actors establish of social ordering and dispute resolution in the absence and diffuse rules about a wide range of transactions and of access to state systems that are perceived as legiti- conduct (see chapter 9). Increasingly, the local experiences mate and effective, such as in Afghanistan, Liberia, and of law are informed by these broader rules covering topics Somalia. Customary legal systems reflect the dominant such as trade, labor, environment, natural resources, finan- (yet evolving, not static) values and power structures of cial institutions, public administration, intellectual property, the societies in which they are embedded, and as such are procurement, utility regulation, and human rights. These often thought to fall short of basic standards of nondis- rules can take the form of binding international treaties and crimination, rights, and due process. The extent to which contracts (hard law) or voluntary standards and guiding prin- they are considered legitimate and effective by local users ciples (soft law). These rules may reinforce, complement, or is an empirical question and a relative one in light of the compete with state law to govern public and private spaces available alternatives. (Braithwaite and Drahos 2000; Halliday and Shaffer 2015). Source: WDR 2017 team. a. Ellickson (1991); Sunstein (1996b); Basu (2000); Posner (2000); Dixit (2004). institutions, or by enabling diversity of preferences. certainty reduces incentives to solve disputes peace- For example, informal mediation of land disputes by fully (Eck 2014). Where formal state laws differ sharply community authorities, customary or religious deter- from the content of other prevailing social norms and mination of personal and family matters, and arbi- rule systems, they are less likely to be obeyed and may tration of contract disputes by business associations undermine trust in the state (Isser 2011). complement the state legal system in many countries. Finally, pluralism can help pave constructive However, in some cases multiple rule systems may pathways to development outcomes by enabling con- create confusion, undermine order, and perhaps lead testation and the shaping of preferences. Throughout to perverse outcomes. These issues could arise when history, social entrepreneurs and clever interme- people can no longer rely on the expectation that oth- diaries have proven to be deft at opportunistically ers will act in accordance with a certain set of rules selecting from among legal and normative claims (Basu 2000). In West Africa, violent communal land and authorities to advance their aims.4 Thus legal conflict is 200–350 percent more likely where there pluralism can serve to expand the languages and sites are competing legal authorities because the lack of in which contests over power are waged. In India’s The role of law | 85 Gujarat and Uttar Pradesh states, advocate groups (factoring in the likelihood of being caught) is higher established informal women’s courts (nari adalat) to than the benefits. Thus state bureaucrats will refrain provide an alternative legal avenue for women sub- from accepting bribes if the cost and likelihood of jected to domestic violence. These courts enabled being caught are higher than the benefit of accepting women to draw on community norms, state law, and the bribe. Manufacturing companies will comply international human rights to contest unequal power with environmental regulations if there is a high relations and to shape emerging norms (Merry 2012). likelihood of being fined an amount greater than The interaction of law, norms, and power is funda- their profit margin gained from noncompliance. mental to understanding how law works to underlie Families can be induced to send their female children persistence or change in the dynamics of the policy to school if the consequence of noncompliance is arena across its three core roles, to which we now sufficiently severe. The converse holds true as well, turn. such as a law that generates a credible reward for compliance—for example, a law requiring people to register for an identity card to gain access to welfare Ordering behavior: benefits. This finding also extends to state entities. The command role of law For example, compliance with the regulations of the European Union, World Trade Organization, or World In this role, law is an instrument of policy. It is the Bank Group depends on the belief that the rewards of means by which governments codify rules about how membership will outweigh the alternative. The coercive individuals and firms are to behave in order to achieve The coercive power of law depends on the power of law economic and social policy outcomes, including in existence of a credible threat of being caught and depends on the the criminal, civil, and regulatory domains. What punished or a credible commitment to obtaining a existence of a makes these laws—essentially words on paper—lead reward for compliance. As Basu (2015) argues, that credible threat to the expected outcomes, or not? How do laws inter- credibility depends on the extent to which the law is of being caught act with power, norms, and capacity to create incen- able to coordinate people’s beliefs and expectations and punished tives, change preferences, and generate legitimacy? about what others—fellow citizens and the officials or a credible Although there is agreement that the legal system who implement and enforce laws—will do (see also commitment to affects economic performance, there is no consensus Malaith, Morris, and Postlewaite 2001). However, obtaining a reward in terms of how it affects performance (box 3.3). This three conditions must be met. First, the state needs for compliance. section draws on the legal, sociological, and economic the technical, physical, and human capacity to carry scholarship to look at three interrelated ways that law through with consistency. Second, the law must pro- serves to induce particular behavior, and why these vide strong enough incentives to overcome the gains may fail. These are the coercive power of law, the coor- from noncompliance, taking into account that many dinating power of law, and the legitimizing power of law. people may not exhibit “rational behavior” (World Although they operate with distinct logic, these three Bank 2015), as well as overcome adherence to any alter- mechanisms rarely work alone but rather in joint native conflicting normative order. Third, the law needs ways that interact with power, norms, and capacity to to be in line with the incentives of those with enough provide the commitment and collective action needed power to obstruct implementation so they will go along to produce results. with it (unless truly effective restraints on such power exist). Together, these conditions will create a credible The coercive power of law: Incentivizing commitment that will induce rational compliance. behavior change through coercion or Take, for example, a law prohibiting bribery. sanctions First, people need to believe that the state has the Perhaps the most conventional reason that people capacity to detect and punish those engaged in the obey the law is fear of sanctions.5 If people, acting practice—that is, it has effective administrative and according to their narrow self-interest, do not behave law enforcement institutions. Even if the state does in a socially desirable way, sanctions can be used to not have adequate reach to detect violations every- induce cooperation by changing incentives. In other where, it could be aided by private enforcement to words, the coercive power of law shapes the options the extent the law (in combination with a broader available to people by making some actions infeasible range of related laws) incentivizes whistle-blowing or just too costly. The traditional law and economics by those in a position to do so. And finally, the sanc- approach uses a cost-benefit analysis: people will tion for violating the law must leave the perpetrator obey the law as long as the cost of noncompliance worse off than any benefits from engaging in bribery. 86 | World Development Report 2017 Box 3.3 Legal origins: Theory and practice One of the most influential explanations of why some strong role of private property as well as the adaptability of countries have legal systems that support more dynamic the case law system that characterize British common law. market economies than others is the legal origins theory The legal origins theory sparked a significant effort to put forward by La Porta and others (1998) and La Porta, reform laws and regulations to imitate common law rules Lopez-de-Silanes, and Shleifer (2013). This theory posits (Besley 2015). Yet, empirical analysis shows that there is that countries that inherited a common law rather than a no clear relationship between changes in legal rules and civil law system from their colonial occupiers have stronger changes in economic outcomes, reinforcing the idea that investor and creditor rights, lower legal formalism, more changes in the form of laws do not necessarily change efficiency of contract and debt enforcement, and higher the way the legal systems function (see figure B3.3.1). judicial independence. These strengths are attributed to the This analysis is further backed by evidence finding only Figure B3.3.1 Changes in investor protection and creditor rights have little impact on economic outcomes Effects of changes in legal indexes on financial indicators a. Investor protection b. Creditor rights and domestic credit and domestic credit 5 5 Domestic credit (% of GDP) Domestic credit (% of GDP) 0 0 –5 –5 0 0.2 0.4 0.6 0 0.5 1 Strength of investor protection index Strength of creditor rights index c. Investor protection d. Creditor rights and market capitalization and market capitalization Market capitalization (% of GDP) Market capitalization (% of GDP) 20 20 10 10 0 0 –10 –10 –20 –20 0 0.2 0.4 0.6 0 0.5 1 Strength of investor protection index Strength of creditor rights index Source: WDR 2017 team, using data from Oto-Peralías and Romero-Ávila 2016. Note: In the graphs, domestic credit extended to the private sector by banks and market capitalization of listed domestic companies are expressed in percentage of gross domestic product (GDP). (Box continues next page) The role of law | 87 Box 3.3 Legal origins: Theory and practice (continued) weak correlations between changes in “Doing Business” These findings are in line with this Report’s argument that indicators and firm-level enterprise surveys (Hallward- the effect of laws and policies is endogenous to governance Driemeier and Pritchett 2011). In addition, the degree of dynamics. The extent to which particular laws are able to legal convergence depends on the application and inter- facilitate commitment and collective action in light of exist- pretation of law, making the differences based on legal ing power, capacity, and norm constraints is far more pre- traditions less clear. Indeed, Oto-Peralías and Romero- dictive of economic outcomes than the content of the rules Ávila (2014) argue that, empirically, common law does themselves. As critics of the legal origin theory have argued, not generally lead to legal outcomes superior to those the manner in which legal systems were transplanted and provided by French civil law when precolonial population adapted over time—that is, whether colonial law became density or settler mortality or both is high. In addition, embedded in and responsive to local context and demand or they find that the form of colonial rule in British colonies remained superficial—is more indicative of any path depen- mediates between precolonial endowments and postcolo- dencies than the origin of the law (Berkowitz, Pistor, and nial legal outcomes. Richard 2003; Oto-Peralías and Romero-Ávila 2014). Source: WDR 2017 team, based on Oto-Peralías and Romero-Ávila (2016). But getting this formula right is complicated and 2011). Similarly, stricter mandatory arrest laws for costly. For example, too weak a sanction will be crimes related to domestic violence in the United absorbed as part of the cost of doing business, while States were found to be associated with higher mur- too strong a sanction for the behavior of potential der rates of intimate partners because reporting of whistle-blowers will reduce the number of people episodes of escalating violence to the police decreased who will engage in private enforcement.6 (Iyengar 2009; Goldfarb 2011). In India, a recent law But even with the right formula, the law must mandating the death penalty for convicted rapists contend with powerful interests. To the extent that could have similar effects because of the greater pres- they benefit from bribery, enforcement will likely be sure now on women not to report a rape (Pande 2015). blocked or not consistent or credible. Norms may also India has had strong laws on the books prohibiting compete in ways that undermine implementation. a range of gender-based violence, including child Several studies have looked at the effect of “practi- marriage, sex-selective abortion, dowry payment, and cal norms” or “culture” on the impact of laws. For domestic violence, but these have barely made a dent example, laws establishing meritocratic civil service in behavior because the social sanctions associated have gone unimplemented in Cameroon and Niger with abandoning customary practice to follow the law because of an overpowering norm that people should are far stronger (Pistor, Haldar, and Amirapu 2010). not be sanctioned for breaking the rules unless it Here the norm is likely operating at several levels. It is an egregious violation. The importance of social undercuts the incentive created by the legal sanction, networks and neopatrimonial logic also undercuts and it also likely undermines a credible commitment the willingness of officials to sanction workers. As because powerful interests (and individuals in legal Olivier de Sardan (2015, 3) notes, “The gap between institutions) may also adhere to such norms. official rules and actual behavior is, per hypothesis, Social norms that are not based on deep-rooted not a space where norms are forgotten or missing, but attitudes can also undercut the intended outcome a space where alternative norms are in use.”7 of a law. As Ellickson (1991) famously documented in Competing normative orders can lead to perverse the study Order without Law, laws that conflicted with effects. For example, rigorous prosecution of domes- the social norms developed to regulate cattle herding tic violence in Timor-Leste during its administration in a California county confused cattlemen and led to by the United Nations resulted in a significant reduc- increased conflict. A law introduced by the British in tion in the reporting of domestic violence because colonial India allowing agricultural lenders to enforce of the devastating social stigma and economic con- debts in court was intended to make credit markets sequences for women (Chopra, Ranheim, and Nixon more competitive to the benefit of farmers. However, 88 | World Development Report 2017 in practice the law had the opposite effect because it of new norms leads an increasing number of people undercut the incentives that lenders had under an to reject old norms until a tipping point is reached at informal enforcement regime to lend at favorable which the old norm elicits social disapproval. interest rates (Kranton and Swamy 1998). For this process to work, a critical mass of sup- An effective system of legal compliance based porters of the new norm is needed, and they must on sanctions is therefore quite difficult to achieve. be able to engage in collective action to push toward It requires significant investment in capacity and the tipping point. “When there are contestations in infrastructure and careful analysis of the types of local norms, formal law can strengthen the stance of incentives most likely to work. However, even those those whose norms are most closely aligned with the measures will not suffice in the face of power and legal rule” (Shell-Duncan and others 2013, 824). The norm constraints. These considerations lead to the more deeply held the old norm and the weaker the second and third mechanisms through which law supporting coalition for the new norm, the more care affects behavior, which do not rely on force. is needed to introduce a new norm through law so it does not backfire. Gradual or partial enforcement, The coordinating power of law: coupled with education, awareness, and coaxing cam- A focal point for change paigns, allow time for norms to shift (Acemoglu and The second way that law leads to economic and social Jackson 2014). policy outcomes is by serving as a focal point for coor- This process of norm shifting has been analyzed dinating behavior. This is also known as the expres- and documented by legal anthropologists as a pro- sive power of law (Cooter 1998; McAdams 2015). Here cess of “translation” or “vernacularization” involving law acts as a signpost—an expression—to guide peo- intermediaries who act as bridges between the world Law acts as a ple on how to act when they have several options, or, of formal law and the real experiences of local people signpost—an in economic terms, when there are multiple equilibria (Merry 2006). For example, the introduction of an expression—to (Basu 2015; McAdams 2015). People comply with the inheritance law in Ghana that was not in line with guide people on law because doing so facilitates economic and social customary systems was followed by a slow evolu- how to act when activities. tion of custom and social change. The formal law they have several The easy case is when the law establishes rules was not enforced through coercion; rather, it served options. about a neutral activity to which citizens have no par- as a magnet to provide people with an alternative to ticular normative attachments. Thus when the law custom (Aldashev and others 2012). Similarly, legal mandates driving on the right- or the left-hand side prohibition of female genital mutilation in Senegal of the road, people generally comply, not because they provided an “enabling environment” for those who fear punishment but because doing so facilitates road wished to abandon the practice. In Senegal, this legal safety. The harder question is whether the law in its prohibition, together with a robust education and expressive role can coordinate behavior around more awareness campaign, shifted more people to this cat- highly charged issues, where alternative norms and egory. However, among those who adhered strongly preferences are strong. In such cases, the law would to the practice, the fear of prosecution (even though need to shift norms and preferences away from alter- no sanctions were carried out) drove the practice native options in such a way that the law becomes the underground, seriously impairing the health of some salient focal point. young women (Shell-Duncan and others 2013). Consider the astonishing success of the ban on This is not to overstate the expressive power of smoking in public places in many parts of the world law. Law does not do the work of shifting a norm by even in the absence of rigorous state enforcement. itself, but rather depends on the incentives it provides Here scholars have demonstrated that the ban has to those who already accept the new law, as well as a served to empower those persons—nonsmokers— range of support programs that drive the process of who adhere to its substantive point to pressure smok- internalizing the new norm more broadly. Although ers to refrain. In a short period of time, this empow- rigorous enforcement can backfire, sometimes erment has shifted societal norms so that the wrong enforcement is needed to kick-start the process of of smoking in public places has become internalized norm shifting and internalization. For example, (McAdams 2015). In other words, the ban has served to during the first term in which a constitutional change the balance of power and norms in the policy amendment mandating gender quotas in village implementation arena by legitimizing the claims of councils in India was implemented, voters’ attitudes some over others. Sunstein (1996a) calls this phenom- toward women were generally negative. After two enon the norm bandwagon in which the lowered cost terms of repeated exposure to women candidates, The role of law | 89 however, men’s perceptions of the ability of women religious law or customary law are fraught with to be leaders significantly improved (Beaman and deeply political issues, with significant implications others 2009). Moreover, the aspirations of parents for legitimacy. For example, in Bolivia, Colombia, and their adolescent daughters for education were and Ecuador constitutional recognition of communal positively affected (Beaman and others 2012), and rights and indigenous law was critical in expanding women’s entrepreneurship in the manufacturing state legitimacy through a sense of shared citizenship sector increased (Ghani, Kerr, and O’Connell 2014). In (Yashar 2005). Formal incorporation of Islamic law the United States, a large coercive force was required is at the heart of contests to define national identity to implement racial desegregation laws in the face of in states and regions with large Muslim populations mass and even violent resistance, but over time these from Libya to Mindanao. And official recognition of laws contributed to internalizing the norm change forms of traditional or customary law remains an (Schauer 2015). important issue in defining state-citizen relations in One way in which development affects gover- much of Sub-Saharan Africa. nance is by changing norms. Certain norms are more Process legitimacy (also referred to as procedural legit- responsive to a higher level of development. The imacy) refers to a situation in which laws are respected introduction and effectiveness of child labor regula- and observed to the extent that they emerge from a tions have been shown to be related to income levels; system deemed fair and trustworthy. Many years ago, as households rely less on children’s incomes, the German sociologist Max Weber (1965) argued that impact of formal regulations increases (Basu 1999). In rational legal authority (in contrast to traditional or India, however, child labor regulations led to a decline charismatic authority) depends on a society’s belief in child wages and a shift to greater child labor in the legitimacy of order. In his seminal study, Tyler among poorer families (Bharadwaj and Lakdawala (2006) offers empirical support for the argument that 2013). Some norms are much more persistent and less people obey laws for reasons other than fear of pun- responsive to change, such as those founded on some ishment when they believe the laws are the product religious or philosophical principles. of a system they believe to be legitimate. Legitimacy here refers to procedural regularity, opportunity for The legitimizing power of law: citizen input, and the respectful treatment of citizens Creating a culture of compliance by those in authority, or what this Report refers to Although sanctions can be used to control deviant as contestability. These findings were confirmed in a behavior, and law can, under the right conditions, study of cross-country survey data in Africa. People’s gradually shift certain norms, these are extremely compliance with the law was found to be related to costly and ad hoc ways of inducing changes in behav- their normative judgment about the legitimacy of ior. Ultimately, a culture of voluntary compliance government, based on assessments of government with the law depends on the legitimacy of the law. competence and performance, but particularly on Scholars point to three kinds of legitimacy: outcome, perceptions that government is procedurally just relational, and process legitimacy (as described in (Levi, Tyler, and Sacks 2012). chapter 2). The latter two are particularly relevant Transplanting laws from one country to another to the role of law. Relational legitimacy (also referred has often failed in the absence of a process of adap- to as substantive legitimacy in some strands of the tation and contestability. Based on an econometric literature) refers to a situation in which the content study of 49 countries that were recipients of foreign of the law reflects people’s own social norms and law, Berkowitz, Pistor, and Richard (2003) found that views of morality. In such cases, the law is largely countries that adapted the transplanted law to meet irrelevant because people would comply for reasons their particular socioeconomic conditions, or had independent of the existence of the law. Even though a population that was already familiar with basic the threat of sanctions lurks in the background, it is principles of the transplanted law, or both, had more primarily there to handle the exceptional cases of effective legality than countries that received foreign deviance (Schauer 2015). law without any similar predispositions. Similarly, In heterogeneous societies, for substantive legiti- legal transplants in the context of integration into the macy the law must strike a balance between recogniz- European Union were more successful to the extent ing differences in worldviews and enabling society that they were accompanied by efforts to empower a to function as a cohesive entity (Singer 2006). Thus variety of domestic state and nonstate actors through debates over how states formally take into account multiple methods of assistance and monitoring, and 90 | World Development Report 2017 that they were able to merge monitoring and learning Figure 3.1 Constitutions have become ubiquitous, at both the national and supranational levels (Bruszt but they are often replaced or amended and McDermott 2014). By contrast, in parts of south- Number of countries with constitutions and number of constitutional events, eastern Europe the transplantation of judicial reform 1789–2013 and anticorruption laws that bypassed legislative pro- 200 cesses and other forms of adaptation did not produce the desired effects (Mendelski 2015). Number of constitutional events 60 150 Ordering power: Number of countries The constitutive role of law In this second role, law plays the more foundational 40 100 constitutive role of defining the de jure governance process. It is through law—generally constitutions8— that states establish and confer power on state actors, 20 50 defining the authority and responsibilities of different agencies and branches of government and their role in the policy-making and implementation process, as 0 0 well as formal constraints on their power.9 This task 1800 1850 1900 1950 2000 is typically carried out by drafting provisions that set New constitutions (left axis) Countries with constitutions (right axis) out a range of checks and balances, including the hor- Amendments (left axis) All countries (right axis) izontal allocation and separation of powers between different branches; by requiring special procedures Source: WDR 2017 team, using data from Comparative Constitutions Project, 2015. for amendment; by establishing independent super- visory and review bodies; and, increasingly, by includ- to two kinds of governance failures. The first—as ing a bill of rights. These formal de jure arrangements, reflected in the short life span of constitutions—is as modified by informal and de facto arrangements, when the bargain itself fails. The second is when the establish the nature of the policy bargaining arena. words on paper persist, but the rules are ignored in In this way, constitutions are effectively rules about the face of power and deal making. In the first failure, making rules. This section addresses why and when the result could be positive to the extent that it leads the formal rules in fact determine the allocation and to a new, more stable, bargain. But it also could be det- limits on power, or act only as “parchment barriers,” rimental to development outcomes if conflict ensues as well as the other roles that constitutive laws play in and if chronic failure undermines the credible com- shaping the dynamics of governance. mitments needed to support investment and pro-poor policies. Empirical evidence on the extent to which Constitutions: Rules about making rules constitutional endurance matters is mixed. Elkins, Constitutions are proliferating (figure 3.1). The grow- Ginsburg, and Melton (2009) demonstrate significant ing number corresponds to both the increase in the associations between longer-lived constitutions and number of independent states as well as the mass various social and political goods, including protec- transition of countries in central Europe and in the tion of rights, democracy, wealth, and stability, but former East European bloc in the post-Soviet era. It establishing causality is problematic. In any event, also reflects the fact that constitutions are generally the entrenchment of fundamental principles and its short-lived. The average life span of a constitution is positive impact on credible commitment and coordi- 19 years, and in Latin America and eastern Europe it nation generally strengthen as constitutions age. is a mere eight years (Negretto 2008; Elkins, Gins- The second type of failure—widespread diver- burg, and Melton 2009). Constitutions are thus an gence between constitutional limitations on power important object of political bargaining and ordering, and actual practice—is more directly associated with with significant energy invested in designing and poorer development outcomes (figure 3.2). As explored adopting them. This is true across all types of political in chapters 5 and 6, failure to uphold the security of regimes (Ginsburg and Simpser 2014). property rights and basic civil, political, and economic And yet the effectiveness of constitutions in rights has negative impacts on both growth and equity. constraining power through rules is mixed, leading More generally, failure to enforce rule-based limits on The role of law | 91 Figure 3.2 In every country, there is a gap between facilitate elite cohesion by coordinating which insti- the laws on the books and the laws implemented, but tutions play which role, thereby minimizing the costs high-income OECD countries generally do better than of renegotiation and conflict. The so-called entrench- low- and middle-income countries ment of provisions, requiring a high standard for change in the form of amendment, provides credibil- 100 ity over time by guarding against shifts in preference, Framework Score, and implementation gap thereby enhancing the credibility of commitments Actual Implementation Score, Legal (Ginsburg 2010; Ginsburg and Simpser 2014). Once 80 entrenched, the rules become “sticky” as institution- alized arrangements develop around them, and it is far less easy for major interest groups to exit if they 60 become unhappy with the allocation of power. Sig- nificantly, constitutions also serve as a coordinating 40 device to enable collective action by citizens in the event of a transgression by those in power. An analysis of a data set of every constitution 20 since 1789 found that enduring constitutions gener- ally have certain common characteristics. They need Countries (from largest to smallest implementation gap) to be sufficiently inclusive to give potential spoilers High-income OECD countries Upper-middle-income countries an adequate payoff for staying inside the bargain High-income non-OECD countries Lower-middle-income countries (how to do so is explored further in chapter 4). They Low-income countries need to be flexible and adaptive so they can be resil- ient in the face of shocks that can change the balance Sources: WDR 2017 team, based on data from World Bank, World Development Indicators (database), 2015, and Global Integrity (database), 2012. of power among interest groups. And they need to Note: The data used are for 2009–11. Global Integrity’s Legal Framework Score measures the quality be specific: the degree of specificity appears to cor- of laws “on the books” in six categories: (1) nongovernmental organizations, public information, and relate positively with endurance, perhaps because it media; (2) elections; (3) government conflicts of interest, safeguards, and checks and balances; (4) pub- lic administration and professionalism; (5) government oversight and controls; and (6) anticorruption reduces the scope for subsequent disagreement and legal framework, judicial impartiality, and law enforcement professionalism. The Actual Implementation requires more investment in negotiation, giving peo- Score measures actual practice. These scores range between 0 and 100, with 0 being the worst score and 100 being perfect. The implementation gap is the difference between the two indexes and thus the ple a bigger stake in success (Elkins, Ginsburg, and length of the bar. OECD = Organisation for Economic Co-operation and Development. Melton 2009). How effective constitutions are at enabling citizen collective action for enforcement is related to the power skews the bargaining process in favor of elite way in which constitutions act as a focal point. Even interests. Nevertheless, divergence from the rules may when politicians have little intention of adhering to also be an important means of holding together elite constitutional provisions—such as when constraints bargains. To understand what accounts for divergence on power and rights are adopted as aspirational between the rules and practice, it is helpful to first or rhetorical appeasement—the words on paper examine the conditions under which rules stick. can matter to the extent that they enable collective action. This is particularly important during times Constitutions as a commitment and of conflict among elites, when constitutions can coordination device serve as devices of horizontal accountability. Thus, Why would rulers adhere to constitutional rules on for example, in Tunisia adoption of international the limits of power? Unlike regular laws that have human rights treaties by the prior regime was largely organized institutions of enforcement, constitutions seen as an empty gesture. Yet, during the transition pose the ultimate question of who guards the guard- to a new government, these provisions were seized ians.10 The answer is that effective constitutions need upon by opposition forces and used to structure that to be self-enforcing. Constitutions are essentially government. Even when the legal enforceability of bargains among major interest groups about how to constitutions is limited, the language of constitu- allocate power. As long as these groups feel they are tional protection has frequently been used as a basis better off with the rules than without them, the rules for political mobilization by competing elite groups will stick. Thus effective constitutions establish an (Ginsburg and Simpser 2014). As will be discussed equilibrium by addressing problems of coordination more fully, constitutions also serve as an important and commitment (Weingast 2013). Constitutions device of vertical accountability because the special 92 | World Development Report 2017 status accorded to constitutional rights can enable Ordering contestation: citizen collective action aimed at the fulfillment of those rights. The role of law in change It is true that in history the law can be seen to Explaining divergence between law mediate and to legitimize existent class relations. and practice Its forms and procedures may crystallize those relations A number of studies have sought to demonstrate and mask ulterior injustice. But this mediation, empirically how various institutional designs opti- through the forms of law, is something quite distinct mize the coordination and commitment embraced by from the exercise of unmediated force. The forms different configurations of elite interests. In theory, and rhetoric of law acquire distinct identity which different political institutions—such as presidential may, on occasion, inhibit power and afford versus parliamentary or majority vote versus pro- some protections to the powerless. portional representation—create different incentives that favor certain outcomes.11 Actual outcomes, how- —E. P. Thompson (1975, 266) ever, depend on the extent to which these de jure rules are in fact used as the main locus of political The role of law in ordering behavior and ordering activity—that is, whether or to what extent political power is primarily about how elites use law to imple- actors choose to invest in these institutions so that ment policies and to exercise authority. The third role they become a self-reinforcing equilibrium (Caruso, of law is about how citizens—nonelites—use law to Scartascini, and Tommasi 2015).12 challenge and contest the exercise of power. As the In many developing countries—and to a certain quotation by the historian E. P. Thompson describes, extent, in developed ones as well—power is often law is both a product of social and power relations and Law is both exercised through a means other than those pre- a tool for challenging and reshaping those relations. a product of scribed by law. Such alternative means are sometimes This section examines how law, often in combination social and power called “alternative political technologies” (Caruso, with other social and political strategies, can be used relations and a tool Scartascini, and Tommasi 2015) or “informal institu- as a commitment and coordination device to promote for challenging tions” (Helmke and Levitsky 2004; Khan 2010). These accountability, and also to change the rules of the and reshaping means include a variety of ways of making bargains game to foster more equitable bargaining spaces. those relations. and deals outside the rules, including conventions for In well-developed legal systems, legal institutions brokering power, clientelism, and purchasing favor promote accountability by imposing horizontal (bribery, vote buying), as well as nonstate authority checks on authorities and providing a forum for verti- structures such as traditional or religious mecha- cal claims by citizens. These legal institutions include nisms. In some cases, the use of a means of exercising courts and associated agencies such as prosecutors power not based on law is simply a matter of devi- and police; special-purpose adjudicative and oversight ance and abuse. But often it is serving the purpose of bodies such as ombudsmen, auditors, and anticorrup- solving commitment and collective action problems tion or human rights commissions; and the public in ways more in line with elite incentives and the administrative law functions of executive agencies de facto distribution of power. In such cases, as Khan such as those involved in property allocation and reg- (2010, 1) explains, “informal institutions like patron- istration, the issuance of identity documents, or the client allocative rules, and informal adaptations to provision of health, education, and sanitation services. the ways in which particular formal institutions The extent to which these institutions are accessible work play a critical role in bringing the distribution and effective forums for citizens to challenge the more of benefits supported by the institutional structure powerful in society varies considerably from country into line with the distribution of power.” In other to country, as a function of historical circumstances words, divergence between the law and practice as well as the political calculus of elites. Spotlight 3 on is rarely an absence of rules but rather a matter of effective legal institutions discusses these conditions replacing law with rules that may be better suited— in depth. under the circumstances—to generating and meeting Even though legal systems in many countries con- shared expectations in order to uphold basic stability tinue to lack effectiveness and autonomy, there has through elite bargains (North and others 2013). The been a marked trend toward juridification of social conditions under which deals-based elite bargains and political contestation across the globe. As Rodrí- evolve into rule-based governance constrained by law guez Garavito (2011, 274–75) has noted, “The planetary are the subject of chapter 7. expansion of the law is palpable everywhere: in the The role of law | 93 avalanche of constitutions in the Global South; in efforts depends to a large degree on the ability of the growing power of judiciaries around the world; claimants to ground the language of rights in local in the proliferation of ‘law and order’ programs and social and political structures of demand—a process the ‘culture of legality’ in cities; in the judicialization Brinks, Gauri, and Shen (2015) call “vernaculariza- of policy through anticorruption programs led by tion.” As Santos and Rodríguez Garavito (2005) argue, judges and prosecutors; in the explosion of private political mobilization at the local—and often inter- regulations, such as the voluntary standards on cor- national—level is a necessary precursor of effective porate social responsibility; and in the transmutation rights-based strategies for the disadvantaged. Thus of social movements’ struggles into human rights efforts to empower the aggrieved to use law and litigation.” Law increasingly provides the common courts must combine legal awareness with broader language for, and demarcates the arenas of contest strategic coalition building. among, very different contenders: citizens and states; Law has also proven to be a powerful tool of multinational corporations and indigenous people; accountability even outside of legal institutions by states, citizens, and international organizations.13 framing claims and serving as a coordinating device. For example, in China citizens are increasingly Law and social rights deploying official laws and policies in efforts to hold In one example of how law is changing the contest- district officials accountable for illegal extraction, ability of policy arenas, a majority of developing coun- rigged elections, and corruption—a process dubbed tries have incorporated social and economic rights “rightful resistance.” Courts seldom feature in these into their constitutions, and citizens are increasingly efforts, which tend to “operate near the boundary using these provisions to advance development goals of authorized channels, employ the rhetoric and (Brinks, Gauri, and Shen 2015). This trend has been commitments of the powerful to curb the exercise most striking in Latin America, where the courts of power, hinge on locating and exploiting divisions have been transformed—from weak, dependent, inef- within the state, and rely on mobilizing support from fective institutions to central players in issues at the the community” (O’Brien and Li 2006, 2). The use of forefront of politics and development. A key reason legal discourse, without recourse to courts, has also for this shift in role is that judicial actors have been played a central role in tenant associations’ claims to emboldened by political fragmentation to assert the adequate housing in Kenya, indigenous groups’ con- power of their institutions at the same time that cit- tests over land and natural resources in Mexico, and izens are demanding this role (Couso, Huneeus, and garment workers’ efforts to gain fair labor conditions Sieder 2010; Helmke and Rios-Figueroa 2011). In India, in Bangladesh (Newell and Wheeler 2006). In these legal institutions—at least at the level of the Supreme cases, the law serves to “name and frame”—that is, to Court—have also proven to be an important venue for structure dialogue and provide a coordination device contestation, with an extensive tradition of public for more contentious strategies for accountability. interest litigation and high-profile legal challenges to dominant power interests and social norms.14 India’s Legal institutions and credible Supreme Court has upheld the rights of the disadvan- commitment taged and has enhanced government accountability Where state legal institutions have lacked the over issues such as child and bonded labor, environ- capacity for credible commitment, they have at mental hazards, public health, and nondiscrimination times sought support from international actors. For (Shankar and Mehta 2008; Deva 2009). Courts in example, aware of its inability to commit to fair anti- South Africa have also made important judgments corruption procedures against powerful interests, holding government accountable for the provision of Guatemala sought support from the United Nations housing and affordable antiretroviral drugs, among to establish the International Commission against other things (Klug 2005; Berger 2008). Impunity in Guatemala (CICIG). The CICIG has suc- In social justice litigation, the legal action itself cessfully prosecuted over 150 current or former gov- need not result in a favorable judgment to be a suc- ernment officials, and in 2015 it charged the sitting cessful part of a contestation. Even judicial defeats president with corruption, leading to his resignation. can be leveraged by activists to coordinate collective Other countries, including Bosnia and Herzegovina, action around rights consciousness (McCann 2004; Cambodia, Fiji, Kosovo, and the Solomon Islands, Rodríguez Garavito and Rodríguez-Franco 2015). As have allowed international judges and prosecutors explored further in chapter 8, the success of such in their courts to enhance credible commitment 94 | World Development Report 2017 around sensitive and political cases. Although these to improve working conditions and to unionize in a initiatives have led to the successful prosecutions of context in which it would have been difficult other- sensitive war crimes and corruption cases, they have wise to overcome entrenched resistance. Critical to also been criticized for lack of sustainability in that their success were their links to transnational advo- they bypass rather than engage directly in the domes- cacy networks that exerted pressure on local govern- tic bargaining arena. ments (Rodríguez Garavito 2005). Cambodian gar- Where domestic courts are perceived as weak in ment workers also benefited from international labor the face of powerful interests, citizens have brought standards that served as a commitment device for the legal cases to other jurisdictions. This approach has government in order to gain favorable trade condi- been facilitated by the growing recognition of the tions (Adler and Woolcock 2009). Elsewhere, indige- concept of universal jurisdiction for severe crimes, as nous groups have been key players in the formation well as by the increasingly transnational character of of international standards for extractive industries, powerful interests. For example, local communities in particular the norm of free, prior, and informed affected by severe environmental damage caused consent (Rodríguez Garavito 2011). In these examples, by a mining company in Papua New Guinea sought legal standards were converted into institutional redress in an Australian court, the home jurisdiction of arrangements that enhanced the contestability of the company. Although the legal case itself was settled the bargaining arena: collective bargaining arrange- and not wholly successful in containing the damage, it ments, a tripartite labor arbitration council, and triggered a change in the local bargaining arena, man- procedural requirements for consultations between dating that community representatives be engaged extractive companies and local communities. in negotiating community development agreements with the company and government (Kirsch 2014). Getting to the rule of law Transnational legal pluralism In establishing the rule of law, the first and contestability five centuries are always the hardest. The legal arena today extends beyond the borders —Gordon Brown of nation-states in other ways as well. As discussed further in chapter 9, an era of “global governance” is The rule of law is widely recognized as necessary for The rule of law is under way. It is characterized by the proliferation and the achievement of stable, equitable development. widely recognized fragmentation of global, regional, and transnational Indeed, over the last few decades no other governance as necessary for instruments, including binding laws (so-called hard ideal has been as universally endorsed.15 There is far the achievement of law, including treaties and conventions) and soft less agreement, however, on what it means. At a min- stable, equitable law (voluntary guidelines, standards, principles, and imum, the rule of law requires that government offi- development. codes of conduct). The domains covered by these cials and citizens be bound by and act consistent with instruments go far beyond relations among nation- the law (Tamanaha 2004; Fukuyama 2014). But this in states to reach deep into the way national state and turn requires that the law be clear, certain, and public nonstate actors govern in many areas, including busi- and that it be applied equally to all through effective ness, labor, crime, information, public financial man- legal institutions.16 agement, intellectual property, procurement, utility “Thin” versions of the rule of law have largely regulation, human rights, food and safety standards, given way to “thicker” versions that move beyond a and environmental sustainability. The formation of focus on procedure to one on substance requiring these transnational governance regimes parallels adherence to normative standards of rights, fairness, this Report’s framework: they are the product of and equity.17 The United Nations exemplifies this nor- contests among multiple actors—state, private, and mative stance, defining the rule of law as “a principle civic—shaped by power, interests, and norms, which of governance in which all persons, institutions and in turn are shaped and reshaped by the outcomes of entities, public and private, including the State itself, these rules (Braithwaite and Drahos 2000). This web are accountable to laws that are publicly promulgated, of legal pluralism creates opportunities for domestic equally enforced and independently adjudicated, and actors seeking to contest the prevailing power and which are consistent with international human rights norms. Global factory workers in Mexico and Guate­ norms and a principle of standards.”18 mala appealed to international labor standards and Correlations between indicators of the rule company codes of conduct and successfully managed of law and income levels are strong (figure 3.3). The role of law | 95 Figure 3.3 The rule of law is strongly correlated with high income Rule of Law Index versus GDP per capita, 2015 1.0 0.8 East Asia and Pacific Rule of Law Index Europe and Central Asia Latin America and the Caribbean 0.6 Middle East and North Africa South Asia Sub-Saharan Africa High-income non-OECD countries High-income OECD countries 0.4 R2 =0.79 0.2 0 500 2,000 10,000 50,000 GDP per capita Sources : WDR 2017 team, based on data from the World Justice Project, Rule of Law Index, 2015, and World Bank, World Development Indicators (database), 2015. But the direction of causality and the mechanisms that institutionalizing interests or objectives. Attention to determine this association are less well understood the microfoundations of laws’ effectiveness can help (box 3.4). policy makers and citizens design laws and strategies Meanwhile, this chapter has focused not on the more likely to achieve success (box 3.5). Ultimately, it rule of law but on the role of law—the instrumental is through this dynamic between power and contes- way through which groups and individuals in soci- tation that societies shape their transitions to the rule ety use law as a means of promoting, enforcing, and of law. Box 3.4 Transitions to the rule of law Compared with the extensive literature on transitions to expanded trade and investment. Scale matters: at a certain democracy, a surprisingly small amount of systematic work point, the personal connections that characterize custom- has been carried out on transitions to a modern rule of law. ary systems become inadequate to support transactions History reveals three separate types of transitions from between strangers at great remove. However, the transition which one can learn: (1) the shift from a customary, infor- costs are high, and the customary rules are often preferred mal, and often highly pluralistic system of law to a unified by the existing stakeholders. Therefore, political power is modern one; (2) how powerful elites come to accept legal critical to bringing about the transition. constraints on their power; and (3) how countries success- Formal law is usually applied first to nonelites (“rule fully adapt foreign legal systems to their own purposes. by law”). There then is a shift to “rule of law” when the The shift from a customary or pluralistic system to elites themselves accept the law’s limitations. North, a codified modern one is usually motivated, at base, by Wallis, and Weingast (2009) have argued that constitu- actors who believe a single formal system will better serve tional constraints become self-reinforcing when power in their interests, particularly their economic interests in the system is distributed evenly and elites realize that they (Box continues next page) 96 | World Development Report 2017 Box 3.4 Transitions to the rule of law (continued) have more to gain in the long run through constitutional Korea, and other Asian countries similarly adapted Western rules. What this theory does not explain, however, is why legal systems to their own purposes. In other cases such as these same elites stick to these constraints when the power Hong Kong SAR, China, Singapore, and India, the colonial balance subsequently changes and one group is able to power (Great Britain) stayed for a long time and was able to triumph over the others. Similarly, independent courts are shape the local legal norms in its own image. Even so, always a threat to elite power, and so why do rulers come today India practices a far higher degree of legal pluralism to tolerate them when they have the power to manipulate than does Great Britain itself, as part of the process of or eliminate them? These questions suggest that constitu- local adaptation. Less successful have been cases in Sub- tionalism needs to be underpinned by a powerful norma- Saharan Africa, where customary systems were under- tive framework that makes elites respect the law as such. mined by colonial authorities but not replaced by well- Subsequent respect for the law will depend heavily on the institutionalized modern systems. degree of independence maintained by legal institutions— Much more research is needed on the question of legal the judiciaries, bars, law schools, and other structures that transitions. It is clear that a fully modern legal system is not have persisted even after their religious foundations have a precondition for rapid economic growth; legal systems disappeared. themselves develop in tandem with modern economies. It Finally, as for importing foreign legal systems, perhaps may be that the point of transition from a customary to a the most important variable determining success is the formal legal system occurs later in this process than many degree to which indigenous elites remain in control of Western observers have thought. But relatively little is the process and tailor it to their society’s own traditions. known about the historical dynamics of that transition, and Japan experimented with a variety of European systems thus too little in the way of theory is available to guide con- before settling on the German civil code and Bismarck con- temporary developing countries as they seek to implement stitution. Later in the 20th century, China, the Republic of the rule of law. Source: Prepared by Francis Fukuyama for WDR 2017. Box 3.5 Understanding the role of law in context As this chapter has argued, law is not an unqualified good. prescribed by law are able to demonstrate commitment Depending on the context, law might functionally and to induce collective action toward the desired end. Specifically, effective laws are able to • Empower change actors—or—reinforce existing power • Provide order and certainty—or—create conflict and Change preferences by enhancing substantive focal •  exacerbate confusion points around which coordination can occur • Build legitimacy—or— undermine legitimacy Change incentives by changing payoffs to lower the cost •  • Structure contests—or—distract from real sites of of compliance or increase the cost of noncompliance contest. Shape bargaining spaces that increase the contestability •  of underrepresented actors. To produce the effects that appear first in each line of this list, legal interventions should ensure that the forms Source: WDR 2017 team. The role of law | 97 Notes decision-making, legal certainty, avoidance of arbi- trariness and procedural and legal transparency” 1. Acemoglu (2003); Galiani and Schargrodsky (2010); (United Nations 2004, 4). Besley and Persson (2014). 2. See, for example, Thompson (1975); Mattei and Nader (2008); and Lund (2012). References 3. Thompson (1975); Epp (1998); McCann (2004); Acemoglu, Daron. 2003. “Why Not a Political Coase Rodríguez Garavito (2011). Theorem? Social Conflict, Commitment, and Politics.” 4. See, for example, Benton (2001); Belmessous (2011); Journal of Comparative Economics 31 (4): 620–52. and Yannakakis (2015). Acemoglu, Daron, and Matthew O. Jackson. 2014. “Social 5. See Schauer (2015) for an extensive argument about Norms and the Enforcement of Laws.” NBER Working the importance of the role of force in law. Paper 20369, National Bureau of Economic Research, 6. For a debate on legalizing bribe giving, see Basu Cambridge, MA. (2011) and Dufwenberg and Spagnolo (2014). Acuña, C., and M. Tommasi. 1999. “Some Reflections 7. See also Acemoglu and Jackson (2014) and d’Iribarne on the Institutional Reforms Required for Latin and Henry (2015). America.” In Institutional Reforms, Growth and Human 8. A constitution is certainly not the only instrument Development in Latin America. Conference Volume. that sets out rules about power, but it is the most New Haven, CT: Yale Center for International and visible one and the most systematically studied. A Area Studies. range of other laws that confer authority and define Adler, Daniel, and Michael Woolcock. 2009. “Justice responsibilities and limitations on power, such as without the Rule of Law? The Challenge of Rights- local governance laws and enabling laws for various Based Industrial Relations in Contemporary Cambo- state agencies, are also relevant. dia.” Justice and Development Working Paper 2 (2), 9. Acuña and Tommasi (1999) propose a similar clas- sification of rules applied at a more practical level World Bank, Washington, DC. (policies, organizational forms, rules about making Aldashev, Gani, Imane Chaara, Jean-Philippe Platteau, rules). and Zaki Wahhaj. 2012. “Formal Law as a Magnet to 10. Regular laws are also plagued by this same question. Reform Custom.” Economic Development and Cultural It is for this reason that Basu (2015) emphasizes that Change 60 (4): 795–828. laws work only to the extent that they establish cred- Aoki, Masahiko. 2001. Toward a Comparative Institutional ible expectations about what others will do. Analysis. Cambridge, MA: MIT Press. 11. See, for example, Buchanan and Tullock (1962); Basu, Kaushik. 1999. “Child Labor: Cause, Consequence, Persson and Tabellini (2003); and Voigt (2011). and Cure, with Remarks on International Labor Stan- 12. This discussion draws on Aoki (2001) and Greif dards.” Journal of Economic Literature 37 (3): 1083–1119. (2006). ————. 2000. Prelude to Political Economy: A Study of the 13. Comaroff and Comaroff (2001); Rajagopal (2003); Social and Political Foundations of Economics. Oxford, Hirschl (2004); Santos and Rodríguez Garavito U.K.: Oxford University Press. (2005). ————. 2011. “Why, for a Class of Bribes, the Act of Giving 14. However, the trend of public interest litigation in a Bribe Should Be Treated as Legal.” Working Paper India has been criticized for shifting in recent years 172011, Department of Economic Affairs, Ministry of from pro-poor causes to promoting the interests of Finance, Government of India, New Delhi. the upper classes (Gauri 2009). Indeed, if law and ————. 2015. “The Republic of Beliefs: A New Approach legal institutions can be used for pro-poor ends, they to ‘Law and Economics.’ ” Policy Research Working can likewise be used for other causes (Scheingold Paper 7259, World Bank, Washington, DC. 2004). Beaman, Lori, Raghebendra Chattopadhyay, Esther 15. 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Effective and equitable legal institutions operate as safeguards against abuses of power and as channels for the protection of rights and peaceful resolution Under what conditions do of conflict. Well-functioning legal institutions are effective and equitable legal important to elicit voluntary compliance by signaling institutions emerge? legitimacy. By reducing transaction costs and increas- ing the predictability of behavior and certainty of All high-income member countries of the Organisa- process, they underpin credible commitment, which tion for Economic Co-operation and Development is needed to modernize socioeconomic relations. (OECD) score well on de jure and de facto indicators of rule of law, including judicial independence, accountability, and effectiveness. This relationship What are effective and illustrates the need for such institutions to support equitable legal institutions? sophisticated and diversified economic models. But as this Report has emphasized, simply transplanting Core state legal institutions include those that declare institutional forms to developing countries does not law (legislatures, government agencies), enforce law work; such forms need to emerge in a homegrown (prosecutors, regulators, police, prisons), and apply fashion from internal governance dynamics that law to individual instances (courts). These institu- reflect socioeconomic demands and other incentives. tions must operate in an integrated fashion with the As shown in figure S3.1, a positive correlation between cadre of private lawyers, academics, and civil society rule of law and income is observed today, but this does engaged in legal activity—the so-called legal com- not explain causality or how countries move up the plex (Karpik and Halliday 2011). They also require an scale. The empirical and theoretical literature point to appropriate enabling environment, including legal five sets of factors that are most likely to contribute mandates, functional institutional systems and rules, to the development of equitable legal institutions that and financial, human, and material resources. Mean- can act as an effective check on power: socioeconomic while, they need to be physically and financially factors, historical factors, institutional factors, strate- accessible to the population, while resonating with gic factors, and ideational factors. peoples’ needs and perceptions of fairness in order to Socioeconomic factors. Across history and all soci- generate trust. To act as an effective check on power, eties, informal mechanisms for social order, dispute courts especially need to be independent of political resolution, and checks on power have arisen in ways pressure, while remaining accountable and effective in that meet local contexts. As Hadfield and Weingast (2013) document, predictable systems relying entirely WDR 2017 team. on communal enforcement arose to bring order to the 102 | World Development Report 2017 Figure S3.1 Although high-income OECD countries generally have well-functioning legal institutions, the relationship between institutional quality and income varies in developing countries Various rule of law indexes versus GDP per capita (log scale) a. Government constraints b. Absence of corruption c. Open governments 1.0 1.0 1.0 Log of GDP per capita Log of GDP per capita Log of GDP per capita 0.8 0.8 0.8 0.6 0.6 0.6 0.4 0.4 0.4 0.2 0.2 0.2 250 5,000 100,000 250 5,000 100,000 250 5,000 100,000 Rule of Law Index Rule of Law Index Rule of Law Index d. Fundamental rights e. Order and security f. Effective regulations 1.0 1.0 1.0 Log of GDP per capita Log of GDP per capita Log of GDP per capita 0.8 0.8 0.8 0.6 0.6 0.6 0.4 0.4 0.4 0.2 0.2 0.2 250 5,000 100,000 250 5,000 100,000 250 5,000 100,000 Rule of Law Index Rule of Law Index Rule of Law Index g. Civil justice h. Criminal justice 1.0 1.0 Log of GDP per capita Log of GDP per capita 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 250 5,000 100,000 250 5,000 100,000 Rule of Law Index Rule of Law Index High-income OECD countries Other countries Sources: WDR 2017 team, based on data from World Justice Project, Rule of Law Index, 2014, and World Bank, World Development Indicators (database), 2016. Note: GDP = gross domestic product; OECD = Organisation for Economic Co-operation and Development. How do effective and equitable legal institutions emerge? | 103 seemingly lawless period of the California gold rush rules, systems, and human capacity to protect judges in the mid-19th century, as well as to solve the con- from political pressure, incentivize efficiency, and tract enforcement dilemmas of traveling merchants promote access and transparency. These are import- in medieval Europe (see also Greif 2006). The diver- ant and necessary interventions, but often they are sification of societies and the increasing complexity insufficient. of socioeconomic transactions created demands for a As figure S3.2 shows, even the most stringent more formalized, arms-length mechanism for a state constitutional guarantees of independence and legal system (Dixit 2004). Even so, a wide range of best-practice forms of judicial appointment often alternative formal and informal mechanisms continue do not correlate with de facto measures of indepen- to exist, often proving capable of serving at least some dent judicial behavior (Feld and Voigt 2003; Ríos- functions of an effective legal system. Neighborhood Figueroa and Staton 2012). Moreover, the same formal mediation practices in urban Papua New Guinea, for rules can produce different incentives, depending example, manage disputes and maintain order in dif- on broader contextual factors (Helmke and Staton ficult urban communities in ways that formal police 2011). At the same time, empirical studies show that and courts have not (Craig, Porter, and Hukula 2016). seemingly minor technical rule changes can have Tribal and customary courts in Afghanistan, Liberia, major effects on a court’s role and assertiveness. For and South Sudan have brought closure to vengeance example, obscure rules on who has the right to bring killings, land disputes, and a range of social concerns, a case (“standing rules”) were instrumental in the rise whereas the formal mechanisms used in some cases to prominence of the courts in Costa Rica and India. have exacerbated tensions (Isser 2011). Without dis- In short, rules and capacity matter, but their relation- counting the important role they can play, such mech- ship to judicial effectiveness in practice is mediated anisms are often effective precisely because they by strategic and ideational factors (Helmke and Ríos- reflect the social norms and power relations in which Figueroa 2011). they are embedded. Ultimately, state legal institutions Strategic factors. The first set of strategic factors are generally needed to promote equity and to serve as relates to the calculus elites undertake to determine an effective check on power. for what reasons they would endow courts with auton- Historical factors. One explanation for why some omy and effectiveness, keeping in mind that both judiciaries emerge as credible and effective while oth- could be used against elite interests. The literature ers do not is rooted in the historical circumstances— points to five key reasons. First, elites may strengthen in particular, colonial legacies—in which the modern judiciaries to signal a credible commitment to commercial justice system developed. Where colonial legal sys- investment by raising the cost of political interference tems and their national aftermaths sought to incorpo- with economic activity, as in several fast-growing rate, accommodate, and adapt to the contending nor- transition economies. The establishment of robust mative orders of society, national law and courts have judicial institutions may also be in response to emerged as relatively effective and legitimate institu- requirements for engagement in international orga- tions, as in India. By contrast, where colonial systems nizations and transnational trade regimes (Moustafa created fragmented spaces of Western law and indi- and Ginsburg 2008). Second, elites may endow courts rect rule through which native authorities were often with capacity in order to use them to enforce central invented, as in Nigeria and Kenya, national law and policy, control agents, and maintain elite cohesion. This courts faced an uphill battle in establishing credible was a key goal underlying Mexico’s introduction of commitments to legality. Although these dynamics the mechanism of amparo, which allows citizens to tend to persist in some ways (through path depen- challenge arbitrary action by individual bureaucrats dency), they are constantly renegotiated in response (Magaloni 2008). Third, elites may bind their hands to underlying patterns of social and economic change by establishing powerful courts during periods of (Daniels, Trebilcock, and Carson 2011).1 political uncertainty as political insurance to protect Institutional factors. Courts are governed by an their policies from being undermined in the event of array of rules—constitutional and otherwise—that a government transition (Ginsburg 2003; Staton and shape the independence, accountability, and effec- Moore 2011). Fourth, judicial review of legislation can tiveness of the judiciary. These rules include judicial serve an important information-gathering role for policy appointment and disciplinary procedures, the scope makers when they are unsure of how laws and poli- of judicial review, case management systems and pro- cies will play out in practice (Staton and Moore 2011). cedures, legal standing, and access. Judicial reform Fifth, elites may empower courts in order to channel efforts often focus on strengthening the formal controversial questions away from executive institutions. 104 | World Development Report 2017 Figure S3.2 The correlation is weak between de jure and de facto measures of judicial independence a. Independence: How often does the high b. Influence: How often does the government court make decisions that merely reflect comply with important decisions of the high government wishes regardless of the court’s court with which it disagrees? sincere view of the legal record? Always Never Usually Seldom About half About half the time the time Seldom Usually Never Always 0 10 20 30 40 50 0 10 20 30 40 50 60 Number of countries Number of countries Countries with judicial independence Countries where high court decisions are final Countries with no such constitutional provision Sources: WDR 2017 team, based on data from V-Dem, 2016, and Comparative Constitutions Project, 2016. For example, by empowering the Egyptian Supreme The experience of the Supreme Court of India Constitutional Court to rule on policies related to illustrates this process. At independence, the Court economic liberalization, the executive was able to was endowed with expansive constitutional powers pass important reforms without significant political of judicial review and rights protection. During the fallout (Moustafa 2007). period of emergency rule, the executive sought to When used strategically by elites in these five curb these powers and pack the Court with govern- ways, courts may be empowered with autonomy for ment supporters. As India transitioned to multiparty some types of cases but not others—and that power politics and a coalition government, the Court began may be taken away when it no longer serves elite to reassert its independence by expanding popular interests. But even limited autonomy may create access to the Court through public interest litigation. spaces for judicial actors to assert themselves and to This step served to consolidate the strength of the strategically expand their role. Judges’ calculus must Court through popular support and to establish prec- take into account their institutional powers, but also edent for a more activist role (Mate 2013). the likelihood of compliance with their rulings. There Ideational factors. Despite their favorable institu- is strong evidence that judiciaries are more likely to tional rules and strategic opportunities to consolidate exercise power in cases of political uncertainty or power, some judiciaries remain constrained. The fragmentation because this reduces the ability of final factor is the so-called legal culture—that is, the others to put political pressure on the courts. This “contested and ever-shifting repertoires of ideas and factor accounts for the emergence of autonomous behaviors relating to law, legal justice and legal sys- judicial behavior in Brazil, Indonesia, and Mexico, tems” (Couso, Huneeus, and Sieder 2010, 6). Simply among other countries (Helmke and Ríos-Figueroa stated, ideas, norms, beliefs, and values matter. For 2011; Dressel and Mietzner 2012). Public expectations example, judges in Chile have been constrained by a and demands on courts are also an important factor tradition of legal formalism. By contrast, in Colombia in this calculus, as is the broader role played by the judges’ perceptions of their own role have shifted private bar, legal academia, and other legal actors as indigenous groups have increasingly employed (Halliday 2013; Shapiro 2013). Judicial autonomy and rights-based strategies (Domingo 2010). A social net- effectiveness are thus an outcome of strategic inter- work analysis of Mexican judges depicts how profes- actions among the judiciary, other branches of gov- sional networks can diffuse fundamental ideas about ernment, and the public (McNollgast 2006). the role of judges (Ingram 2016). How do effective and equitable legal institutions emerge? | 105 Implications for judicial Guinea’s Urban Settlements.” World Bank Research Report, Justice for the Poor, Washington, DC. reform efforts Daniels, Ronald J., Michael J. Trebilcock, and Lindsey D. Carson. 2011. “The Legacy of Empire: The Common Analyzing how these factors play out in a given con- Law Inheritance and Commitments to Legality on text can help identify what kind of reformist activi- Former British Colonies.” American Journal of Compar- ties are most likely to have traction. Investments in ative Law 59: 111–78. improving the efficiency and effectiveness of com- Dixit, Avinash. 2004. Lawlessness and Economics. Prince- mercial courts, for example, may take root where elite ton, NJ: Princeton University Press. incentives and business demands align in favor of Domingo, Pilar. 2010. “Novel Appropriations of the Law effective, impartial courts. Investments to strengthen in the Pursuit of Political and Social Change in Latin citizen access and empowerment and improve judges’ America.” In Cultures of Legality: Judicialization and Polit- perceptions of their own roles are more likely to prove ical Activism in Latin America, edited by Javier A. Couso, Alexandra Huneeus, and Rachel Sieder. New York: fruitful where strategic opportunities exist to expand Cambridge University Press. the judicial role to limit abuse of power and protect Dressel, Björn, and Marcus Mietzner. 2012. “A Tale of rights. Conversely, the absence of such conditions Two Courts: The Judicialization of Electoral Politics may undermine efforts to build the capacity of legal in Asia.” Governance: An International Journal of Policy, institutions. Administration, and Institutions 25 (3): 391–414. Where conditions do not favor empowerment Ellickson, Robert. 1991. Order without Law. Cambridge, of formal legal institutions, reformists can look to MA: Harvard University Press. a broader set of formal and informal institutions Feld, Lars, and Stefan Voigt. 2003. “Economic Growth that may be relevant in terms of meeting the key and Judicial Independence: Cross-Country Evidence Using a New Set of Indicators.” Working Paper functions of commitment, coordination, and coop- 906, Center for Economic Studies and Ifo Institute eration for particular issues. Commitment devices (CESifo), Munich. for commercial transactions include reputational Ginsburg, Tom. 2003. Judicial Review in New Democracies: considerations that might be served by industry Constitutional Courts in Asian Cases. New York: Cam- mechanisms of alternative dispute resolution.2 A bridge University Press. range of customary, communal, or nonstate institu- Greif, Avner. 2006. Institutions and the Path to the Modern tions may serve as effective cooperation mechanisms Economy: Lessons from Medieval Trade. Cambridge, U.K.: to resolve social and economic disputes peacefully. In Cambridge University Press. such cases, efforts to improve the desired functions Hadfield, Gillian, and Barry Weingast. 2013. “Law with- out the State: Legal Attributes and the Coordination will be better served by understanding the strengths of Decentralized Collective Punishment.” Journal of of existing institutions and seeking to enhance and Law and Courts 1 (1): 3–34. complement their functional capacity by expanding Halliday, Terence. 2013. “Why the Legal Complex Is accountability. Integral to Theories of Consequential Courts.” In Consequential Courts: Judicial Roles in Global Perspective, edited by Diana Kapiszewski, Gordon Silverstein, Notes and Robert Kagan. Cambridge, U.K.: Cambridge Uni- 1. For a more nuanced discussion of how legal cultures versity Press. were forged by a dynamic interplay between imperial Helmke, Gretchen, and Julio Ríos-Figueroa. 2011. Courts policies and native agency, see Yannakakis (2015). in Latin America. Cambridge, U.K.: Cambridge Univer- 2. For examples of social mechanisms of commitment, sity Press. see Ellickson (1991); Dixit (2004); and Greif (2006). Helmke, Gretchen, and Jeffrey Staton. 2011. “The Puz- zling Judicial Politics of Latin America: A Theory of Litigation, Judicial Decisions and Interbranch Con- References flict.” In Courts in Latin America, edited by Gretchen Helmke and Julio Ríos-Figueroa. Cambridge, U.K.: Comparative Constitutions Project. Various years. http:// Cambridge University Press. comparativeconstitutionsproject.org/#. Ingram, Matthew. 2016. Crafting Courts in New Democra- Couso, Javier A., Alexandra Huneeus, and Rachel Sieder. cies: The Politics of Subnational Judicial Reform in Brazil 2010. Cultures of Legality: Judicialization and Political and Mexico. Cambridge, U.K.: Cambridge University Activism in Latin America. New York: Cambridge Uni- Press. versity Press. Isser, Deborah H. 2011. Customary Justice and the Rule of Law Craig, D., D. Porter, and F. Hukula. 2016. “Come and See the in War-Torn Societies. Washington, DC: United States System in Place: Mediation Capabilities in Papua New Institute of Peace Press. 106 | World Development Report 2017 Karpik, Lucien, and Terrence C. Halliday. 2011. “The Legal Ríos-Figueroa, Julio, and Jeffrey Staton. 2012. “An Eval- Complex.” Annual Review of Law and Social Science 7: uation of Cross-National Measures of Judicial Inde- 217–36. pendence.” Journal of Law, Economics, and Organization Magaloni, Beatriz. 2008. “Enforcing the Autocratic 30 (1): 104–37. Political Order and the Role of Courts: The Case of Shapiro, Martin. 2013. “The Might Problem Continues.” Mexico.” In Rule by Law: The Politics of Courts in Author- In Consequential Courts: Judicial Roles in Global Perspec- itarian Regimes, edited by Tamir Moustafa and Tom tive, edited by Diana Kapiszewski, Gordon Silverstein, Ginsburg. New York: Cambridge University Press. and Robert Kagan. Cambridge, U.K.: Cambridge Uni- Mate, Manoj. 2013. “Public Interest Litigation and the versity Press. Transformation of the Supreme Court of India.” In Staton, Jeffrey, and Will H. Moore. 2011. “Judicial Power Consequential Courts: Judicial Roles in Global Perspective, in Domestic and International Politics.” International edited by Diana Kapiszewski, Gordon Silverstein, Organizations 65 (3): 553–87. and Robert Kagan. Cambridge, U.K.: Cambridge Uni- V-Dem (Varieties of Democracy). Various years. Database versity Press. hosted by Gothenburg Institute (Europe) and Kellogg McNollgast. 2006. “Conditions for Judicial Indepen- Institute (United States), https://www.v-dem.net/en/. dence.” Journal of Contemporary Legal Issues 15 (1): 105–27. World Bank. Various years. World Development Indi- Moustafa, Tamir. 2007. The Struggle for Constitutional cators (database). Washington, DC, http://data.world Power: Law, Politics, and Economic Development in Egypt. bank.org/data-catalog/world-development-indicators. New York: Cambridge University Press. World Justice Project. Various years. Rule of Law Index. Moustafa, Tamir, and Tom Ginsburg. 2008. “Intro­ Washington, DC, http://worldjusticeproject.org/. duction: The Functions of Courts in Authoritarian Yannakakis, Yanna. 2015. “Beyond Jurisdictions: Native Politics.” In Rule by Law: The Politics of Courts in Author- Agency in the Making of Colonial Legal Cultures. itarian Regimes, edited by Tamir Moustafa and Tom A Review Essay.” Comparative Studies in Society and Ginsburg. New York: Cambridge University Press. History 57 (4): 1070–82. How do effective and equitable legal institutions emerge? | 107 PART II Governance for development 4. 5. 6. ______________________________________ ______________________________________ ______________________________________ Governance Governance Governance for security for growth for equity CHAPTER 4 Governance for security Sometime around 1775 BCE, Zimri-Lim, the king of When institutions of governance—the specific insti- the ancient Mesopotamian city of Mari in today’s Syr- tutions for making and implementing policy—solve ian Arab Republic, wrote the world’s earliest account— cooperation and commitment problems in ways that engraved on a clay tablet—of the use of arbitration create incentives not to use violence, security prevails. and restitution to settle a dispute between two of his When they do not, violence prevails. In the absence vassals. He rebuked one of them: “You have raided of cooperation, contending sides walk away from the his country. Everything you took, gather it together bargaining table, and citizens do not comply with gov- and return it” (Munn-Rankin 1956, 95). On another ernment rules. When commitment is lacking, warring occasion, the same king negotiated a power-sharing factions renege on peace agreements, policy makers agreement over a contested city with his more pow- default on their promises to transfer resources to dis- erful rival, King Hammurabi of Babylon. Bargaining contented groups or regions, disputants fail to abide extended over several years—“Remove [that city] from by court judgments, the police abuse citizens instead the treaty tablet and I shall commit myself!” offered of protecting them, and violence ensues. Hammurabi at one point—but no agreement could The framework adopted by this Report emphasizes be reached, a consequence of the uneven balance of the centrality of three constitutive elements of gover- power between the two kingdoms (Heimpel 2003, nance for development: (1) the relative distribution 379). Violence ensued, and in 1759 BCE the king of of power among individuals and groups with con- Violent conflict Babylon destroyed Mari, boasting that he had “turned flicting preferences; (2) the bargaining arena where is the result of the land into rubble heaps and ruins” and displaced its conflicting interests are mediated and policy choices three types of entire population (Heimpel 2003, 177). are made and implemented; and (3) the barriers to breakdowns in entry to this arena. Accordingly, violent conflict is the governance: the result of three types of breakdowns in governance, unconstrained Can governance solve the all rooted in cooperation and commitment problems: power of problem of violence in (1) the unconstrained power of individuals, groups, individuals, groups, and governments; (2) failed agreements between and governments; society? participants in the bargaining arena; or (3) the exclu- failed agreements Can dispute settlement, power sharing, restitution, sion of relevant individuals and groups from this between and other forms of governance solve the problem of arena. Power sharing, resource redistribution, dispute participants in the violence in society? Yes, under certain circumstances. settlement, and sanctions and deterrence have long bargaining arena; Violence recedes when individuals, groups, and gov- been identified as potential ways governance can pre- or the exclusion of ernments have incentives not to use it to pursue their vent, reduce, or end violent conflict, yet they succeed relevant individuals objectives, and when not using it eventually becomes only when they constrain the power of ruling elites, and groups from the norm. Institutions create incentives to reach agree- achieve and sustain agreements, and do not exclude this arena. ments (cooperation) and enforce them (commitment). relevant individuals and groups. 110 | World Development Report 2017 Security, governance, and Figure 4.1 Violence inflicts a high cost on development power are tightly interlinked Security—the security of people—is freedom from Internet users violence and the threat of violence (coercion).1 Rather Net enrollment rate, secondary than representing discrete, opposed situations, secu- Adult literacy rate rity and violence are on a continuum. For that rea- Primary completion rate son, this Report measures security as the reduction in the incidence of violence.2 The threat of violence, Access to improved water source however, is more difficult to measure. Compounding Access to electricity the measurement challenge is the overlapping and Poverty rate at $1.90 a day coexis­tence of violence and security.3 Vulnerable employment Security is a precondition for development 0 20 40 60 80 100 The cost of violence to development outcomes is Share of population (%) staggering (figure 4.1). In 2015 violence cost the global Negligible violence economy US$14.3 trillion, or 13.4 percent of the global Minor violence gross domestic product (GDP), and this cost has risen Major violence by more than 15 percent since 2008 (IEP 2015). Violent Sources: WDR 2017 team, using data from World Bank 2011; World Bank, World Development Indicators conflict has a negative impact on GDP per capita (database), 2015; Geneva Declaration Secretariat 2015; UCDP/PRIO 2015. (figure 4.2). Civil war reduces economic growth by 2.3 Note: The figure displays median values for all countries, by level of violence, for which data on development outcomes and violent deaths are available, ranging from 91 countries for poverty ratio percent a year (Collier 2007; Dunne and Tian 2014). data to 170 countries for access to electricity. Vulnerable employment is expressed as a percentage of Violent crime hinders economic development as well total employment. (Dell 2015). A 1.00-point decrease in homicide rates per 100,000 persons is associated with a 0.07–0.29 Figure 4.2 Violent conflict is associated percentage point increase in GDP per capita growth with a reduction in GDP per capita over the next five years (World Bank 2006). 0.4 At the micro level, violence results in changes in household composition, losses in the productive Incidence of conflict 0.3 capacities of household members, the destruction of productive assets and livelihoods, and displacement (Ibáñez and Vélez 2008; Justino 2009). Violence and 0.2 its threat also indirectly impede trade, investment, and growth because of the uncertainty and the loss of 0.1 trust and cohesion they generate (Knack and Keefer 1997; Zak and Knack 2001). For example, violent con- 0 flict directly cost Iraq 16 percent in per capita welfare 0 0.2 0.4 0.6 0.8 1.0 from April 2011 to April 2014 and Syria 14 percent. Percentile of GDP per capita However, when the foregone benefits of trade integra- Fan regression 95% upper/lower band tion between the two countries and their neighbors Sources: WDR 2017 team, based on Blattman and Miguel 2010 using data are taken into account, the total cost of war almost from World Bank, World Development Indicators (database), 2015, and doubles, to 28 percent for Iraq and 23 percent for Syria UCDP/PRIO 2015. (Ianchovichina and Ivanic 2016). Note: Incidence of conflict = number of violent conflicts in a country that led to at least 25 battle deaths in a year, between 1960 and 2015. GDP = gross domestic product. The state’s monopoly over violence is a precondition for security largely helped reduce violence, but security was In traditional societies, when security was still in the fragile, and the specter of violence always loomed hands of private individuals and groups, the credible (Bates 2001; North, Wallis, and Weingast 2009). Simi- threat of violence through retaliation served as a lar security arrangements based on deterrence persist deterrent against violence, and it was the main deter- in many parts of the developing world (Jacoby and minant of order and security.4 The threat of revenge Mansuri 2010). Governance for security | 111 Modern societies, by contrast, are fundamentally capacity—the stock of material and technological and characterized by a concentration of security arrange- human resources available to the state—to enforce ments in the hands of the state, which has a monop- these bargains and deter groups tempted to defect oly over the means of violence and coercion (Weber or renege on them is uneven and discontinuous over 1965; Mann 1984). At its core, the state’s monopoly time and space. over violence is the outcome of a collective agreement among powerful actors—an elite bargain, really—over Violence affects governance by changing who can use violence and when its use is acceptable power and norms (Wallis 2016).5 The use of violence and coercion under Violence and security change the distribution of this agreement is organized by the state, which typi- power among groups and consequently affect gov- cally enforces the agreement. ernance—how these groups interact within a set of The monopoly over violence is an ideal that few rules, which are themselves a function of the groups’ states attain in all places at all times. It is the outcome relative power (see chapter 2 and Tilly 1978).6 One of complex historical processes that unfold over group’s use of force can strengthen or weaken—even decades, if not centuries (box 4.1). The elite bargains annihilate—the power of other groups almost by that give rise to this monopoly are contested, rene- definition. Assassinations, mass killings, coups, and gotiated, and reasserted every day, everywhere. The revolutions do just that. New actors emerge and Box 4.1 How modern governance was born offers lessons for today’s “fragile” countries Today’s governance is the child of yesterday’s violence. into laws. But violence did not disappear—on the contrary, From the earliest records of human societies until the more revenues were available to finance more external modern era, violence has been the norm (Pinker 2011). It wars. It was now monopolized by these emerging states was not until violence was constrained by the state that and channeled toward providing law and order, combating development began to occur on a large scale (North, crime, and protecting property rights (Bates, Greif, and Wallis, and Weingast 2009). Even the countries that enjoy Singh 2002). Modern governance was born.a the highest per capita incomes and most peaceful societies Today, millions of people live under the rule of nonstate in the world, such as most of Europe, emerged from wars armed groups, contemporary equivalents of the medieval and violent contests for power (Tilly 1985, 1990). They were violence specialists who gave rise to the western European “fragile states” for most of their historical trajectory. states.b Wartime institutions—the “rules of the game that How these countries made this transition from violence result from the interaction between civilians and armed and underdevelopment to security and prosperity reveals factions”—have created new, enduring realities on the intriguing patterns. As commerce expanded in medieval ground, with profound implications for processes of state Europe, violence specialists—individuals or groups that and nation building in the aftermath of violence (Justino procured resources for themselves primarily through vio- 2016; see also spotlight 4). The relative security of places lence and coercion—traded the provision of security for such as Somaliland provides a compelling illustration of the financial resources to finance their wars (Braudel 1966). sustainability of the governance arrangements that arise They allowed economic activity to flourish under their organically—and without donor intervention—from the protection, founded states, and ceded some power and bargains struck among armed rebels, business communi- rights to business and other elites (Duby 1991; Bates 2001). ties, and civilians (Bradbury 2008). These arrangements Later, these rights were gradually expanded and eventually exemplify the significance of these homegrown rules for conceded to the majority of the population (Acemoglu and the future governance of postwar countries—and the puz- Robinson 2006). Constraints on unbridled power and other zles they pose to the international development commu- outcomes of these bargains between elites were formalized nity (Weinstein 2004). Source: WDR 2017 team. a. This narrative has been extended by some authors to contemporary states in eastern Africa and Southeast Asia as well. See Weinstein (2005) and Slater (2010). b. Gambetta (1996); Weinstein (2007); Mampilly (2011); Ahmad (2015); Arjona, Kasfir, and Mampilly (2015); Sanchez de la Sierra (2015). 112 | World Development Report 2017 gain power from rebellions and wars. Historical and between 1400 and 1700 reveals that it is associated contemporary examples abound. Indirectly, individ- with more postcolonial violent conflict, in addition uals and groups can use violence and coercion to to lower levels of trust and a stronger sense of ethnic concentrate the proceeds of growth and development identity (Besley and Reynal-Querol 2014). in their hands and increase their relative power by strengthening networks of patronage or gaining Governance can prevent conflicts from informational advantages (Levitsky and Way 2012). becoming violent Moreover, violence also affects norms of behavior Social choices, political change, and development Social choices, and can shape new values and attitudes, including atti- itself are all inherently contentious and conflictual political change, tudes toward violence itself (box 4.2). This impact can processes. The status quo benefits some members and development be positive as well as negative. Exposure to violence of society; any change is likely to benefit others, and itself are all from war has had surprisingly salutary and persistent conflict ensues (Acemoglu and Robinson 2006). This inherently effects on altruism (Burundi), empathy (Liberia), and Report defines conflict as an active disagreement or contentious political participation and social mobilization (Sierra dispute that arises when two or more individuals or and conflictual Leone). It has also been linked to increased trust in groups believe their policy choices, interests, pref- processes. government (Uganda), voluntary compliance with erences, or concerns are incompatible. Accordingly, authority (Liberia), as well as higher levels of social conflict in itself is not necessarily negative, and it capital, reciprocity, and interpersonal trust (Nepal).7 can even be a constructive force for social change Exposure to violence can also shape attitudes toward (Keen 1998). It is, in fact, an integral element of women along several fronts—including labor force human interactions, and it is found in all societies at participation, marriage and divorce (Germany after all times. World War II), political participation (Peru), and bar- Poverty, inequality, and other manifestations of gaining among household members—and contribute the unevenness of the development process generate positively to changes in gender roles.8 Violence also tensions and distributive conflicts (Hirschman 1958; changes identities and beliefs, including as a result of Knight 1992; Bardhan 2005). In addition to uneven migrations and changes in the composition of house- development, three other broad sets of factors can holds (Justino, Leavy, and Valli 2009). also cause conflicts: identity and ideology; resources, The effects of violence on norms and attitudes can including land, water, and extractives; and economic also be negative. The increased cooperation brought and other shocks. More often than not, these factors about by exposure to violence is mostly observable combine (box 4.3).9 within groups rather than between groups, leading to forms of parochialism or identity-based insularity Conflict and violence are not the same (Bowles and Gintis 2011). This effect could in theory And yet conflicts, no matter what causes them, generate more violence by reinforcing within-group need not erupt into organized violence. Examples cohesion based on distrust of others. Indeed, violence are numerous. At the micro level, peaceful protests, has the observed effect of hardening attitudes toward strikes and lockouts, boycotts, and mass resignations others and can also help construct identities in more are all examples of nonviolent manifestations of con- rigid ways (Grossman, Manekin, and Miodownik flicts over any of these sets of drivers. At the country 2015). These new norms and identities increase the level, Australia, Botswana, and Norway all have oil support for elites who favor the continuation of vio- or mineral wealth, and yet none has experienced lence to strengthen or extend their hold on power significant violent conflict in generations. Singapore (Fearon and Laitin 2000; Fearon 2006). The power and and Switzerland are ethnically, religiously, and lin- resources that accrue to political elites who benefit guistically diverse, but they enjoy some of the lowest from the use of violence then fuel more violence (Bes- levels of violence anywhere. Belgium recently expe- ley and Persson 2011). rienced an acute crisis between parties representing So, violence affects norms, and norms affect its two main ethno-linguistic groups, including 541 violence. Violence affects power, and power affects days without a central government, but no violence violence. These two-way relationships highlight erupted. Why? Because these countries have effective the broader point that violence can be persistent institutions of governance. They make all the differ- and self-sustaining. It tends to occur in interlinked ence in whether and when a conflict turns violent. episodes, with its intensity subsiding between A main message of this chapter is that institutions cycles (World Bank 2011). Within-country and cross- of governance can address conflicting interests and country analysis of historical violent conflict in Africa preferences without recourse to violence.10 Governance for security | 113 Box 4.2 The persistent links among gender-based violence, power, and norms Gender-based violence (GBV) reflects power inequalities internalized, and violence can even become acceptable for between women and men. Women and girls are more com- the victims, who may be afraid to challenge shared norms monly the victims of GBV—a manifestation of power imbal- out of fear of backlash (they may not even be aware of ances tilted in favor of men that characterizes many cultures alternatives to the norm). For example, more positive atti- around the world, most of them patriarchal. According to tudes toward FGM are typically found in countries where its Watts and Zimmerman (2002, 1232), “Violence against prevalence is higher. Interestingly, support for the continu- women is not only a manifestation of sex inequality, but ation of FGM is generally similar among women and men, also serves to maintain this unequal balance of power.” and among women greater support is expressed by those Collectively shared norms about women’s subordinate role who themselves have undergone FGM. in society, which potentially leads to violence against them, Biased formal laws restricting women’s economic perpetuate the power imbalance. opportunities reinforce (and are reinforced by) discrimi- Female genital mutilation (FGM), sex selection, child natory gender norms, which in turn strengthen the power marriage, dowry deaths, honor killings, and widowhood imbalance. Although many countries have recently carried rituals are harmful cultural practices that are supported by out reforms to remove legal restrictions, about 90 percent various social norms and beliefs. For example, FGM is tradi- of the 173 countries reviewed in a recent study still have at tionally believed to preserve a girl’s virginity until marriage; least one legal gender difference on the books, including not conforming to the practice may lead to social exclusion, laws requiring a woman to seek her husband’s permission stigma, and the inability to find a husband (UNICEF 2013). to work, travel, and register a business, and prohibitions on Sex-selective abortions, infanticide, neglect of female chil- women working in certain industries or hours (World Bank dren, and mistreatment of women who did not bear male 2015). children are manifestations of pervasive son preference, The persistence of these cultural practices depends in typically grounded in rigid patrilineal and patrilocal family part on reciprocal expectations about the behavior of oth- systems and the special role of male children in religious ers.b As long as discriminatory norms are broadly shared rituals.a Dowries—a practice that strengthens son pref- by a critical mass of individuals who expect that others erence because it leads parents to consider daughters as will conform to the practice, there will be no incentive to liabilities—has often been linked to brutally violent acts deviate from them. A shift requires coordination of beliefs against women—such as harassment, domestic violence, because each individual’s action depends on expectations murder, and suicide—as a way to extract a higher dowry of what the others will do. Strategic interdependence of from the wife’s family (UNFPA 2013). Honor killings involve individual beliefs will maintain the unequal distribution murders, often committed by close relatives, in the name of of power. Many state laws (such as those prohibiting FGM, “family honor.” Such killings of women are a way to sanc- domestic violence, child marriage, sex-selective abortions, tion the refusal of a female to enter an arranged marriage, and dowries, often introduced under domestic and interna- an attempt by a female to marry outside her own social tional pressure from women’s movements) have not been group, or the attack of a female by a rapist (UNFPA 2000; effective in reducing the prevalence of harmful practices Pande 2015). Widows are sometimes victims of violence because of the failure to understand the conditions needed by in-laws and the object of humiliating rites and isolation to shift norms and the need to translate laws in the context as part of the mourning process. Such acts are intended of the local culture (see chapter 3). Other forces may lead to to demonstrate a widow’s grief and innocence in her hus- persistence that does not depend specifically on reciprocal band’s death (Chen 2000; Sossou 2002). social expectations, but rather on private motives that vary The continuation of these practices is supported by considerably across individuals and may require specific both women and men. The power imbalance can become policy interventions (Efferson and others 2015). Source: WDR 2017 team. a. Das Gupta and others (2003); Milazzo (2014); Jayachandran (2015). b. Mackie (2000), with specific reference to FGM. 114 | World Development Report 2017 Box 4.3 Several factors can cause conflicts, and they often combine Identity is perhaps the broadest set of drivers of conflict. access) resources is ubiquitous and has been the subject of It encompasses ethnicity, race, language, territory, caste, landmark analyses and case studies (Ostrom 1990; Ellickson gender, sexual orientation, religion, belief, and potentially 1991). Resources also generate rents, which can be used to all “markers” of difference between human beings. Identity fuel and sustain conflict (Besley and Persson 2011). carries the seeds of conflict in its womb: those who share Economic and other shocks may also drive conflict: An the same identity are part of the “in-group,” while those external (exogenous) event or condition (such as a drought, who do not are the “out-group”—the others. When people climate change, the discovery of a new trade route, or a hike acquire a strong and exclusive sense of belonging to a sin- in commodity prices) or an internal (endogenous) event or gle group, the stage is set for conflict (Sen 2006). Just as condition (such as technological change or demographic identities are a primary driver of conflict, conflict is the main shifts) can disrupt a stable situation by introducing tension way identities are shaped (Berman and Iannaccone 2006; in the control of scarce or expanding resources.a Fearon 2006): “There is nothing like conflict to determine, The development process itself—or rather its uneven- delineate, and accentuate the sense of belonging” (Lianos ness in the form of poverty, income inequality, and urban 2011, 4). migration—can also be a powerful driver of conflict.b Resources are another major driver of conflict, whether Drivers of conflict can combine. Horizontal inequality— they are natural resources such as oil, minerals, and gem- the confluence of ethnic identity and income inequality—is stones; common pool resources such as fisheries, forests, a particularly explosive combination (Esteban and Ray grazing land, and water basins; or private resources such 2008; Esteban, Mayoral, and Ray 2012). Extreme sce- as agricultural land and cattle. An extensive literature asso- narios feature all drivers. Such was the case of Darfur in ciates natural resources with the onset of violent conflict Sudan, where local conflicts over land and water resources, (Caselli, Morelli, and Rohner 2015; Ross 2015). Resources drought, poverty and inequality, and ethnic and religious can trigger conflict whether they are scarce or abundant polarization all conspired, at a time when local governance (Collier and Hoeffler 1998; Bardhan 2005). Conflict over the broke down, to turn these drivers of conflict into one of the mismanagement and overuse of common pool (or open deadliest civil wars of the time (de Waal 2007). Source: WDR 2017 team. a. For drought, see Miguel, Satyanath, and Sergenti (2004); for climate change, Burke, Hsiang, and Miguel (2015); for commodity price shocks, Dube and Vargas (2013) and Bazzi and Blattman (2014); and for demographic shifts, Goldstone (2002). b. For poverty, see Justino (2009); for income inequality, Fajnzylber, Lederman, and Loayza (2002), Montalvo and Reynal-Queyrol (2008), Stewart (2008), Enamorado and others (2016), and Ray and Esteban (2016); for urban migration, World Bank (2010). Violent conflict is the result of a individuals from using violence. The absence of this governance failure deterrent will likely decrease the cost of the violent There are converging indications that the use of orga- option. Violent conflict, then, is the outcome of the Violent conflict nized violence to resolve a conflict is the outcome of a failure of institutions of governance to resolve a con- is the outcome rational decision: leaders go to war when they believe flict, regardless of what factors or combinations of of the failure of the expected benefits of a war outweigh its expected factors cause it. Three types of such governance fail- institutions of costs (Tilly 1978; Fearon 1995), and young men join ures can lead to violent conflicts: bargaining failures governance to gangs and rebellions when this option is superior to between individuals and groups; the unconstrained resolve a conflict, the next best opportunity foregone (World Bank 2011). power of the state; and the exclusion of powerful indi- regardless of Institutions and norms shape behavior—including viduals and groups from the bargaining arena where what factors or violent behavior. They create incentives for individu- policies are made and implemented. combinations of als and groups to use violence, or refrain from using Bargaining failures. Violence can arise when agree- factors cause it. it, to resolve conflicts by determining the expected ments between opposing sides break down, such as gains from each option. These incentives differ in when the state’s monopoly over violence falls apart various institutional settings. For example, the exis- (Bates 2008a, 2008b). This violence becomes the pre- tence of a credible threat of sanctions will discourage ferred—and rational—way for certain individuals and Governance for security | 115 groups to alter the distribution of power in their favor succeeded in avoiding violent conflict. The extent or to pursue their interests (Fearon 1995; Wagner of groups’ access to state structures (in the form of 2000; Walter 2009). Such is the case in several fragile jobs in the government and the military) and to state states, in the peripheral areas of many stronger states, resources (such as land, commercial licenses, and but also in the so-called ungoverned spaces (which other rents) determines the degree of inclusiveness are often just “differently governed”) (Pujol 2016) or exclusiveness of these elite coalitions (Lindemann (spotlight 4). What these very different places have in 2008, 2010). common is the failure—sometimes localized only—of bargaining over who has the monopoly over violence Institutions of governance create incentives in a territory. not to use violence Unconstrained power of the state. Although the state’s Ironically, some of the clearest insights into how insti- monopoly over violence is a necessary condition of tutions of governance shape incentives to prevent security, it is by no means sufficient to guarantee the and reduce violent conflict have come from recent long-term security of people and property. Violent work on the ways violent groups maintain order and conflict can, and often does, come at the hand of security within their own ranks (Justino 2016). Prison the state itself, particularly through its military and bands and slum gangs create informal governance police. Ruling elites often resort to military force and rules to adjudicate disputes, divide resources, and repression against civilians to avoid having to share enforce sanctions among their members (Venkatesh power (Acemoglu and Robinson 2006). Police forces 2006; Skarbek 2014). Criminal associations such may threaten and use unsanctioned violence against as the Sicilian Mafia do so as well (Gambetta 1996). the population of urban slums instead of protecting Pirate organizations are a fascinating illustration of them, as occurs in some U.S. and Latin American cit- the emergence of rules of governance aimed at resolv- ies. Governments, or the private interests that have ing conflicts driven by material inequalities and per- captured them, often violently expel local communi- ceptions of unfairness and at eliciting cooperation ties from their land for reasons ranging from grant- among members of the group (Leeson 2011). ing concessions to mining corporations to expanding Formal and informal institutions of governance infrastructure projects (Hall, Hirsch, and Murray Li solve commitment and cooperation problems in ways 2011; Moyo, Tsikata, and Diop 2015). that create incentives not to use violence. What these Exclusion of powerful actors. Violence can also governance institutions are exactly, how they solve emerge when powerful actors are excluded from these functional problems, and under what conditions the bargaining arena where policies are made and they work (or fail) to prevent, limit, or end violence are implemented—usually along identity fault lines. The the subject of the rest of this chapter. distribution of power among ethnic groups, measured by their access to central state power, is a strong predic- tor of violent conflict, whether in the form of repres- Governance can improve sion by the state or rebellion against the state. Cross- country statistical analyses using the Ethnic Power security in four ways Relations data set indicate that countries in which This Report identifies four categories of governance large portions of the population are excluded from institutions that directly create incentives for individ- access to the state based on ethnicity are more likely uals, groups, and governments to refrain from using to face armed rebellions and to experience violent violence to resolve conflicts.11 Other types of institu- repression by the state (Wimmer, Cederman, and Min tions, such as markets or schools, play only indirect 2009; Rørbæk and Knudsen 2015). The level of such roles. exclusion seems to matter, too: the more excluded from state power ethnic groups are, the more likely Sanction and deterrence institutions. Governance •  their members are to initiate violent conflict with institutions that punish and deter opportunistic the government, especially if they have recently lost behavior reduce incentives for violent behavior by power (Cederman, Wimmer, and Min 2010). increasing the cost of violence. Over time, they also Qualitative comparative and case study analyses shift preferences away from violence by changing of violent conflict in postcolonial Africa share the norms and attitudes toward violence, leading to same finding that exclusionary elite bargains have led the internalization of new norms (see spotlight 5 to trajectories of civil war, whereas countries in which on crime). Ultimately, they foster a culture of vol- elites have struck more inclusive elite bargains have untary compliance based on legitimacy (chapter 2). 116 | World Development Report 2017 Examples range from speed limits and penalty fees diminishing returns, capital punishment appears to Governance to prison sentences. have statistically insignificant effects on crime.12 institutions that • Power-sharing institutions. Governance institutions On the other hand, incarceration has negative balance, divide, that balance, divide, and share power reduce the effects on recidivism, and the empirical findings and share power incentives to engage in violence by increasing the are particularly troubling for youth. The experience reduce the benefits of security. They may increase the contest- of prison appears to create opportunities to build incentives to ability of policies as well. Examples include consti- criminal capital and deepen criminal social networks, engage in violence tutions and proportional representation electoral with the result that hardened youth frequently end by increasing systems. up returning to crime after incarceration and at the benefits of • Redistributive institutions. Governance institu- higher rates with harsher prison conditions. Incarcer- security. tions that allocate and redistribute resources and ation can also ruin a youth’s employment prospects, resource rents are a special case of power-sharing thereby reducing the future opportunity cost of vio- institutions. They too reduce the incentives to use lence (Mueller-Smith 2015). violence by increasing the benefits of security. These findings are consistent with various ana- Examples include budgets, social transfers, and lytical studies suggesting that mano dura approach- victim compensation schemes. es—a set of heavy-handed government policies to • Dispute resolution institutions. Governance institu- combat criminal gangs in Latin America—are coun- tions that resolve and arbitrate disputes reduce terproductive (Kleiman 2011). These studies posit incentives for using violence by stabilizing expec- that heightened police engagement in crime-ridden tations. They can also shift preferences toward non- communities may increase the risk of police abuse violent outcomes. Examples include courts, as well of innocent citizens and undermine citizen trust in as institutions of property rights such as contracts government and community cohesion (Berkman and titles. 2007; World Bank 2010). Conversely, programs such as the “Youth and the Police” project in Belo Horizonte, Sanctions and deterrence can reduce Brazil, which organized workshops and seminars violence by changing incentives and between police and youth groups, have been shown in preferences some preliminary evaluations to improve local police- Deterrence maintains security by raising the cost of community relations (Berkman 2007). engaging in violence, whether by preventing crime In Rio de Janeiro, Brazil, Pacifying Police Units (general deterrence) or by limiting recidivism (spe- (UPPs) combine an increased police presence to cific deterrence). Sanctions limit opportunities to use regain control of urban territory from armed crimi- violence by way of incapacitation. Formal institutions nal groups with a new model of “proximity policing.” of deterrence and sanction include the array of insti- This program seeks to build closer ties with local tutions falling under the criminal justice system such residents by holding community meetings and social as the police, prosecutors’ office, courts, prisons, pen- events, providing teenagers with soccer lessons, and alties, and fines. Under the state’s monopoly over vio- engaging in informal dispute settlement. In addition, lence, the coercion emanating from these institutions it starkly reverses policemen’s financial incentives deters and constrains those tempted to use violence by offering performance bonuses for reducing police to pursue their objectives. homicides, thereby replacing an earlier policy that Robust empirical evidence indicates that crime offered higher salaries to police officers who shot responds to the preventive potential of incentives suspects in acts of legitimate defense. A recent eval- set by the criminal justice system, which is deter- uation of the impact of the introduction of the UPPs mined by two main parameters: a (nonabusive) police indicates that homicides by police would have been a presence and number of policemen and the length of massive 60 percent higher without UPP intervention prison sentences. More police and more police pres- (Magaloni, Franco, and Melo 2015). ence have been shown causally to lead to declines in crime (Di Tella and Schargrodsky 2004; Chalfin and Power sharing can reduce violence by McCrary 2014). The length of prison sentences has as changing incentives and increasing well, but to a lesser extent: for the adult population, contestability the elasticity of crime with respect to length of sen- Power-sharing mechanisms give multiple contend- tence is small but still positive, whereas youth do not ing elites a stake in the decision-making process and seem responsive to this incentive. Finally, because can rebalance power in the governance arena. Some the effects of length of sentence exhibit rapidly form of power sharing aimed at co-opting elites and Governance for security | 117 constraining majority rule has been attempted to end Figure 4.3 An even balance of power violence in nearly all conflicts within states over the is associated with positive security last few decades. Power-sharing arrangements are outcomes especially relevant for societies divided along ethnic and religious identity lines such as in Bosnia and 4 Power distributed by social group score Herzegovina, Kenya, Lebanon, Northern Ireland, and South Africa, but also in countries where the conflict is a legacy of opposing ideologies. 3 Power-sharing institutions can take many forms. In one set of forms, particular offices or processes in national government can lower barriers to the entry 2 of certain groups to the policy arena and increase its contestability. Examples include ensured representa- tion of different individuals or factions in executive 1 positions (Iraq, Kenya, Lebanon, Somalia); ensured minority voice in policy making through vetoes for minorities in coalition governments or supermajority requirements; positive action mechanisms such as 0 legal quotas for women and marginalized groups in 0.2 0.4 0.6 0.8 1.0 public office (India); and forms of legislative selection Order and security score that guarantee the representation of all factions and High-income OECD countries groups such as electoral systems with proportional High-income non-OECD countries representation. In a second set of forms, power is Upper-middle-income countries distributed among groups at the subnational level. Lower-middle-income countries Examples include federalism (Belgium, Nigeria); Low-income countries administrative decentralization (Nepal, Sierra Leone); Sources: “Power distributed by social group” variable: V-Dem, version 6; or regional autonomy (Aceh, Indonesia; Bougain- “order and security” variable: World Justice Project, Rule of Law Index, 2015, Factor 5. ville, Papua New Guinea; Catalonia, Spain; Corsica, Note: The “power distributed by social group” variable is measured on a 0–4 France)—see Gates and others (2016). scale, ranging from 0 (political power is monopolized by one social group) Cross-country statistical analyses robustly associ- to 4 (social groups have equal political power). The “order and security” variable is measured on a 0–1 scale, ranging from 0 (low score) to 1 (high ate institutions of power sharing with better security score). This composite variable consists of three dimensions measuring outcomes (Gurr 1993; Linder and Bächtiger 2005)—see whether “crime is effectively controlled”; “civil conflict is effectively limited”; and “people do not resort to violence to redress personal grievances.” figure 4.3. Executive power sharing in broad multi­ OECD = Organisation for Economic Co-operation and Development. party coalitions, an executive-legislative balance of power, multiparty systems, and proportional rep- resentation electoral systems are all significantly identity-driven violent conflict. Where violence has correlated with less incidence and risk of internal already occurred, they give rebel factions incentives conflict, and less vulnerability to domestic terrorism, to lay down arms by offering them alternative ave- after controlling for economic and population charac- nues for contesting power in nonviolent ways, such teristics. Statistical and empirical evidence in favor of as in Bosnia and Herzegovina, Liberia, and South decentralized and federal governance institutions is Africa.13 Over time, cooperation builds trust in the not as strong (Lijphart 2012). power-sharing mechanism and enhances its legiti- macy—the extent to which people voluntarily comply Power sharing can reduce violence by with institutions and decisions (see chapter 2). giving the parties in a conflict incentives to cooperate Cooperation is more likely when parties in a Mechanisms of power sharing manage conflict conflict can credibly commit to deals by encouraging cooperative behavior among rival Fighting parties are significantly more likely to factions. They give leadership elites incentives to cooperate and sign peace agreements to end wars if collaborate, bargain, and encourage conciliation the deals contain specific assurances to share power and tolerance among their followers. They also help (Walter 2002; Hartzell and Hoddie 2003). Enshrining mitigate the effects of the exclusion of minorities power-sharing arrangements in peace agreements by majorities, reducing the likelihood of the onset of removes motives to continue fighting and has been 118 | World Development Report 2017 negatively and significantly associated with renewed Figure 4.4 Constraining state power violent conflict (Walter 2015). Given the lack of trust ensures security among warring factions, mechanisms that ensure the 1.0 credible commitment of elites, both to one another not using public office for private gain score Government officials (police and military) and to their followers, play a major role in ensuring that, once reached, power-sharing arrangements are 0.8 implemented and violence stops (Keefer 2012). Independent third-party mechanisms are the main 0.6 mechanisms for ensuring the credibility of commit- ments in general (Schelling 1960; Bates 2008b). The 0.4 same mechanisms can work to credibly commit par- ties in a conflict in the specific case of implementing 0.2 power-sharing deals. For example, the deployment of international peacekeepers provided security guar- 0 antees for the agreements that ended the civil wars in Bosnia and Herzegovina, Liberia, and Sierra Leone. The commitment of regional and international pow- 0.2 0.4 0.6 0.8 1.0 ers played a similar role in reaching power-sharing Order and security score accords in Lebanon, the former Yugoslav Republic of Macedonia, and Mali. However, third-party external High-income OECD countries enforcers cannot always ensure that power-sharing High-income non-OECD countries Upper-middle-income countries arrangements end the violence and restore order. Lower-middle-income countries Under which conditions do power-sharing arrange- Low-income countries ments promote order and security, and when do they fail? Source: WDR 2017 team with data from the World Justice Project, Rule of Law Index, 2015. As in the earlier example of ancient Babylon and Note: The “order and security” variable (Factor 5) is measured on a 0–1 scale, Mari, large power asymmetries between contending ranging from 0 (low score) to 1 (high score). This composite variable consists factions make it easy for the stronger side to renege of three dimensions measuring whether “crime is effectively controlled”; “civil conflict is effectively limited”; and “people do not resort to violence to redress on its promises and hard for the weaker side to hold personal grievances.” “Government officials in the police and the military do it to account for failing to commit (Walter 2009). not use public office for private gain” variable (Factor 2.3) is measured on a 0–1 scale, ranging from 0 (low score) to 1 (high score). Results are presented Power asymmetries rooted in governments’ monop- as residuals after controlling for the natural logarithm of income per capita. oly over taxation of resources explain the likelihood OECD = Organisation for Economic Co-operation and Development. of violent repression (Besley and Persson 2009). They also explain why some wars last longer than others Verdier 2004). Budgets then become the true battle- (Fearon 2004). Conversely, power-sharing institutions ground for distributive conflicts, and they reflect the can reduce violence when they constrain the power of bargains made among elites and between elites and ruling elites (figure 4.4). The more accountable a gov- citizens (Dorotinsky and Pradhan 2007). ernment is to a large share of the population, the eas- Redistributive mechanisms address conflicts ier it will be able to credibly commit to share power driven by poverty and inequality, usually in combina- and the fewer incentives the sides will have to return tion with the three other drivers. They can address con- to violence (Walter 2015; Gates and others 2016). flicts rooted in grievances about the lack of access or unequal access to land and natural resources; inequal- Redistributing resources and wealth can ities along identity fault lines (horizontal inequality); reduce violence by changing incentives and economic or environmental shocks. Redistribu- Redistributing wealth and sharing power affect tion can also address conflicts stemming from the security in similar ways. Indeed, they often go hand greed of groups coveting the natural and material in hand: accessing centers of power and decision resources of the state and the rent extraction opportu- making opens the door to controlling resources and nities that access to these resources generates.14 extracting rents. But elites can also redistribute wealth Forms of redistributive governance institutions without having to share power by simply using fiscal and policies include fiscal decentralization, intergov- policy to transfer resources to groups that threaten ernmental transfers, taxation, social security systems to use violence to pursue their interests (Bueno de and safety nets, subsidies and cash transfers, funds Mesquita and others 2002; Acemoglu, Robinson, and such as pension funds and permanent funds, and, by Governance for security | 119 extension, social services such as health and educa- by way of patronage, a mode of governance in which tion. Other institutions of governance, such as public politicians, or patrons, confer public jobs and benefits employment, can serve both redistributive purposes on supporters or clients (Keefer and Vlaicu 2008; Rob- and productive ones. inson and Verdier 2013). A time series cross-sectional study of 40 African countries found that expanding Redistribution can buy peace by the size of cabinets by one additional minister reduces strengthening the social contract between the risk of a coup more than the effect of a 1 percent states and citizens increase in GDP—see Arriola (2009). Historically, governments used social policy and Governments often resort to patronage in public other broad redistributive programs as a way to main- employment to maintain the stability of coalitions and tain order and reduce civil unrest. One example is the ensure the loyalty of key constituencies whose dis- mainstreaming of insurance schemes in 19th-century content could jeopardize security (North and others Europe in the face of more assertive and better- 2013). During the recent uprisings in the Arab world, organized labor movements. Much more recently, oil-rich governments—confronted with mounting panel data from 16 Latin American countries reveal dissent at home and concerned about the contagion that steady increases in government expenditures on from neighboring countries—decided to hike both the social welfare between 1980 and 2010 caused gradual numbers and compensation of public employees in an but significant reductions in political violence in effort to keep the peace and maintain the loyalty and countries that witnessed reductions in inequality quiescence of a key constituency (Brownlee, Masoud, (Justino and Martorano 2016). Similarly, government and Reynolds 2013)—see figure 4.5. expenditures on social services such as health, edu- Large increases in the public sector wage bill have cation, and welfare in 16 states of India from 1960 to deleterious effects on both budgetary sustainability 2011 were associated with a significant decrease in and administrative efficiency. Attempts at curbing both the outbreak and escalation of riots across the the trends have generally failed or have not been country (Justino 2015). That such reductions occurred sustained (World Bank 1999). Despite these problems, in the medium term further suggests that, here as public sector employment can solve the first-order well, these redistributive social policies are working problem of violence. Timor-Leste is a case in point. through reductions in poverty and inequality. In both Following widespread unrest in 2006, the new gov- Afghanistan and India, more government spending ernment used revenues from the oil windfall to on public services appears to have played a role in increase the budget 14-fold, from US$135 million in reducing insurgent violence (Beath, Christia, and 2006 to US$1,850 million in 2013. Public employment Enikolopov 2012; Khanna and Zimmermann 2015).15 spiked from 20,000 to more than 35,000 during the Government interventions to reduce urban crime same period, along with social transfers to veterans in Latin America display a comparable pattern of (Srivastava and Blum 2016). increasing security by reducing poverty and inequal- ity. Brazil’s conditional cash transfer program, Bolsa Redistribution can become corruption Familia, had a strong negative causal effect on urban The rent redistribution and patronage that accom- crime in São Paulo as a result of increases in house- pany the bargains that are often necessary to maintain hold incomes and changes in peer group membership security and solve the first-order problem of violence (Chioda, de Mello, and Soares 2012). Colombia’s Famil- frequently come at the expense of public integrity ias en Acción program in Bogotá displayed similar (Szeftel 1998). In few countries are these trade-offs results (Camacho and Mejía 2013). between “buying the peace” and controlling cor- ruption more salient than in the Republic of Yemen. Redistribution can buy peace by Before the revolution of 2011, Republic of Yemen tribes co-opting elites formed a core part of the elite bargain that ensured Short of committing to universalistic redistribution— relative security in this historically weak central state. usually offered in exchange for citizens abstaining An essential element of these armed tribes’ loyalty to from violent contestation—governing elites can the central government was a vast patronage network, credibly commit to narrower subsets of the popu- both formal and informal, that benefited the cooperat- lation, whether groups with a strong capacity for ing tribal elites. The Ministry of Tribal Affairs handed mobilization or elites with veto power (Acemoglu and out formal monthly stipends to more than 4,500 tribal Robinson 2006). Bringing these smaller groups, or leaders across the country. In elections, the regime other elites, into the bargaining arena often happens also favored local tribal elites, who used their position 120 | World Development Report 2017 Figure 4.5 Recruitment of civil servants increased exponentially in Tunisia and the Arab Republic of Egypt in the aftermath of the Arab Spring uprisings of 2011 a. Tunisia, 2000–14 b. Arab Republic of Egypt, 2000–14 Tenured government employees (millions) 50,000 20,000 6.4 6.2 Total/civil servants recruited 40,000 15,000 6.0 Workers recruited 5.8 30,000 10,000 5.6 5.4 20,000 5,000 5.2 Arab Spring 5.0 Arab Spring 10,000 0 4.8 2000 2005 2011 2014 2000 2005 2011 2014 Total recruited (left axis) Civil servants recruited (left axis) Workers recruited (right axis) Sources: Tunisia: Brockmeyer, Khatrouch, and Raballand 2015; Arab Republic of Egypt: Bteddini 2016. as parliamentarians to secure public employment makes them very credible commitment devices for their followers. Although some of this employ- (Acemoglu and Robinson 2006). ment was real—particularly in the army and security Such commitment, coupled with the demon- forces—an informal mechanism awarded government strated and repeated capacity of governments to jobs to more than 40,000 “ghost workers”—that is, make good on their promises, could increase trust clients and relatives of tribal leaders who received sal- in government over time and reduce the chances aries without being expected to work. This fictitious of choosing the violent option. Conversely, the poor employment consumed up to 6 percent of the national credibility of governments in committing to the budget in the education sector alone (Egel 2013). transfer of resources can lead to violence, especially if the chances of overthrowing the government by Redistribution can reduce violence by violent means are greater than the probability of it increasing trust in government and credibly transferring the resources (Acemoglu and interpersonal trust Robinson 2006; Murshed and Tadjoeddin 2009). The exact mechanisms by which redistributive Social welfare policies can also reduce political policies achieve security entail the resolution of conflict by helping to strengthen interpersonal trust commitment and cooperation problems between gov- between citizens. In both theory and analytical case ernments and groups pressing for redistribution— studies, interpersonal trust has been classically linked whether these are powerful elites or mobilized to increased social cohesion and thus less social con- citizens (Addison, Le Billon, and Murshed 2002). flict. Empirically, it is linked to reductions in crime lev- Sustained and steady increases in government expen- els (Lederman, Loayza, and Menéndez 2002). Quanti- ditures on social welfare, such as those in Latin Amer- tative evidence linking social welfare to interpersonal ica in the 1990s and 2000s, signaled governments’ trust is more limited, but empirical studies do show commitment to the social contract that ties the state that interpersonal trust is higher among members to its citizens—or at least to the groups that would of communities that are economically homogeneous otherwise threaten elite control over the state (Bueno and more equal. Conversely, participation in social de Mesquita and others 2002, 2003). The political activities, a close proxy of social cohesion, is lower in difficulty in rolling back these social welfare pro- places where economic and social inequality are high grams, which have become seen as entitlements, (Alesina and La Ferrara 2002a, 2002b). Governance for security | 121 The link between fiscal decentralization and secu- behavior—usually codified into laws—including the rity levels is less well documented. One empirical use of violence and other types of offenses. before-and-after analysis of 98 districts in Java, Indo- In the absence of strong formal institutions such nesia, shows that the incidence of routine violence as courts or police, individuals and communities in the form of neighborhood and village brawls and resort to alternative dispute resolution (ADR) mech- vigilante justice decreases as fiscal decentralization anisms—that is, a set of informal skills, practices, is implemented. This analysis suggests that the com- and norms of negotiation and mediation that aim mitment to devolving resources and autonomy from to help parties reach self-enforcing bargains and distant central governments to local governments reduce the cost and length of disputes. ADR mech- may increase the legitimacy of the local government, anisms improve cooperation by building trust and which in turn translates into more cooperative behav- improving communication and mutual understand- ior and stronger cohesion among groups (Murshed ing among parties and by cultivating a set of norms and Tadjoeddin 2008). that encourage them to stay at the bargaining table (Blattman, Hartman, and Blair 2014). They cause a Restitution and compensation also reduce shift in preferences away from some options and in When the incentives to engage in violence favor of others. When the third-party institutions third-party Governance institutions that recognize and redress that enforce contracts are weak or do not exist, dispu- institutions that grievances present a special case of redistribution. tants have incentives to renege on their agreements. enforce contracts They reduce incentives to engage the state through Informal social sanctions can solve this commitment are weak or do not the use of violence by seeking to right past wrongs, problem (Bardhan 1993). The norms promoted by ADR exist, disputants which may help avoid repeated conflict (Walter 2015). mechanisms, such as shaming would-be defectors, have incentives These institutions include truth and reconciliation help enforce the bargains reached. to renege on commissions such as in South Africa after apartheid; In Liberia, a large education campaign to promote their agreements. victim compensation schemes such as in El Salvador; ADR mechanisms for settling land disputes in 86 Informal social and an array of material and nonmaterial measures, treated communities in 2009 resulted in a 32 percent sanctions including symbolic ones, intended to restore people’s decrease in property destruction relative to the con- can solve this dignity. The latter should not be underestimated. trol group (Blattman, Hartman, and Blair 2014).16 In commitment Indeed, the desire to restore a sense of dignity and addition to reducing violence, the campaign in Liberia problem. self-worth as citizens and human beings appears to also had unintended consequences: it exposed more have been an essential element of the set of factors disputes, reflecting power struggles between village that triggered the Arab Spring (Brownlee, Masoud, elders and youth, but these were overwhelmingly and Reynolds 2013). peaceful. This particular finding underscores some of the main points made in this chapter: that conflict is Dispute settlement can reduce violence a normal element of the change process and is quali- by changing preferences tatively distinct from violence, and that what matters Dispute resolution institutions are critical to secu- for security is not the occurrence of conflict per se but rity and development. They help reduce violence rather its peaceful resolution by institutions. and protect property rights. Mechanisms of dispute Dispute resolution mechanisms do not always resolution include mediation, conciliation, and nego- achieve security. The field experiment in Liberia tiation, where parties try to reach mutually satisfac- remains an example of self-enforcing dispute reso- tory, self-enforcing agreements on their own. These lution institutions helping to resolve low-intensity mechanisms also include litigation and arbitration, communal conflict, where the distribution of power where disputants rely on a third party such as a judge between parties is relatively even. Such is not the or a jury for resolution and the credible commitment case in the more acute conflicts over land and water needed to enforce the resolution. These institutions resources that plague so many developing countries. can be informal, such as elder councils in a village, These conflicts involve significant power dynam- or formal, such as courts, ombudsmen, and peace ics such as land grabs by governments and closely negotiators. Institutions of dispute resolution seek connected local elites or extractive and agricultural to resolve conflicts over material resources, whether concessions to multinational firms (Hall, Hirsch, and scarce or abundant, such as land, water, extractives, Murray Li 2011; Boone 2013). An evaluation of a donor- and movable assets. They also aim to resolve con- funded land mediation program that is also in Liberia flicts over violations of norms of socially acceptable indicates that once such power dynamics are at play, 122 | World Development Report 2017 self-enforcing dispute resolution mechanisms no lon- that stemming from crime). This chapter does not ger achieve reductions in violence (Hartman, Morse, discuss other threats, but it recognizes that they and Kitt 2014). can lead to conflict and even violence. In this chap- The uneven distribution of power among parties ter, violence is defined as the use of physical force intended to kill, harm, or destroy. to a dispute stands in the way of reaching and enforc- 2. Peace, a concept much broader than security, is not ing mutually satisfactory bargains. The stronger addressed in this chapter. disputants have few incentives to make concessions 3. This chapter uses a single framework—a unifying and relinquish power and resources, and they have model of violence—to address the relationships many incentives to renege on agreements over time, among governance, security, and development, and as the rich literature on bargaining power suggests.17 it applies the same framework to all types and actors Solving disputes and enforcing contracts through the of violence. The many forms of violence, which often threat or use of force then become the more rational overlap, include violence from civil war, repression, strategy for a powerful actor because the benefits of rebellion, coups, interstate conflicts, and genocide; its use outweigh its costs, such as the risk of sanc- violence from gang activity, terrorism, piracy, and organized crime; communal violence; urban vio- tions (Schelling 1960; Walter 2015). The existence of lence, riots, and civil strife; and interpersonal and norms that exclude certain groups such as women gender-based violence. A particular characteristic of and minorities from the bargaining arena where modern violence is that the lines between forms of disputes are settled reinforces power asymmetries violence are becoming increasingly blurred (World and perpetuates inequitable and insecure outcomes Bank 2010, 2011; Geneva Declaration Secretariat (Platteau 2000). 2015). Similarly, violence has many agents or actors. Governments, political militias, rebels, criminal gangs, communal militias, rioters, radicalized indi- Conclusion viduals and groups, and external armed forces can As noted in chapter 1, security is a precondition for all be agents of violence. Sometimes, it can be dif- development. However, using governance to solve ficult to tell them apart; indeed, at times different actors of violence operate side by side. Finally, vio- the first-order problem of violence requires reaching lence mutates from one form to another over time, and sustaining stable elite bargains, and it inevitably and so do the identities and affiliations of its perpe- involves compromises, concessions, and trade-offs trators, making the typologies of actors and forms of between development outcomes. The rent redistri- violence less useful for the purposes of this Report. bution that accompanies the bargains necessary to 4. As the British anthropologist E. E. Evans-Pritchard maintain security can constrain development (North observed in 1940 about the Nuer, an ethnic group and others 2013; Acemoglu and others 2014). In spe- in today’s South Sudan, “The very readiness of the cific cases, power-sharing arrangements between Nuer to employ violence provides a reason, then, elites have helped avoid violent conflict, but they have that violence so rarely takes place” (quoted in Bates also shackled the economy (Lindemann 2011). Simi- 2001, 45). 5. Max Weber, in his 1965 essay Politics as a Vocation, larly, elite bargains that enshrine existing inequalities originally theorized that the monopoly over violence can ensure security in the short term, but they are not was a single agreement among powerful groups sustainable in the long term. How governance can over the use of violence. The authors are grateful to resolve these trade-offs among growth, equity, and John Wallis for making this important point. security constitutes a new frontier on the develop- 6. As Tilly (1978, 62) notes, “Great shifts in the arrange- ment research agenda. ment of power have ordinarily produced—and have often depended on—exceptional moments of collec- tive violence.” Notes 7. Bellows and Miguel (2006); Blattman (2009); 1. This chapter is about the security of people, as Gilligan, Pasquale, and Samii (2011); Voors and others opposed to national security or the security of terri- (2012); Blair (2015); Hartman and Morse (2015). tories. Because of the particular threat it discusses— 8. Calderón, Gáfaro, and Ibáñez (2011); Justino and oth- violence—the definition of security used here is ers (2012); Buvinic and others (2013); García-Ponce narrower than “human security” (where threats are (2015); Akbulut-Yuksel, Khamis, and Yuksel (2016). multiple, ranging from, in addition to violence, loss 9. The World Development Report 2011: Conflict, Security, of income to food shortages, infectious diseases, and and Development identified a very broad range of environmental threats) and yet broader than “citizen factors associated with violent conflict (World Bank security” (where the threat is violence, but mainly 2011). It referred to them as internal and external Governance for security | 123 “stresses,” whether economic, security-related, or Ahmad, Aisha. 2015. “The Security Bazaar: Business political, adding that “they can combine and pre- Interests and Islamist Power in Civil War Somalia.” cipitate actual violence.” This chapter calls a small International Security 39 (3): 89–117. subset of these factors “drivers” and shows instead Akbulut-Yuksel, Mevlude, Melanie Khamis, and Mutlu that they cause all conflicts, but need not result in Yuksel. 2016. “For Better or for Worse: The Long-Term violence. It isolates governance as the precipitating Effects of Postwar Reconstruction on Family Forma- element that determines whether and when con- tion.” Applied Economics 8 (29): 2771–84. flicts caused by these drivers turn violent. Alesina, Alberto, and Eliana La Ferrara. 2002a. “Partic- 10. 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What these concepts of “hybrid gover- Eelam (LTTE) in Sri Lanka, the Taliban in Afghanistan, nance,” “governance without government,” “twilight the National Union for the Total Independence of institutions,” “practical norms,” and “negotiated state- Angola (UNITA), Al-Shabaab in Somalia, and, more hood” have in common with each other and with the recently, the Islamic State of Iraq and the Levant framework adopted in this Report is their theorization (DAESH) in the Syrian Arab Republic and Iraq. These of governance as the outcome of complex bargains actors resort frequently to the use or threat of violence between different actors and groups, in this case for to maintain their authority through raiding, victimiz- the purpose of filling gaps in state capacity.1 ing, and plundering contested territories. Yet, not all Underpinning these concepts is a growing litera­ armed groups behave in solely destructive ways, nor ture and empirical evidence with far-reaching impli- do the more violent groups exercise violence at all cations for development: “Instead of focusing on times. In many of these cases, insurgent groups have fixing ‘failed states,’ development practitioners and taken on some (if not all) of the functions of the state academics are asking new questions about whether in terms of providing local security and formal and more appropriate forms of order can be constructed informal dispute resolution mechanisms, building by . . . focusing on ‘function rather than form’ in a infrastructure, setting up systems of administration, context in which suboptimal hybrid arrangements are mediating access to and in some cases providing better than the total collapse of services” (Meagher, public goods, imposing revenue-extracting systems, De Herdt, and Titeca 2014, 1). “Wartime governance” regulating markets—in brief, governing.2 is a specific application of these governance arrange- To govern, armed actors establish “wartime insti- ments to territories where the state’s monopoly over tutions,” defined as the rules of the game that result the use of violence has collapsed or is being contested, from the interaction between civilians and armed and where armed groups, traditional authorities, factions. Wartime institutions have three important and other informal local actors have taken over and dimensions: (1) they constrain absolute power by become the de facto authority, sometimes undertak- armed factions; (2) they establish boundaries to civil- ing functions normally performed by the state. ian behavior; and (3) they are negotiated, depending Although these territories are typically portrayed on shifts in power between warring factions in given as anarchic, disordered, and ungoverned, observa- localities (Stojetz and Justino 2015). These wartime tions from the field show that this is not the case. institutions determine how different armed factions Different actors adopt a myriad of strategies in the govern territories and populations in the absence of a areas they control, some resulting in fairly stable unitary national government. It is the ability and willingness to govern that WDR 2017 team, based on Justino (2016). distinguish “state-like” armed groups from bandits 130 | World Development Report 2017 or other extractive organizations. For example, in the a way that overlooks the micro-foundations necessary Democratic Republic of Congo, the Rally for Congo- for sustainable peace. The resulting inattention to lese Democracy-Movement for Liberation (RCD-ML) local conflicts leads to unsustainable peacebuilding developed into an amalgam of militiamen and local in the short term and potential war resumption in the businessmen who provide minimal services, levy long term” (Autesserre 2010, 39–40). taxes, and seek to access global markets, while still Of course, not all local political dynamics are relying on coercion. The Union of Patriotic Congo- always purely local events; they often depend on how lese (UPC), on the other hand, remains a coercive bargains, relations, and negotiations among factions military junta (Raeymaekers 2013). Such divergence unfold in the wider political arena (Balcells and Jus- in wartime governance across time and space is in tino 2014). Yet, a local perspective on wartime insti- turn shaped by several factors. Among them are the tutions and wartime governance is still important. strength and nature of preexisting systems; how civil- State-building processes in conflict-affected coun- ians accept and comply with different local forms of tries are influenced by multiple actors operating at authority; the levels of competition among political different levels of governance. This influence can be actors, including the state, for a certain territory; the exerted through formal and informal structures and time horizons of different factions and how long an networks, and it is not always driven solely by the armed group expects to stay in a certain area; and the interests of national-level elites. Local actors are also sources of external financing available to the group.3 influenced by geopolitical and external factors, rang- Wartime governance arrangements may result in ing from foreign donor interventions to international relative security outcomes nested within violent con- and regional military forces, peacekeeping missions, flict contexts when this security benefits the strategic private commercial and security organizations, pri- objectives of particular political groups. These groups vate sector and foreign investment in resources and need at the very least to extract revenue to fund land, international and local media, and international fighting and territorial expansion. Because revenue drug and arms control systems, among others. extraction is likely to be higher in situations in which Understanding in more detail the role of these one group exercises the monopoly of violence, some groups in processes of state building is important armed actors may choose to levy taxes in exchange because the activities and behavior of these groups— for the provision of public goods and security. This notably, how they govern and interact with civil- choice may in turn result in the emergence of secu- ians—shape how institutions are formed, reinforced, rity as postulated by Olson (1993) and Tilly (1992). The and change in the postconflict period. In particular, wartime systems of governance just described may the exclusion of elements of these groups from state- also result in the emergence of security in conflict building processes in the aftermath of violent conflicts contexts when a given political actor is accepted (or may result in further armed conflict, or may disturb tolerated) and recognized by local populations. Nota- political order for a long time, leading to the situations bly, wartime forms of governance may offer a sense of “no peace, no war” experienced by many countries of legitimacy and certainty, which may reflect civilian with a history of conflict (Richards 2005). perceptions about the authorities who govern them and the nature of their authority (Bates 2008). Recent research on violent conflict has found com- Notes pelling evidence that local (and not just state-level) 1. Migdal and Schlichte (2005); Lund (2006); Olivier de institutional structures influence political processes Sardan (2008); Raeymaekers, Menkhaus, and Vlassen- during and after conflicts (Kalyvas 2006; Blattman root (2008); Hagmann and Péclard (2010); Meagher, and Miguel 2010). A related body of literature has long De Herdt, and Titeca (2014). questioned the centrality of the state in local systems 2. Weinstein (2007); Mampilly (2011); Arjona, Kasfir, and of governance in areas of uneven or absent state pres- Mampilly (2015). ence—the so-called ungoverned spaces (Scott 1999; 3. Snyder and Bhavnani (2005); Kalyvas (2006); Wein­ Batley 2011). This local perspective is an important stein (2007); Arjona (2014); Sanchez de la Sierra (2014). supplement to national-level perspectives on state building because, as argued in a landmark study on the Democratic Republic of Congo, “The dominant inter- References national peacebuilding culture shapes the interveners’ Arjona, Ana M. 2014. “Wartime Institutions: A Research understanding of peace, violence, and intervention in Agenda.” Journal of Conflict Resolution 58 (8): 1360–89. Wartime governance | 131 Arjona, Ana M., Nelson Kasfir, and Zachariah Mampilly. Crises of State Domination, edited by Klaus Schlichte, 2015. Rebel Governance in Civil War. New York: Cam- 1–40. Burlington, VT: Ashgate. bridge University Press. Olivier de Sardan, Jean-Pierre. 2008. “Researching the Autesserre, Séverine. 2010. The Trouble with the Congo: Practical Norms of Real Governance in Africa.” Local Violence and the Failure of International Peacebuild- Discussion Paper 5, Africa, Power, and Politics Pro- ing. Cambridge Studies in International Relations gramme, Overseas Development Institute, London. Series. New York: Cambridge University Press. Olson, Mancur. 1993. “Dictatorship, Democracy and Balcells, Laia, and Patricia Justino. 2014. “Bridging Micro Development.” American Political Science Review 87 (3): and Macro Approaches on Civil Wars and Political 567–76. Violence: Issues, Challenges and the Way Forward.” Raeymaekers, Timothy. 2013. “Robin Hood, the God- Journal of Conflict Resolution 58 (8): 1343–59. father, and Judge Dredd: Explaining De Facto Sov- Bates, Robert H. 2008. When Things Fell Apart: State Failure ereignty in Sub-Sahara Africa.” Paper presented at in Late-Century Africa. Cambridge, U.K.: Cambridge the “Unravelling Public Authority: Paths of Hybrid University Press. Governance in Africa” workshop, London School of Batley, Richard. 2011. “Structures and Strategies in Economics, December 6–7. Relationships between Non-government Service Raeymaekers, Timothy, Ken Menkhaus, and Koen Providers and Government.” Public Administration and Vlassen­ root. 2008. “State and Non-state Regulation Development 31 (4): 306–19. in African Protracted Crises: Governance without Blattman, Christopher, and Edward Miguel. 2010. “Civil Government?” Afrika Focus 21 (2): 7–21. War.” Journal of Economic Literature 48 (1): 3–57. Richards, Paul, ed. 2005. No Peace, No War: An Anthropology Hagmann, Tobias, and Didier Péclard. 2010. “Negotiating of Contemporary Armed Conflicts. Oxford, U.K.: James Statehood: Dynamics of Power and Domination in Currey. Post-colonial Africa.” Development and Change 41 (4): Sanchez de la Sierra, Raul. 2014. “Defining the State: 539–62. Armed Groups’ Monopolies of Violence and Emer- Justino, Patricia. 2016. “Implications of Wartime Institu- gence of State-Like Behavior in Eastern Congo.” tions for State-Building in Post-conflict Countries.” Unpublished working paper, Harvard University, Background paper, WDR 2017, World Bank, Washing- Cambridge, MA. ton, DC. Scott, James C. 1999. Seeing Like a State. New Haven, CT: Kalyvas, Stathis N. 2006. The Logic of Violence in Civil Yale University Press. Wars. New York: Cambridge University Press. Snyder, Richard, and Ravi Bhavnani. 2005. “Diamonds, Lund, Christian. 2006. “Twilight Institutions: Public Blood, and Taxes: A Revenue-Centered Framework Authority and Local Politics in Africa.” Development for Explaining Political Order.” Journal of Conflict and Change 37 (4): 685–705. Resolution 49 (4): 563–97. Mampilly, Zachariah. 2011. Rebel Rulers: Insurgent Gover- Stojetz, Wolfgang, and Patricia Justino. 2015. “Long-Run nance and Civilian Life during War. Ithaca, NY: Cornell Effects of Wartime Institutions in Post-war Angola.” University Press. Unpublished working paper, University of California, Meagher, Kate, Tom De Herdt, and Kristof Titeca. 2014. Berkeley. “Unravelling Public Authority: Paths of Hybrid Gov- Tilly, Charles. 1992. Coercion, Capital, and European States: ernance in Africa.” Research Brief 10 (March), IS Acad- AD 990–1992. Studies in Social Discontinuity Series. emy on Human Security in Fragile States, Wagen­ Oxford, U.K.: Blackwell. ingen University, Wageningen, the Netherlands. Weinstein, Jeremy M. 2007. Inside Rebellion: The Politics of Migdal, Joel S., and Klaus Schlichte. 2005. “Re-thinking Insurgent Violence. Cambridge Studies in Comparative the State.” In The Dynamics of States: The Formation and Politics Series. New York: Cambridge University Press. 132 | World Development Report 2017 SPOTLIGHT 5 Crime How much reduction in crime is possible? A look it appears that trends in the levels of interpersonal at past trends indicates the degree to which crime violence and organized crime stem only partly from can be reduced globally over the next 15 years. The factors that governments can directly influence. For broad crime drop in the United States between 1991 example, analyses of time series going back to the and 2014 amounted to an annual decline of about 2.9 1970s suggest that factors such as changing demo- percent a year, which included a range of manifes- graphics, unemployment, technological change, drug tations of interpersonal violence such as homicide, epidemics, and changes in norms and attitudes toward child maltreatment, assault, and violence in schools. violence have affected trends in crime levels generally Meanwhile, Singapore has achieved its very low and homicides specifically (Baumer and Wolff 2014). crime rates—including the lowest homicide, robbery, On the other hand, changes in income inequality over and domestic violence rates known in the world— the last 100 years seem to be entirely unrelated to through a sustained decline of about 5 percent a year changes in homicide rates, despite income inequality over the last 25 years. Italy has experienced an annual being a robust and consistent cross-sectional correlate decline in homicides of about 6 percent since the early of homicide (Brush 2007). 1990s. In South Africa, homicides have fallen about 4 However, there is increasing evidence of a pos- percent a year since the mid-1990s, or just about the itive correlation between homicide and organized same yearly rate of decline as in Colombia since the crime levels, on the one hand, and corruption levels, early 1990s. Indeed, many countries have seen annual on the other (Lappi-Seppälä and Lehti 2014; Pinotti reductions in serious crime and violence of 2–5 per- 2015). This correlation can be interpreted as empirical cent over two decades or more. An average annual evidence of a role for governance in the reduction of decline of 3 percent may therefore be possible at the interpersonal violence, and specifically for the theory global level, leading to a reduction of about 40 percent that the failure of governments to sanction and deter by the end of 2030 (Eisner and Nivette 2012). organized criminal groups is one important factor contributing to high levels of homicides. Why do interpersonal violence and crime decline? Three sets of factors explain Why interpersonal violence and organized crime homicide drops in the past are declining is still not possible to explain with any In addition to theories linking the decline in crime real accuracy. However, it is currently possible to rates to demographics and access to economic oppor- disentangle the mix of factors that influence both the tunities (see, for example, Donohue and Levitt 2001 cross-sectional variation in crime rates among coun- and de Mello and Schneider 2010), comparisons of tries and the trends of crime levels over time. First, major sustained declines in homicides by country and historical period across the globe suggest that WDR 2017 team, based on inputs from Manuel Eisner. declines in murder rates occurred when three factors Crime | 133 came together (Eisner 2013, 2014). The first factor is Figure S5.1 Homicide rates across changes in relative power: homicide rates declined Europe have declined dramatically over where states gained control over private organized the last 800 years providers of protection and enhanced their legiti- macy through effective institutions that produced 80 Homicides per 100,000 residents benefits for broader segments of society (see chapter 4 and Rotberg 2004). 60 The second factor is changes in technological and human capacity: declines in homicides appear to be regularly linked to the spread of new social 40 con­trol technologies such as the monitoring and management of daily behaviors; increased control 20 over disorderly conduct and substance use, especially alcohol; and sys­ tems aimed at early identification 0 and treatment of offenders and victims (Eisner 2014). 1200 1400 1600 1800 2000 For example, the international fall in crime over the Year last 20 years is best seen as a result of investments Belgium Netherlands in security technologies that have affected almost Finland and Sweden Spain every aspect of daily routines (Farrell and others 2011). France Switzerland These technologies include electronic immobilizers Germany United Kingdom Italy to prevent car theft, burglar alarms, CCTV cameras in hot spots of disruptive behavior, a less cash-based Sources: WDR 2017 team, based on Eisner 2003 with data from Eisner 2014. economy, more private security personnel, and mobile telephones to call help and record crimes more easily. expansion in state capacity, brought about changes in Many of these security and surveillance technologies societal attitudes toward homicide that over time led are designed to reduce property crime, but they may to a drastic reduction in homicide levels (figure S5.1)— have had an effect on violent crime as well. see Eisner (2003). The third factor is changes in norms of behavior: Before the expansion of the capacity of courts and historical declines in homicides appear to have been bureaucracies that accompanied the rise of the states’ catalyzed by a diminishing acceptability of violence monopoly over violence in 17th-century Europe, gov- and intentional harm to others. Historically, such ernment attitudes toward homicides were lenient if change in social norms manifests itself in a growing the motives were passion or the defense of honor, and repugnance for public executions and torture, disgust society perceived private retaliation as an acceptable with blood revenge and duels, or increasing sensiti- way of restoring order. Between the 16th and 17th zation to child maltreatment and neglect. Political or centuries, dispute settlement moved out of the private religious leaders, philanthropists, intellectuals, and sphere and became the prerogative of judges and gov- teachers are among those ushering in such changes ernment officials, and perpetrators of homicide came in societal preferences (Pinker 2011). to be seen as criminals. Campaigns of social aware- ness; societal acceptance of increased bureaucratic control of everyday life; improved trust in and the The state’s monopoly over legitimacy of the state as an overarching institution; the means of violence is the the evolution of the notion of honor, which lost its cul- overarching factor tural significance; and the liberation of the individual from his or her obligations to the group—in short, a This report argues that the changes in capacity and in change in norms—eventually led to this historical norms of behavior that affect development outcomes, decline in homicide rates (Tilly 1992; Rousseaux 1999). including reductions in levels of violence and crime levels, are ultimately derived from changes in the relative power among actors. The sharp declines in References homicide rates that occurred in more than 10 Western Baumer, Eric P., and Kevin T. Wolff. 2014. “The Breadth European countries after 1650 illustrate how shifts and Causes of Contemporary Cross-National Homi­ in the balance of power toward the state and away cide Trends.” Crime and Justice: A Review of Research 43 from private providers of security, and the resulting (1): 231–87. 134 | World Development Report 2017 Brush, Jesse. 2007. “Does Income Inequality Lead to In The Future of Criminology, edited by Rolf Loeber More Crime? A Comparison of Cross-Sectional and and Brandon C. Welsh, 219–28. New York: Oxford Time-Series Analyses of United States Counties.” Eco- University Press. nomics Letters 96 (2): 264–68. Farrell, Graham, Nick Tilley, Andromachi Tseloni, and de Mello, J. M. P., and A. Schneider. 2010. “Assessing São Jen Mailley. 2011. “The Crime Drop and the Security Paulo’s Large Drop in Homicides: The Role of Demog- Hypothesis.” Journal of Research in Crime and Delin- raphy and Policy Interventions.” In The Economics quency 48 (2): 147–75. of Crime: Lessons for and from Latin America, edited Lappi-Seppälä, Tapio, and Martti Lehti. 2014. “Cross- by Rafael Di Tella, Sebastian Edwards, and Ernesto Comparative Perspectives on Global Homicide Schargrodsky, 207–35. Chicago: University of Chi- Trends.” Crime and Justice: A Review of Research 43 (1): cago Press. 135–230. Donohue, J. J., and S. D. Levitt. 2001. “The Impact of Legal- Pinker, Steven. 2011. The Better Angels of Our Nature: Why ized Abortion on Crime.” Quarterly Journal of Economics Violence Has Declined. New York: Penguin. 66 (2): 379–420. Pinotti, Paolo. 2015. “The Causes and Consequences of Eisner, Manuel. 2003. “Long-Term Historical Trends in Organized Crime: Preliminary Evidence across Coun- Violent Crime.” Crime and Justice: A Review of Research tries.” Economic Journal 125 (586): F158–F174. 30: 83–142. Rotberg, Robert I., ed. 2004. When States Fail: Causes —— ——. 2013. “What Causes Large-Scale Variation in and Consequences. Princeton, NJ: Princeton University Homicide Rates?” In Aggression in Humans and Other Press. Primates: Biology, Psychology, Sociology, edited by Rousseaux, Xavier. 1999. “From Case to Crime: Homicide Hans-Henning Kortüm and Jürgen Heinze, 137–62. Regulation in Medieval and Modern Europe.” In Die Berlin: Walter de Gruyter. Entstehung des öffentlichen Strafrechts: Bestandsaufnahme —— ——. 2014. “From Swords to Words: Does Macro-Level eines europäischen Forschungsproblems, edited by Diet- Change in Self-Control Predict Long-Term Variation mar Willoweit, 143–75. Cologne: Böhlau Verlag. in Levels of Homicide?” Crime and Justice: A Review of Tilly, Charles. 1992. Coercion, Capital, and European States: Research 43 (1): 65–134. AD 990–1992. Studies in Social Discontinuity Series. Eisner, Manuel, and Amy Nivette. 2012. “How to Reduce Oxford, U.K.: Blackwell. the Global Homicide Rate to 2 per 100,000 by 2060.” Crime | 135 CHAPTER 5 Governance for growth If a firm in Brazil or Mexico is asked how long it has policy commitments, harming investors. In some to wait to receive approval for new construction, the cases, existing norms such as tolerance of corruption answer could range from as little as 1 day to more than in public agencies can reinforce such policy failures. 100 days (figure 5.1). Such remarkable variation in the That said, the influence of interest groups, while wait time experienced by firms within the same coun- ubiquitous, does not always render growth policies try is true of almost any basic regulatory procedure ineffective; sometimes, it can even improve them. in most low- and middle-income countries. Examples How this process plays out depends on the character- of such procedures are receiving a license to set up a istics of the government agencies that enact the poli- new firm or a permit to import an item.1 cies in question, as well as the incentives of influential One reason for the variance in regulatory imple- groups, such as industry associations, that interact mentation could be that some firms have more influ- with those agencies. Understanding what drives this ence over the policy arena than others. For example, difference can help identify ways to improve policy recent firm-level studies suggest that, to the detriment effectiveness. of long-term economic growth, firms with powerful One lesson that emerges from such understanding political connections are unduly favored in the way is that designing second-best policies that can achieve certain policies are designed or implemented.2 These at least the partial goals of security, growth, or equity firms receive preferential access to state credit, land, may be more effective than designing ideal policies and import licenses. The sectors in which they oper- that are at high risk of capture (such second-best pol- ate are protected from competition from other firms icies are considered implementable). A second lesson A lesson is the through high regulatory barriers to entry. This form is the value of avoiding policies that look good in the value of avoiding of policy subversion has significant negative effects short term but could end up reinforcing the power of policies that look on the economy. dominant groups that could block further reforms, good in the short thereby hindering the effectiveness of policies in term but could end the future. A third lesson is that undue influence up reinforcing the How policy “capture” slows from dominant groups can be counterbalanced by power of dominant groups that could economic growth the appropriate design of incentives within public block further agencies, checks and balances between agencies, and This chapter explains how and when powerful groups mechanisms that extend accountability to a broad reforms. with narrow interests can have an undue influ- group of firms and individuals. Such reforms can ence on policy (“capture”) and slow down economic expand the set of implementable policies. growth, even in the context of high state capacity.3 This approach assumes that the interests of high- Such dominant groups can include politically con- level policy makers are aligned in the direction of nected firms and lobbies for industry, farmers, or reform. Whether that is the case depends on the evo- consumers. This chapter also analyzes cases in which lution of the broader governance environment, a topic shortsighted, opportunistic state actors renege on examined in part III of this Report. Governance for growth | 137 Figure 5.1 Length of time needed for firms to obtain a action are associated with persistent differences construction permit varies widely in levels of economic development. For example, in some regions of Peru an extensive system of forced Russian Federation mining labor (mita) was in effect from 1573 to Peru 1812. Today, the average household consumption Chile levels in those regions are about 25 percent lower than in adjoining regions. One explanation is that Brazil in areas without mita, the landowning class that Vietnam emerged had an incentive to set up stable property Romania rights institutions. Today, areas that did not have the Paraguay mita system continue to have more secure property Mexico rights and do a better job of providing public goods (Dell 2010). Guatemala When change is viewed over the shorter time span Argentina of decades rather than centuries, the relationship India between broad, aggregate measures of governance Turkey and economic growth is weaker (figure 5.3). Over the last century, growth accelerations and slowdowns Nigeria that lasted as long as a decade do not seem to have 0 100 200 300 400 500 been correlated with major changes in governance, Days to obtain a construction permit nor have sustained periods of high growth lasting as long as three decades.6 It is possible for economies 25th–75th percentile to grow without big changes in the nature of gover- Median Outliers nance, but it is not clear how long such growth can Minimum and maximum values excluding outliers be sustained. What are the mechanisms behind the aggre- Sources: WDR 2017 team, based on data from World Bank, Enterprise Surveys, circa 2006 to 2014. gate relationship between governance and growth? Because different dimensions of governance are correlated across countries, it is not easy to delin- How governance matters to eate their impacts on growth using a cross-country growth: A microeconomic analysis alone. A more microeconomic analysis of the mechanisms through which governance affects perspective growth is therefore a vital complement to the macro- There is a clear positive correlation between aggre- economic analysis of governance and growth (Pande gate measures of governance and per capita income and Udry 2006). across countries (figure 5.2). Because countries had similar levels of per capita income in the distant past, Two sources of growth: Investment current differences in their per capita income largely and efficiency reflect differences in their long-term growth rates.4 On the surface, growth in per capita income has two Thus governance and long-term growth are positively sources: investment and efficiency. On the one hand, associated. investment is the process by which economies accu- This correlation should be viewed with some mulate physical capital, skills, and knowledge. Effi- caveats, however. It could reflect reverse causation ciency, on the other hand, determines how well this from growth to governance, or some third factor (such labor and capital are put to use. In general, at least half as accumulated knowledge and skills) that affects of the per capita income differences across countries both governance and income growth. Bearing in mind is attributable to differences in countries’ efficiency these caveats, many cross-country studies suggest levels (total factor productivity, or TFP). The rest is that the nature of governance—as reflected in broad due to differences in investment (accumulation)—see institutional measures such as protection of prop- Caselli (2005, 2016). Both investment and efficiency erty rights, rule of law, and absence of corruption— thus matter to growth. matters to long-term growth.5 Countries vary in the emphasis they place on Even within countries, historical differences in various forms of investment and efficiency in their institutions that affect property rights and collective growth models. Some growth models emphasize 138 | World Development Report 2017 Figure 5.2 Per capita income and governance are correlated a. Bureaucracy b. Government decisions effectively implemented 12 12 GDP per capita (log) GDP per capita (log) 10 10 8 8 6 6 4 4 0 2 4 6 8 10 0 2 4 6 8 10 Bureaucracy Government decisions effectively implemented c. Personal security and private property d. Bribery and corruption (absence of) 12 12 GDP per capita (log) GDP per capita (log) 10 10 8 8 6 6 4 4 0 2 4 6 8 10 0 2 4 6 8 10 Personal security and private property Bribery and corruption (absence of) Sources : WDR 2017 team, using data from IMD World Competitiveness Online, and World Bank, World Development Indicators (database, GDP per capita). For both sources, the data are shown for 2010. Note: “Bureaucracy” indicates to what extent bureaucracy does not hinder business activity; “government decisions effectively implemented” indicates to what extent government decisions are effectively implemented; “personal security and private property” indicates whether personal security and private property rights are adequately protected; and “bribery and corruption” indicates to what extent bribery and corruption do not exist in a country. The scale ranges from 0 (worst outcome) to 10 (best outcome). GDP = gross domestic product. accumulation, such as the mobilization of savings The key governance functions: Enhancing for industrial investment. Other models emphasize commitment and collective action growth in efficiency through innovation and compe- In the absence of a credible commitment to the tition among firms. Growth models based on factor security of property rights (that is, when there is accumulation may require a different governance risk of expropriation), the incentives for investment configuration than those based on efficiency. Transi- or innovation will be limited. Firms and individuals tioning from one model to another has proven to be a that experience lower security will invest less in pro- complex policy challenge (Gill and Kharas 2015)—see ductive activities. Moreover, differences across firms spotlight 6 on the middle-income trap. in the level of security from expropriation will affect Governance can affect investment and efficiency the efficiency of resource use. If the more productive through two types of institutional “functions.” The firms in an economy experience lower security than first deals with commitment—that is, creating an envi- the less productive ones, then investment by produc- ronment in which firms or individuals feel secure in tive firms will be inefficiently low, leading to misallo- investing their resources in productive activities and cating resources and thwarting growth. have the incentives to use them efficiently. The second Consistent with theory, household-level studies pertains to socially beneficial collective action to coor- find that farmers are more likely to make long-term dinate investment decisions and promote cooperation investments in their land when their tenure is more among investors to solve potential market failures. secure, and urban households are more likely to Governance for growth | 139 Figure 5.3 Medium-term growth and governance are not correlated a. Bureaucracy b. Government decisions effectively implemented Average annualized growth rate Average annualized growth rate 0.15 0.15 in logs (1990–2015) in logs (1990–2015) 0.10 0.10 0.05 0.05 0 0 –0.05 –0.05 0 2 4 6 8 10 0 2 4 6 8 10 Bureaucracy Government decisions effectively implemented c. Personal security and private property d. Bribery and corruption (absence of) Average annualized growth rate Average annualized growth rate 0.15 0.15 in logs (1990–2015) in logs (1990–2015) 0.10 0.10 0.05 0.05 0 0 –0.05 –0.05 0 2 4 6 8 10 0 2 4 6 8 10 Personal security and private property Bribery and corruption (absence of) Sources: WDR 2017 team, using data from IMD World Competitiveness Online (1996 and 1998 for “government decisions effectively implemented”), and World Bank, World Development Indicators (database, average annualized growth rate in logs, 1990–2015). Note: “Bureaucracy” indicates to what extent bureaucracy does not hinder business activity; “government decisions effectively implemented” indicates to what extent government decisions are effectively implemented; “personal security and private property” indicates whether personal security and private property rights are adequately protected; and “bribery and corruption” indicates to what extent bribery and corruption do not exist in a country. The scale ranges from 0 (worst outcome) to 10 (best outcome). renovate homes when the risk of being dispossessed sell those parts at whatever price that particular buyer is lower.7 Secure rights also improve labor allocation offers. Thus the firm will hesitate to specialize unless because protecting one’s property is no longer a pri- both parties can agree on an enforceable contract mary motivation in decisions about where to work with a fair price. In small economies, reputation and (Field 2007). Similarly, studies find that firms that relationships can be effective means of enforcement, perceive themselves to be more secure from expropri- but as growth leads to greater market size, impersonal ation reinvest more of their profits in their business interactions become more likely, and thus formal (Johnson, McMillan, and Woodruff 2002b). Theory contract enforcement begins to matter more (Dixit also suggests that well-defined property rights 2007). Empirical studies find that a strengthened for- should improve the functioning of credit and other mal enforcement system (such as through the courts) asset markets, but empirical evidence in support of can foster the creation of new business relationships, such suggestions is weak. promote trade in goods, and increase the flow of credit Enforcement of contracts governing economic to firms.8 transactions is also critical because problems with The design and implementation of regulations contract enforcement prevent specialization and an that affect competition between firms are another optimal division of labor (North 1990; Costinot 2009). policy dimension central to growth. For example, Suppose a firm is considering whether to specialize poorly designed licensing requirements for new firms in producing parts for a bigger firm. Once committed can make it difficult for entrepreneurs to bring new to this specialization, it will have no alternative but to investment ideas to fruition, and they can reduce the 140 | World Development Report 2017 competitive pressure on existing firms to innovate that are functionally optimal for aggregate growth. and become more productive.9 For example, a policy Yet, even when such capacity exists and a first-best of industrial licensing in India required firms to policy has been identified, those in power may not obtain government permission before setting up a have the incentive to choose that policy. Indeed, spe- new factory or expanding output in an existing fac- cific actors in the policy arena may be able to design or tory. The process of license approval was onerous and implement a policy that maximizes their private ben- unpredictable. Loosening these requirements in some efits rather than social welfare because they have so industries in the 1980s may have increased efficiency much bargaining power. In this Report, this arrange- levels by as much as 22 percent (Chari 2011). ment is called capture. Capture is not easy to identify, Some forms of collective action, such as coordinat- and there is the risk of mistaking what was simply a ing investment and ensuring cooperation to prevent misinformed policy choice for deliberate subversion. free-riding, can solve potential market failures that Recent years have seen a burgeoning of quanti- can impede growth and investment in public goods. tative research into this question. This research has Although discussing all possible market failures is detected specific forms of capture, and in some cases beyond the scope of this chapter, what follows illus- it has even measured its efficiency costs. For exam- trates the key issues by looking at a specific type of ple, studies of trade policy suggest that even in high- failure. income countries policy choice can unduly reflect the The insight that failure to coordinate investment preferences of groups with high levels of influence in activity could lead to underdevelopment is decades the policy arena. Although low trade barriers are gen- old.10 Suppose an industry could upgrade to a mod- erally good for long-term growth, domestic industries ern technology that relies on a range of specialized that compete with imports stand to lose from them in skills. For a worker, investing in learning those skills the short term. Political influence or campaign contri- does not make sense if it is not clear that the modern butions from industry lobbies and labor unions have technology will be adopted. For a firm, investing in been shown to affect the setting of import tariffs. the new technology does not make sense unless a Larger and better-organized industries that compete supply of the required specialized skills will be avail- with imports tend to win more import protection.14 able. Thus without some way of coordinating the The potential power to influence policy is distrib- decisions of workers and firms, the industry could uted unevenly, not only across industries but also remain trapped in a low-level equilibrium.11 Such across firms within industries. In most countries, coordination problems can occur in many contexts, some firms are much better connected to the gov- ranging from finance and adoption of technology to ernment than others. Sometimes, state actors collude innovation and industrial clusters.12 with such politically connected firms to subvert a Policies to address coordination and other col- policy in the interest of those firms, possibly to the lective action problems are difficult to design and detriment of unconnected firms in the same industry. implement. For example, when complementarities Such capture by politically connected firms may Capture by between firms could lead to a coordination failure, not be easily identifiable or as large scale as, say, politically governments could use subsidies or taxes to encour- setting high tariffs in import-competing industries, connected firms age firms to invest in a coordinated manner (Rodrik but the evidence suggests that its economic costs may not be easily 1996). But targeting such a subsidy scheme to the are far from trivial. In the 1990s, for example, some identifiable, but right set of firms requires information on precisely of Indonesia’s largest industrial groups had strong the evidence which firms could have spillovers on others, and on connections to President Suharto.15 Between 1995 suggests that its how much they are investing (Bond and Pande 2007). and 1997, rumors about the state of Suharto’s health economic costs Because of such implementation challenges, policies circulated on several occasions. Each time, the more are far from trivial. to address collective action problems in growth are closely industrial groups were connected to the pres- particularly sensitive to the quality of governance.13 ident, the more their stock values fell (figure 5.4). In fact, the more serious the health rumor, the greater was the fall in stock values. Because this decline was How policies are affected not connected to other changes in market conditions by undue influence from or the productivity of connected firms, the drop in share prices was a proxy for the private benefits of powerful groups being able to capture policy through political connec- A poor capacity to design or implement policies could tions (Fisman 2001). Based on a similar method, the be one reason why governments do not enact policies estimated value of political connections in the Arab Governance for growth | 141 Figure 5.4 In Indonesia, the stock value of politically connected firms fell when the connection was jeopardized The closer that industrial groups were to President Suharto, the more the value of their stock fell as rumors about the president’s health circulated Indonesian firms (percentage points) 2 Change in stock values of 0 –2 –4 –6 1 2 3 4 5 (Firms least connected) (Firms most connected) Degree of political dependence Suharto illnesses: 1995: Jan. 30–Feb. 1 1996: April 29 1996: July 26 1995: April 21 1996: July 4–July 9 1997: April 1–April 3 Source: Fisman 2001, figure 1. Republic of Egypt during the Mubarak era was about Granting import licenses to favored firms. Another 13–16 percent of firm value (Chekir and Diwan 2014). way to channel favor to connected firms is to grant import licenses only to specific (favored) firms. In How politically connected firms gain Suharto-era Indonesia, being politically connected undue advantage tripled the likelihood of receiving a license relative The benefits of policy capture to politically connected to a firm’s competitors. And the licenses conferred firms can be economically significant. Understand- monopolistic power on the licensee. For example, ing the ways in which policy capture occurs is there- a highly connected firm in the milk industry was fore important. granted import licenses for 12 inputs necessary to Diverting credit. One way in which state actors produce milk, whereas some other firms in the same favor connected firms is to divert government loans industry had three to four licenses at most. This sit- to them. In Pakistan, for example, between 1996 and uation forced competitors to rely on the connected 2002 politically connected firms borrowed 45 percent firm or on inferior domestic supplies (Mobarak and more and had 50 percent higher loan default rates Purbasari 2008). than other firms (Khwaja and Mian 2005). This pref- Using market regulations to favor firms. Market reg- erential treatment was related entirely to loans from ulations can also be used to favor connected firms. government banks. Moreover, it increased when the For example, regulatory barriers to the entry of new power of the connected politician increased, and it fell firms can be a means of protecting incumbents to when there was more electoral competition within the the detriment of market entry and competition. In politician’s constituency. In Brazil, firms that made Tunisia during the regime of Zine El Abidine Ben campaign contributions to winning candidates in the Ali (1987–2011), firms under the control of the ruling 1998 and 2002 elections had higher returns and sub- clan accounted for a disproportionately high share sequently received greater credit from banks (Claes- (21 percent) of total private sector profits (Rijkers, sens, Feijen, and Laeven 2008). A study of Malaysia Freund, and Nucifora 2014). The superior profits of at the time of the Asian financial crisis found that the these connected firms may have been due to the heavy market value of politically connected firms improved regulation of firm entry, investment, and foreign relative to that of other firms after international capi- direct investment in the sectors in which they had a tal controls were imposed, suggesting that connected heavy presence. Indeed, the gap in profits between firms had easier access to domestic credit (Johnson connected firms and others was higher in the more and Mitton 2003). regulated sectors, suggesting that entry regulation 142 | World Development Report 2017 served to shield connected firms from competition. consumer advocacy groups prevails, regulators may There is similar evidence from Mubarak-era Egypt set the price too low.16 (Diwan, Keefer, and Schiffbauer 2015). Tilting policies to favor politically influential groups. Sometimes, politicians direct public investment to Political cycles and populism benefit narrow groups of supporters—a practice Potentially, any group of firms, workers, or consum- known as clientelism (see chapter 6). Such a client-based ers that is politically influential can influence policies. allocation of public investment is likely to be highly For example, the adoption of “green growth” policies inefficient. that are socially beneficial and would not necessar- More generally, public resources can be allocated ily slow down economic growth could be blocked in favor of politically influential groups without nec- by influential groups of farmers or consumers who essarily involving a strict patron-client relationship. stand to lose from the policies in the short term (box For example, many countries have development 5.1). Sometimes, it is hard to predict which side will programs that direct state credit to small firms, rural manage to tilt policies in its favor. For example, in the enterprises, and farmers. This credit can be used to utilities industries, the unregulated price can be inef- favor groups that have outsized political influence. ficiently high, and there is a valid economic argument Cole (2009) found that from 1985 to 2009 in India for regulating the price. However, the regulators may agricultural credit from state banks increased by set the price too high if they collude with the utility 5–10 percentage points in an election year. This firm, whereas if the countervailing influence from higher lending during election years targeted places Box 5.1 Why some people see red when they hear “green growth” “Green growth is about making growth processes smaller, targeted doses and more organic fertilizers, efforts resource-efficient, cleaner and more resilient without nec- to phase out the subsidy could hurt maize farmers for some essarily slowing them” (Hallegatte and others 2012, 2). For years (Resnick, Tarp, and Thurlow 2012). many reasons, environmental conservation is also good for It could be that the groups who stand to lose from long-term economic growth and development. Economic green growth policies in the short term have an oversized production depends on the stock of natural resources and influence in the policy arena, and so they are able to block on environmental quality (“natural capital”). Green growth reforms and undermine commitment. Because the costs are strategies can increase natural capital by preventing envi- concentrated and many of the benefits from cleaner tech- ronmental degradation. Environmental protection can also nologies are intangible and dispersed, the potential losers contribute indirectly to growth by correcting market fail- from such reforms are likely better able to organize. They ures. For example, a policy that addresses market failures can also form a strong electoral constituency. For example, leading to urban congestion can improve air quality and Malawi’s fertilizer program has been popular among small increase urban productivity. Green growth can also improve farmers—an important constituency. At times, switching well-being directly by improving air and water quality. to green growth strategies can entail losses for influential However, switching to green growth strategies could groups of consumers and firms. For example, South Africa impose short-term costs on some groups in society. Take announced an ambitious climate change plan in 2010 that the case of organic fertilizer. Smaller and more targeted would reduce the share of electricity generated by coal- doses of fertilizer (a “green” approach) are better for the fired plants in a country in which electricity is in short environment in the long run, but conventional fertilizer is supply and coal is a relatively abundant source. The plan, less costly and easier to use. Malawi faced this problem in despite being watered down a year later, has been opposed 2005 when, to cope with food insecurity, it introduced a by consumers, labor unions, and business interests, partic- fertilizer subsidy for smallholder maize farmers. The inten- ularly those in mining and heavy industry (Resnick,Tarp, sive use of conventional fertilizer did lead to an immediate and Thurlow 2012). As these examples demonstrate, the increase in farm output. However, because small farmers design of green growth policies must take into account the would not find it easy to adopt greener approaches using potential resistance from short-term losers. Sources : Hallegatte and others (2012); Resnick, Tarp, and Thurlow (2012). Governance for growth | 143 where the electoral race was particularly close, hint- Such misallocation could also have a long-term ing at the political motives behind the credit boom. impact on growth through its detrimental effects on Such political cycles in government lending during the basic economic process of creative destruction— election years have been observed in many countries that is, the entry of new firms, investment by existing (Dinc 2005). In Italy, the interest rates charged in the firms to become more productive, and the exit of 1990s by politically affiliated banks varied with the unproductive firms.17 Entrepreneurship is likely to election cycle, which is also suggestive of political be discouraged in an environment in which firms influence on lending (Sapienza 2004). with political influence earn rents (disproportionate Misallocating public investment. Failed industrial benefits) at the expense of more efficient or more development programs are another example of how innovative firms that lack influence. By tilting the political influence can undermine growth by misallo- playing field against ordinary firms, such capture can cating public investment. Governments often direct also make growth less inclusive. But measuring such public investment to specific sectors or regions, long-term costs is difficult. ostensibly to address coordination failures. Such pro- This reckoning of the costs of undue influence on grams could become a vehicle for providing hidden policies is relative to a benchmark in which resources benefits to politically influential groups (Coate and are efficiently allocated. However, the removal of Morris 1995). For example, landowners and work- means of rent-seeking by influential firms could ers in politically important regions might gain if have other systemic effects on the economy. Indeed, an industrial zone is located in their region, raising according to one view, many low-income economies prices and wages. are characterized by socioeconomic relationships The disappointing experience of Sub-Saharan based not on impersonal rules but on personal con- Africa with industrial coordination policies is illustra- nections and privilege.18 In this political order, the tive. Defying economic logic, one program in Ghana elites manipulate the economy to maintain rents for involved the transport of cattle hides to a tannery 500 powerful groups. This manipulation then serves to miles to the south in the country, only to send the maintain social order and restrain violence. In such leather back north to a footwear factory 200 miles a world, “capture” is just one manifestation of deeper away—all to serve a market a farther 200 miles north. political economy problems, and so long as those are Poor siting of the tannery thus rendered the pro- not addressed, simply prohibiting means of capture gram economically unviable (Robinson 2009). Some and rent-seeking will not lead to efficient outcomes of these case studies conclude that poor location (Acemoglu and Robinson 2013). decisions were the outcomes of political influence. In Zambia, for example, the Industrial Development When interest group influence is not Corporation evidently chose economically infeasible necessarily bad for policies Sometimes, the locations for many subsidiary firms, mainly on the Sometimes, the self-interest of powerful businesses self-interest basis of providing employment in rural areas (Robin- can coincide with policies that are good for long-term of powerful son 2009). growth. The expansion of trading opportunities in businesses can the Mediterranean in the 10th to the 12th centuries, coincide with The cost of capture for example, led to the establishment of a broad- policies that are The most obvious cost of policy capture is the inef- based merchant class in that part of the world. This good for long-term ficient allocation of public resources. For example, merchant class was interested in market-supporting growth. bank loans should go to the most productive firms, institutions that would enable trade for all its mem- but that does not necessarily happen when lending bers. In Venice, it used its economic power to push is based on a firm’s political connections. Corporate for the establishment of robust contracting institu- lending data from Pakistan for 1996–2002 reveal that tions and constraints on the executive (by ending the connected firms received a disproportionately large practice of hereditary doges and instituting a de facto share of credit, but they were more likely than other parliament). Similarly, the merchant class that arose firms to default on their loans and they were less in Great Britain because of the growth of Atlantic productive. Based on the gap in productivity between trade in the 1600s pushed for better property rights connected firms and other firms, the annual loss and contracting institutions.19 from giving disproportionate amounts of credit to More contemporary case studies suggest that, for connected firms could have been as high as 1.6 per- their collective benefit, business associations have cent of GDP (Khwaja and Mian 2005). helped governments improve various dimensions 144 | World Development Report 2017 of the business environment (such as secure prop- capture. MITI, however, was also highly meritocratic, erty rights, fair enforcement of rules, and provision with bureaucrats following long-term career paths, of public infrastructure) through lobbying efforts clear rules, and established norms. It drew staff or better monitoring of public officials (Doner and largely from a select group of elite technocrats who Schneider 2000). They have also helped solve coor- had strong informal ties with one another, giving the dination problems. The Republic of Korea’s phase of agency an unusually high level of internal coherence. growth through export-oriented industrialization, This organizational strength may have prevented which lasted for three decades, exemplifies this kind MITI from being captured by narrow interests (Wade of pro-growth state-business interaction.20 Other 1990; Evans 1995). examples include the footwear manufacturers’ associ- ation in Brazil, the coffee federation in Colombia, and Policy design under risk the textile manufacturers’ association in Thailand, all of which played a coordinating role in reducing the of capture costs of information about export markets (Doner and How should the risk of undue influence from dom- Schneider 2000). inant groups be taken into account in the design of Broad-based business associations are more likely policies and by the government agencies responsible to have an interest in pushing for better institutions for their implementation? This section begins by dis- rather than narrow rents. It is in the collective interest cussing a pragmatic approach to policy design that of firms in an industry to prevent policy capture by a duly considers the probability of capture. few of them. Industry groups can develop collective mechanisms that prevent members from colluding Designing policies that are implementable with state officials and subverting policies in their Sometimes, when the possibility of capture looms narrow interest (Dixit 2015). Case studies suggest that large, policies that are first-best on the basis of eco- business associations whose membership represents nomic efficiency are less implementable than second- a large segment of the industry tend to be more influ- best ones. Why? Even a powerful interest group must ential and more “developmentally oriented” in their expend effort and resources to gain influence. The influence (Doner and Schneider 2000). benefits of a second-best policy may be too small to The extent and type of transparency also affect make it worth the cost for interest groups to expend the nature of state-business interaction. When a state such effort and resources. Building on this insight, agency and the firms with which it interacts have a policies are often designed to give less room for dis- monopoly over critical information, there is a greater cretion at the implementation stage. For example, scope for them to collude and subvert policy in their when a regulator mainly enforces rigid rules, there mutual interest. Consider the regulation of a natural is less scope for subverting the enforcement of those monopoly such as a public utility. Typically, the regu- rules to award undue favor. As a result, the benefit latory agency caps prices and compensates the utility from capture is too low.21 firm based on an assessment of the firm’s cost of Admittedly, designing policies that are less suscep- production. In such situations, the firm could gain by tible to capture involves a trade-off with efficiency. colluding with the regulator to overstate its cost. The Replacing regulatory discretion with rigid rules gain from such collusion is larger (and the chances it gives the regulator less room to adapt enforcement to will be detected, lower) when the regulator and the changing conditions. Rigid regulation thus imposes firm know more than others about the cost (Laffont excessive costs on firms. and Tirole 1991, 1993). The risk of capture by self-interested, myopic state The nature of the government agencies that inter- actors too can be addressed through pragmatic policy act with firms also determines when state-business design—although with the same efficiency trade-offs. links will degenerate into narrow interest group Think of a situation in which a government wants to capture. One example is the design of some industrial attract foreign direct investment (FDI), but there is development agencies in East Asia from the 1950s to a history of FDI disputes, and investors are hesitant 1970s. Japan’s Ministry of Trade and Industry (MITI), because they perceive a high risk of expropriation. for example, combined bureaucratic autonomy with Although strengthening checks and balances on strong business ties. Although this step was neces- state actors can reduce the perceived likelihood of sary for the agency to be effective in coordinating expropriation, such institutional reforms take time. industrialization, it also exposed the agency to In the meantime, there are ways to design the FDI Governance for growth | 145 contract to make expropriation less likely. Efficiency they used their power to institute an oligarchy (Puga dictates a revenue-sharing scheme in which the and Trefler 2014). host country receives a fixed amount every period, The sugar boom that swept over the Caribbean leaving the investor with strong incentives to islands around the 1650s and lasted for more than 200 increase profitability. However, when expropriation years also illustrates this point. Before the advent of is a possibility, a more practical revenue-sharing large-scale sugar production, these islands were typ- scheme is one in which the host country automat- ically smallholder peasant societies. The sugar boom, ically receives more (less) revenue when profits however, concentrated power in the hands of large are high (low)—see Engel and Fischer (2010). This plantation owners—a development that has been scheme is more consistent over time, as it takes into associated with the rise of slavery, as well as the per- account the government’s incentives to uphold its sistent undermining of the property rights of small commitment under different scenarios. Spotlight 7 farmers in the region. This institutional stunting had addresses similar issues in the design of contracts serious adverse consequences for long-term growth for public-private partnerships (PPPs). (Levchenko 2016). To put it in general terms, policies that are com- Thus anyone assessing a policy that seems opti- patible with the existing balance of power may not mal in theory should ask if, in the given context, it be ideal, but they can effectively deliver growth. could concentrate economic power in a way that For example, in China the Township and Village would ultimately undermine institutions.22 Consider Enterprises (TVEs) policy yielded strong investment the experience of the Russian Federation and eastern growth until the mid-1990s (Qian 2003; Yao 2014). European countries in their transition toward market This policy was an unusual way of committing to economies At the time, there was a consensus among property rights because TVEs were under the con- economists that the privatization of state-owned trol of local community governments, and not, as is enterprises (SOEs) was a priority for improving the more common, under full private or central govern- efficiency of these economies. Russia and many east- ment control. Nevertheless, the policy was effective ern European countries therefore focused on rapid, because of China’s context at that time. From the era large-scale privatization of SOEs. But the way in of central planning, China had inherited a strong which privatization was implemented created a new ideology opposing private property, and firms lacked class of oligarchs who were able to block other policies legal protection for their private property rights. Giv- that could promote competition (such as easing the ing local governments control stakes in local firms procedure for setting up a new business). As a result, and tying local fiscal outcomes and cadre incentives many of these economies are still struggling with to TVE success were important factors in making the inefficient, oligopolistic industries. This is consistent commitment to TVE property rights credible. with the view that reforms that create an initial con- centration of gains may engender strong opposition Anticipating how a policy could change to further reform from early winners (Hellman 1998). the balance of power By contrast, Poland chose to focus first on reforms Beyond its immediate impact on investment and pro- that would make it easy for new firms to enter duction, an economic policy could have far-reaching and privatized existing firms more gradually. This consequences for governance—and thus growth—by sequencing created a class of young firms that were altering the balance of power. Consider how a policy collectively interested in further reforms, while pre- that promotes international trade could have such venting the sudden emergence of a powerful group of an effect. As discussed earlier, in both 11th-century large firms that could block reforms (Jackson, Klich, Venice and 17th-century Great Britain, the growth and Poznańska 2005). of trade led to a rising merchant class, which in turn helped establish strong contracting and property rights institutions. But theory suggests that these How the design of public effects were not inevitable, for trade does not always agencies mediates the affect the distribution of economic power and incen- tives in the same way (Do and Levchenko 2009). influence of powerful groups Indeed, over time Venetian wealth from trade became Why are some public agencies able to work with concentrated in a narrower set of merchant families. different interest groups to design and implement No longer needing the support of smaller merchants, policies without being unduly influenced by any 146 | World Development Report 2017 particular group, while others are captured by dom- to the number of violations detected might become inant groups? The answer depends on a number of too zealous in detecting “violations” or demand even features of the internal design of bureaucracies. The higher bribes to not report violations. The design design features of public agencies, such as how offi- In such settings, the design of selection methods features of public cials are selected, how the performance of officials for regulators may be a more effective lever. It has agencies, such is assessed and rewarded, and how much discretion been shown that selection methods can influence the as how officials they have in implementing those goals, can help degree to which officials are responsive to particular are selected, how to mediate the influence of powerful groups. The interest groups. A study that compared direct election the performance allocation of functions across agencies and the role with political appointment of power utility regulators of officials is of oversight agencies such as auditors also matter across U.S. states found that elected regulators have a assessed and (Tirole 1994). Finally, as discussed in the World Devel- more pro-consumer stance (Besley and Coate 2003). rewarded, and how opment Report 2015: Mind, Society, and Behavior (WDR In fact, regulatory policy is just one of many policy much discretion 2015), bureaucratic norms can emerge that facilitate areas for which politicians are responsible, and it is they have in or obstruct capture.23 not very salient to voters. As a result, appointed reg- implementing ulators are more likely to respond to the interests of those goals, can Selection methods, incentives, and political elites than voters. But when regulators are help to mediate intrinsic motivation elected, regulatory policy becomes more important the influence of Recently, a number of studies have examined empir- to voters. powerful groups. ically how selection and incentive structures in “Intrinsic motivation” is another lever for influ- bureaucracies affect the behavior of officials. This encing the behavior of officials. Surveys and lab research can be useful for understanding how agency experiments suggest that public officials are intrinsi- design could make officials less susceptible to bribery cally more motivated than private sector employees or other forms of undue influence by those seeking to toward public service.26 Such pro-social motivation capture a policy.24 is also correlated with better job performance (Perry Consider tools that provide incentives, such as and Hondeghem 2008). pay-for-performance schemes. Randomized evalua- It is possible to design the work environment in tions of these schemes in the context of the frontline ways that enhance intrinsic motivation. For example, provision of public services find that the performance smaller caseloads and higher salaries have a more pos- of public officials in fulfilling their tasks improves.25 itive effect on the performance of judges in U.S. state Pay-for-performance could also weaken the incen- supreme courts when those judges are given more tives of officials to collude in policy capture if that discretion in selecting cases (Ash and MacLeod 2015). would mean missing performance targets. This is consistent with the hypothesis that judges are But there are settings in which an overreliance on intrinsically motivated to work hard on important financial incentives could backfire. One issue with cases. Reducing caseloads and increasing salaries incentive schemes is that many government agencies give them the time and financial security to focus on have multiple objectives. Making officials’ pay too producing high-quality judgments, especially when dependent on achieving any one objective can lead they have the discretion to choose important cases. to a disproportionate focus on that objective to the The extent to which officials are already motivated exclusion of others (Tirole 1994). For example, when in a pro-social direction could have an important police agencies in the United States are allowed to impact on how changes in the operating environment keep the revenue they obtain from assets they seize of a public agency play out. If officials care only about in drug arrests, they make even more drug arrests, monetary rewards and are susceptible to bribes, but at the cost of reducing enforcement of other petty reducing the extent of discretion in decision making crimes (Baicker and Jacobson 2007). Focusing on one- can restrict the scope for capture. But this approach dimensional incentives could also encourage over- may not be effective in an agency in which the levels zealous or biased behavior by officials. This concern is of intrinsic motivation for public service are already especially salient among officials whose jobs involve high, because the approach could undermine that exercising expert judgment, such as regulators and intrinsic motivation. judges. Making their rewards dependent on taking Designing selection methods that attract more a particular position could induce them to distort intrinsically motivated officials is another promising their judgments routinely in favor of that position. approach, but evidence on it is limited. A recent field For example, a regulator who is rewarded according experiment randomized salaries for public sector job Governance for growth | 147 offers in Mexico to test whether higher wages attract (such as the underreporting of import values), which more motivated officials (Dal Bó, Finan, and Rossi is one way firms can subvert the implementation of 2013). Higher compensation was associated with a trade policy through bribery or other means of influ- better-qualified applicant pool—that is, the applicants ence (Fisman and Wei 2001; Sequeira and Djankov were smarter and had better personality traits, higher 2014). To combat this kind of fraud, foreign inspectors earnings, and a better occupation profile. Remarkably, at the point of origin would have accurate informa- the high-wage applicant pool was also more moti- tion about the value of shipments, and they are less vated toward public service. But some other studies susceptible to the influence of domestically powerful suggest that offering higher wages attracts quality (as firms. A study using data from 104 developing coun- reflected in previous wages and work experience) at tries between 1980 and 2000 found that countries the expense of pro-social motivation (Finan, Olken, that hire foreign inspectors to verify the tariff classi- and Pande 2015). fication and the value of shipments before they leave their origin country increase import duty collections Norms in public organizations by 15–30 percentage points on average (Yang 2008). Conformity with accepted norms of behavior in one’s But monitoring has its limits. It can make officials organization could be a powerful driver of individual overly cautious, worsening their performance.28 And Honesty can behavior in government organizations. Honesty can monitors themselves are not immune to capture. become a become a self-reinforcing norm in some agencies, Such capture was revealed in a system of environ- self-reinforcing whereas corrupt norms of behavior can take hold in mental audits of firms in an Indian state (Duflo and norm in some others.27 In organizations in which corruption is con- others 2013). In the prevailing audit system, auditors agencies, whereas sidered acceptable because “everyone does it,” a tempo- who had been hired by the firms themselves were corrupt norms of rary reform that shocks some officials into behaving conducting the pollution audits. But a study found behavior can take more honestly could disrupt this bad norm, leading to that these auditors were underreporting the inci- hold in others. a permanent, self-reinforcing improvement. dence of pollution by firms. Replacing this system Although systematic evidence on such norm- with one in which auditors were randomly assigned shifting reforms is lacking, an example from the to firms and paid fixed wages from a central pool Republic of Korea’s past suggests that an intervention reduced auditors’ underreporting of pollution. that operates on multiple fronts to shift norms could work. In 1961 new Korean president Park Chung Accountability through horizontal checks Hee inherited a bureaucracy known for its political and balances decisions made on the basis of “self-enrichment.” Effective checks and balances within a government Immediately upon accepting his new office, Park should reduce the risk of short-term, opportunistic took action to curb the rampant corrupt behavior in behavior by a few state actors. Consistent with this the government. Within a month, he had “dismissed hypothesis, there are fewer disputes about foreign the top 10 percent of bureaucrats, jailed a number of direct investment in countries with stronger horizon- the country’s leading businesspersons for corruption, tal political constraints, as measured by the number of and sent the rest of the bureaucracy to two-week independent branches in government with veto power training courses in management, efficiency, and pub- over policy change and the degree of party alignment lic spiritedness” (Hoff 2001, 163). Moreover, for the across different branches of government (Jensen and bureaucrats that would remain, Park instituted strict others 2012). Even in authoritarian regimes, the exis- performance monitoring practices alongside fre- tence of legislative bodies increases investment by quent office rotations. The result of these efforts was raising the cost of expropriation (Wright 2008). a government whose functioning was far improved. Compared with high-income countries, low- and middle-income countries have weak formal checks Monitoring and balances within government on average (figure Monitoring by higher agencies can deter officials 5.5), and strengthening these institutions is a long- from colluding in policy capture and generate useful term project. However, the principle of accountability information for third parties interested in preventing through horizontal checks and balances lends itself to capture. Audits, for example, have been shown to other approaches tailored to the specifics of a context. reduce leakage in village-level public investment pro- Allocating power among government agencies grams (Olken 2007). Informed third parties can also and creating independent oversight agencies can be recruited as monitors. Consider customs fraud reduce the chances of “grand” capture of policy by 148 | World Development Report 2017 Figure 5.5 Formal checks and balances with stronger protection of property rights and less are weaker in low- and middle-income regulation of firm entry (La Porta and others 2004). In countries the United States, the delegation of decision-making authority to bureaucratic agencies and of arbitration authority to the courts has helped make regulatory 1.00 policies more consistent (Spiller and Tommasi 2005). It has also helped level the playing field for less pow- 0.75 erful actors. However, judicial review has its limits; in Proportion particular, the judiciary can step in only after being 0.50 approached by an affected party with the legal stand- ing to do so (Magill 2013). 0.25 Experience with the U.S. Office of Information and Regulatory Affairs (OIRA) suggests that the existence 0 of an agency tasked with cross-cutting oversight of Low- Lower- Upper- High- regulators, based on a cost-benefit analysis, can also income middle- middle- income countries income income countries help prevent capture. It has been hard for any partic- countries countries ular narrow interest group to capture OIRA because Legislative checks it is a generalist institution and not focused on a sin- Judicial checks gle regulatory issue. Moreover, its practice of using Audits and reviews standardized cost-benefit analysis in assessing reg- Sources: WDR 2017 team, based on data from the World Justice Project, Rule ulations helps counteract the potential use of biased of Law Index, and World Bank, World Development Indicators (database), information and analysis by industry or consumer circa 2014. interest groups to influence regulations (Livermore and Revesz 2014). dominant special interest groups. This principle can Institutions of accountability are also politically be illustrated by considering the design of regulatory embedded, and so they too could be subverted by agencies. powerful narrow interests. Nevertheless, even in When regulators and the regulated firms have a countries with complicated and far-reaching gover- monopoly over information pertinent to a regulation nance environments, the state is rarely monolithic, (such as firms’ cost structure), they can collude over and accountability institutions often manage to pre- regulatory design. In such circumstances, the divi- serve autonomy. A recent case study of telecommu- sion of power across regulatory agencies can reduce nications in three middle-income countries—Mexico, the monopoly over information and thus deter collu- South Africa, and Turkey—is illustrative. Although sive capture (Laffont and Martimort 1999). But such the telecom sector remains monopolistic or oligopo- a division of power is not without its drawbacks. listic in all of these countries, recent years have seen Acquiring the information and expertise needed for clear improvements in access, technology, and market regulatory design is difficult, and it might be easier competition. One reason is that accountability insti- to consolidate such expertise in a single regulatory tutions—the judiciary, competition commissions, and agency. Thus a multiplicity of agencies could make telecom regulators—have often acted autonomously coordination of regulatory policy more difficult, against anticompetitive practices (Atiyas, Levy, and Review and slowing down decision making. Indeed, if regulators Walton 2016). oversight of are motivated purely by public interest and there is regulatory little chance of collusion, splitting functions between Mechanisms of vertical accountability and agencies by other agencies could be counterproductive. increased contestability government There is evidence that review and oversight of Economically dominant groups such as large firms branches, such regulatory agencies by other government branches, have the resources to gain influence in the policy as the judiciary, such as the judiciary, can help prevent or invali- arena, whereas consumers and citizens are a diffuse can help prevent date regulatory decisions that are not in the public interest group, facing a collective interest problem or invalidate interest. Across countries, the strength of judicial when advocating for their policy preferences.29 Thus regulatory independence and constitutional review (the power mechanisms of vertical accountability that facilitate decisions that are of the courts to check laws passed by the legislature contestability by citizen (or consumer) groups could not in the public that contravene a rigid constitution) is associated help balance influence in the policy-making process. interest. Governance for growth | 149 Figure 5.6 Formal avenues for broad-based participation in regulatory decision making are limited in low- and middle-income countries Percentage of citizens participating 100 75 50 25 0 East Asia Europe and Latin America Middle East High-income South Asia Sub-Saharan and Pacific Central Asia and the and OECD Africa Caribbean North Africa countries Provide impact assessments Publish notice Publish regulations Request comments Report results Source: WDR 2017 team, using data from World Bank, Global Indicators of Regulatory Governance, various years. Note: OECD = Organisation for Economic Co-operation and Development. Recent research suggests that media coverage can Mechanisms that facilitate policy input from help reduce the influence of special-interest groups on consumer and citizen advocacy groups can also coun- policies by increasing the influence of ordinary vot- tervail the influence of dominant industry lobbies. ers. A study documenting the effect of “muckraking” In the United States, regulatory bodies have devised magazines on the voting patterns of U.S. representa- a range of mechanisms that facilitate consumer tives and senators in the early part of the 20th century advocacy.30 For example, in the 1970s the big oil price found that media coverage induces more populist shocks ended a period of declining prices, and many legislative outcomes (Dyck, Moss, and Zingales 2013). energy utilities sought an increase in the prices they When the benefits of preventing special-interest cap- were allowed to charge. In response, many states ture of a policy are diffuse, individual voters may lack introduced consumer advocacy groups to balance the the incentive to gather information about that policy. pressure from producers. As a result, price increases The media can therefore substitute for collective were lower in these states, indicating the growing action in information gathering. This populist tilt is influence of consumers in regulatory price setting likely to be stronger when the policy issues are more (Holburn and Spiller 2002). newsworthy and the media are profit-maximizing Participatory mechanisms in regulatory insti- because these factors increase the incentives of the tutions are still relatively uncommon in low- and media to cater to a wider consumer base, especially middle-income countries (figure 5.6).31 For example, low-income groups. most high-income countries provide advance notice Procedural requirements that government agen- of regulatory changes and make information about cies seek diverse inputs during policy design and existing regulations publicly available. Such practices rollout can also balance influence. In the United are relatively uncommon in low- and middle-income States, the Administrative Procedure Act has put countries, however. Mechanisms to collect feedback in place a series of procedural requirements for the from the public are also rare in these countries, as are participation of different interest groups in the reg- mechanisms that report on the results and impact ulatory process. Under this act, “regulatory agencies assessments of regulatory policies. must provide notice, must inform about proposed rule makings, must make their decisions taking into account the submissions of interested parties, and Finding the right approach cannot rush nor make decisions in the dark” (Spiller In conclusion, there are ways to alter both policy and and Tommasi 2005, 535). institutional design that can reduce the harm from 150 | World Development Report 2017 capture. In terms of policy design, it is important to (PPDs) as an intermediate institutional design for ver- think pragmatically about the risk of undue influence tical accountability (box 5.2). PPDs do not necessarily and identify implementable policies—if not first-best rely on the existence of proxy advocate agencies or ones. Another lesson is to avoid policies that look strong citizen and small business advocacy groups. good in the short term but could end up reinforcing Instead, they mobilize local communities in the con- the power of dominant groups that could block fur- text of specific reforms. Successful PPDs can go on to ther reforms. become institutionalized more formally. Better design of public agencies can help expand Countries with difficult governance environments the set of implementable policies in two ways. First, could also experiment with “ring-fencing” reforms— how public officials are selected for service and the in other words, building “islands of effectiveness” incentive structure they face within their organiza- (Fisman and Werker 2011; Levy 2014). For example, in tions matter. This aspect of design should take into many countries the dominance of powerful business account not only economic motivations, but also the groups or other political considerations make it dif- intrinsic motivation for public service and norms of ficult to liberalize firm entry or enact other business behavior. In policies in which there is a significant climate reforms that would increase competition role for discretion during implementation, credi- between firms. In such settings, creating special ble monitoring mechanisms can further discipline economic zones (SEZs) with their own rules is a way implementation. Second, mechanisms of horizontal to ring-fence competition within specific locations. and vertical accountability in public agencies also China’s extensive use of SEZs, beginning with coastal help balance influence in the policy arena. For exam- SEZs that were focused on export-oriented firms, is a ple, general-purpose oversight agencies can act as a case in point. Studies suggest that SEZs made a sig- check on the capture of agencies in charge of specific nificant contribution to investment and productivity policy areas. Mechanisms that help less powerful, growth in China (Wang 2013). diffuse interest groups have a bigger say in the policy arena could help even out the influence of more pow- Reforms at the top: The overall governance erful narrow interest groups. environment Chances are that the agency-level reforms discussed Translating reform principles into solutions so far will not be pursued seriously unless commit- This discussion of regulatory agency design in the ment is forthcoming at the highest levels of policy United States has served to illustrate some key prin- making. Consider the various experiences with the ciples for reform. But this is not to say that low- and introduction of anticorruption agencies. In 1974 middle-income countries with difficult governance Hong Kong introduced an Independent Commission environments should simply copy the formal struc- Against Corruption (ICAC). The ICAC reported directly tures of horizontal and vertical accountability found to the Governor of Hong Kong, recruited employees to work in high-income countries. from the civilian population, and paid relatively high Adapting these blueprints to specific governance salaries. It has been remarkably effective: today Hong environments is ultimately a matter of experimenta- Kong SAR, China, ranks in the top 20 worldwide of tion, but both the capacity of existing agencies and the Transparency International’s corruption perceptions present balance of power should factor into this pro- index. Nevertheless, the ICAC model has not had cess. For example, consider the design of mechanisms much success in other countries. The ICAC succeeded for strengthening regulatory advocacy by citizens and in part because its authorizing environment was well small firms. In the United States, some states have governed and stable, and the commitment to making created a public agency tasked with acting as a proxy the ICAC work did not depend on a fortuitous, fragile advocate for consumers, while others have opted to configuration of interests at the highest levels (Fis- offer incentives and support for existing advocacy man and Werker 2011). This issue—how the broader groups to participate in regulatory decision making governance environment becomes more committed (Magill 2013). Neither approach, though, is likely to to reform—is discussed in part III of this Report. be effective in settings in which public agencies and consumer advocacy groups have low capacity. Case Trade-offs between growth and equity studies suggest, however, that some low- and middle- Sometimes, a “solution” to an institutional func- income countries have successfully used participa- tion such as commitment can deliver growth, but tory mechanisms such as public-private dialogues with adverse consequences for equity. For example, Governance for growth | 151 Box 5.2 Participatory mechanisms in policy design: The “Bulldozer Initiative” in Bosnia and Herzegovina Strengthening mechanisms to promote inclusive public- Meanwhile, the work of the initiative did not end at design- private dialogues could lead to better information flows ing and selecting proposals; members of the initiative also and accountability in the design and implementation of provided feedback and helped with monitoring during reforms of the business climate. In Bosnia and Herzegovina, implementation, which lasted more than two years for some the “Bulldozer Initiative” mobilized local business commu- reforms. A biannual Bulldozer publication served to inform nities to suggest reforms and to become more engaged the public about this process, with the relevant government with the authorities during implementation. In the process, body receiving a score for each reform being implemented. it reduced the influence of narrow interest groups. An independent evaluation of the initiative suggests Remarkably, during the first phase of the initiative 250 that it had positive impacts in terms of identifying and proposals were collected to reform the business climate. effectively implementing a range of reforms. The current Independent experts, including economists, lawyers, and evidence on the impact of such initiatives is based on industry experts, assessed the proposals through a pro- case studies; large-sample, rigorous evaluations have not cess designed to minimize the undue influence of narrow yet been conducted. Because of the promising evidence interest groups. This process was very selective—only 5 from cases, more pilot initiatives with rigorous evaluations percent of proposals made the final list in the second phase. should be encouraged. Source: Herzberg (2007). coalitions of powerful actors can monopolize resources regulations, are not associated with a reduction in for investment, solving internal commitment prob- this variation. lems but excluding less powerful actors from access 2. See, for example, Fisman (2001); Johnson and Mitton to productive resources. The wave of industrialization (2003); Khwaja and Mian (2005); and Rijkers, Freund, in Latin America at the end of the 19th century and and Nucifora (2014). the first part of the 20th century was characterized 3. Traditionally, in the economics literature capture is said to occur when the design of a regulation reflects by just such an arrangement: the state would protect the narrow interests of specific groups of firms or politically connected, powerful business interests consumers (Stigler 1971; Peltzman 1976). This chap- in exchange for a commitment to investment, rent ter applies the term more broadly to include not only sharing, and political support (Haber, Razo, and regulations but also any policy related to economic Maurer 2003). This arrangement delivered growth, growth. but that growth was not shared widely. A more broad- 4. The gross domestic product (GDP) per capita dif- based form of commitment to property rights would fered only modestly across countries before 1600, so have led to a more equitable path of development. much so that the rising difference in GDP per capita Thus issues of equity and growth cannot always be across higher- and lower-income countries since considered in isolation when thinking about gover- then has been termed the “Great Divergence” (Jones, nance reforms. This chapter therefore complements forthcoming). chapter 6, which focuses on equity and governance. 5. See, for example, Mauro (1995); Hall and Jones (1999); and Acemoglu, Johnson, and Robinson (2001). They show that historical or culturally driven sources of Notes difference in some dimensions of governance (such as security of property rights, corruption, and poli- 1. In recent research, Hallward-Driemeier and Pritch- cies of economic openness) have had an impact on ett (2015) use firm-level data to analyze how the long-term growth in per capita GDP. Building on implementation of simple business regulations such approaches, Kaufmann and Kraay (2002) pro- varies across firms within the same country. They pose a methodology to investigate the two-way cau- find that procedural reforms, which simplify these sality between governance and per capita income. 152 | World Development Report 2017 Their results also suggest a positive causal effect access order” is discussed in North, Wallis, and from governance to long-term growth, but a weak Weingast (2009). and even negative effect running from per capita 19. See Puga and Trefler (2014) on Venice, and Acemo- income growth to better governance. See Pande and glu, Johnson, and Robinson (2005) on Atlantic trade. Udry (2006) for a critique of such approaches. The background paper prepared for WDR 2017 by 6. See Hausmann, Pritchett, and Rodrik (2005); Rodrik Levchenko (2016) provides a summary of recent (2005); Jones and Olken (2008); Eichengreen, Park, research on the impact of trade on institutions. and Shin (2012); and Levy (2014). 20. See, for example, Evans (1995). However, the story of 7. This evidence is reviewed in Galiani and Schar- the Republic of Korea also suggests that productive grodsky (2011). business-state relationships can sometimes degen- 8. Well-functioning courts can help firms switch to new erate into instruments of capture. There is evidence suppliers by strengthening the level of trust between that large businesses eventually captured some of unknown parties (Johnson, McMillan, and Woodruff the state support that was meant to kick-start invest- 2002a). Better contract enforcement is also associ- ment (Eichengreen 2012). ated with higher lending and less default (Castelar 21. Laffont and Tirole (1993) formalize this idea. Glaeser Pinheiro and Cabral 2001; Cristini, Moya, and Powell and Shleifer (2003) present a theory along sim- 2001; Jappelli, Pagano, and Bianco 2005). And better ilar lines in their study of the rise of regulation in contract enforcement can also enhance the impact the United States in the early decades of the 20th of trade liberalization on productivity (Ahsan 2013). century. 9. Among others, Haskel, Pereira, and Slaughter (2007) 22. See Acemoglu and Robinson (2013) for an evidence- and Aghion and others (2009) present firm-level evi- based discussion of this argument. dence on how competition (from entrants) affects 23. See spotlight 1 in WDR 2015 (World Bank 2015, 60). productivity growth. 24. Some of the discussion in this section is based on a 10. The theory of a “big push” in industrialization put review paper by Finan, Olken, and Pande (2015). forth by Rosenstein-Rodan (1943) is an early exam- 25. See, for example, Banerjee, Glennerster, and Duflo ple. Murphy, Shleifer, and Vishny (1989) model a (2008); Glewwe, Ilias, and Kremer (2010); Basinga more recent version of this idea. and others (2011); Muralidharan and Sundararaman 11. This example is from Rodríguez-Clare (2005), who (2011); Duflo, Hanna, and Ryan (2012); and Gertler reviews microeconomic models of coordination and Vermeersch (2012). failures. 26. See Cowley and Smith (2014) for survey-based evi- 12. Hoff (2001) reviews models of coordination failures dence and Banuri and Keefer (2013) for evidence in a wider range of contexts, including social norms from lab experiments. and corruption. Cooper (1999) reviews macroeco- 27. Game theory calls this “multiple equilibria” in orga- nomic models of coordination failures. nizations: one in which honesty is a self-reinforcing 13. Wade (1990), Evans (1995), and Kohli (2004) examine norm; another in which corruption is the norm. See the role of governance in the industrial policy of the Bardhan (1997) and Hoff (2001). East Asian countries from the 1960s to the 1990s. 28. Lichand, Lopes, and Medeiros (2015) found evidence Robinson (2009) discusses how governance issues that municipal audits to monitor the use of federal have constrained industrial development policies in funds reduced procurement, thereby worsening most parts of the world. health outcomes. 14. For evidence from developed countries, see, for 29. A classic exploration of this idea, in the context of example, Goldberg and Maggi (1999); Gawande regulation, is Stigler (1971). and Bandyopadhyay (2000); Mitra, Thomakos, and 30. Dal Bó (2006) reviews the empirical evidence on Ulubaşoğlu (2002); and Esfahani (2005). advocacy and other accountability interventions in 15. Suharto was the second president of Indonesia. After the context of regulatory bodies. Schwarcz (2013) ousting the first president, Sukarno, from office in presents a case study of some citizen advocacy 1967, Suharto served as president for 31 years, until mechanisms in the context of insurance regulation his resignation in 1998. across U.S. states. 16. See, for example, Stigler (1971) and Peltzman (1976) 31. See http://rulemaking.worldbank.org. for theory and Dal Bó (2006) for a review of the empirical evidence on capture, largely from the United States. References 17. See Aghion, Akcigit, and Howitt (2014) for a sum- Acemoglu, Daron, Simon Johnson, and James A. Robin­ mary review of this theory of growth. son. 2001. “The Colonial Origins of Comparative 18. See Pritchett and Werker (2012) for a discussion of Development: An Empirical Investigation.” American “deals-based” systems. A similar concept of “limited Economic Review 91 (5): 1369–1401. 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Recently, countries experi- MAC KWT High-income SGP encing growth stagnation at middle-income levels, a countries NOR HKG USA CHE NLD condition Gill and Kharas (2007) termed the “middle- OMN TWN IRL AUT DEU BMU DNK ESP FRA income trap,” have received considerable attention. KOR CYP GRC ISR GBR BHR NZL SAU MLT PRT Although middle-income economies are no more 44 GAB HUN BRB Relative income (%), 2010 POL BHS MYS CHL TTO countries likely to stagnate than economies at any other income middle- income LBN Upper- BWA ROM IRN TUR MDV KNA MEX URY level (Bulman, Eden, and Nguyen 2014), a compelling THA BRA CRJ PAN VEN TUN LCA ZAF economic theory that can guide growth for middle- GNQ CHN GRD DOM PER COL 15 ECU BLZ ALB income countries is still lacking. Indeed, this lack of a EGY BTN SWZ SUR LKA JOR NAM countries middle- income MAR SYR AGO JAM Lower- MNG “satisfactory growth theory” to inform development IND CPVBOL PRY PHL IRQ GTM ZWE in middle-income countries was the original reason VNM IND COG MRT SOM HND GHA DJI for referring to a middle-income trap (Gill and Kharas 5 LAO CMR NGA ZMB STP 2015). This spotlight uses this Report’s framework to LSO BGR SEN CIV BEN argue that the difficulty many middle-income coun- BFA NPL UGA TZA KEN Low-income RWA GNB countries MLI tries have in sustaining growth can be explained by MOZ SLV SLE MDG GIN ETH MWI power imbalances that prevent the institutional tran- CAF NER sitions necessary for growth in productivity. BDI LBR COD 0 Is middle-income growth 0 5 15 44 different? Low-income countries Lower- middle- Upper- middle- High-income countries income income countries countries Middle-income countries may face particular chal- lenges because growth strategies that were successful Relative income (%), 1970 while they were poor no longer suit their circum- Source: WDR 2017 team, using data from Penn World Table, version 8.1 (Feenstra, Inklaar, and Timmer stances. For example, the reallocation of labor from 2015). agriculture to industry is a key driver of growth in low-income economies. But as this process matures, returns to investment set in, implying a need for a the gains from reallocating surplus labor begin to evap- new source of growth. Middle-income countries that orate, wages begin to rise, and decreasing marginal become “trapped” fail to sustain total factor produc- tivity (TFP) growth. By contrast, “escapees” find new WDR 2017 team. sources of TFP growth (Daude and Fernández-Arias The middle-income trap | 159 2010). Indeed, 85 percent of growth slowdowns at the Political economy traps middle-income levels can be explained by TFP slow- downs (Eichengreen, Park, and Shin 2013). The creation of these institutions may be stymied by For middle-income escapees, evidence suggests vested interests. Creative destruction and competi- that one source of sustained TFP growth is an tion create losers—and in particular may create losers increasingly efficient allocation of resources. On a of currently powerful business and political elites. broad level, escaping countries experience much This is a more politically challenging problem than more rapid transitions out of agriculture and more spurring productivity growth through the adoption of rapid increases in manufacturing/industry (Bulman, foreign technologies, which tends to favor economic Eden, and Nguyen 2014). Perhaps more important incumbents (Acemoglu, Aghion, and Zilibotti 2006). is the allocation of resources across subsectors and These political challenges may be particularly great in across firms within sectors. Because the productivity middle-income countries because actors that gained levels of firms in the same subsector can be markedly during the transition from low to middle income unequal, the entry of new firms and exit of unpro- may now be powerful enough to block changes that ductive firms (creative destruction), and the extent threaten their position. to which productive firms are able to gain a bigger In this sense, the challenges that middle-income market share by reallocating inputs between firms, countries face go beyond policy choice to the chal- are important for TFP growth (Hsieh and Klenow lenge of power imbalances. Yet, with few exceptions, 2009; Bartelsman, Haltiwanger, and Scarpetta 2013; discussions of the middle-income trap have generally Melitz and Polanec 2015). For example, when capital focused on the proximate causes of transition difficul- and labor in Indian and Chinese manufacturing firms ties and on selecting the right policies rather than the are hypothetically “reallocated” to match the level of underlying determinants of these transitions. Under- efficient allocation observed in the United States, the standing the policy arena in which elites bargain is two countries experience TFP gains of 40–60 percent essential for explaining the political economy traps and 30–50 percent, respectively (Hsieh and Klenow faced by middle-income countries. 2009). One such political economy trap is a persistent Other analyses of the middle-income trap have deals-based relationship between government and focused on the lack of industrial upgrading (Ohno business. Deals-based, sometimes corrupt, interac- 2009; Doner and Schneider 2016). Evidence suggests tions between firms and the state may not prevent that middle-income escapees have more diversified growth at low income levels; indeed, such ties may and sophisticated exports than those that remain actually be the “glue” necessary to ensure commitment stuck (Felipe, Abdon, and Kumar 2012). Such upgrad- and coordination among state and business actors ing requires proactive government policies and (see spotlight 1 on corruption). But they become more coordination between domestic firms. A related view problematic for upper-middle-income countries. For is that market failures may occur in many countries example, theory suggests that as markets expand and when private incentives to enter new sectors are supply networks become more complex, deals-based less than social returns, necessitating a process of relationships can no longer act as a substitute for imper- economic development as “self-discovery” (Haus- sonal, rules-based contract enforcement (Dixit 2004). mann and Rodrik 2003). Consistent with this hypothesis, upper-middle-income Efficient resource allocation and industrial upgrad- escapees lower their levels of corruption significantly ing require a set of institutions that differs from those before becoming high-income economies, whereas that enable growth through resource accumulation. “non-escapees” do not see an improvement in corrup- Efficient allocation requires new institutions to man- tion (figure S6.2, panel a). In non-escapees, corruption age competition and creative destruction. Industrial may prop up the status quo, undermining competition upgrading requires the institutional capacity for and the creation of new growth coalitions. greater intersector and government coordination, Combating entrenched corruption and creating a possibly through a strategic alliance between gov- level playing field for firms imply a need for account- ernment and business (Doner and Schneider 2016). able institutions. At upper-middle-income levels, Product differentiation to succeed in new export legislative, judicial, media, and civil society checks markets requires “modern and more agile” property become increasingly important. Indeed, escapees tend rights institutions and capital markets (Kharas and to see much larger improvements in these institu- Kohli 2011). tional checks when they are at upper-middle-income 160 | World Development Report 2017 levels than non-escapees, although the differences helped lead to pro-growth coalitions that could between successful and unsuccessful countries are push for “nonparticularistic” policies benefiting broad less distinct at the low- and lower-middle-income interests to enable broad-based growth. Other recent levels (figure S6.2, panels b, c, d). transitioning countries have had a source of external The sources of these rules-based institutions support/pressure for reform: nearly half of the coun- for contestation and accountability are discussed tries that grew recently from middle to high income in part III of this Report, but comparing escapees are in Europe, where the external commitment pro- and non-escapees helps identify several conditions vided by European Union accession and membership that make institutional reforms and thus successful has made institutional development credible. transitions more likely. Recently, many countries Lower levels of inequality may also help prevent that have transitioned, including East Asian econ- institutional sclerosis at middle-income levels. High omies and Chile, have had strong, representative levels of inequality can generate societal cleavages business groups. Well-represented business groups that prevent the emergence of the growth coalitions Figure S6.2 Checks on corruption and accountability institutions improve more in countries that escape upper-middle-income status to achieve high-income status than in countries that are “non-escapees” a. Public sector corruption b. Judicial constraints on the executive Average change in index score Average change in index score 0.20 0.15 0.10 0.15 0.05 0.10 0 0.05 –0.05 0 –0.10 Low-income Lower-middle- Upper-middle- Low-income Lower-middle- Upper-middle- countries income countries income countries countries income countries income countries c. Government censorship of media d. CSO entry and exit Average change in index score Average change in index score 1.5 1.5 1.0 1.0 0.5 0.5 0 0 Low-income Lower-middle- Upper-middle- Low-income Lower-middle- Upper-middle- countries income countries income countries countries income countries income countries Non-escapees Escapees Source: WDR 2017 team, using data from V-Dem, 2015. Note: The bars represent the average change in the relevant category for all “non-escapees” (beige) and “escapees” (blue) during the time a country is at the income level specified. Escapees are defined as those countries that reach the subsequent income levels during the sample period (1950–2011). Non-escapees are those that remain trapped at the same income level or move to a lower income level. All four panels use the same methodology. In panel a, public sector corruption (v2x_pubcorr) is an index ranging from 0 to 1, with 1 representing the most corruption. In panel b, judicial constraints on the executive (v2x_jucon) is an index ranging from 0 to 1, with 1 representing the greatest constraints. Government censorship of media (v2mecenefm) in panel c and CSO entry and exit (v2cseeorgs) in panel d are ordinal variables ranging from 0 to 4, with 4 representing the most accountability (that is, the least media censorship and the most CSO entry and exit). CSO = civil society organization. The middle-income trap | 161 necessary for reform (Doner and Schneider 2016). 18673, National Bureau of Economic Research, Cam- According to the data, escapees not only have lower lev- bridge, MA. els of inequality when they become middle income, but Feenstra, Robert C., Robert Inklaar, and Marcel P. also do not experience the large increases in inequality Timmer. 2015. “The Next Generation of the Penn that characterize non-escapees on average (Bulman, World Table.” American Economic Review 105 (10): Eden, and Nguyen 2014). Middle-income countries 3150–82. Version 8.1, http://www.rug.nl/ggdc should therefore value equity not just as an aim in /productivity/pwt/pwt-releases/pwt8.1. itself, but also as a precondition that increases the like- Felipe, Jesus, Arnelyn Abdon, and Utsav Kumar. 2012. lihood of escaping the middle-income growth trap. “Tracking the Middle-Income Trap: What Is It, Who Is in It, and Why?” Working Paper 715 (April), Levy Economics Institute of Bard College, Annandale- References on-Hudson, NY. Acemoglu, Daron, Philippe Aghion, and Fabrizio Zilibotti. Gill, Indermit S., and Homi Kharas. 2007. An East Asian 2006. “Distance to Frontier, Selection, and Economic Renaissance: Ideas for Economic Growth. Washington, Growth.” Journal of the European Economic Association 4 DC: World Bank. (1): 37–74. ————. 2015. “The Middle-Income Trap Turns Ten.” Bartelsman, Eric, John Haltiwanger, and Stefano Policy Research Working Paper 7403, World Bank, Scarpetta. 2013. “Cross-Country Differences in Pro- Washington, DC. ductivity: The Role of Allocation and Selection.” Amer- Hausmann, Ricardo, and Dani Rodrik. 2003. “Economic ican Economic Review 103 (1): 305–34. Development as Self-Discovery.” Journal of Develop- Bulman, David, Maya Eden, and Ha Nguyen. 2014. “Tran- ment Economics 72 (2): 603–33. sitioning from Low-Income Growth to High-Income Hsieh, Chang-Tai, and Peter J. Klenow. 2009. “Misallo- Growth: Is There a Middle-Income Trap?” Policy cation and Manufacturing TFP in China and India.” Research Working Paper 7104, World Bank, Washing- Quarterly Journal of Economics 124 (4): 1403–48. ton, DC. Jones, Charles I. 2015. “The Facts of Economic Growth.” Daude, Christian, and Eduardo Fernández-Arias. 2010. NBER Working Paper 21142, National Bureau of “On the Role of Productivity and Factor Accumula- Economic Research, Cambridge, MA. tion in Economic Development in Latin America and Kharas, Homi, and Harinder Kohli. 2011. “What Is the the Caribbean.” Working Paper 155, Inter-American Middle-Income Trap, Why Do Countries Fall into It, Development Bank, Washington, DC. and How Can It Be Avoided?” Global Journal of Emerg- Dixit, Avinash K. 2004. Lawlessness and Economics: Alter- ing Market Economies 3 (3): 281–89. native Modes of Governance. Gorman Lectures in Eco- Melitz, Marc, and Saso Polanec. 2015. “Dynamic Olley- nomics Series. Princeton, NJ: Princeton University Pakes Productivity Decomposition with Entry and Press. Exit.” RAND Journal of Economics 46 (2): 362–75. Doner, Richard F., and Ben Ross Schneider. 2016. “The Ohno, Kenichi. 2009. “Avoiding the Middle-Income Trap: Middle-Income Trap: More Politics than Economics.” Renovating Industrial Policy Formulation in Viet- World Politics 68 (4): 608–44. nam.” ASEAN Economic Bulletin 26 (1): 25–43. Eichengreen, Barry, Donghyung Park, and Kwanho Shin. V-Dem (Varieties of Democracy). Various years. Database 2013. “Growth Slowdowns Redux: New Evidence hosted by Gothenburg Institute (Europe) and Kellogg on the Middle-Income Trap.” NBER Working Paper Institute (United States), https://www.v-dem.net/en/. 162 | World Development Report 2017 SPOTLIGHT 7 Public-private partnerships In 318 BCE, the ancient Greek city of Eretria signed PPPs are considered an alternative to both public a contract with a wealthy citizen, Chairephanes, to provision and private provision. Unlike public provi- drain a lake in its territory to create more usable land sion, where a private firm is responsible only for build- for agriculture. According to the contract, Chaire- ing the infrastructure, under PPPs the concessionaire phanes was responsible for financing and managing builds, manages, maintains, and retains control of the drainage operation. In return, he was granted the the assets for the duration of the contract, which can right to use the land for 10 years and an exemption last more than 30 years. Unlike private provision, in from tax duties on materials imported for the project. PPPs the private firm has only a temporary and partial The contract foresaw a four-year construction sched- ownership of the asset. PPPs have been adopted for ule, renegotiable in case of war, and it bound heirs the provision of various services, providing mainly in case of the contractor’s death. Anyone attempting infrastructure in network industries such as electric- to rescind the contract was subject to extreme sanc- ity, telecommunications, water, and transport. PPPs tions. The contract was carved in marble and placed have also been used for delivering other services on public display (Bresson 2016, 165). Similar con- traditionally connected to public provision such as tracts may date as far back as the Achaemenid (First health and education, garbage collection, agriculture Persian) empire (6th to 4th century BCE), when, by extension services, and social housing. royal decree, all individuals who dug a quanat (a sub- PPPs were recognized as playing a key role in terranean gallery used to intercept water sources for infrastructure financing at the recent Addis Ababa irrigation) had the right to retain all profits for up to International Conference on Financing for Develop- five generations (Goldsmith 2014, 11). ment (United Nations 2015, para. 48). Although the Contracts such as these are examples of what today participation of the private sector in infrastructure are known as public-private partnerships (PPPs). A projects has grown considerably in the last 25 years public entity contracts the construction and main- in developing countries, especially in the energy tenance of public infrastructure to private entities, sector (figure S7.1), private financing continues to which receive the exclusive rights to profit for a fixed constitute a limited share of aggregate infrastructure period of time. More specifically, PPPs are defined investment. In developing countries, it is less than 25 as “long-term contracts between a private party and percent (IMF 2014; World Bank 2014). a government entity, for providing a public asset or The most common argument in favor of PPPs is service, in which the private party bears significant that they free up resources in budget-constrained gov- risk and management responsibility, and remunera- ernments for other projects.1 If a country is too poor to tion is linked to performance” (World Bank, ADB, and collect enough resources domestically, or if the gov- IDB 2014, 14). ernment cannot credibly commit to using revenues for providing public services or to repay investors in the long term, it may be difficult to collect enough WDR 2017 team. funds to finance the initial investment in the form of Public-private partnerships | 163 Figure S7.1 Private participation in private firms may worry that the profitability of their infrastructure projects in developing investment could be undermined. countries remains limited For this reason, many PPPs have not resulted in the expected efficiency gains. For example, without 450 a credible commitment to enforce the terms of the agreement, contracts are frequently renegotiated in 400 favor of the private contractor, with considerable gov- 350 ernment spending often allocated in questionable, Number of projects 300 noncompetitive ways. Renegotiation often occurs as a 250 consequence of an aggressive bidding strategy at the time of auction. After having been awarded the con- 200 tract, the concessionaires can lobby the government 150 to renegotiate the terms, voiding the potential effi- 100 ciency gains of the auction. For example, 68 percent 50 of the 1,700 PPP projects financed in Latin America from 1990 to 2013 (78 percent in the transport sector) 0 were renegotiated on average one year after the con- 1980 1985 1990 1995 2000 2005 2010 2015 tract award, according to Guasch and others (2014). All sectors Transport Taking into account actors’ incentives and making Energy Water and sewerage sure that the contract’s terms are consistent over time Telecom may reduce the likelihood of opportunistic behavior, Source: WDR 2017 team, using data from World Bank, Private Participation in such as renegotiation. However, depending on the Infrastructure Database, 1980–2014. circumstances, the form in which this commitment is credibly reached may vary. In the ancient Greek city of Eretria, it would have been very difficult to either taxes or public debt. Another reason PPPs may renegotiate the terms of a contract carved in marble. be appealing is that they can increase efficiency in Publicizing the contract in a public square also helped providing public services because private firms obey bind the contracting parties by increasing scrutiny. the rules of the financial markets. In contrast to state Although this specific commitment device clearly officials, who obey political considerations, private may not be the best solution for PPPs today, the firms introduce competition in markets character- underlying principles remain valid. ized by the features of natural monopolies, and they The optimal contract may depend on whether it prevent investment in projects with negative social is possible to collect user fees, whether there is high values because the profitability of the investment demand, and whether the quality of the service is depends on the demand for the service. easily contracted. For example, the commitment A key challenge for PPPs in providing public ser- device needed to effectively deliver on highway infra- vices efficiently is that they must take into account structure may be very different from that needed for the incentives of both public and private entities health services. Consider the financing of a new high- because PPPs allocate risks between the contracting way: demand is high, user fees can be collected, and parties over a long period of time, when circum- quality is easily contractable. However, the returns on stances often change. Actors will likely fail to reach investment depend on future demand, which cannot an agreement or the PPP may be ineffective if there be controlled by the concessionaire. If the contract is is no mechanism to allocate the risk in a credible way. fixed-term, the risk is borne by the private contractor, Auction bids are based on long-term forecasts of the who will internalize the volatility linked to traffic expected demand for a service. In reality, however, forecasts and ask for a higher subsidy ex ante, or the demand may vary from the forecast. For example, renegotiate the terms of the contract once the bid is forecasts may fail to accurately take into account the won. The higher state subsidy will in turn blunt the impact of service fees on user demand, or the service role of PPPs in ruling out bad investments, and rene- may become obsolete as technology advances. Simi- gotiation will undermine the competitive benefits of larly, because the government agenda may change the auction. In such a context, it would be better for with the political cycle and pressures for reelection, the planner to bear the demand risk.2 164 | World Development Report 2017 Notes 50723, Center for Economic Studies and Ifo Institute, Munich. 1. Economic theory also predicts that the present value Guasch, José Luis, Daniel Benitez, Irene Portabales, of all the user fees that the government could have and Lincoln Flor. 2014. “The Renegotiation of PPP been collecting under public provision of the service Contracts: An Overview of Its Recent Evolution in equals the initial saving under PPPs. For a formal dis- Latin America.” International Transport Forum Dis- cussion, see Engel, Fischer, and Galetovic (2014). cussion Paper 2014/18, Organisation for Economic 2. For example, the tender could specify a discount rate Co-operation and Development, Paris. and a user fee schedule, and the bids could be made on IMF (International Monetary Fund). 2014. World Eco- the present value of revenue. The contract term would nomic Outlook, October 2014: Legacies, Clouds, Uncertain- then last until the winning contractor collects all the ties. World Economic and Financial Surveys. Wash- fees demanded in the bid, thereby deterring any form ington, DC: IMF. of renegotiation and chances for the government to United Nations. 2015. “Report of the Third International subsidize the private firm with transfers (see Engel, Conference on Financing for Development: Addis Fischer, and Galetovic 2014). Ababa, 13–16 July 2015.” Report A/CONF.227/20 (August 3), United Nations, New York. World Bank. Various years. Private Participation in References Infrastructure Database. Washington, DC, https:// ppi.worldbank.org/. Bresson, Alain. 2016. The Making of the Ancient Greek Econ- ————. 2014. “Overcoming Constraints to the Financ- omy: Institutions, Markets, and Growth in the City-States. ing of Infrastructure: Success Stories and Lessons Translated by Steven Rendall. Princeton, NJ: Prince- Learned: Country, Sector, and Project Examples of ton University Press. Overcoming Constraints to the Financing of Infra- Engel, Eduardo, Ronald D. Fischer, and Alexander Gale- structure.” World Bank, Washington, DC, January. tovic. 2014. The Economics of Public-Private Partnerships: World Bank, ADB (Asian Development Bank), and IDB A Basic Guide. New York: Cambridge University Press. (Inter-American Development Bank). 2014. Public- Goldsmith, Hugh. 2014. “The Long-Run Evolution of Private Partnerships: Reference Guide, Version 2.0. Report Infrastructure Services.” CESifo Working Paper 90384. Washington, DC: World Bank. Public-private partnerships | 165 CHAPTER 6 Governance for equity “We are the 99%” became the slogan of street dem- productive assets and opportunities that individuals onstrators in the United States in August 2011 as have determine their capacity to generate income they demanded public action against rising income and contribute to growth, given market conditions. inequality and the growing perception of the unfair- In this way, economic growth reflects the aggregate ness of the economic system after the 2008–09 global productive capacity of different individuals and the financial crisis. Observers viewed the mounting con- accessibility and functionality of markets. In the long centration of income and wealth as a threat to the sus- run, however, the potential for people to accumulate tainability of an institutional setting that responds to and productively use assets is influenced by policy the needs of all citizens (Stiglitz 2011, 2012). Concerns decisions such as the allocation of public spending to about how to tackle the “unfair” features of the global public education, health, or infrastructure. Inequality economic system were gaining momentum through- and growth are thus tightly linked, and the way in out the world. which the benefits from growth translate into socio- Indeed, as discussed in chapter 2, the perception economic achievements across different individuals Perception of of whether policies and rules are fair matters when and groups is determined by how actors interact and whether policies it comes to inducing better cooperation in society.1 make policy decisions about redistribution. and rules are fair Although the concept of fairness is complex, it cer- Many policies can enhance equity. Governments matters when it tainly involves some dimensions related to outcomes use fiscal instruments—taxes and transfers—to comes to inducing and others related to process.2 Through this lens, redistribute income ex post, and they use public better cooperation equity is associated with fairness to the extent that spending—via the provision of public goods and ser- in society. outcomes (income, educational attainment, or own- vices—to reshape the distribution of “opportunities” ership of assets such as land) and the opportunities and foster mobility within and across generations for individuals to pursue a life of their choosing are (figure 6.1). The provision of quality public goods independent of their circumstances such as their eth- and services can help equalize opportunities, allow- nicity, race, gender, location, or other factors beyond ing individuals to increase their stock of assets—for their control. However, in addition to outcomes being example, in terms of human capital such as educa- independent of circumstances beyond their control, tion, health, or skills; financial capital; or physical inequality in outcomes matters per se. Such inequal- capital such as land or machinery. Promoting an envi- ity, in fact, reflects a differential ability of certain ronment of investment and innovation can expand actors and groups to influence policy making and the access to opportunities as individuals use their capital allocation of resources in society (box 6.1).3 and labor to generate income—for example, utilizing As explained in chapter 1, this Report builds on the their skills to participate in the labor market or using premise that societies care about prosperity and how their land for agricultural production. Social protec- prosperity is shared. However, ultimately growth and tion systems—including safety nets, subsidies, and inequality are jointly determined (Chenery and others transfers—also act as a mechanism for equity, redis- 1974; Ferreira 2012). At a given moment in time, the tributing resources to the most vulnerable. Governance for equity | 167 Box 6.1 What is equity? This Report views equity in terms of both equal oppor- of current and future actors, which can influence the oppor- tunities for individuals to pursue a life of their choosing, tunities of the next generation. independent of circumstances beyond their control, and Inequality in outcomes must be a matter of concern inequality in outcomes, such as income or consumption.a in public policy, as much as inequality of opportunities, Equality of opportunities requires that all individuals because it is a manifestation of asymmetries in the influ- have the same chances, independent of circumstances ence of actors to make governance responsive to their beyond their control. Inequality in outcomes reflects the needs and interests. Empirically, circumstances typically notion that differences in the levels of outcomes among explain only about 40 percent of inequality in socioeco- individuals also matter. Equity thus includes poverty, nomic achievement, though the number depends on the defined as extreme deprivation in outcomes. The “accept- definition of the outcome being analyzed (Ferreira and able” level of inequality in outcomes is a decision that is Peragine 2015). Efforts to equalize opportunities will not up to each society. Yet, in addition to its normative value, eliminate persistently high levels of outcome inequality if the concept is of particular interest in the context of this they do not also address the unequal access to voice in the Report in terms of its role in shaping the bargaining power policy arena. Source: WDR 2017 team.  his definition builds on the definition in the World Development Report 2006: Equity and Development: “By equity we mean that individuals should a. T have equal opportunities to pursue a life of their choosing and be spared from extreme deprivation in outcomes” (World Bank 2005, 2). This Report extends this definition to also cover inequality in outcomes. Figure 6.1 States can improve equity by intervening in the distribution of final outcomes through taxes and transfers and by providing access to basic services a. Gini index of market and final incomes b. Contribution of taxes, monetary transfers, and in-kind transfers to reduce inequality varies by country Armenia (2011) Armenia (2011) Bolivia (2009) Bolivia (2009) Brazil (2009) Brazil (2009) Dominican Republic (2013) Dominican Republic (2013) Ethiopia (2011) Ethiopia (2011) Georgia (2013) Georgia (2013) Ghana (2013) Ghana (2013) Guatemala (2010) Guatemala (2010) Indonesia (2012) Indonesia (2012) Jordan (2010) Jordan (2010) Mexico (2010) Mexico (2010) Peru (2009) Peru (2009) Russian Federation (2010) Russian Federation (2010) South Africa (2010) South Africa (2010) Sri Lanka (2010) Sri Lanka (2010) Uruguay (2009) Uruguay (2009) 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0 10 20 30 40 50 60 70 80 90 100 Gini index Percent Market income Final income Taxes and transfers In-kind transfers Source: WDR 2017 team, based on Inchauste and Lustig, forthcoming, table 1.1. Note: In panel a, market income refers to income before taxes and transfers. Final income is defined as income after direct and indirect taxes and transfers, also taking into account transfers in kind (access to basic services). The graph presents lower-bound estimates of redistributive impact. 168 | World Development Report 2017 Pro-equity policies can boost overall growth in the policies or shape the allocation of public spending for medium and long term, but they also can adversely their personal benefit. Civil servants may undermine affect specific groups, particularly in the short term. the access and quality of public services. When soci- The groups likely to lose out from these policies—in eties have high levels of inequality, such inequalities terms of income, rents, or influence—may attempt are reflected in the unequal capacity of groups to to undermine their adoption or implementation. For influence the policy-making process, which makes example, influential actors may block land reform inequality even more persistent (box 6.2). Box 6.2 A vicious cycle: How inequality begets inequality In societies in which inequality is high, the effectiveness of governance to deliver on equity outcomes can be weakened Figure B6.2.1 Capture is associated structurally because those at the top of the income ladder with lower levels of commitment not only have control over a disproportionate amount of 0.8 wealth and resources, but also have a disproportionate ability to influence the policy process. This type of power asymmetry may lead even a benevolent planner, who is fair Share of crony-billionaires and freely elected and is seeking efficiency (and even more 0.6 so, a corrupted official) to end up systematically favoring the interests of those at the top over those at the bottom. The result is a more inefficient allocation of resources and 0.4 further entrenchment of existing inequalities over time (Esteban and Ray 2006). This undue influence can be illustrated by looking at 0.2 countries in which lobbying is integrated in the political system. Igan and Mishra (2014) find compelling results using data on the politically targeted activities of the finan- 0 cial industry (including lobbying, campaign contributions, and political connections) from 1999 to 2006 in the United Low Medium High States. They find that lobbying expenditures and network Commitment connections are associated with a greater probability that 25th–75th percentile Median legislators will switch their position from advocating tighter Minimum and maximum Outliers financial market regulations to voting in favor of deregu- values excluding outliers lation. More broadly, levels of commitment are lower in Sources: WDR 2017 team estimates, based on Forbes, “The World’s countries with higher shares of billionaires whose wealth Billionaires,” http://www.forbes.com/billionaires/, and WDR 2017 comes from sectors prone to capture and rent-seeking, Governance Indicators. including those who are heavily dependent on government Note: Commitment is measured as protection of property rights, con- concessions such as in the financial, real estate, and natural tract enforcement, and lack of arbitrary expropriation without proper compensation. The classification of commitment levels is as follows: resources sectors (figure B6.2.1).a low = < 0; medium = 0–2; high = > 2. The categories comprise 11, 29, and Theory suggests that, in most cases, the overall gains 9 countries, respectively. Crony-billionaires are defined as the subset of billionaires whose fortunes belong to the following sectors: agriculture, from equity-enhancing redistribution policies are greater communication, construction, oil, gas, chemicals and other energy, than gains from inequality-neutral growth policies for the financial and insurance activities, mining and quarrying, real estate activities, and conglomerates. top 1 percent or 5 percent (Milanović 2016). Nevertheless, for those at the top, policies that increase inequality can be preferable to those that would enable a more efficient allocation of public resources and lead to higher overall States, the government also approved more generous tax economic growth. For example, Stiglitz (2012) finds that cuts on capital gains. Unsurprisingly, these tax cuts mainly as market income became more unequal in the United favored those who were already at the top of the income (Box continues next page) Governance for equity | 169 Box 6.2 A vicious cycle: How inequality begets inequality (continued) distribution (including the members of Congress who were the distribution are moving ahead more quickly than those voting for those policy reforms). at the bottom) may be larger than the contentment from an Inequality affects governance not only by means of cap- absolute improvement in living standards—as documented, ture, but also by weakening how individuals perceive the for example, for Europe and central Asia by Dávalos and fairness of the society they live in. When a country fails to others (2016). deliver on its commitment to improve and equalize oppor- The concern about the vicious cycle of inequality and tunities for all citizens, and it responds only to the interests governance, in which initial conditions of inequality pro- of those at the top of the distribution, citizens may decide mote a policy arena that further entrenches that inequality, to opt out of or exit the existing political processes instead is exacerbated by the surge in the concentration at the of contesting the outcomes in the policy arena. This deci- top of the income and wealth distributions in many coun- sion leads to a weakening of cooperation. Even in countries tries (Atkinson, Piketty, and Saez 2011; World Bank 2016). in which the benefits of economic growth reach all mem- Understanding the entry points to break this persistent loop bers of society, the discontent arising from a perception of is crucial to restoring a social contract that can promote an increase in relative deprivation (when those at the top of greater and more equal access to opportunities for everyone. Source: WDR 2017 team. a.0 During the 2015–16 election cycle in the United States, the largest disbursement (27 percent of all outlays) came from the financial sectors, which include insurance companies, securities and investment firms, real estate interests, and commercial banks (Center for Responsive Politics). These are the sectors with the largest number of billionaires (WDR 2017 team, based on Forbes, “The World’s Billionaires,” http://www.forbes.com/billionaires/). To increase the success of reforms opposed by constraining the effectiveness of policies. The second powerful interests, it may be necessary to modify the part of the chapter then looks at the levers of change bargaining process by changing the incentives or prefer- and how constraints can be alleviated to level the ences of the actors who bargain or allowing new actors playing field and make policies more responsive to all. to contest policies. At times, members of the elite may have incentives to become aligned with actors pushing for reforms in taxation and public spending that favor Two key policy areas that the poor. For example, the first antipoverty programs matter for equity: Investing in 19th-century England and Wales were pushed by in public goods and the top 1 percent of the landed gentry. Against the backdrop of the French Revolution, this group sought expanding opportunities to keep cheap labor in rural areas and prevent it from Although income inequality between countries has migrating to urban areas, at a time when the French declined over the last 20 years as low- and middle- Revolution spurred fear of revolts (Lindert 2004; income countries have grown faster than those at Ravallion 2015). Increasing the participation of disad- the top of the world income distribution, the level of vantaged groups can also help change the incentives of income inequality within countries has increased.4 actors who bargain over policies. Direct participation This trend can be explained in part by governance and contestation in decision making can improve environments that prevent the successful adoption cooperation as well. For example, in Ghana, when and implementation of policies to enhance equity. businesses were involved in tax collection they became This chapter considers two key policy areas that more likely to pay their taxes (Joshi and Ayee 2009). By matter for equity: investment that helps equalize building common interest, political organization can opportunities through the accumulation of assets, and aggregate citizens’ preferences and demand in policy- policies that increase access to economic opportuni- making processes. However, such reforms can be com- ties to utilize those assets. As emphasized in the World plex and frequently involve setbacks. Development Report 2006: Equity and Development (World This chapter explores how power asymmetries Bank 2005), the opportunities of individuals arise to matter for equity. It begins by looking at how they a considerable extent from investments in public can lead to breakdowns in institutional functions, goods and services, particularly in terms of health and 170 | World Development Report 2017 education. But such investments depend on collecting A low commitment to providing quality public and redistributing resources. Indeed, no high-income services is one of the main characteristics of the country has improved equity without significant poorest countries in the world, as well as the most taxation and public spending to protect individuals unequal ones. Pro-equity policies require state capac- against shocks (such as illness, unemployment, and ity, including a bureaucracy able to collect taxes and old age) and to reduce welfare disparities within and teachers well trained to educate children. A profes- across generations (Barr 2001; Lindert 2004). In addi- sional bureaucracy has been identified as a significant tion, for individuals to realize the returns on such feature of any state seeking to achieve development investments, they need access to economic opportu- (Rauch and Evans 2000). “Weak states,” particularly nities in adulthood, especially those opportunities in Sub-Saharan Africa, are characterized by a limited that allow them to use the human capital they have state presence beyond the capital and coastal areas and acquired. by a limited ability to tax (Migdal 1988; Herbst 2000). Although the focus of this chapter is not on labor In middle-income countries with high inequality, such markets, it does touch on important determinants as in Latin America, “truncated” welfare states exclude of labor income inequality. Consider Latin Amer- a large share of the population from public spending ica, the most unequal region in the world, which (De Ferranti and others 2004; Ferreira and others 2013). has experienced an important decline in income When the commitment to deliver on policies, inequality over the last two decades (Rodríguez- such as the provision of quality services, breaks Castelán and others 2016). This decline is largely down, individuals tend to opt out and demonstrate explained by the decline in labor income inequality— less cooperation in, for example, their willingness associated with an expansion of education—as well to pay taxes. Figure 6.2 shows how lower levels of as the decline in nonlabor income inequality, largely explained by more progressive government transfers (Lustig, López-Calva, and Ortiz-Juárez 2015). Indeed, Figure 6.2 When commitment is low, the provision of quality public goods and services as countries exhibit low compliance (high a means of leveling the playing field and reducing shadow economy) poverty has been unambiguous (World Bank 2005). 40 ZWE COD CAF HTI TCD LAOBDI LBR SLE GIN ERI CIV BOL ETH TJK BGD KHM YEM NPL KGZ LSO CMR VNM SLB PNG MWI UGAGMB MLI TZA BEN COM MDG KEN NIC BFA PAK ZMB SEN BTN GHA IND COG PRY UKR ALBGEO GUY MNGMAR IDN GTM CHNHNDARM PHL EGY LKA CPV BLR AGO BIH ECU FJI DZA AZE MKD PER DOM MDV SLV COL BLZTHA NAM TUN JOR JAM KAZLBNBGR SUR ROU CRIBWA MUS ZAF MYS Equity and institutional IRN ARG RUS GAB MEX TUR BRA URY CHL LBY POL LTU HUN VEN HRV LVA SAU SVK TTO EST functions: The role 30 GNQ OMNCZE KOR MLT PRT Shadow economy (%) SVN BHS of commitment and GRC ISR CYP BRN ESP NZL cooperation ITA FRAGBR DEU 20 ARE JPNBEL SGP ISL AUT CAN USA FIN AUS NLD As argued in this Report, the effectiveness of policies to KWT IRL SWE achieve equitable development is related to how well DNK institutions perform certain key functions. Policies 10 that require long-term objectives, for example, are often CHE truncated (a commitment failure). Effective policies tend to have long-term objectives (extending beyond the 0 political cycle), matching resources, and well-aligned −2.0 −1.5 −1.0 −0.5 0 0.5 1.0 1.5 2.0 incentives for the actors involved. Actors must trust Commitment that promises will be kept, even in the face of changing Sources: Commitment: WDR 2017 Governance Indicators; shadow economy: circumstances. Often, however, the incentives of public Schneider, Buehn, and Montenegro 2011. officials become misaligned with those of the constitu- Note: “Shadow economy” is defined as the share of the market-based legal production of goods and services that is deliberately concealed from public encies they are meant to serve. In clientelistic settings, authorities for any of the following reasons: (1) to avoid payment of income, the interaction between public officials and citizens value added, or other taxes; (2) to avoid payment of social security contri- butions; (3) to avoid having to meet certain legal labor market standards is distorted: public officials “buy” the votes of citizens such as minimum wage, maximum working hours, and safety standards; in exchange for short-term benefits (see box 6.4 later and (4) to avoid complying with certain administrative procedures such as completing statistical questionnaires or other administrative forms in this chapter for a definition of clientelism). Or public (Schneider, Buehn, and Montenegro 2011). The variable “shadow economy” officials may become accountable only to certain influ- is the predicted value of the measure, controlling for the gross domestic product (GDP) per capita. “Commitment” is measured as protection of ential groups, or “clients,” promoting their interests in property rights, contract enforcement, and lack of arbitrary expropriation exchange for their political support. without proper compensation. Governance for equity | 171 commitment are associated with larger “shadow Figure 6.3 Fear of sanctions and economies,” in which individuals opt out by not com- participation in decision-making plying with the existing rules. Collecting the taxes processes promote cooperation needed to fund investments in public goods crucially a. Cooperation in a lab experiment in Uganda requires the willingness of taxpayers—individuals Average offers in a “dictator game” paid by and firms—to cooperate and comply with the rules. egoist players to coethnics Perceptions of free-riding by others or low-quality services can lead to breakdowns in cooperation. In Offerer not seen middle-income countries with high inequality, such by other players as in Latin America, citizens may exit—for example, by opting out of basic public education—because they Offerer seen by other players obtain little from the state (Hirschman 1970; Perry and others 2007). The low quality of service provision prompts the upper-middle class to demand private a. Cooperation 0 10a lab in 20experiment 30 in 40Uganda 50 60 services, which in turn weakens their willingness to “dictatoroffered Average offers in aShillings paid by game” (%) egoist players to coethnics fiscally cooperate and contribute to the provision of Source: WDR 2017 team, based on Habyarimana and others 2007. b. Cooperation in rural Indonesia public goods—a perverse cycle. At other times, actors Note: The figure shows the average offer paid by egoist players (those Offerer Increase seen not in probability thethe potentially affected by policies may be excluded from who always employ most selfishthat individuals strategy state available in theyof all rounds will the by other players contribute to project construction when plebiscites are held their design, undermining their incentive to cooper- game) in a “dictator game”—that is, a game in which a player (the dictator) determinescompared with how to split representative-based an endowment meetings with other players. Subjects were ate and weakening compliance. given seen shillings—10 coins of 100 shillings each—and asked to 1,000 Ugandan Offerer What makes people cooperate so they do not by other them distribute among themselves and the two other players in any way they players pleased. The figure shows the “benchmark coethnic” measure: any pair of free-ride on others and do comply with the rules? players who identified themselves as belonging to the same ethnic category Cooperative behavior results in part from the credi- inWomen’s project questionnaire was coded as coethnics. their pre-experiment 0 10 20 30 40 50 60 bility of sanctions against those who do not comply. Shillings offered (%) For example, ethnic networks may be able to induce cooperation in the form of school funding among b. Cooperation in rural Indonesia their members because they have more credible sanc- Increase in the probability that individuals state they will tions against free-riders (Miguel and Gugerty 2005). General to contribute project construction when plebiscites are held project compared with representative-based meetings This view was tested in a lab game with players from a multiethnic neighborhood in Kampala, Uganda. Players in charge of allocating resources shared much higher amounts with others when their actions were Women’s project 0 5 10 15 20 25 30 35 taken in full view of others than when they were not. Share of individuals saying In both cases, other players were from their same they would contribute (%) ethnic group. These results indicate that for individ- Female respondents uals who are not willing to share, the risk of a social Male respondents sanction shapes their behavior rather than altruism General project toward coethnics (figure 6.3, panel a). Cooperation is enhanced by commitment. The credibility of policy makers is essential for the enforce- ment of sanctions and the payment of compensation 0 5 10 15 20 25 30 35 when redistribution reforms are carried out. Consider Share of individuals saying the difficulties in reforming energy subsidies. Such they would contribute (%) subsidies are often inequitable because they benefit Female respondents relatively richer households, which devote a larger Male respondents share of their total consumption to energy-related Source: WDR 2017 team, based on Olken 2010. goods. They are inefficient because their high fiscal Note: In an experiment conducted in rural Indonesia, villages were randomly cost precludes other public spending (Coady and assigned to choose development projects either through meetings at which others 2015). Therefore, eliminating these subsidies representatives would make the selection (the majority of attendees were government officials, neighborhood heads, and those selected to represent while setting up compensatory measures for the poor village groups) or through direct election plebiscites (in which all adults could improve both efficiency and equity. Yet, virtu- eligible to vote in the last national parliamentary election could vote). The villages had to select a general project and a women’s project. After conclu- ally all countries that have attempted energy subsidy sion of the project selection process, respondents were asked about their reforms have faced social and political unrest. This is plans to make voluntary contributions to the project (labor, money, food). 172 | World Development Report 2017 often because policy makers are not credible in their clientelist strategies thanks to the other “services” commitment to redistribute the savings from effi- they can provide, such as their trading networks. ciency gains. Prevailing social norms in the villages—the caste Perceptions of fairness also matter for coopera- system—help the Marathas maintain their political tion. Experimental evidence indicates that individ- influence because they are the traditionally dominant uals adjust their behavior and are willing to incur a caste in Maharashtra and are better able to enforce cost in order to sanction behaviors that they perceive sanctions (Anderson, Francois, and Kotwal 2015). to be unfair. More specifically, the fairness of the pro- On paper, allowing village councils to select the cesses through which decisions are made matters. beneficiaries of antipoverty programs in a setting in Participation in the decision-making process has an which the councils are freely elected should enhance intrinsic value in allowing more legitimate choices equity outcomes: local governments can be held (Habermas 1996; Rawls 1997). But participation may accountable, and beneficiaries can better observe and also have an instrumental value by increasing coop- control their effort because of their proximity. Village eration—for example, in the form of contribution councils, in theory, would also be better at targeting to the funding of projects or in the form of compli- beneficiaries and selecting public works projects ance with decisions made. Experimental evidence that are most useful for the community. In reality, supports this view (Dal Bó, Foster, and Putterman however, as the example in Maharashtra shows, local 2010; Goeree and Yariv 2011). A study from Indonesia influential actors may take advantage of their role in indicates greater cooperation when participatory the allocation of resources to block redistribution, processes are in place: individuals are more willing exchanging political support for short-term benefits. to contribute to projects when the whole village can More generally, asymmetries in bargaining cast a vote directly in plebiscites than when the usual power shape how commitment and cooperation decision-making meetings, run by representatives, are sustained, ultimately affecting whether equity- are held (figure 6.3, panel b). enhancing policies are adopted and implemented. Fairness and “process legitimacy” also matter for Although a policy to improve equity may look good Although a policy economic opportunities. The credible and consistent on paper, such as strengthening access to land, it may to improve equity enforcement of laws and regulations, including also be prone to clientelism and capture (box 6.3). may look good property rights, can help expand opportunities and Groups that directly influence policies—called elites in on paper, it may level the playing field. For example, if property rights this Report—may have more bargaining power than also be prone to are secure only for some, then those who are not others because of the existing inequalities in income clientelism and protected as much as others will respond by under- or wealth, or the difficulties that other actors face in capture. investing (Goldstein and Udry 2008). Furthermore, organizing and lobbying effectively. Indeed, in the if individuals think their effort will not be rewarded presence of weakly organized constituencies, political because of discrimination, they may exert less effort elites may have fewer incentives to invest in public (Hoff and Pandey 2006). goods and improve equity. They may instead engage in narrow patron-client relationships that maintain their ability to influence decision making. How policies to promote equity can be affected by Clientelism and capture: Weakening the commitment to service delivery power asymmetries This Report, like the World Development Report 2004: In the Indian state of Maharashtra, villages domi- Making Services Work for Poor People (World Bank 2003), nated politically by the Maratha caste are 10 percent views service provision as a series of relationships less likely to implement nationally funded antipov- between principals and agents. In the classic case, erty programs than other villages, even though their the official is the agent of the voter (who monitors population—who votes in free elections—consists and sanctions the agent). However, this dynamic largely of poor or landless laborers.5 Why? A credi- of monitoring by citizens is often undermined by ble explanation is that the local landed class from political incentives. Committing to a broad provision the Maratha caste uses its political power—leading of public goods can be politically disadvantageous village councils—to block antipoverty programs, because the benefits of public goods become diluted “buying” votes instead through the provision of among nonsupporters and are more difficult to informal insurance to voters in times of financial monitor—and reverse. By contrast, political candi- crisis. The Marathas are particularly successful in dates may commit to targeted benefits for narrow Governance for equity | 173 Box 6.3 Efforts to expand and secure access to land often lead to capture Expanding and securing access to land are important policy Interventions to change land tenure, including in cities, areas in efforts to increase economic opportunities. Indeed, have often been captured and used for patronage. In many in 2008 an estimated 75 percent of the world’s poor lived African cities, a range of land interventions, such as land in rural areas and their incomes depended, directly or regularization and resettlement operations, have been indirectly, on agriculture (Ravallion 2015). Thus, improving captured by local elites and used for political patronage, and securing their access to land are important to increase including through corruption of civil servants (such as staff investments and productivity. More equitable access to land of the land registry). Bribes may be used to facilitate access has also been associated with higher equity and efficiency, to land, obtain formal tenure, or obtain plots for friends both directly and indirectly, through better institutions and and political clients (Durand-Lasserve, Durand-Lasserve, increased citizen participation—an important element of and Selod 2015). collective action.a When inequality is too entrenched to expect sales Land tenure reforms, however, can be used for patron- and rental markets to reallocate land, land redistribution age. The security of land tenure varies considerably across reforms become necessary. However, because of the and within countries, depending greatly on systems difficulty in reaching agreement on such reforms, they of inheritance, existing social hierarchies, and gender often take place at times of significant political change, norms—all of which can hamper the ability of disadvan- such as the end of colonial rule, or with strong pressure taged groups to improve their livelihoods. In Vietnam, for from outside, as in the Republic of Korea. When no such example, individuals with connections to politicians and major political changes have occurred, land redistribution bureaucrats have much more tenure security than others has been spurred by collective action by citizens, including (Markussen and Tarp 2014). In Ghana, property rights are peasant movements that increased pressure for reform, particularly insecure for women, who are less likely than such as in Brazil (Binswanger-Mkhize, Bourguignon, and men to play local political or social roles. van den Brink 2009). Source: WDR 2017 team. a. For microeconomic evidence in India, see Banerjee and Iyer (2005). For a comparison of North and South America, see Engerman and Sokoloff (2002). groups of “clients”—such as their ethnic group or In the first form of clientelism (clientelism case 1 their caste—because they can more credibly deliver, in figure 6.4), the interaction between public officials and control, these benefits. For example, politicians and citizens is distorted: rather than officials acting can target input subsidies for farming to supporters, as the agents of citizens and voters monitoring and while maintaining a threat to remove the subsidies. sanctioning officials, the dynamic becomes a bar- Such arrangements ensure that supporters credibly gain in which the politician “buys” the citizen’s vote commit to backing politicians, while politicians also for what usually are short-term gains (Khemani and have a credible tool to “punish” supporters if they others 2016). These bargains tend to be more frequent defect (Bates 1981). where individuals have a higher time preference for In such clientelist settings (see box 6.4), the the present with respect to the future. The poor and traditional principal-agent relationship between disadvantaged are particularly vulnerable to exchang- citizens and officials breaks down, and accountabil- ing their votes for short-term benefits in the form of ity becomes up for sale (figure 6.4). Clientelism can transfers because their pressing needs make their affect the adoption and implementation of policies discount rates for the present higher than those of in two main ways. In the first, citizens’ expectations the better-off. Where commitments to broad-based of politicians become skewed (some receive targeted policies do not appear to be credible—for example, in benefits, whereas many may go without). In the sec- situations with limited state capacity—such voting ond, service providers extract rents because they play behavior is rational, not merely short-sighted. This a role in politicians’ reelection (Bold and others 2016). clientelist bargain tends to lead to a breakdown in Both cases lead to breakdowns in commitments to commitment to programmatic objectives. Evidence long-term objectives. suggests that clientelism in the form of vote buying 174 | World Development Report 2017 Box 6.4 Defining and measuring clientelism Clientelism is a political strategy characterized by giving act to pursue short-term benefits rather than focus on material goods in return for electoral support (Stokes 2009). broad policy considerations such as equitable and sustain- Clientelism can be viewed as a two-party encounter between able reforms. a politician and a voter (Hicken 2011). It is, however, often Measuring clientelism is a challenge. Distinguishing organized in networks, which can be based on districts or empirically between public goods and private goods can regions. As a result, a central part of clientelism’s organiza- be complex. For example, infrastructure projects, typically tional structure is an intermediary or a broker, whose role is considered a public good, can be locally targeted to a to mobilize a network of local voters in exchange for financial specific geographic area.b By contrast, redistribution prom- payment or patronage jobs. The behavior and strategy of a ised by politicians to win votes can be beneficial to broad broker and the contractual arrangement with the national groups. For example, in the cases of the Peruvian Social politician are thus an important element of clientelism.a Fund (Schady 2000) and the investment in infrastructure A number of studies mentioned in this chapter empha- in Spain from 1964 to 2004 (Solé-Ollé 2013), even though size the negative impact of clientelism on the provision of welfare-enhancing transfers were targeted to secure votes, public goods. Indeed, it can entail significant welfare costs the policies benefited large swaths of the population, for societies (Bardhan 2002). When it is prevalent, voters beyond those targeted to win elections. Source: WDR 2017 team, based on Wantchekon (2016). a. See Stokes (2005); Cruz (2013); Holland and Palmer-Rubin (2015); and Schneider (2015). b. See review in Bouton, Castanheira, and Genicot (2016). is associated with a lower provision of public services Figure 6.4 A politician can become an agent of the (Khemani 2015). provider in clientelist settings In a second form of clientelism (clientelism case 2 a. Classic case b. Clientelism case 1 c. Clientelism case 2 in figure 6.4), specific groups capture policy-making processes, reducing the incentives of public officials to adopt and implement policies for their constituency as Citizens O cials Citizens a whole. This capture takes place when public officials grant benefits in exchange for the political support Principal of a single-issue or homogeneous group. In this equi- librium, public officials become accountable to such groups, including—but not limited to—service pro- viders, whose support becomes indispensable for offi- cials’ political survival. Public sector providers, such as teachers’ unions, may extract rents through the diversion of public resources or through lower effort in the form of absenteeism or low-quality service pro- Agent vision, which can hamper the delivery of services such as education, health, or infrastructure (see spotlight 8 O cials Citizens O cials for a broader discussion of the governance challenges Sources: WDR 2017 team, extending World Bank 2003 and Khemani and others 2016. in service delivery). Note: Arrows indicate who is responsive to whom. When groups in charge of providing services capture politicians, monitoring and sanctioning of these providers are no longer credible, leading to a increased only in the intervention run by NGOs, weak commitment to service delivery. A policy exper- indicating that the NGOs were more credible in iment in Kenya illustrates this point. It compared implementing sanctions—through firing—than the the impact of contract teachers in interventions government (Bold and others 2013). managed by nongovernmental organizations (NGOs) Policy makers’ lack of credibility in sanctioning and interventions run by the government. Test scores public sector workers results in part from the role Governance for equity | 175 that the latter play in politics. In clientelist contexts, individuals report that informal payments (such as public sector jobs may be awarded in exchange for bribes and under-the-table payments) are made to political support. For example, in surveys conducted access health services; this proportion rises to 9 out by the Program on Governance and Local Develop- of 10 persons in Azerbaijan (figure 6.6). In education, ment (GLD) in countries in the Middle East and North corruption also affects learning outcomes. In Brazil, Africa, between 40 and 70 percent of respondents students’ test scores in mathematics and Portuguese stated that political connections are as important as are higher when corruption is lower in the municipal- or more important than qualifications to obtain a ities where the schools are located (Ferraz, Finan, and government job (figure 6.5)—see GLD (2016). In the- Moreira 2012). ory, a job is an attractive way for politicians to reward Capture that undermines the role of officials in supporters. Politicians can exercise control over the sanctioning service providers goes beyond the diver- careers of public sector workers, such as their loca- sion of financial resources; it also helps to explain tion and promotions, and thus have a credible threat absenteeism and lack of work effort. Averaging to maintain the workers’ support. And it is in the across Bangladesh, Ecuador, India, Indonesia, Peru, interest of public sector workers to support politi- and Uganda, a survey conducted by unannounced cians, thereby obtaining help for their careers.6 enumerators found that about 19 percent of teach- When sanctioning of service providers is not cred- ers were absent from primary schools (Chaudhury ible, the most blatant consequence is the diversion of and others 2006). Absentee rates for health workers financial resources. For example, in most countries in the same countries were even higher: 35 percent in Europe and central Asia, more than one-third of on average. Recent data measuring teacher absen- teeism in the classroom in seven countries in Sub- Saharan Africa reveal very high rates: as much as Figure 6.5 In some countries in the Middle East and 56 percent in Mozambique. Even when teachers are North Africa, a large proportion of citizens believe in the classroom, they often are not teaching or not that connections are as important as or even more teaching well. Similarly, health workers often exert important than professional qualifications in little effort: in Senegal, clinicians spend an average of obtaining a government job only 39 minutes a day counseling patients (Bold and others 2011). Family or tribal affiliation Arab Rep. Clientelism and capture further hamper a gov- Egypt, Personal network ernment’s ability to raise resources and commit to Political affiliation service delivery in the future. Providing few public Family or tribal affiliation goods can undermine economic activity and future Jordan Personal network taxation. In theory, this is one way politicians can Political affiliation maintain power over “clients”; they can reduce the Family or tribal affiliation alternatives in the private sector (Robinson and Libya Personal network Verdier 2013). For example, in Sierra Leone President Political affiliation Siaka Stevens dismantled the railway leading to a Family or tribal affiliation region with a high concentration of supporters from Tunisia Personal network the opposition party. Although interpretations of the Political affiliation underlying reason for this differ, some argue that the “presence” of the state in certain parts of the country 0 10 20 30 40 50 60 70 80 was deliberately maintained at a low level (Abraham Share of population (%) and Sesay 1993, 120; Acemoglu and Robinson 2012). Connections more important than qualifications Connections as important as qualifications Breakdowns in cooperation: Contributing Sources: University of Gothenburg 2016, using data from GLD 2016. (or not) to public goods Note: The question: “What is the importance of a person’s professional qualifications in obtaining a government job relative to other factors? Please indicate whether each is more important, equally Actors potentially affected by reforms, such as on fis- important, or less important as a person’s experience and professional qualifications? 1. A person’s cal policy, may prevent the adoption of such reforms, political affiliations. 2. A person’s personal network, relation to influential people. 3. A person’s family or tribal affiliation.” The graph shows the percentage stating that each factor is more important (or especially when the actors are part of a cohesive as important) than (as) experience and qualifications in obtaining a government job in each country. group. Consider the contrasting examples of a failed Data are for the following years: Egypt, 2012; Jordan, 2014; Libya, 2013; Tunisia, 2015. Surveys are administered among a nationally representative sample of citizens in each country (using probability land tax reform and a successful personal income tax proportion to size sampling). reform in Uruguay. In 2006 Uruguay introduced a 176 | World Development Report 2017 reform aimed at increasing the efficiency and the pro- Figure 6.6 Unofficial payments for education gressivity of its fiscal system. Its central feature was and health services are widespread in Europe and the introduction of a progressive personal income Central Asia tax intended to improve redistribution, reduce the tax burden on the poorest taxpayers, and increase Azerbaijan revenue collection.7 The government was able to Kyrgyz Republic limit opposition to the reform by offering transparent Moldova information on the impact of the reform and publi- Ukraine cizing the government’s commitment to fight and Romania punish evasion. Moreover, opponents did not object Tajikistan with a united voice. By contrast, a few years later, in Albania 2012, when the government proposed a progressive Hungary tax on land assets, medium and large landholders, Slovak Republic together with cattle-raisers and managers of large Armenia rural estates, rallied together against it. The reform Lithuania then failed to pass and was ruled unconstitutional by Belarus the Supreme Court. A plausible explanation for this Bosnia and Herzegovina result was the organized legal action of the two main associations representing the interests of the landed Russian Federation elites (Rius 2015). Uzbekistan However, even when economic elites form a Serbia cohesive group, changes in their incentives can affect Croatia whether taxation and public spending reforms in Bulgaria favor of the poor are adopted. Faced with changing Montenegro economic conditions or fear of citizen-led regime Kazakhstan change, even cohesive elites can push for increased Czech Republic taxation and social spending. As noted earlier, the Mongolia first antipoverty programs in 19th-century England Turkey and Wales were pushed by the landed aristocracy Latvia to keep cheap labor in the countryside and prevent Kosovo it from migrating to urban areas at a time when the French Revolution spurred fear of revolts. In South Macedonia, FYR Africa during apartheid, white elites financed the Poland eradication of white poverty through direct taxation, Slovenia seeking to stabilize segregation and prevent interra- Georgia cial solidarity among the poor white minority and the Italy black majority (Lieberman 2003). France Estonia Social norms: At times hindering the Germany effectiveness of de jure reforms aimed at United Kingdom increasing cooperation Sweden Social norms and individuals’ beliefs about how other people—both fellow citizens and public officials— 0 10 20 30 40 50 60 70 80 90 100 will behave also matter for equity. Policies may fail Share of respondents (%) to expand opportunities when deeply rooted social Unofficial payments for education norms, such as those related to gender or racial dis- (primary or secondary) crimination, are not addressed. For example, evidence Unofficial payments for health suggests that entrenched norms and beliefs about the Source: WDR 2017 team, using data from the European Bank for Reconstruction and Development, ability of women to be effective political leaders are Life in Transition Survey, 2010. associated with lower representation of women in Note: The graph shows the percentage of each country’s respondents who answered “Always,” “Usually,” national parliaments, which has negative effects on or “Sometimes” to the question “In your opinion, how often do people like you have to make unofficial payments or gifts in these situations? Receive public education (primary or secondary)/Receive medical the introduction of inclusive policies (see chapter 7). treatment in the public health system?” Other possible answers are “Seldom” and “Never.” Governance for equity | 177 At times, even when a specific reform passes Leveling the playing field and is not captured, entrenched power or norms may make it ineffective. Indeed, de jure reforms are and making governance often not enough to improve economic opportunities more responsive to all sustainably. A good example is what happened to Expanding opportunities for disadvantaged individu- the African-American population in the U.S. South als is potentially beneficial for growth in the medium following the end of the Civil War in 1865, despite and long term, but it may threaten the interests of radical changes on paper. Although slavery had been certain groups. When such groups have a direct influ- abolished, little else changed for African Americans ence on policy design or implementation, including in the South. The white elites adopted measures because of existing patterns of inequality in income to maintain low wages and restricted mobility for or wealth, they may be able to block or undermine African-American workers (Ransom and Sutch 2001). reforms. Effective policy design should therefore take And a measure to grant each freed slave 40 acres of into account the bargaining power of the different land failed to pass (Wiener 1978). Another hundred actors involved. Threats to policy adoption and imple- years would pass before more profound changes mentation need to be fully considered, incorporating occurred. ways to increase the cost of blocking reforms. Design- De jure reforms are particularly at risk of not being ing policies that are based on the existing bargaining implemented when they clash with prevailing social power among actors may be more likely to make them norms, including customary law (see chapter 3). successful in the short run. Ultimately, however, it Efforts to expand Efforts to expand opportunities—such as legal reforms may be necessary to modify the policy arena in order opportunities— to improve women’s rights and opportunities—can to enlarge the set of policies that can be successfully such as legal remain ineffective if norms that consolidate existing adopted and implemented. reforms to asymmetries in bargaining power are not changed Expanding the set of equity-oriented policies improve women’s (Milazzo 2016). For example, norms can hinder the that can be effectively implemented will depend on rights and effectiveness of land titling programs in improving modifying the policy bargaining process by changing opportunities—can women’s access to land. Women may be afraid to the incentives and preferences of actors who bargain remain ineffective claim their titles for fear of social sanctions and back- or by reducing the entry barriers for actors who are if norms that lash from their husbands and families, as occurred in more likely to adopt redistributive policies—includ- consolidate Bolivia and the Lao People’s Democratic Republic ing those from disadvantaged groups. Efforts to existing (Giovarelli and others 2005; World Bank/FAO/IFAD adopt policies that imply losses for certain powerful asymmetries in 2009). actors may benefit from providing those actors with bargaining power On the other hand, the introduction of formal incentives to support the reform (such as bundling the are not changed. rules may, in some circumstances, undermine policy with others that benefit them). Another entry pro-equity social norms and voluntary compliance— point, shaping preferences, can enhance collective for example, in terms of philanthropic giving or action—for example, by building common interest tax compliance. Consider progressive tax reform in around certain policies. Moreover, enhancing contest- ancient Greece (Christ 1990). Before the reform, the ability is a key entry point to help solve power asym- wealthy were responsible for financing public goods metries. For example, increasing the direct repre- and services, especially festivals and military cam- sentation of disadvantaged individuals in legislative paigns, through a practice called liturgies. As a reward assemblies can promote policy makers’ commitment for their cooperation in fiscal affairs, the wealthy to reforms that improve equity. liturgists enjoyed the prestige of being appointed to public office and could claim leniency if tried in court. In this sense, tax compliance was seen as a civic Changing actors’ incentives in the policy honor. Under a tax reform, however, liturgies moved arena through voting and information from voluntary to compulsory. This shift resulted in Understanding the incentives needed to convince diminished social recognition of the taxpayers, who influential actors to adopt and implement policies could no longer claim privileges before the judges on that will benefit the poor and disadvantaged is key the basis of their cooperation. As a result, the wealthy to improving equity. In the example from Kenya liturgists became increasingly reluctant to pay taxes discussed earlier, even though involving parents in and tried to conceal their wealth or transfer the role school monitoring after new contract teachers were of paying taxes to even wealthier individuals. hired helped improve outcomes, this success was not 178 | World Development Report 2017 scaled up because the government lacked incentives (Fujiwara and Wantchekon 2013). The effects may be to credibly implement sanctions (Bold and others ambiguous, however, because increased communica- 2013; Duflo, Dupas, and Kremer 2015). This example tion may also help to better identify targeted short- illustrates the need to change the incentives of elected term benefits. leaders. Faced with new incentives in the context of The provision of information can help transform The provision of changing economic conditions or rising citizen pres- incentives and overcome collective action problems, information can sure, elites may increase taxation and social spending, but information alone is not enough. In the case of help transform as illustrated in the previously discussed example of tax reforms, people may misinterpret the effects of incentives the adoption of antipoverty programs in 19th-century a redistributive reform, prompting them to oppose and overcome England and Wales (Lindert 2004). it even though it would benefit them (Cruces, Perez- collective action In some contexts, when political elites face stiff Truglia, and Tetaz 2013). For example, Bolivia tried to problems, but competition as well as high demand for public goods, introduce a progressive personal income tax with a information alone they may be under more than the usual pressure to flat rate of 12.5 percent and a no-tax threshold of twice is not enough. deliver services because they may need to broaden the minimum wage. The announcement of the reform their support base. In the United States, there is evi- led to massive public protests, including by certain dence that greater political competition has led to professionals who believed they would bear the more new infrastructure (Besley, Persson, and Sturm largest cost of the reform, even though their salaries 2010). In Brazil, there is also evidence of less corrup- fell in the no-tax area. The government’s inadequate tion among mayors who face reelection (Ferraz and effort to explain that the tax would have affected only Finan 2011). When politicians face increased compe- a small group of high earners and mistakes in com- tition, they may delegate implementation decisions municating the reform, such as addressing the group to better-trained bureaucrats to whom they also give of potential losers as the “middle class,” contributed more autonomy (Rasul and Rogger 2015). However, in to the demise of the tax (Fairfield 2013). By contrast, clientelist settings more competition may not always in Uruguay, during the successful personal income result in more public goods. The effects of competi- tax reform in 2006, the government effectively com- tion depend on whether the constituencies whose municated that only wealthier individuals would be support politicians require are easier to win over affected (Rius 2015). with public goods or targeted policies. For example, Information is, in theory, a critical tool to monitor competing for the votes of the middle class—which elites, including service providers. For example, an demands public goods—can make politicians opt out experiment in primary health care in Uganda that of clientelism (Weitz-Shapiro 2012). mimicked traditional community-driven develop- The engagement of disadvantaged groups through ment approaches found that the quality of care or voting can change the incentives of political leaders. health outcomes improved only in the subgroup in In the United States, laws that extended women’s which communities were also provided with infor- suffrage were followed by increases in public health mation on the relative performance of the facilities. spending and door-to-door hygiene campaigns Such information helps identify what is within the (Miller 2008). In Brazil, the effective enfranchise- control of policy makers or service providers (Bjork- ment of poorer and less educated voters, thanks to man, De Walque, and Svensson 2014). In Pakistan, a improvements in voting technology using electronic randomized experiment that gave parents informa- ballots, contributed to an increase in the number of tion on the performance of private and public schools prenatal visits by health professionals, and possibly increased test scores, decreased private school fees, to a decrease in the prevalence of low birth weights and increased primary enrollment (Andrabi, Das, and among less educated voters (Fujiwara 2015). Khwaja 2015). New experimental evidence indicates that com- However, the provision of information on its munication and deliberation can help overcome own often fails to improve delivery because many clientelism. More avenues for communication can implicit assumptions link the provision of informa- allow politicians and voters to uncover common tion to improving services. In particular, information interests. They can also allow voters to learn about on local interventions may improve outcomes only one another’s preferences and expectations and to when the constraints related to asymmetries in update beliefs about candidate quality. For example, bargaining power are alleviated. For example, in an experimental evidence from Benin suggests that town experiment in Kenya, providing information on chil- hall meetings reduce the prevalence of clientelism dren’s performance in schools and how parents could Governance for equity | 179 take action to help their children did not increase par- this finding to the fact that schools in Tanzania more ents’ participation in monitoring. The study suggests actively foster a national identity than do schools in that experiments providing information make many Kenya, thereby improving cooperation in the provi- implicit assumptions; two important ones in this case sion of public goods. that seem to be wrong are that parents think that monitoring services is their responsibility and that Enhancing contestability they can do anything about it (Lieberman, Posner, and Increasing the direct representation of disadvantaged Tsai 2014). or minority individuals in legislative assemblies and Other mechanisms, such as earmarking resources, other political bodies can help sustain commitment can also change incentives for adopting policies. Bun- to pro-equity reforms. For example, the significant dling reforms that improve equity with other reforms increase in the proportion of women in national legis- that matter to opposing elites may increase their lative assemblies over the last 20 years (even though, buy-in. For example, in tax reforms earmarking can at below 30 percent, it remains low) has helped to help garner support. Although earmarking has been bring about policies that are more aligned with wom- criticized for generating rigidities in the fiscal sys- en’s preferences. Evidence from India demonstrates tem, it has been used often to improve commitment that women taking part in village councils vote for and convince elites to accept reforms (Fairfield 2013). public goods that are more aligned with their prefer- Colombia, for example, managed to pass a wealth ences and that improve health, such as investments tax levied on the richest 1 percent of the population in safe drinking water (Chattopadhyay and Duflo because the tax revenues were explicitly devoted to 2004). Other studies find that political reservations security and crime reduction. (electoral quotas) for scheduled tribes and castes lead to higher spending on social welfare for scheduled Shaping preferences to increase tribes and more jobs for scheduled castes (Pande cooperation 2003). Ultimately, the political representation of dis- Collective action—particularly cooperation—can be advantaged groups seems to be effective in reducing enhanced by building common interest. It is argued poverty (Chin and Prakash 2011). Involving that external conflicts have played a role in develop- Involving excluded groups in the design and excluded groups ment by helping build common interest against a implementation of specific policies, such as taxa- in the design and common enemy (Besley and Persson 2010). However, tion, can help increase cooperation. One promising implementation of stressing the identity of certain groups and improv- example is explicitly taxing the informal sector in specific policies, ing their participation in policies may improve the developing countries.8 In Ghana, as of 1981 informal such as taxation, outcomes for these groups, but it could come at the public transport workers were successfully incorpo- can help increase expense of other groups, or at the expense of longer- rated into formal tax policy, thanks to the delegation cooperation. term benefits. For example, in India the political of tax collection to informal sector associations. This reservations (electoral quotas) for scheduled tribes arrangement is believed to have increased tax rev- increased social welfare spending in their favor, but enues (Joshi and Ayee 2009), and it was extended to they decreased spending on education (Pande 2003). 32 other informal sector associations (Joshi, Prichard, Scheduled tribes may perceive that they will receive and Heady 2014). An important element of the success low returns on their education and thus may decide to of this policy is that it improved taxpayer services, invest less in it. Although higher social welfare spend- providing incentives for cooperation. Importantly, it ing is beneficial to them, it comes at the expense of introduced a culture of tax compliance in a sector pre- redistribution that could benefit other groups and viously neglected by the tax authorities. Ultimately, that may be more beneficial in the long term. the associational form of taxation moved in 2003 Rigorous work on how to build common interest to a more cost-efficient presumptive tax regime in in times of peace is lacking, but there is evidence that which drivers are asked every quarter to buy a sticker education can play a role. A study of border regions in and display it on their vehicle’s windshield (Prichard Kenya and Tanzania that were “artificially” divided by 2009). colonial powers and thus share many common char- In service delivery, “empowering” users by involv- acteristics found that ethnic fractionalization does ing them in management can help improve services not lead to the underprovision of public goods on the and reduce capture. For example, when parents’ coun- Tanzanian side of the border as much as it does on the cils at schools are well trained and have credible sanc- Kenyan side of the border. Miguel (2004) attributes tions, they can improve educational outcomes (Bruns, 180 | World Development Report 2017 Filmer, and Patrinos 2011). In a reform experiment in Figure 6.7 Empowering parents Kenya to hire contract teachers, capture by civil ser- with school-based management vice teachers was lower by a third in the subgroup of training helps lessen capture (teacher schools in which school committees received training absenteeism) in Kenya in school-based management. In this subgroup, the school committee was better able to monitor the hir- ing of contract teachers and reduce absenteeism and Attendance the hiring of relatives (figure 6.7). of civil servant teachers Reducing power asymmetries through con- testability mechanisms is not without challenges, however. Capture can occur even in participatory programs, such as community-driven development, Attendance of contract that specifically seek to include disadvantaged indi- teachers viduals in policy-making processes. These individ- uals may participate less in these processes because of the higher opportunity costs of their leisure time, 0 20 40 57.9 60 80 or because entrenched social norms make it hard to Share of teachers present oppose those who traditionally hold more power (box during a surprise visit (%) 6.5). This is an example of how good institutional Schools that hired additional contract teachers forms sometimes fail to perform their functions. Schools that hired additional contract teachers Measures to empower users may work best if they and had school-based management training are linked to political authorities in order to change Teacher attendance in schools that did not hire the power dynamics with providers. In Indonesia, additional contract teachers (control group) for example, a field experiment compared various Source: WDR 2017 team, based on Duflo, Dupas, and Kremer 2015. mechanisms to strengthen school committees. The Note: Attendance was measured by the percentage of teachers present in results suggested that linking school committees, school during a surprise visit. Box 6.5 Local elites can capture public spending despite participatory programs Reforms to increase public spending in favor of disadvan- they do so less often and to a lesser extent than more taged individuals may be captured by local elites, who can advantaged individuals—that is, in the framework of this disproportionately sway expenditure decisions (Galasso Report, CDDs often fail to improve contestability because and Ravallion 2005). Capture occurs even in participatory they do not lower the entry barriers for the poor in deci- programs such as community-driven development (CDD), sion making. As a review of participatory programs found, despite program objectives to include disadvantaged participants in “civic activities tend to be wealthier, more individuals in spending decisions. CDDs are a form of educated, of higher social status (by caste and ethnicity), decentralization of spending that seeks to allow decisions male, and more politically connected than nonparticipants” to be better aligned with the preferences of local commu- (Mansuri and Rao 2013, 5). The opportunity cost to partic- nities and, through participation, foster collective action. ipate is higher for the poor because they have less leisure A review of participatory programs, however, has found time and need to work longer hours to generate income. evidence that the poor benefit less from these programs In addition, when they participate, it is more difficult for than the better-off (Mansuri and Rao 2013). them to influence outcomes because they are less edu- Existing patterns of inequality and poverty shape how cated or may find it difficult to debate with and contradict collective action takes place in villages. One reason CDDs individuals who traditionally hold influence and authority may not benefit poor people is that even when, on paper, (Abraham and Platteau 2004). the poor are supposed to take part in decisions, in practice Source: WDR 2017 team. Governance for equity | 181 which are considered relatively powerless, to elected levels, across income groups, and between service village councils through joint meetings and action providers and users. To design more plans was the most cost-effective method to increase To design more effective policies, those in the pol- effective policies, test scores. Linking school committees to village icy arena must understand the existing patterns of those in the councils alleviated some of the power constraints inequality. For example, anyone considering at which policy arena must that committees faced on their own (Pradhan and level reforms should be implemented should take into understand the others 2014). account how national and local elites shape policies. existing patterns If the credibility of sanctions by parents and com- Although decentralization or participatory develop- of inequality. munities is limited, empowering parents may not be ment may seem promising on paper, elites may be effective. In the absence of formal sanctions to hire more entrenched at the local level than at the national and fire (such as in well-trained school councils), level (Bardhan 2002). Indeed, one of the founding school-based management may exercise influence by documents of the United States, The Federalist Papers, exerting social pressure on providers. However, when argued for the need for federal intervention because teachers or health workers are wealthier or more of the risk that vested interests would capture local influential than the users of their services, the latter governments, leaving minorities less protected (Ham- may not be able to exert social pressure. For example, ilton, Madison, and Jay 1788).9 Decentralization can interventions to empower communities to monitor also create spaces where de jure power and de facto health clinics in Uganda are less successful in areas power conflict, potentially undermining policies. In with higher inequality (Bjorkman and Svensson some Sub-Saharan African countries, opportunities 2010). In Mexico, grade failure and dropout rates were for bribes stem in part from incomplete decentraliza- not reduced in poorer communities after a school- tion; central authorities may, for example, try to retain based management program was rolled out (Gertler, power over land allocation in practice despite de jure Patrinos, and Rubio-Codina 2012). decentralization (Durand-Lasserve, Durand-Lasserve, Given the limits of local actors, what matters for and Selod 2015). Policy design needs to be compre- more significant reforms is the balance of power hensive and reduce room for local elites to intervene between providers and politicians and how they adversely. For example, increasing resources that aim bargain. Some reforms that have managed to include to fund pro-poor policies may increase the incentives unions and balance their power have succeeded. For of local elites to be involved in policy making in order example, in Chile ambitious education reforms were to capture these new resources (Mansuri and Rao passed because of the inclusion of unions in a setting 2013). in which the executive had high credibility. Workers Beyond national and local elites, it is important approved the increase in spending in exchange for to weigh how different groups in society will shape performance pay reforms (Mizala and Schneider the effective implementation of policies. In the case 2014). of social safety nets, failing to take into account the different bargaining power of the actors involved, at every stage of the design, may lead to the failure of Improving policy reforms. For example, although social safety nets that effectiveness by taking into target the poor may be cost-effective for reducing pov- account asymmetries in erty, such policies may face opposition from groups that do not benefit from them (box 6.6). Project design bargaining power can partly improve the performance of community Policies can be blocked, captured, or rendered ineffec- projects and decrease the adverse impacts of local tive when their design does not account for asymme- inequality. For example, in 99 rural communities in tries in bargaining power. Assuming that some actors northern Pakistan, projects that required more labor want to implement reforms that improve equity, how inputs (to which villagers could contribute directly can these reforms be designed, passed, and imple- and thus monitor) and less capital (which is more mented effectively? difficult to monitor) were better maintained, even Asymmetries in bargaining power need not result in communities where land inequality was high in failed policies. Reforms can be successful in improv- (Khwaja 2009). ing equity if their design takes into account how the This chapter has described various mechanisms bargaining power of different actors will affect policy for adopting and effectively implementing equity- implementation, including at the national and local oriented policies, but these mechanisms come into 182 | World Development Report 2017 Box 6.6 Designing social safety nets to account for asymmetries in bargaining power Asymmetries in bargaining power matter at every stage of bargaining power: who registers applicants, who validates the design of social safety nets. Policy makers and devel- applications, and who is present during the process. opment practitioners need to decide whether to target a Politicians may want to be involved at every step for politi- particular group, how to target it, how to operationalize the cal gain. However, when they are, the benefits of the reform program, and how to choose the nature of the benefits. may shift toward political supporters, although there is no Whether to target a particular group. Gauging the influ- clear evidence about the extent of the bias (Weitz-Shapiro ence and bargaining power of actors matters at the earliest 2012). design stages when deciding whether to target a particular Amount and nature of benefits. In choosing the amount group at all. Because of financial constraints, targeting the and nature of benefits, the approach that is the technical poor may be the most cost-efficient policy to reduce pov- first-best may not be the preferred tool of policy makers. erty. The “first-best” approach may be to reform consumer Giving cash to households is usually the technically first- subsidies to protect the poor from price increases. However, best approach because it allows them to better allocate passing the reform may require compensating other groups their total expenditure. Incumbent authorities, however, that may be more connected to political elites or better may prefer to distribute food because it is easier to pub- able to organize to demonstrate. For example, when the licize and exploit for political gain. This loss of efficiency Dominican Republic adopted gasoline subsidy reforms, the may be further aggravated if the authorities prefer food for transport industry was influential enough to obtain com- more lucrative reasons—because it may benefit influential pensation for the reforms. Such compensation may not be food-importing and transporting groups (Graham 1994). cost-efficient, but failing to compensate the industry could All the initial choices in program design can have have stopped the reform from passing altogether. Similarly, longer-term or spillover negative consequences by further the compensatory cash transfers for removing the electric- entrenching power relations. These choices could, however, ity subsidy also covered part of the middle class to preempt help pass reforms in the short term. Reforms, by improving opposition (Gallina and others, forthcoming). the livelihoods of the poor and their investment in human Targeting methodology. The choice of targeting meth- capital, can ultimately help rebalance power in their favor. odology also needs to take into account the existing bar- Some cash transfer programs in Latin America are credited gaining power among actors. Indeed, when it is not easy to with contributing to the empowerment of the poorest cit- target the poorest, putting communities in charge of allo- izens. However, these trade-offs may also reinforce vested cating benefits may appear to be the best technical solution. interests, such as food importers when benefits are in kind, However, in practice it may allow members of the elites to or local elites when the only way to implement reforms block or capture programs or use them for political gain. is to involve the elites in the allocation of benefits. Such Operationalization. For a given reform design, its oper- trade-offs need to be carefully considered when designing ationalization must also take into account asymmetries in reforms. Sources: Aline Coudouel, World Bank Social Protection, Labor, and Jobs Global Practice, and WDR 2017 team. play only if processes for change have already begun. Notes Part III of this Report delves into these processes. Chapter 7 examines when and how elites permit new 1. Philosopher John Rawls (1971) starts his classic actors to bargain over policies, including through A Theory of Justice by saying that “justice is the first virtue of social institutions, as truth is of systems of changes in incentives or preferences. When elite thought.” Rawls associated the notion of justice pre- bargains are not conducive to more accountability to cisely with fairness. citizens, disadvantaged groups may organize in order 2. Along the same lines, Sen (2002) discusses the notion to have more voice in society. This possibility is dis- of opportunity freedom and process freedom. cussed in chapter 8. Chapter 9 concludes this Report 3. In 1974 sociologist James Coleman wrote a critique by examining the role of international actors and pro- of Rawls’s A Theory of Justice in the American Journal of cesses in influencing the domestic policy arena. Sociology (Coleman 1974). 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Weitz-Shapiro, Rebecca. 2012. “What Wins Votes: Why Some Politicians Opt Out of Clientelism.” American Journal of Political Science 56 (3): 568–83. 188 | World Development Report 2017 SPOTLIGHT 8 Service delivery: Education and health Improving access to health services and ensuring that education may be optimal only if all actors move students learn are essential to expanding opportuni- together. Individuals may not invest in skills if they ties for all citizens. Various market failures explain think that firms are not investing in complementary the need for collective action to deliver these services. technologies, and firms may not invest in new tech- However, power asymmetries often prevent the nologies if they think they will not be able to find successful implementation of policies that improve skilled workers (Acemoglu 1998). In some instances, health and education. such as the fight against communicable diseases, an individual has no incentive to invest in his or her own welfare if others do not invest as well. Public interventions: Third, failures in other markets affect investments Needed for investments in in human capital: individuals may not be able to human capital borrow to make investments, or they may be misin- formed about the gains from them. This is especially Various market failures may make individuals under- true for poorer or disadvantaged individuals. For invest in health and education. First, certain aspects example, because of credit constraints only those who of health and education are public goods, and many have enough wealth may be able to invest in educa- individuals can benefit from investments in them tion. And because of lack of information, poorer chil- without paying. For example, spraying against mos- dren may be more likely to underestimate how wages quitoes in a neighborhood benefits all residents; those increase with education, as a study in the Dominican who do not pay for spraying cannot be excluded. As a Republic found (Jensen 2010). result, some residents may free-ride and not pay for the spraying because they will benefit from it anyway. If all residents adopted this logic, spraying would ulti- Education: The challenges of mately not be funded. delivering learning for all Second, investments in human capital present externalities: the benefits to society from educating The problems outlined in chapter 6 hamper education or promoting the health of individuals can be larger systems from achieving their goals. Bureaucratic than their private benefits. Some may argue, for forms do not necessarily serve their intended func- example, that education matters not only because of tions, often because power relationships prevent the economic gains it produces, but also because of systems from promoting student learning equitably its contribution to shaping civic behavior (Andrabi, and efficiently. Moreover, norms consolidate power Das, and Khwaja 2015). In addition, some levels of further and prevent laws and policies from being implemented as written. In 2014 in Mozambique, 45 percent of primary WDR 2017 team, based on inputs from Paolo Belli and Halsey school teachers and 44 percent of directors were Rogers. absent from school during an unannounced visit by Service delivery: Education and health | 189 survey enumerators of the Service Delivery Indicators Difficult education reforms can be (SDI) initiative. However, even if schools managed to effectively adopted and implemented reduce teacher absenteeism to zero, pupils would not How can reforms change the power dynamics to be able to learn what their teachers do not know. The improve the outcomes of education systems? Despite survey found that in Mozambique only 65 percent of the gloomy picture overall, change can happen, most mathematics teachers could calculate 86 minus 55, likely when reforms are successful in changing the and just 19 percent of teachers were able to develop a incentives of teachers and policy makers, involving sound lesson plan. new actors in the policy bargaining arena, and chang- ing norms. Power dynamics undermine education Changing the incentives of policy makers and teachers reforms through public awareness. Information is often viewed In many cases, although policies seem to be in place as a way in which policy makers can better monitor to improve educational outcomes—for example, providers. However, information as a purely technical governments train teachers or carry out national tool may not be enough. Rather, information is useful assessments of student learning—such policies are when it can be easily understood and targets those nevertheless ineffective in improving outcomes. with incentives to act. Reforms have failed because they were thwarted Improving public awareness of the unacceptably by power dynamics. Indeed, reforms for hiring con- low levels of learning in many areas of a country tract teachers have failed frequently. The idea behind has proven to be a successful policy for chang- hiring contract teachers is to reduce class size and ing the incentives of teachers and policy makers employ teachers who are easier to sanction (thanks to and improving the quality of education. This idea the threat of firing or at least contract nonrenewal). underlies citizen-led assessments of student learn- Thus these teachers face stronger incentives. ing, such as the ASER Centre program in India and However, teachers and their unions are a potent the Uwezo program in East Africa, both of which political force. When contract teachers ally with civil aim to improve data on and public awareness of the service teachers, they also become a potent political levels of learning. The same theory inspired efforts force that can lobby to be absorbed into the civil ser- such as the SDI initiative in Sub-Saharan Africa. The vice. Over the last decade or two, large numbers of SDI gathers data on both inputs and outcomes in contract teachers have been “regularized” (given civil representative samples of schools in many countries, service status) in Kenya, Peru (Webb and Valencia and its data are useful for diagnosing problems and 2006), Indonesia, and other countries. As discussed targeting support. But ultimately, the SDI effort is in chapter 6, this power dynamic demonstrates that, not just about fine-tuning an education system by although policy makers should monitor teachers to turning technocratic dials, but also about shifting ensure they deliver better learning, policy makers the equilibrium by marshaling public awareness to may in fact be dependent on teachers for political sup- support reform. port. This dependence diminishes the willingness of Combining information and sequencing to build sup- policy makers to monitor and enforce performance. port for reforms. Many important education reforms This example reveals that if policy design ignores have taken place over the last two decades, including the power dynamics, a reform can leave the system in settings in which teacher unions play important worse off than before the reform. Teachers hired on roles. Policy makers who want to implement reforms contract are often less qualified than civil servant can reach out to build support from other actors by teachers, at least in terms of formal qualifications. first using information on student performance and Yet, schools, communities, and governments are directly communicating with the public. In some willing to hire these contract teachers because they cases, such as in Ecuador, Mexico, and Peru, the resis- are willing to trade qualifications for effort. In the tance to efforts to reform education has been strong. end, though, they have received the worst of both But in Chile, where policy makers had high credibility worlds from a service delivery perspective: once with the unions because they were traditional allies, the less qualified contract teachers have been incor- a process of continual negotiation paved the way for porated into the civil service, the country ends up the passage of important reforms, such as bonus pay, with the same low effort, lower skills, and a higher including by bundling them with higher spending on budgetary cost. education (Bruns and Luque 2015). 190 | World Development Report 2017 Bringing new actors into education policy: The role of of examination items and questions on medical his- parents. Directly involving parents in school policies is tory. The same doctors performed better when they another way to change the power dynamics. However, were in the private sector, indicating the importance it can work only when parents can credibly enforce of incentives. Nevertheless, virtually no doctors con- sanctions. For example, why did giving more power ducted all the examinations indicated when a child to parents through school-based management (SBM) had diarrhea. Meanwhile, patients were much more reforms work in Honduras but fail in Guatemala? likely to receive an unnecessary treatment than a Ganimian (2016) argues that in Honduras teachers’ correct one. Only 3 percent of doctors gave a correct unions focused on higher-order problems such as treatment (Das and others 2015). wages, and the investment from the national gov- In addition, household out-of-pocket expenditures ernment was small, especially in the beginning. As dominate health financing in low-income countries a result, SBM was able to endure through different and in many middle-income countries (World Bank administrations. In Guatemala, by contrast, the high 2007). Ukraine illustrates the problem of out-of-pocket cost of maintaining the program made it more vulner- expenditures—including a gap between formal rules able to special-interest groups, who managed to orga- and actual practice. As in several other countries of nize and successfully advocate to revert the reform. the former Soviet Union, all Ukrainians have a con- Changing norms. Changing education systems also stitutional right to access free health services. Nev- means promoting norms that support better behav- ertheless, direct payments by patients account for ior and promoting teachers who share these norms. more than 40 percent of total health expenditures and Many teachers throughout the developing world are a heavy burden for the majority of Ukrainians.1 make heroic efforts to educate children in extraor- De facto, patients pay an informal fee for almost every dinarily difficult circumstances, contending with service offered by public health providers. These a lack of learning materials, student absenteeism, informal payments seem to be partly pocketed as and threats to their safety. They do this at times out informal income and split among the care providers of altruistic concern for children, but they also may (physicians and nurses), other health care personnel subscribe to a norm of teacher professionalism and a (chief doctors, hospital administrators), and political sense of duty. Ensuring that more such teachers are authorities at various levels. They are also used to selected into public service and rewarded appropri- finance the recurrent expenses of health facilities ately can help shift the composition of the teacher such as various supplies, refurbishment, and recon- body and change the power dynamics. struction (Belli, Dzhygyr, and Maynzyuk 2015). Poor quality of care and high out-of-pocket pay- Health: The challenges of ments are in part a result of the political equilibrium between the different actors involved in the process improving access of adopting and implementing health policy. The fol- Investments in health early in life are key to health lowing policy principles, however, can help to guide later in life, as well as for education and learning out- more effective health care reform. comes (Almond, Chay, and Lee 2005; Black, Devereux, and Salvanes 2007). However, in many developing Change the actors involved in health countries, and especially in low-income countries, policy adoption and implementation the quality of health care is poor. As discussed in Involve more actors in hiring practices to break patronage. chapter 6, doctors are absent, and when they are In Ukraine and other countries, patronage plays a present, they exert little effort or make mistakes in decisive role in the recruitment and placement of doc- diagnosing and treating patients. tors, especially for attractive positions—that is, those The state of Madhya Pradesh in India illustrates in which it is possible to extract more and larger infor- the challenge of poor availability and quality of care mal payments. This scheme consolidates networks of (Chaudhury and others 2006; Das and Hammer 2007). personal connections and erects high entry barriers. In a representative sample of rural areas of Madhya Several Ukrainian health workers reported that they Pradesh, 40 percent of doctors in public health had to pay to secure a job or to retain their positions, facilities were absent at any given time. Doctors in and also that they had to maintain their discipline public facilities spent on average 2.4 minutes with a and loyalty to their line managers (Belli, Dzhygyr, and patient and completed only 16 percent of a checklist Maynzyuk 2015). Service delivery: Education and health | 191 The patronage system, especially among doctors, disintegration of the centralized Soviet Union and should be reformed. In Ukraine, for example, broad- the collapse of central revenues, most public services ening the set of actors involved in the process of financing and administration, including health, were hiring doctors holds promise. Some cities have intro- decentralized to the regional, district, and municipal duced the requirement that the municipal health care levels. But only the municipal level was governed department approve any appointment and dismissal by elected officials; all other levels were governed of medical staff to stem the power of chief doctors. by officials appointed from the center, thereby Involve users, including through good use of infor- ing the representativeness of local authorities. limit­ mation and monitoring. Involving communities can In addition, there was no clear assignment of new work to strengthen the quality of care and decrease accountabilities. The process thus increased frag- absenteeism, provided that they have clear mandates mentation because several levels of government and tools to monitor providers. An intervention financed, owned, and ran health facilities. Decentral- designed to strengthen local accountability and ization, then, ended up “crystalizing” the status quo— community-based monitoring in the primary health for example, making it impossible to streamline the care sector in Uganda was remarkably successful in excess infrastructure because health services became improving both health services and outcomes in the a source of patronage and informal revenue for participating communities (Björkman and Svensson local elites and senior doctors (Belli, Dzhygyr, and 2009). The intervention consisted of a series of com- Maynzyuk 2015). munity meetings facilitated by a nongovernmental Better incentives for providers can work if effectively organization, using report cards on the quality of implemented. The introduction of performance-based services and resulting in action plans. Utilization budgeting schemes may improve the level and dis- of outpatient services increased by 20 percent, and tribution of key health outcomes and change the there were significant improvements in treatment incentives of health providers by making them more practices, waiting time, examination procedures, and accountable. More research is needed to assess the absenteeism. Most important, the weight of infants effectiveness of these schemes, and their impact increased significantly, and the under-5 mortality rate may depend on existing conditions. For example, fell by one-third in the treatment villages. in Ukraine the introduction of program-based bud- geting collided with the existing detailed spending Change the incentives of politicians requirements and simply added a layer of bureau- and providers cracy. On the other hand, in Argentina the introduc- There are limits, however, to how much local control tion of performance incentives to finance a provincial can achieve, in part because important components insurance scheme for maternal and child health of the quality of service delivery are not determined care (Plan Nacer) improved not only the number of locally. It may be necessary to change the incentives prenatal care visits, but also the quality of prenatal at a higher level or through top-down approaches to care and delivery. The incidence of low birth weight improve the delivery of health services. and neonatal mortality fell (Gertler, Giovagnoli, and Better incentives for policy makers can work if effectively Martinez 2014). implemented. The example of decentralization is often seen as an attempt to increase accountability because users/voters can better observe the efforts of policy Note makers. In Brazil, the public health system, which 1. In 2010, for example, about 60 percent of Ukrainians is funded primarily by transfers from the federal had at least partially forgone health care services government and administered by the states and because they could not afford them (Tambor and others 2014). municipalities, is the main source of health care for the poor. Because of the competition for the votes of the uninsured (poor) who want public health care and References the insured (richer) who do not, spending on health Acemoglu, Daron. 1998. “Why Do New Technologies care is higher in municipalities where the proportion Complement Skills? Directed Technical Change and of poor is higher and where voter turnout is higher Wage Inequality.” Quarterly Journal of Economics 113 (4): (Mobarak, Rajkumar, and Cropper 2011). 1055–89. Decentralization can, however, be ineffective, Almond, Douglas, Kenneth Y. Chay, and David S. Lee. simply adding a bureaucratic layer. And that is what 2005. “The Costs of Low Birth Weight.” Quarterly Jour- happened in Ukraine. In the 1990s, following the nal of Economics 120 (3): 1031–83. 192 | World Development Report 2017 Andrabi, Tahir, Jishnu Das, and Asim I. Khwaja. 2015. Ganimian, Alejandro J. 2016. “Why Do Some School- “Report Cards: The Impact of Providing School and Based Management Reforms Survive While Others Child Test Scores on Educational Markets.” Policy Are Reversed? The Cases of Honduras and Guate- Research Working Paper 7226, World Bank, Wash- mala.” International Journal of Educational Development ington, DC. 47: 33–46. Belli, Paolo, Yuriy Dzhygyr, and Kateryna Maynzyuk. Gertler, Paul, Paula Giovagnoli, and Sebastian Martinez. 2015. How Is It Working? A New Approach to Measure Gov- 2014. “Rewarding Provider Performance to Enable a ernance in the Health System in Ukraine. Washington, Healthy Start to Life: Evidence from Argentina’s Plan DC: World Bank. Nacer.” Policy Research Working Paper 6884, World Björkman, Martina, and Jakob Svensson. 2009. “Power to Bank, Washington, DC. the People: Evidence from a Randomized Field Exper- Jensen, Robert. 2010. “The (Perceived) Returns to Educa- iment on Community-Based Monitoring in Uganda.” tion and the Demand for Schooling.” Quarterly Journal Quarterly Journal of Economics 124 (2): 735–69. of Economics 125 (2): 515–48. Black, Sandra E., Paul J. Devereux, and Kjell G. Salvanes. Mobarak, Ahmed Mushfiq, Andrew Sunil Rajkumar, 2007. “From the Cradle to the Labor Market? The and Maureen Cropper. 2011. “The Political Economy Effect of Birth Weight on Adult Outcomes.” Quarterly of Health Services Provision in Brazil.” Economic Journal of Economics 122 (1): 409–39. Development and Cultural Change 59 (4): 723–51. Bruns, Barbara, and Javier Luque. 2015. 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Service delivery: Education and health | 193 PART III Drivers of change 7. 8. 9. ______________________________________ ______________________________________ ______________________________________ Elite bargaining Citizens as Governance in an and adaptation agents of change interconnected world CHAPTER 7 Elite bargaining and adaptation For the past four decades, China has been the world’s enhanced the stability of the ruling party during a fastest-growing country. Meanwhile, it has lifted over period of tremendous change. 700 million people out of poverty. According to many When powerful interests resist change, governance commonly used indicators, China’s institutional institutions that stunt inclusive development can environment during this period appears to have not persist. Yet history is rife with examples of countries changed. And yet these indicators fail to identify the that improved rules, institutions, and processes that deep changes to China’s policy arena that facilitated constrained powerful interests and facilitated devel- adaptive policy decisions and enhanced state capac- opment progress. All of today’s high-income countries ity and thus enabled China’s economic and social were once poor and had unaccountable governments. transformation. These countries sustained economic growth over In China, the Communist Party of China (CPC) has long periods, while improving social welfare and been the sole governing party since 1949. Neverthe- preventing violence. Sustained inclusive growth was less, China has significantly increased contestability facilitated by evolving institutions and rules of the game that constrained arbitrary behavior by decision by gradually changing processes for leadership makers, enhancing contestation in policy making, selection and collective decision making at both and increasing the accountability of decision makers. central and local levels. In the years following Deng Such changes have been accomplished using different Xiaoping’s 1980 assertion that “over-concentration institutional forms. Some countries have broadened of power is liable to give rise to arbitrary rule by accountability within dominant political parties or individuals at the expense of collective leadership,” opened the space for contestation only in specific the CPC broadened horizontal accountability and domains or at the local administrative levels; others institutionalized collective leadership through norms have introduced free and fair competitive elections and on leadership transitions, rules on selection and broad corporatist consultative arrangements. retirement, consultative decision making, greater Changes to party institutionalization, bureaucratic profession- the rules of alization, and the introduction of village elections. Understanding elite bargains the game that The growth of state and party bureaucracies, as well The institutions and rules these countries established determine policy as organized business and societal interests, com- facilitated nonviolent and equitable development. But formulation and bined with decentralized economic power, led to a why did these durable institutions develop? Changes implementation proliferation of organizational bases with bargaining to the rules of the game that determine policy formu- result from a power (Lampton 1987). All these reforms reflected the lation and implementation result from a bargaining bargaining process incentives and preferences of those in power: broader process among elite actors acting in their own inter- among elite actors accountability and a more rules-based space for con- ests. Reforms that limit the arbitrary exercise of power acting in their own testability helped solve commitment and collective today may be necessary for maintaining or enhancing interests. action challenges within the ruling elite and thus power or providing insurance against a loss of power 196 | World Development Report 2017 in the future. Formal institutions—moving from deals This chapter focuses on national elites—those elites to rules—can enhance the credibility of commitments, who have direct influence over the formulation and overcoming coordination challenges and strengthen- implementation of national policy, as well as the rules ing the stability of bargains among elites. In cases of of the game by which national power is allocated, long-term successful transformation, elite actors have exercised, and constrained.1 Even at the national adapted to changing circumstances by generating level, elites differ by sector: those with agenda- more capable, contestable, and accountable institu- setting or veto control over health policy may not have tions. These institutions themselves helped enable control over constitutional reforms. At the national further development. level, political (state) elites are of particular impor- The processes through which elite actors and tance. However, formal political elites wield variable the organizations that support them coordinate and amounts of de facto power. In highly institutionalized commit to one another to determine outcomes can be countries, political power may flow from official posi- thought of as elite bargains. Elite bargains are dynamic, tions, but in most countries—developed and devel- constantly adapting to changes in the relative power, oping alike—nonstate elites also directly influence incentives, and preferences of elite actors. The devel- bargaining outcomes. In the United States, a high- opment path is bumpy: shocks (such as terms of trade income institutionalized democracy, policies are shocks and natural disasters) and gradual develop- much more likely to match the preferences of eco- ments (such as urbanization or a growing middle nomic elites than the preferences of average citizens, class) alter elite power and preferences, often benefit- despite a de jure commitment to equal representation ing one group of elites at the expense of another. In (figure 7.1)—see Gilens and Page (2014). Elsewhere, the face of these changes, many deals-based bargains relational or ideological informal power may trump that cannot accommodate new actors or demands col- economic or military might: in history, the de facto lapse. At other times, elite bargains successfully adapt “power behind the throne” has often been a trusted to changes in the relative power, incentives, and pref- adviser or counselor who lacked formal de jure erences of societal interests by accommodating new powers. demands through credible rules for elite-elite and Organizations empower elites, help them over- elite-citizen interactions (see chapter 2). come coordination problems, and enable them to Long-term development progress is predicated on credibly commit to one another. Elites differ in their this ability to adapt to changing circumstances. The capacity to organize: can they credibly commit to institutional forms selected to solve commitment and those they seek to influence and thus coordinate their collective action challenges at particular junctures behavior? Certain wealthy oligarchic elites may not in a country’s development may produce trade-offs: depend on internal organization directly, but money is growth with higher inequality; more redistribution fungible, and it can buy collective action when neces- or less violence accompanied by lower long-term sary. For example, during periods of political unrest in growth; successful growth episodes but with higher Thailand economic elites paid “protestors” to occupy environmental costs; or growing levels of injustice or public spaces and demand a change in government exclusion despite good growth outcomes. The intro- (Winters 2011). Similarly, intellectual or charismatic duction of contestability and accountability mecha- leaders may become powerful elites because of their nisms can help countries adapt when tensions related ability to generate large mass followings by shifting to these trade-offs arise. When adaptation takes place preferences. In this sense, elites are elite by virtue of through rules-based mechanisms, virtuous cycles of their capacity to organize collective action and thus continued adaptation and development progress are exercise influence (Mosca 1939; Mills 1956). more likely. However, the conditions under which The use of an elite bargaining framework helps such rules-based adaptation occurs are limited: in move beyond the black box view of the state. A state is most of the world and most of human history unsta- not monolithic, but rather a reflection of bargaining ble deals-based bargains have dominated. outcomes among groups of empowered economic and political actors. All governments have some sort Who bargains? of power-sharing arrangement, regardless of their Actors in the policy arena bargain over the design regime type (Bueno de Mesquita and others 2003). and implementation of policies and the definition of Even in regimes that seem to be dominated by one rules. Elites are those actors with the ability to directly person, the ethnic composition of the ministerial influence outcomes within a given sector or issue. cabinet is inclusive and proportional to the popu- But identifying these elites can be difficult (box 7.1). lation, reflecting political bargaining rather than Elite bargaining and adaptation | 197 Box 7.1 Expert survey to identify elites All social science disciplines and development practitioners and the formulation and implementation of laws governing recognize the importance of elite actors in determining the exercise of power. development outcomes—from Aristotle and his “oligarchy” The survey reveals that the identity of the powerful elite to early 20th-century “elite theorists” such as Mosca (1939), actors who bargain over national policy decisions differs Pareto ([1927] 1971), and Michels ([1911] 1966), to recent greatly over space, time, and issue area. For example, grand theorists of economic and institutional coevolution although national chief executives were part of the elite such as North, Wallis, and Weingast (2009) and Acemoglu ruling coalition in all 12 survey countries in 2015, the other and Robinson (2012). The international donor community actors varied greatly in both number and representative- is looking increasingly at the consequences of different ness (figures B7.1.1, panel a). With the exception of those “political settlements,” which can be understood as the in the Russian Federation, Rwanda, and Turkey, where the elite bargaining equilibria that emerge at critical junctures national chief executives monopolize decision making, the in a country’s development (Di John and Putzel 2009; Khan ruling coalition was quite varied. For example, in Bolivia the 2010; Parks and Cole 2010). And yet the set of conceptual ruling coalition consisted of legislators, party elites, local research tools available to scholars of elite bargaining and governments, labor unions, and civil society organizations. to development practitioners remains limited, as does Ruling elites also differ within countries over time. In the agreement on exactly who are elites. Republic of Korea during the regime of Gen. Park Chung- To help fill this gap, the World Bank, in collaboration hee (1963–1979), the bargaining strength of military actors, with V-Dem (Varieties of Democracy), conducted an expert bureaucratic actors, and economic actors was relatively survey, Measuring Elite Power and Interactions, to generate high (panel b). The post-1987 transition to democracy cross-national indicators that enable comparison of who resulted in greater strength for new actors, particularly holds power and how they wield this power (World Bank political parties, legislators, and the judiciary, but economic 2016b). The survey covers over 100 years of data in 12 coun- and bureaucratic actors remained highly empowered. By tries across six regions. The data produced help to identify contrast, Brazil has experienced much more volatility in how the distribution of elites maps onto national power empowered elites, particularly before the 1990s (panel c). Figure B7.1.1 Elite actors within national ruling coalitions vary greatly across countries and over time a. Twelve-nation comparison of number of groups in ruling coalition, 2015 6 5 Number of elite groups 4 3 2 1 0 Brazil Indonesia Korea, Rep. Rwanda Sri Lanka Turkey Bolivia India Kenya Russian Spain Tunisia Federation National chief executive Local government leaders Civil society organizations National legislators Bureaucratic actors Media Judicial actors Economic actors (national) Foreign governments Political party elites Organized labor unions International economic actors and organizations (Box continues next page) 198 | World Development Report 2017 Box 7.1 Expert survey to identify elites (continued) Figure B7.1.1 Elite actors within national ruling coalitions vary greatly across countries and over time (continued) b. Relative strength of elite actors in the Republic of Korea, 1900 –2015 4 Elite actor relative strength 3 2 1 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 c. Relative strength of elite actors in Brazil, 1900–2015 4 Elite actor relative strength 3 2 1 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 National chief executive National legislators Judicial actors Political party elites Local government leaders Bureaucratic actors Military actors Economic actors (national) Civil society organizations Media Foreign governments International economic actors and organizations Source: WDR 2017 team, using data from World Bank and V-Dem 2016b. Note: In this figure, relative strength is measured on a 0–4 scale, ranging from 0 (no power to influence decision making) to 4 (group has a lot of power to influence decision making on many issues). Panel a shows the number of elite groups that have a relative strength of greater than 3. For more information on specific variables and survey methodology, see World Bank and V-Dem (2016a) and Coppedge and others (2015). Source: WDR 2017 team. Elite bargaining and adaptation | 199 Figure 7.1  Preferences of economic coordination, but this credibility depends on main- elites predict policy adoption more than taining the exclusivity of the bargain.2 Borrowing citizen preferences in the United States from the economic literature on oligopolies, when incumbent elites seek to prevent currently excluded 0.7 (opposition) elites from entering the ruling coalition, they have three potential strategies: block (to prevent Predicted probability of adoption 0.6 entry); deter (modify incumbent behavior to deter entry); and accommodate (allow other elites to enter 0.5 and modify the behavior of incumbents and new elites). Despite a tendency for limited deals-based bar- 0.4 gains, under certain circumstances elite bargains may expand and generate formal rules to help overcome 0.3 collective action and commitment challenges, often to bring about effective deterrence or accommodation. 0.2 How do bargains adapt to changes in the 0.1 relative power, incentives, and preferences 0 of elites? 0 10 20 30 40 50 60 70 80 90 100 Most elite bargains are deals-based and “exclusive,” Share favoring proposed policy change (%) and they tend to resist adaptation. Bargains with few Average citizen’s preferences actors that are less open to external influences have Economic elite’s preferences less accountability, which can undermine future adaptability as new actors become powerful. The Source: Gilens and Page 2014. lack of adaptability of deals-based bargains helps Note: The analysis is based on 1,779 policies in the United States between 1981 and 2002 in which public opinion polls were carried out. explain why regimes in low- and middle-income countries are tenuous; they experience violent tran- sitions every eight years on average (Cox, North, and Weingast 2015). “Big Man” rule (Francois, Rainer, and Trebbi 2012). In states with deals-based bargains, the distribu- As they engage in elite bargains, actors have not only tion of rents tends to be the glue that provides politi- different degrees of relative power, but also different cal stability and enables development (North, Wallis, incentives and preferences. and Weingast 2009). Commitment to distributing For the broad sweep of human history, elites have rents to those within the coalition may suffice to bargained using deals-based mechanisms. The tran- generate security and tie the state together, but such sition toward more rules-based governance is often a state faces difficulties incorporating the new elites thwarted by the incentives that elites face to maintain perhaps needed to generate growth and equity (see or maximize utility—be it wealth, influence, or repu- discussion on security in chapter 4). Indeed, these sta- tation. Preserving or maximizing utility depends on ble bargains can quickly deteriorate when the source preventing expropriation and exploitation by other of rents breaks down. For example, in South Sudan powerful actors. But the ability of elites to credibly from the period of the Comprehensive Peace Agree- commit to not expropriating from one another is ment (CPA) in 2005 through the formation of the state limited because of coordination and common agency in 2011, the distribution of rents held together het- challenges. This difficulty in establishing credible erogeneous factions and structured power relations internal commitment tends to lead to unstable and that were reflected in patronage networks, including nonadaptable short-term bargains. When elite bar- well-connected (but unproductive) “tenderpreneurs,” gains are deals-based, there is a natural tendency to who survived on government contracts. However, keep coalitions small (Riker 1962). It is easier to coor- these rents were unreliable, and undoing them proved dinate preferences among a small group because bar- difficult: a period of austerity in 2012–13 under- gains become less efficient with many actors (Mailath mined South Sudan’s patronage-based elite bargain, and Postlewaite 1990), and closer relationships make making the country one of the world’s most fragile commitments more credible. (Twijnstra 2015). Commitment within the elite bargain may be Under certain circumstances, however, elite bar- credible because of the low threshold for small group gains adapt to changing circumstances by improving 200 | World Development Report 2017 state capacity and moving from deals-based agree- cede power. If ruling elites believe expropriation or ments to formal rules-based mechanisms for con- violent punishment will result from ceding power, testability and accountability. In these bargains, elites they will reject electoral results that support the institutionalize increasingly broad commitments to opposition (figure 7.2). The most important determi- one another; they move from narrow deals to broad nant of the cost of losing is the level of polarization rules. between the preferences of elite groups; starkly Elites adopt rules-based mechanisms for two gen- opposed preferences raise the likelihood of violence eral reasons: to sustain power or to provide insurance and instability (Vu 2007). Similar or overlapping elite against a future loss of power. When actors who preferences—low levels of polarization—tend to facil- have been excluded become stronger, bringing these itate coordination across different elite groups. When new actors into credible institutions and granting polarization is high, accommodating new groups concessions may be less costly than repressing them. becomes more challenging because the concessions Similarly, expanding the formal accountability space may be too costly for the ruling elites. When elite may help provide internal commitments that facil- polarization decreases, countries are more likely to itate agreement. As Tancredi says in The Leopard, “If institutionalize elite interactions and generate rules we want things to stay as they are, things will have to for contestation and accountability. change” (Tomasi di Lampedusa [1958] 2007, 40). When The context in which bargains take place also dif- ruling elites are no longer confident of their hold on fers according to how much competition or political power, the introduction of rules may lower the future uncertainty the ruling coalition faces. This relates to costs of losing power by providing “insurance.” both the contestability of access to decision making The introduction of rules-based mechanisms will as well as the degree of internal cohesion in the rul- coincide with elite self-interest only under certain cir- ing coalition. When ruling coalitions face competi- cumstances. When the cost to ruling elites of losing tion or when they have only a weak hold on power, power is high, they will be less inclined to increase political uncertainty about who will be in power in the space for contestability and accountability and to a future period is high. Thus threats to losing power Figure 7.2 When the cost of losing power is high, elites are more likely to reject electoral results that support the opposition and are less likely to move toward rules-based contestability and accountability a. Acceptance of election results by b. Institutionalized elite interactions losers versus cost of losing power versus cost of losing power 4 4 Acceptance of election results by losers Institutionalized elite interactions 2 3 0 2 –2 1 –4 0 0 1 2 3 4 0 1 2 3 4 Cost of losing power Cost of losing power Sources: WDR 2017 team, based on V-Dem 2015 and World Bank and V-Dem 2016b. Note: The cost of losing power, the acceptance of election results by the losers, and institutionalized elite interactions are all measured on an ordinal 0–4 scale, as determined by an expert survey. Elite bargaining and adaptation | 201 are credible.3 Uncertainty does not necessarily imply The cost of losing power and the degree of political instability, but rather simply the unpredictability of uncertainty interact to help determine the likelihood who will hold power in the future. When uncertainty that elites will generate rules for contestability and is high, ruling coalitions are more likely to implement accountability (box 7.2). Historical contingencies reforms that will serve as insurance to protect them and specific country circumstances ultimately help in the event of losing power. Alternatively, when determine outcomes, but a low cost of losing, and uncertainty is low and ruling coalition elites are thus low polarization, may be a necessary condition confident of their power, they may take a longer-term for the emergence of bargains that adapt through perspective and accommodate the demands of other the adoption of rules. The discussion that follows elites through the introduction of new rules that can provides examples of institutions and rules that increase or sustain power. ruling coalition elites introduced to enhance power Box 7.2 When do elites have incentives to introduce rules for contestability and accountability? The cost of losing power—largely determined by the polar- ization of elite preferences—and the degree of political Figure B7.2.1 The interaction uncertainty act together to shape elite incentives for intro- between political uncertainty and ducing rules for contestability and accountability. There the cost of losing power are four broad possibilities, considering the high and low 4 values of these two dimensions: When uncertainty is high, elites may implement “insur- •  ance” reforms to protect themselves in the event of Political uncertainty losing power (upper-left quadrant of figure B7.2.1). 2004–present 1965 2000–present “Insurance” reforms are unlikely to happen, however, •  1917 2 if the cost of losing is too high because in this case the commitments of one group of elites to another through 1963–72 either deals or rules are not credible. The result is fre- 1977– 96 quently state collapse or a cycle of violence (upper-right quadrant). 1954– 84 When uncertainty is low and ruling coalition elites are •  0 confident in their power, they may take a longer-term 0 2 4 perspective and accommodate the demands of other Cost of losing power elites through the introduction of new rules that can increase or sustain power (lower-left quadrant). Indonesia Korea, Rep. Soviet Union When uncertainty is low but the cost of losing is high, •  Sources: WDR 2017 team, based on V-Dem 2015 and World Bank repressive states may arise in which the preferences of and V-Dem 2016b. the opposition elites are in stark contrast to those of the Note: “Political uncertainty” is calculated as the average of four ruling elites. Repression sustains a large power imbalance variables, each ranging from 0 to 4: (1) elite cohesion in the ruling coalition, (2) elite ideological unity, (3) the relative strength between the ruling coalition and the opposition (lower- of opposition elites, and (4) the de facto competitiveness of right quadrant). In this context, it is unlikely that credible multiparty elections. The “cost of losing power” variable ranges from 0 to 4. rules to regulate contestation and accountability will be introduced. uncertainty can change elite incentives to institute rules- Results from the Measuring Elite Power and Interactions based contestability and accountability. Figure B7.2.1 shows Survey conducted for WDR 2017 offer empirical evidence selected historical data points for three countries in the to help demonstrate how the cost of losing and political survey: Indonesia, the Republic of Korea, and the Russian (Box continues next page) 202 | World Development Report 2017 Box 7.2 When do elites have incentives to introduce rules for contestability and accountability? (continued) Federation (which shows up as the Soviet Union from 1922 Korea during the presidency of Gen. Park Chung-hee was to 1991 in the data). also highly stable and nondemocratic, but low elite polar- Indonesia in 1965 and the Soviet Union in 1917 lie in the ization, identified by high degrees of elite cohesion across upper-right quadrant: both the cost of losing and political the political, military, bureaucratic, and business realms, uncertainty were high. In both countries, elite polarization reduced the potential cost of losing to the opposition was extremely high, and elite conflict became violent. elites, enabling the development of rules-based institutions Neither state had a ruling coalition willing or able to insti- (Campos and Root 1996). This institutionalization included tute credible rules. broader space for civil society and the media and institu- Both Indonesia and the Soviet Union slowly transi- tionalized interactions between business and the state. tioned toward more stable repressive states (lower-right Finally, over the last two decades both Indonesia and quadrant), one ruled by a dominant individual (Suharto in Korea have transitioned toward increased democratic Indonesia) and the other ruled by a dominant political party competition. Korea has done so while maintaining low (the Communist Party of the Soviet Union). Although both degrees of elite polarization. As Indonesia moved away from states generated economic growth and reduced political a personalistic system to more rules-based decision making, uncertainty, neither broadened contestability or developed the winner-take-all mentality declined and reduced elite strong institutions for accountability. When shocks hit and polarization. Both systems have experienced a turnover of societal demands increased in Indonesia during the Asian political parties and the establishment of rules by outgoing financial crisis and in the Soviet Union in the late 1980s, parties that seek to tie their successors’ hands (to provide neither system could adapt. “insurance” for the outgoing elite’s eventual loss of power). Source: WDR 2017 team. or insure against loss. In some cases, elites generate may strengthen the state through bureaucratic and more capable states; in others, they expand the formal civil service reforms and party institutionalization in space for contestability and accountability. The con- search of what this Report calls outcome legitimacy— cluding section of this chapter discusses when and that is, enhancing cooperation and coordination by why these rules persist through continual adaptation. delivering effectively on commitments. Under certain conditions, broad administrative Elite bargains and uneven reforms that move from patronage to meritocracy may be possible. Although high levels of education state capacity and historically strong states may make meritocratic Over time, state capacity is largely a function of power; reforms easier, there are no foregone conclusions. ruling elites invest in the capacity of governing struc- Throughout postindependence Africa, individual tures when it is in their interest to do so—and they capacity (education levels) increased while institu- neglect those investments when it is not (see chapter tional capacity declined as civil service recruitment 2). Such investments tend to improve institutional policies were placed under presidential authority, functions and development outcomes, but undertak- leading to politicization and deprofessionalization ing them is largely a problem of redistributing polit- (van de Walle 2001). The Republic of Korea, often ical power. Increasing the strength of bureaucratic assumed to have a “Confucian tradition” of meri- actors is risky, creating the possibility of institutional tocratic civil service, actually undertook massive champions that can contradict ruling elite prefer- improvements in bureaucratic quality during the ences. And bureaucracies often serve purposes of 1960s and 1970s. During the era of the country’s patronage and rent distribution; undermining these first president, Syngman Rhee, the bureaucracy was arrangements is politically challenging and can desta- legally meritocratic, and yet between 1949 and 1961 bilize elite bargains. Despite these challenges, elites only 336 bureaucrats passed the High Civil Service Elite bargaining and adaptation | 203 Examination, while 8,263 received “special appoint- Although at times broad administrative reforms ments” (Cheng, Haggard, and Kang 1998). are possible, elites are more likely to direct scarce Reforms to limit patronage frequently arise from resources and political capital only toward those top-down initiatives or elite accommodation (Grindle agencies that help achieve specific goals, resulting in 2012). At times, broad meritocratic reforms may be uneven development capabilities. An elite bargaining initiated as part of an effort to strengthen the ruling framework can help explain the emergence of these coalition. In China during the late 1970s, the “Four bureaucratic pockets of effectiveness—public agencies General Principles” calling for more revolutionary, that carry out agency objectives effectively despite younger, more professional, and more educated cad- existing in an environment in which most other res were both technically and politically effective: the agencies are ineffective and subject to predation reform improved bureaucratic capacity by increas- (Leonard 2008). In these cases, influential elite actors ing standards for education and professionalism. have incentives to ensure the effectiveness of such Including a “revolutionary” (geminghua) requirement agencies and use their own political capital to shield made the reform difficult to oppose on ideological the organizations from external interference (box 7.3). grounds, and introducing strict retirement ages at all Extending the state’s presence to new areas or government levels resulted in the mass retirement gaining legitimacy through economic growth may be of uneducated older cadres, who often opposed eco- particularly compelling reasons for developing a non- nomic reforms (Li 1998). With the rapid retirement of coercive state capacity. For example, as states have 3.4 million revolutionary veterans, it was found that realized they need to know the extent and makeup 90 percent of the county-level and above government of their own population (increase “legibility”), they officials in office in 1988 had been appointed after have increased investment in their statistical and 1982, and 60 percent of them had college degrees. census capacity (Scott 1998). In particular, economic Box 7.3 Pockets of effectiveness in Nigeria The emergence of “pockets of effectiveness” depends on illustration of one such pocket of effectiveness (Pogoson political support from powerful elite actors. Taking steps and Roll 2014). The agency was created in 1993. In 2001 to ensure the professionalization and autonomy of an President Olusegun Obasanjo had a personal interest in individual government agency often precedes wholesale combating counterfeit and dangerous drugs as a way to reform of the bureaucracy because political elites may improve Nigeria’s international image. He wanted in part seek effective management of a particular sector. High- to seek debt relief, but also to boost his personal reputation level political interest in and commitment to an agency’s and international prestige. He selected Dora Akunyili to success and political insulation from other elites whose head NAFDAC because of her reputation for incorruptibil- interests the autonomous agency may harm are essential ity. NAFDAC was then granted autonomy from the Ministry for effectiveness. Agency autonomy is most likely to be of Health to recruit staff and was given an independent supported when the agency provides benefits that are budget. It was also allowed to operate free of political immediate, identifiable, and beneficial to an important control. Under Akunyili’s leadership and Obasanjo’s direct group of elite actors who “have a conception of the state as support and clearance, NAFDAC returned to Nigerian ports, a public good, rather than simply as a target of predation from which it had been banned in 1996, and NAFDAC clear- or a tool for gaining advantage over others” (Leonard ance of imported goods again became compulsory, which 2008, 25). But autonomy and political support are not broke the clearance monopoly of the Customs Service and enough; bureaucratic pockets of effectiveness require plugged a major leak for imported counterfeit products. adequate resources as well as managerial factors that Challenging the interests of these powerful elite interests support rational decision making, including meritocratic (the Customs Service) would not have been possible with- recruitment, internal discipline, and performance-based out agency autonomy and direct support of the president. management. In 2007 NAFDAC ranked first in a national poll of agency Consider the National Agency for Food and Drug effectiveness (at 70 percent, it was 12 percentage points Administration and Control (NAFDAC) in Nigeria as an higher than the second-place agency). Sources: Leonard (2008); Pogoson and Roll (2014). 204 | World Development Report 2017 Figure 7.3 Horizontal and vertical accountability become more common as party institutionalization increases a. Judicial constraints on the executive b. Legislative constraints on the executive 0.6 1.0 0.4 Change in index Change in index 0.5 0.2 0 0 −0.5 –0.2 –0.4 −1.0 –0.2 0 0.2 0.4 0.6 0.8 –0.2 0 0.2 0.4 0.6 0.8 Change in party institutionalization Change in party institutionalization c. Civil society participation d. Free and fair elections 0.6 1.0 Change in index Change in index 0.4 0.5 0.2 0 0 −0.5 –0.2 −1.0 –0.2 0 0.2 0.4 0.6 0.8 –0.2 0 0.2 0.4 0.6 0.8 Change in party institutionalization Change in party institutionalization Source: WDR 2017 team, using data from V-Dem 2015. Note: The data are for 2000 and 2010 and cover 166 countries. All variables range from 0 to 1. Changes are calculated as the difference between 2010 and 2000 values. goals may be essential for regime legitimacy. In Brazil investment by tying leaders’ hands (Gehlbach and under its military dictatorship, industrial promotion Keefer 2012). In doing so, parties contribute to regime agencies were turned into islands of excellence to durability (Brownlee 2008). When parties become ensure growth (Schneider 1991). In Korea, General more institutionalized, other formal accountability Park installed technocrats in ministries related to mechanisms also tend to emerge (figure 7.3). economic development, but filled nondevelopment ministries (such as home affairs, construction, and Broadening the policy arena transportation) with military cronies (Kang 2002). Often, the institution in which elite groups choose to enhance elite power to invest resources is a political party. Chapter 8 In 16th-century France, jurist and political philoso- looks at political parties as mechanisms for citizen pher Jean Bodin advised absolutist French monarchs collective action, but parties are also key channels to voluntarily relinquish power, arguing that “lim- to resolve coordination and commitment challenges itations placed upon [a monarch’s] caprice markedly among elites. Institutionalization constrains party increase his capacity to govern and to achieve his elites from arbitrary decision making by increasing steady aims” (Gandhi 2009, 186). Many elites have fol- their accountability to party subordinates and con- lowed this advice, institutionalizing bargains among stituents, thereby solving the internal commitment elites through greater contestability and account- problem and making parties more effective (Panebi- ability in order to increase and sustain power. Elites anco 1988). Party institutionalization may facilitate in these cases make concessions in order to enhance collective action by supporters of the regime, helping their own position. This can be done by co-opting to produce credible commitments and greater private newly powerful actors into formal institutional Elite bargaining and adaptation | 205 mechanisms for contestation (institutionalizing hori- implementation. Decision-making elites likely see zontal contestability) or by increasing horizontal and co-optation solely as a means of staving off opposi- vertical accountability. tion demands rather than as a means of changing the balance of power within the arena. But both processes Institutionalizing horizontal contestability inevitably occur. Rising elites can in this sense be con- (broadening coalitions) sidered Trojan horses for expressing new demands To maintain their To maintain their own power, ruling coalitions may internally. own power, ruling provide rising elites with payoffs or co-opt potential Often, the co-opted parties are new economic inter- coalitions may opposition by creating formal mechanisms to chan- ests that have grown more powerful over the course provide rising nel their preferences. To sustain coalitions, elites of development. The inclusion of business interests elites with payoffs must provide their coalition partners with benefits. in formal institutions can lead to improved economic or co-opt potential Despite a preference for keeping coalitions small, outcomes through more successful state-business opposition by politicians may broaden coalitions when the poten- coordination (see chapter 5 on growth). Formal rules creating formal tial for conflict arises (Riker 1962). Indeed, broadened for inclusion provide a credible commitment that mechanisms to coalitions help improve regime stability, although noninstitutionalized efforts at coordination would channel their there are difficulties in quantifying this effect. In not achieve. In Chile, President Augusto Pinochet’s preferences. Africa, the addition of one cabinet member lowers the co-optation of business elites to lead ministries and risk of a coup by 23–25 percent, all else being equal agencies during the 1980s arose out of fear that these (Arriola 2009). elites would turn to the opposition. Their entry in Broadening the bargaining arena by including the state led to systematic consultations with peak new actors in the formal decision-making bodies of industries, benefiting business elites themselves the state—institutional co-optation—may be cheaper while also improving coordination and strengthen- and more sustainable than increasing payoffs. When ing the state beyond Pinochet’s rule (Silva 1996). In rising elites are paid off instead of being included in China, the Communist Party’s decision to add entre- decision making, systems may become overly depen- preneurs to its ranks in the early 2000s signaled an dent on the source of rents, making them unable to increased commitment to the private sector, helping withstand shocks that undermine this rent source, spur growth and also leading to further changes in as illustrated by the case of South Sudan described regime policy and legal development, including con- earlier in this chapter. stitutional change in 2004 that strengthened legal Ruling coalitions may be strengthened by bring- protection for private property. ing local or communal elites into the ruling coalition, Ruling coalitions may also introduce formal insti- often by co-opting existing informal institutions tutional “checks” on their behavior to maintain power into more formal structures. Co-opting local elites and sustain rents. Consider the case of authoritarian rather than replacing them can increase the power legislatures. They are not mere window dressing; of the ruling coalition. In Somaliland, the 1993 clan they provide a safety valve to vent political pressures, conference (shir beeleed) in the capital city of Borama co-opt the opposition, signal regime strength, help brought together 500 elites from the modern and regimes withstand leadership transitions, and dis- traditional sectors and institutionalized these clans tribute rents.4 However, authoritarian legislatures do and elders into formal governing bodies, a clan (beel) not just serve the political purposes that spawn their system that has led to 20 years of stability in a fragile creation; they can also lead to positive feedback loops. region (Kaplan 2008). In Sub-Saharan Africa more For example, the existence of legislatures in author- broadly, when ruling authoritarian coalitions incor- itarian regimes increases investment by raising the porated local authorities rather than replace them, cost of expropriation (Wright 2008; Gandhi 2009), these authoritarian incumbents had more support helping foster negotiations among private actors and were stronger during the democratic transition (Jensen, Malesky, and Weymouth 2014), and provid- (Riedl 2014). ing useful policy information that improves resource However, the participation of new actors is a two- allocation (Boix and Svolik 2013). way street: it mitigates conflict and creates “insiders” with incentives to support the ruling coalition, but Institutionalizing vertical accountability in providing new actors with commitments, it also The introduction of elections or electoral reforms tends to empower these actors and the sectors they may be a rational elite strategy to maintain power or represent at the expense of the current elite, giving privilege, particularly in the face of rising demands them the ability to influence policy formulation and from opposition elites. When there are splits among 206 | World Development Report 2017 elite actors, the introduction of vertical account- multimember districts undermined the power of ability mechanisms and responsiveness to citizens emerging parties by creating nationwide coordina- may enhance the power of one faction. For example, tion challenges for smaller parties, which allowed the countries without elections at the national level may dominant parties to maximize legislative seats.5 introduce local elections to appease local interests, gain information, and solve the principal-agent con- trol problems of local elites by recruiting citizens to When binding rules for monitor local elites on behalf of the central elites. accountability serve as These local elections may strengthen the regime, but they also may lead to better social outcomes, as in the political insurance introduction of village elections in China (Martinez- Sometimes, ruling coalition elites, acknowledging Sometimes, ruling Bravo and others 2011). threats to their continued dominance, introduce coalition elites, When bottom-up citizen movements (discussed power-constraining rules that they hope will bind acknowledging in chapter 8) threaten elite interests, elites may intro- not only themselves, but also their successors. In threats to their duce mechanisms to respond to societal demands particular circumstances, the adoption of cohesive continued before such pressures reach a tipping point. When and constraining institutions increases with the like- dominance, asked “Why liberalize?” for example, the former pres- lihood that the incumbents will be replaced (Besley introduce power- ident of Tanzania Julius Nyerere responded, “When and Persson 2011). constraining rules you see your neighbor being shaved, you should wet Although greater political competition may that they hope your beard. Otherwise you could get a rough shave” increase the likelihood that elites introduce binding will bind not (Levitsky and Way 2010, 16). In 19th- and 20th-century rules, the credibility of these new rules depends only themselves, Europe, the extension of suffrage was predicted by critically on continued competition. When power but also their the threat of revolution, proxied by revolutionary imbalances grow between the ruling elites and oppo- successors. activity in neighboring countries (Aidt and Jensen sition forces, rules may fail to bind. For example, in 2014) and by strikes or riots in the home country (Kim Bangladesh in the 1990s equal power between the 2007; Przeworski 2009). ruling and opposition parties led to a constitutional Even without a direct threat from below, many amendment in 1996 that called for establishment of democratic transitions are initiated from a position of a neutral caretaker government at the end of each strength to ensure maximum benefits for empowered term, headed by the last Supreme Court chief justice, elites. In a “conceding-to-thrive” scenario, the ruling to facilitate rules-based transitions. This constitu­ coalition recognizes a future threat to the regime, but tional arrangement collapsed in 2007 when the rul- it maintains enough strength relative to the opposi- ing Bangladesh Nationalist Party (BNP) interfered tion to not fear losing an election (Slater and Wong with Supreme Court retirement dates, resulting in a 2013). It may be rational for elites to engage in democ- violent standoff (Khan 2013). ratization now in order to maintain power because the stronger ruling elites are during democratic Horizontal accountability as political transitions, the less the economic redistribution after insurance transition (Albertus and Menaldo 2014). For exam- Competition among elites helps explain the emer- ple, in Spain after the autocratic Franco era, because gence of horizontal checks and autonomous insti- the left had been undermined, conservative elites tutions in new or weak democracies. Competitive did not think that the advent of democracy would systems facing political uncertainty are more likely threaten property rights (Alexander 2002). In Latin to adopt independent judiciaries because the current America, economic elites allowed democratization ruling elites know they will be better off subject to when conservative parties were in charge and could independent actors than to the machinations and protect their interests (Rueschemeyer, Stephens, and retaliations of political rivals. For example, although Stephens 1992). Argentina’s ruling Peronist party agreed as early as Where elections are introduced to strengthen an 1994 to strengthen an independent judiciary, such elite bargain, electoral rules may serve to favor the reforms were not implemented until the Peronists continued dominance of those in power. Following thought they would lose power, at which point judi- democratization in post–World War II Japan, rural cial independence was granted in order to control the voters had twice the voting power of urban voters opposition after ceding power (Finkel 2004). (Hata 1990). In Korea, Japan, and Taiwan, China, the Other judicial reforms, including judicial review, combination of single nontransferable votes and also become more common when greater competition Elite bargaining and adaptation | 207 increases the likelihood that the ruling coalition elites manipulation of the terms of democratization can will lose power. In new democracies, the constraint on serve as a source of political insurance. During arbitrary power imposed by judicial review can serve República Bolivariana de Venezuela’s democratic tran- as insurance to potential electoral losers, providing sition in 1958, the three main political parties signed support for democracy, as was the case during demo- the Punto Fijo Pact, which not only established respect cratic transitions in some East Asian democracies such for constitutions and elections, but also determined as Korea and Mongolia (Ginsburg 2003). The adoption that electoral winners should put members of all of constitutional review in 204 countries from 1781 three parties into positions of power to create national to 2011 was driven largely by electoral politics, which unity governments (excluding the Communists). The served as political insurance when the ruling party pact helped ensure the survival of democracy, but also was in jeopardy (Ginsburg and Versteeg 2014). made outcomes less likely to reflect the will of the The same logic applies to accountability, oversight, people (Myers 2004). and transparency laws. In eastern European econ- omies in transition in the 1990s, governments were When elites adapt through less likely to extract resources from the state when political competition was high, and they were more rules-based mechanisms likely to introduce institutions of accountability and In the examples just discussed, elites enhanced state oversight, particularly those related to civil service, capacity or introduced rules to manage contestation accounting, and anticorruption (Grzymala-Busse and increase accountability to adapt to changes 2006). In Brazil, audit courts are more effective in spurred by the development process that affected the localities with a greater turnover of elites (governors) relative power, preferences, and incentives of actors because these localities have delegated authority to (see part I of this Report). Such adaptation is essential independent auditors as an insurance mechanism for long-term development. Adaptation is not (Melo, Pereira, and Figueiredo 2009). Fiscal trans- Adaptation is not a one-off trait. Rather, it is a a one-off trait. parency ties not only the hands of current elites, but continual process as the needs and demands of soci- Rather, it is a also those of successors (Alt, Lassen, and Rose 2006). ety change over the course of development. At low- continual process This is consistent with the actions of certain states in income levels, deals may be sufficient to overcome as the needs Mexico. Although access to information and trans- elite coordination and commitment challenges; and demands of parency laws were strengthened at the federal level patronage can effectively provide credible commit- society change after the political change in 2000, and more recently ment and give the elite ruling coalitions cohesion. over the course of in 2016, such laws were more likely to be passed at At middle-income levels, however, rising societal development. the state level when opposition parties were stronger demands make the transaction costs of coordinating and when there was greater executive office turnover interests greater, potentially undermining deals- (Berliner and Erlich 2015). based bargains. This situation helps explain why low-income countries that are successful in terms of Vertical accountability as political medium-term economic growth tend to not have gov- insurance ernments that are appreciably cleaner than those of Elites sometimes introduce elections from a position comparator countries, whereas upper-middle-income of strength; at other times, they may do so to insure countries that grow to high-income levels experience themselves against exploitation by other elites. a sharp decline in perceived corruption relative to Movements toward democracy may result as new those countries that remain at the middle-income economic elites seek to safeguard (ensure a com- level. They also experience greater increases in hori- mitment to) their new position and wealth. Under zontal and vertical accountability (see spotlight 6 on authoritarian regimes, the commitment to protect the middle-income trap). resources and property is often weak.6 Broken com- Bargains that can adapt to accommodate evolv- mitments can lead empowered economic elites to ing elite interests may nevertheless struggle to part ways with the ruling coalition and support the adapt to growing citizen demands. Many countries democratic transition because they view it as more experiencing spells of rapid growth have engaged likely to prevent further exploitation. in rights violations, particularly of student and labor When elites introduce elections as a way to insure organizations, as a way to support the interests of the themselves against exploitation by other elites, the state, bureaucratic, and business elites in the ruling electoral rules are also likely to reflect the interests coalition (Leftwich 1995). In these cases, the tensions of these declining powers. When power is weakened, between growth outcomes and equity outcomes and 208 | World Development Report 2017 between legitimizing outcomes and legitimizing pro- that can lead to credible commitments. Credible cesses have increased. Regimes may be delegitimized institutions can lower the costs of losing by tying the when decision-making processes are insufficiently hands of competing elites, thereby lessening polar- inclusive, even when other development outcomes ization and making change more likely. Conversely, appear successful—that is, process legitimacy may informal patrimonialism pushes regimes to resist become more important than outcome legitimacy. democratic reforms because the costs of transition As discussed in part I of this Report, cooperation and are higher (Bratton and van de Walle 1997). coordination—collective action—are weakened as a Although the conditions that determine whether result of a “legitimacy deficit.” elites will adapt through rules are historically con- Overcoming delegitimization requires greater tingent and highly context-specific, there are a few inclusion in the political process. As elite ruling coali- circumstances in which such adaptability becomes tions grow in size, coordination difficulties increase, more likely: when elites have exogenous reasons to elite splits become more likely, and the space widens find common ground; when national institutions for citizen groups to enter. Here, the interaction produce leaders who effectively shape the incentives between citizens and elites becomes key, particularly and preferences of other elites; and when countries in the development of social movements. When have more balanced, diversified, and organized busi- bureaucratic interests diverge from political interests, ness interests. These circumstances are discussed in for example, they may attempt to organize citizens in the sections that follow. their support. But this co-optation of citizens follows the same logic as the institutionalized co-optation Common ground: Reducing polarization by of other elites: once citizens gain a seat at the table, maximizing shared elite interests vertical accountability increases and citizen interests When elite preferences converge and polarization are articulated and reflected in elite bargains. The decreases, coordination and cooperation become less interaction between elites and citizens is thus a two- challenging. Often, there are exogenous reasons for way dynamic with both sides playing decisive roles— such reductions in polarization. External threats or elites in seeking citizen support and opening up new internal threats from nonelites increase the fusion spaces for contestation and citizens in organizing to between ruling and opposition elites. When citizens overcome collective action problems and apply pres- are united against elite interests, the opposition sure on elites, as discussed in chapter 8. and ruling coalition can more easily find common Adaptation is necessary for long-term develop- ground—the cost of losing to the opposition becomes Adaptation is ment, but most elite bargains cannot be adapted. smaller. In Southeast Asian countries that feared necessary for long- Adaptability in elite bargains requires feedback mech- class revolution, elite groups with opposing class and term development, anisms, as well as an ability to accommodate rising ethnic backgrounds made “protection pacts” with one but most elite and falling powers. The free flow of information and another to resist mass mobilization (Slater 2010). For bargains cannot greater freedom of association make such accommo- example, in Malaysia the threat of urban communists be adapted. dation more likely. Many of the reforms described enabled ethnic Chinese businesses to unite across Adaptability in earlier are complementary and make further reform ethnic and ideological lines with traditional Malay- elite bargains more likely, leading to a virtuous circle. For example, sian elites. requires feedback many reforms that tie the hands of elites are embod- Polarization can also decline through shared mechanisms, as ied in new organizations, including independent ideologies and shared experience. When elites share well as an ability bureaucracies, anticorruption agencies, and legis- an ideology, they can more readily solve internal to accommodate latures. The actors in these organizations can then collective action challenges, enhancing cohesion and rising and falling directly contest in the policy bargaining arena. Stron- making rules-based bargains more viable (figure 7.4). powers. ger organizations want institutional improvements Shared military and revolutionary backgrounds help that support themselves, leading to a self-reinforcing to explain the cohesion and long-term stability of virtuous circle (North, Wallis, and Weingast 2009). Mexico’s Institutional Revolutionary  Party  (Partido Many of the reforms described earlier also tend to Revolucionario Institucional,  PRI) and China’s CPC lead to further adaptation because the degree of insti- (Knight 1992). Shared schooling can achieve similar tutionalization of the policy bargaining arena itself outcomes. Public schooling with nationally deter- influences the level of uncertainty and the cost of los- mined curricula can generate a national identity that ing. The rules that govern formal bargaining by elites may help overcome underlying schisms. However, help them overcome common agency problems and education can also increase polarization; ideologically also provide the structure for repeated interactions diverse societies may prefer school choice, which can Elite bargaining and adaptation | 209 Figure 7.4 Greater ideological unity among elites is associated with greater cohesion of the ruling coalition, as well as more institutionalized elite interactions a. Level of ruling coalition cohesion b. Level of institutionalized elite interactions versus elite ideological unity versus elite ideological unity 4 4 Institutionalized elite interactions Ruling coalition cohesion 3 3 2 2 1 1 0 0 1.0 1.5 2.0 2.5 3.0 3.5 1.0 1.5 2.0 2.5 3.0 3.5 Elite ideological unity Elite ideological unity Sources: WDR 2017 team, based on V-Dem 2015 and World Bank and V-Dem 2016b. Note: All variables are ordinal and range from 0 to 4, based on expert survey responses. The charts plot nonoverlapping decadal observations for 12 countries. result in greater ideological and cultural segmenta- coordinate among elite actors to overcome common tion over time (Kremer and Sarychev 2000). agency problems and reach positive sum (win-win) Specialized “elite” schools may be able to reduce outcomes. They also may change the incentives of the polarization of elite preferences and facilitate bar- other elites, taking into consideration who wins and gains. In Somaliland, elite secondary schools played who loses over time (the intertemporal dimensions). a crucial role in generating a unified leadership; the Transactional leaders, by means of “good poli- highly selective Sheekh Secondary School, which tics,” can reduce the polarization of elite preferences enrolls only 50 students a year, includes students without shifting norms. In the United States, Lyndon from all clans and has produced three out of four Johnson, as Senate majority leader before becoming presidents and numerous vice presidents and cabinet president, pushed through the Civil Rights Act of 1957 members. According to one graduate, “The gradu- despite resistance from the opposition as well as the ates of Sheekh School have had a huge influence on anti–civil rights southern bloc of his own party. By Somaliland, on its development, its politics. . . . Elite taking personal risks to force a resolution, he over- leadership was trained in us there” (Phillips 2013, 70). came a natural tendency of Congress to avoid risk (Schofield 2006). And he did this less by changing Effective leadership: Shaping elite beliefs than through good politics, including deals, preferences and incentives trades, threats, and ego stroking (Caro 2002). Effective leadership can change the parameters of By contrast, “transformational” leaders can change elite bargains. In an elite bargaining framework, the elite preferences or gain followings by shaping pref- importance of leaders is not in selecting the “right” erences. They are entrepreneurial in coordinating policy, but in spurring new ways in which organiza- norms and can effect large changes in society by tions can interact (Andrews 2013). Leaders are instru- changing the environment in which politics is played mental in determining outcomes by solving coordi- out, often by reducing the polarization of elites. nation challenges or by transforming the beliefs and Lyndon Johnson would not have been able to push preferences of followers (Ahlquist and Levi 2011). The through the more far-reaching Civil Rights Act of ability to solve coordination challenges corresponds 1964 had not the Reverend Martin Luther King Jr. and with a “transactional” role for leaders.7 Using an array his fellow civil rights activists successfully shifted the of bargaining tactics and strategies, these leaders contours of the conversation on race, nonviolence, 210 | World Development Report 2017 and human rights in the United States through helping to maintain a coherent national state during self-sacrifice, nonviolent struggle, moral courage, and destabilizing times (Fukuyama 2014). oratorical brilliance. National institutions help determine leader qual- Transformational national leaders can indelibly ity both through selection (ex ante accountability) and alter the nature of the policy arena and the state itself. punishment (ex post accountability)—see Maskin and Perhaps most notably, ideological nation-building Tirole (2004). When subsets of the population—such efforts can create political and social stability and as women (see box 7.4)—are excluded from leadership identity that can lead to greater trust, cooperation, positions, competitive selection is less likely to pro- and commitment to ethnically neutral policies (Gell- duce effective leaders. In democracies, political lead- ner 1983). In Tanzania, Julius Nyerere’s “extended ers must be elected, and local competition can prove a family” (ujamaa) socialism served as the ethnically fertile ground for demonstrating capacity for higher unifying basis for national development. Although office (see spotlight 9 on decentralization). Regard- economic development did not improve initially, less of whether citizens or a small elite elect or select mass compulsory education and the widespread leaders, transparency and information provision are use of Swahili helped overcome tribal cleavages and critical for screening good candidates (see chapter 8). produce a more unified and stable state. In Indonesia, For leaders to be effective, they must be not President Sukarno introduced the Five Pillars (Pan- only well-meaning, but also constrained by strong casila) to unite disparate elements of society during norms or formal institutions, including parties and the process of state formation. The concept survived legislatures (Ezrow and Frantz 2011). Term limits a military coup as well as the transition to democracy, can encourage party-based decisions rather than Box 7.4 Female elites and female leaders When half the population is excluded from leadership com- take citizens’ inputs into account in decision making (Fox petition, the political processes are half as likely to generate and Schuhmann 1999); female mayors tend to favor coop- good candidates. Although gender gaps are narrowing eration rather than a hierarchical approach to governing around the world in several domains, female elites remain (Tolleson-Rinehart 1991); and female chairs of state leg- underrepresented. The proportion of seats held by women islature committees act more as facilitators in committee in national parliaments is 22.5 percent worldwide; in the hearings than do male chairs, who instead use their power world’s largest 200 companies in 2014, women accounted to control the direction of the hearings (Lyn 1994). for only 17.8 percent of members of boards of directors; There is also evidence that female leaders are less and the average share of female justices in constitutional prone to patronage politics and corruption. In Africa, courts worldwide is 22.4 percent.a Even when women do women are less likely to become ministers in settings in gain positions of power, they are often constrained. For which incumbents use patronage to support ethnic con- example, when women are appointed ministers (in a sam- stituencies (Arriola and Johnson 2014). In India, the 1993 ple of 117 countries worldwide), they are largely assigned constitutional amendment that mandated the reservation to less strategic and more “feminine” policy areas (Krook of one-third of local government council positions for and O’Brien 2012). women also reduced the incidence of corruption (Beaman The lack of female elite representation has negative and others 2011). In Brazil, random audits of government effects on the introduction of inclusive policies (see chap- administrations showed that female municipal mayors ter 6) because the preferences of female leaders may be were less likely than male mayors to be corrupt and were systematically different from male preferences. In the also less engaged in patronage (Brollo and Troiano 2016). context of elite bargaining, female leaders are also more More broadly, countries with a higher representation of likely to engage in inclusive decision-making processes. In women in parliament have lower levels of corruption the United States, female city managers are more likely to (Dollar, Fisman, and Gatti 2001). Source: WDR 2017 team. a. Data are from the World Bank, World Development Indicators (database); Globe Women, Corporate Women Directors International; and World Bank, Women, Business and the Law (database). Elite bargaining and adaptation | 211 personalistic decisions, as well as the cultivation When diverse productive interests gain in of successors (Ginsburg, Melton, and Elkins 2011). strength because of external shocks and internal Term limits also help with informal coordination by change, they can improve elite bargains. For example, signaling to rivals. Even in autocratic settings, higher in the conflict between the English Parliament and leadership turnover is associated with more success- the monarchy during the 17th-century civil war, trad- ful economic and human development (Besley and ers provided parliamentary moderates who lacked Kudamatsu 2007). mercantile interests with financial assets and com- pany shares, creating a broad parliamentary majority Balanced, diversified, and organized that overcame monarchic rule and changed the mech- business interests anisms by which Parliament operated (Jha 2015). Economic conditions help determine the adaptabil- Business associations can help diverse business ity of elite bargaining. Where productive business interests overcome collective action problems and interests dominate, ruling coalitions are likely to be gain influence in elite bargains. They can push for more dynamic and adaptive; where monopoly inter- institutionalized consultations that can enhance ests dominate, policies are more likely to prevent the coordination and decrease elite polarization. Chile’s emergence of new economic elites. Concentrated movement from particularistic state-business rela- economic power makes adaptability to external tions in the 1970s to peak business association con- shocks and internal change less likely, with important sultations in the 1980s improved economic efficiency, political consequences. More concentrated economic and by aligning the interests of political insiders and power tends to lead to concentrated political power business elites it helped pave the way for a smoother that reflects this economic distribution. And when democratic transition (Silva 1996). Business associa- economic power translates into political power, insti- tions can also act to balance the power of entrenched tutions of accountability are less likely to develop political elites. In Korea, the nature of empowered (figure 7.5). For this reason, reforms that concentrate businesses led to a form of business-state collusion economic power without institutions in place to deal that was pro-development, in contrast to business- with new powerful interests may be ineffective, as state relations in the Philippines that tended to be in many postcommunist countries, where the initial much less conducive to broad-based development beneficiaries of market reforms became economi- (Kang 2002). In these cases, the key to effective busi- cally and politically powerful enough to block further ness associations is the representation of diverse reform (Hellman 1998). interests: when business associations represent a diversity of interests, they are more inclined to push for universalistic rules and institutional reforms Figure 7.5 When economic power maps onto political (Maxfield and Schneider 1997). power, there are fewer institutional checks on power Freedom of association index Entry points for change 1.0 through elite adaptation 0.8 How can a deeper understanding of elite bargains Party system 0.6 Alternative sources of 0.4 point to entry points for change? First, changes in institutionalization index information index 0.2 the rules of the game in the policy arena are driven 0 by the relative power of self-interested actors. Trying to impose reforms for contestability or accountabil- Civil society participation Judicial constraints on the ity is not likely to gain traction. This chapter focuses index executive index on national elites, but the same analysis could also consider the subnational level and agency-specific Legislative constraints on reforms. In all of these cases, reform of the rules by the executive index which actors interact can succeed only when the rules Economic elites All citizens reflect the actual distribution of power and interests. have power 0 1 2 3 4 have power Rules that do not reflect this power distribution or Source: WDR 2017 team, using data from V-Dem 2015. change this power distribution will not stick. Note: The figure maps the association between economic and political power. The analysis is based on Second, under certain circumstances elites do data for 170 countries in 2012. The variable indicating how economic power maps onto political power is from V-Dem, based on expert surveys. A score of 0 means that economic elites have a monopoly on choose to tie their own hands, so there is room for political power; a score of 4 means that all citizens have equal power, regardless of economic position. optimism. Trying to create these circumstances by 212 | World Development Report 2017 altering incentives, preferences, and contestability at other actors (citizens and international actors) to the margins may be an effective way to help change change the nature of elite bargains. rules. Although there are few entry points, there are ways to facilitate this process and support develop- Notes ment of homegrown rules: 1. The same analysis could also consider the subnational level and agency-specific reforms. Effectively change the incentives of elite actors. Even •  2. This leads to the “limited access orders” described when the relative power of actors remains the in North, Wallis, and Weingast (2009) and the same, the nature of elite bargains can change when “extractive” political institutions described in Acemo- the elites in power face changed incentives, often glu and Robinson (2012). as a result of shocks or gradual processes of eco- 3. This can happen in both autocratic and democratic nomic development. Economic diversification can settings. In autocracies, elites face a “dictator’s undermine rent-based elite bargains, changing the dilemma”: their hold on power is tenuous, and they usually are overthrown from within (Svolik 2012). incentives of ruling elites to support more broad- In democracies with significant oppositions, voting based policies. Effective transactional leaders can regularizes (institutionalizes) uncertainty because a engage in “good politics” to change the incentives change of administration entails a loss of power for facing other elites in the policy arena. When citi- incumbents. zens overcome their collective action challenges to 4. For safety valves, see Malesky and Schuler (2010); for pressure elites, they change the incentives of elites co-optation, Gandhi and Przeworski (2006), Langston to respond to their demands (see chapter 8). Exter- (2006), and Gandhi (2009); for signaling, Geddes nal actors can help change elite incentives when (2005); for leadership transitions, Ezrow and Frantz they present inducements or threats, such as condi- (2011); and for rent distribution, Lust-Okar (2006). tional development assistance or the possibility for 5. Brady and Mo (1992); Cox and Niou (1994); Cox (1996). membership in the European Union or World Trade 6. From 1950 to 2002, the majority of Latin American countries under an autocracy engaged in at least one Organization (see chapter 9). large-scale expropriation of private finance, land, or •  Reshape preferences in the policy arena. The nature of natural resources (Albertus and Menaldo 2012). elite bargains can also change when actor prefer- 7. For the distinction between transactional and trans- ences evolve. Often, changes in preferences occur formational leaders, see Burns (1978). slowly over extended periods, such as global trends over centuries to view the practices of slavery and Referencesa torture as immoral. In the shorter term, transfor- mational leaders can coordinate norms and change Acemoglu, Daron, and James A. Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. beliefs. 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Political Science 52 (2): 322–43. 216 | World Development Report 2017 SPOTLIGHT 9 Decentralization At their most effective, decentralized systems can Decentralized governance can create incentives spur experimentation that helps localities adapt for competent individuals to pursue political lead- proactively to changing circumstances. In the ership, societal groups to invest in building political United States, Supreme Court justice Louis Brandeis parties, or existing subnational governments to adopt famously referred in 1932 to the 50 states as “labora- innovative policy solutions. Competitive local elec- tories for democracy” that could “try novel social and tions can enable the entry of political outsiders and economic experiments without risk to the rest of the provide incentives for incumbent administrations to country.”1 strive to show competence in governance. In India, By multiplying the number of more or less auton- which has a decentralized system, several regionally omous arenas within which public authority is exer- based parties have grown to form national coalitions, cised, decentralization increases the opportunities whereas two dynastic parties have dominated the for policy innovations and the emergence of effective politics of Bangladesh, a more centralized state. As a leaders (Tendler 1997; Campbell 2003). Often these result, India has introduced a far greater range of pol- innovations are spurred by political outsiders, who icy innovations than has Bangladesh in spheres such may not have access to the national policy arena but as language and management of internal conflict are more likely to acquire citizen support locally and (Norris 2008). spur local institutional reforms. For example, after If the career prospects of subnational officials direct mayoral elections were introduced in Colombia depend on their performance in running subnational in the 1990s, municipalities led by political outsiders governments, they have a strong incentive to seek invested heavily in upgrading their administrative policy innovations to address local governance chal- capacities (Fiszbein 1997). lenges. In China, local policy autonomy has served Although decentralization increases opportunities as an incentive for local institutional innovations; for innovation and the entry of political outsiders, leadership personnel are nominated by the upper only certain arrangements provide the correct incen- level (and formally approved at the local level) in an tives for experimentation. To generate adaptive and arrangement dubbed “experimentation under hierar- innovative local governance, it is essential to have a chy” (Heilmann 2008). well-defined assignment of responsibilities across The nature of decentralization and central-local levels of government and a clear expectation that relations shape local incentives for innovation. For subnational governments will be held responsible for example, different incentives and pressures arise their performance. To prevent clientelism or capture when local parties are in opposition to central parties. at the local level, citizens or central elites must have In Lagos, Nigeria, the opposition leadership could not both the ability to hold local elites accountable and the rely on intergovernmental transfers from the center, incentives to do so. and thus it put in place innovative approaches to secure greater internally generated revenues. Because new actors needed to be persuaded to cooperate in WDR 2017 team, based on inputs from Yasuhiko Matsuda. Decentralization | 217 order to secure these revenues, more contestability to demonstrate their competence and deliver per- emerged in the local policy bargains (Watts 2016). formance in numerous subnational governments (Myerson 2011). In recent years, Mauricio Macri of Argentina, Narendra Modi of India, and Joko Widodo National diffusion of local of Indonesia all demonstrated their effectiveness innovations as local governors before winning national office. Even when successful, idiosyncratic local innova- Decentralized democracies allow opposition political tions in isolated local governments may not translate parties to gain support in specific localities or regions into systemic adaptation; these innovations must and eventually to challenge the dominant national be diffused across jurisdictions. Decentralization party. In India, the Bharatiya Janata Party (BJP), which can increase policy experimentation, but it also can carried Modi into the national government, gained increase the number of veto players. In some cases, strength over time by winning several elections at the a nimble unitary state may be more agile in policy state level (Rudolph and Rudolph 2001). adaptation, compensating for the reduced number of opportunities for experimentation and outsider entry. The politics of Certain governance environments and power rela- tionships encourage efficient diffusion of local inno- decentralization vations. Diffusion through “demonstration effects” The decision to decentralize can be spurred by many requires both competition among local governments different combinations of incentives and arrange- in different jurisdictions and relatively free flows of ments of relative power among various actors. A split information, so that elites and citizens can identify may arise among central actors, and to gain strength innovations in other jurisdictions. In Brazil, partici- they may turn to supportive local actors. Sometimes, patory budgeting began in a handful of municipali- ruling elites have attempted to diffuse popular dis- ties in southern parts of the country and eventually content with the performance of the national gov- spread to hundreds of local governments. In this ernment by decentralizing roles and responsibilities case, diffusion followed more or less partisan lines, to subnational governments. The military regime demonstrating the effectiveness of political parties that governed Brazil from 1964 to 1985, for example, as institutional mechanisms to transmit information formed tacit alliances with subnational political elites (see chapter 8). to maintain both a modicum of political legitimacy Diffusion may also be facilitated by strong central and coalitional support (Hagopian 1996). In other control. In China, where subnational governments instances, elites have tried to preempt rising demands have acquired significant levels of autonomy over for regional autonomy through greater decentraliza- fiscal and economic affairs but where local leaders tion, such as Bolivia in the 1990s and Indonesia in the face accountability to upper-level governments, indi- early 2000s, or have introduced more decentraliza- vidual jurisdictions have emulated successes from tion to signify a move away from the authoritarian other jurisdictions. When provinces faced a challenge centralization of power and resources, such as the of controlling local inflation soon after market- Philippines after the fall of Ferdinand Marcos. For- oriented reforms were introduced in the late 1980s, malization of a decentralized governance structure more effective approaches—such as a market-oriented can also be a form of “settlement” after a prolonged measure adopted by one of the reform front-runners, internal conflict (see chapter 4). the province of Guangdong—drove out less effective Even after a political system decides to decentral- ones—such as a price-control policy introduced by the ize, the central-local relationship constantly devel- more conservative province of Heilongjiang, border- ops; it is not linear. Changing power dynamics can ing Siberia (Montinola, Qian, and Weingast 1995). generate pushes for recentralization if national and Local innovations can translate into nationwide subnational elites are in competition. For example, reforms through processes of political renewal when in the Philippines, during legislative consideration local leadership—whether through parties or as indi- of the Local Government Code in 1991, members of viduals—wins national power and leads their coun- the House of Representatives, who were elected from try in a new direction. Subnational political leaders congressional districts (typically smaller than a prov- are more likely to step up to the national level in a ince), opted to weaken the fiscal resource base of pro- political system in which decentralization is insti- vincial governments whose governors were viewed tutionalized and political leaders have opportunities as potential rivals as dispensers of local patronage. 218 | World Development Report 2017 Senators, who were elected nationally, were more Hagopian, Frances. 1996. Traditional Politics and Regime willing to devolve more power to the provinces (Eaton Change in Brazil. New York: Cambridge University 2001; Matsuda 2011). Press. As these cases demonstrate, political incentives Heilmann, Sebastian. 2008. “Policy Experimentation in China’s Economic Rise.” Studies in Comparative Interna- shape important aspects of the design of intergovern- tional Development 43 (1): 1–26. mental relations, with lasting consequences for the Matsuda, Yasuhiko. 2011. “Ripe for a Big Bang? Assess- ability of the decentralized governance arrangement ing the Political Feasibility of Legislative Reforms to adapt to emerging challenges. Decisions to decen- in the Philippines’ Local Government Code.” Policy tralize (or recentralize) are primarily politically moti- Research Working Paper 5792, World Bank, Wash- vated and involve bargains among multiple stakehold- ington, DC. ers in which technocratic criteria often take a back Montinola, Gabriella, Yingyi Qian, and Barry R. Wein- seat. Outcomes reflect the relative bargaining powers gast. 1995. “Federalism, Chinese Style: The Political of competing interests, mediated by the existing polit- Basis for Economic Success in China.” World Politics ical institutions. Understanding how these bargains 48 (1): 50–81. take place can help produce more effective, adaptive, Myerson, Roger B. 2011. “Toward a Theory of Leadership and State Building.” Proceedings of the National Academy and context-specific decentralization designs. of Sciences 108 (Supplement 4): 21297–301. Norris, Pippa. 2008. Driving Democracy: Do Power-Sharing Note Institutions Work? New York: Cambridge University 1. New State Ice Co. v. Liebmann, 285 U.S. 262 (1932).  Press. Rudolph, Lloyd I., and Susanne Hoeber Rudolph. 2001. “Redoing the Constitutional Design: From an Inter- References ventionist to a Regulatory State.” In The Success of Campbell, Tim. 2003. The Quiet Revolution: Decentralization India’s Democracy, edited by Atul Kohli, 127–62. Con- and the Rise of Political Participation in Latin American temporary South Asia Series. New York: Cambridge Cities. Pittsburgh: University of Pittsburgh Press. University Press. Eaton, Kent. 2001. “Political Obstacles to Decentraliza- Tendler, Judith. 1997. Good Government in the Tropics. Balti- tion: Evidence from Argentina and the Philippines.” more: Johns Hopkins University Press. Development and Change 32 (1): 101–27. Watts, Michael. 2016. “The Lagos Model: Political Reform Fiszbein, Ariel. 1997. “The Emergence of Local Capacity: and Asymmetrical State Capabilities in an Oil State.” Lessons from Colombia.” World Development 25 (7): Background paper, WDR 2017, World Bank, Washing- 1029–43. ton, DC. Decentralization | 219 SPOTLIGHT 10 Public service reform In the United States, the Pendleton Civil Service A case in point: Mexico’s Reform Act of 1883 sought to abolish the spoils system then at work in the federal government. To this end, Professional Career Service it established a meritocratic public service, governed Mexico’s SPC law of 2003 was a historical milestone, by rules that restricted politicians’ power over their passed at a moment of opportunity after the National administrative agents (Horn 1995). Implementation of Action Party (Partido Acción Nacional, PAN) won the these rules took a long time; a half-century later, about presidency.3 It aimed to put an end to the spoils sys- 75 percent of public servants were subject to them tem of the Institutional Revolutionary Party (Partido (Grindle 2012, 1). Fast-forward to April 2003 when Revolucionario Institucional, PRI), in place for over 70 Mexico’s president, Vincente Fox, signed into law years, by establishing meritocratic rules for middle- the Professional Career Service (Servicio Profesional and senior-level management positions. Patronage de Carrera, SPC), which set up meritocratic rules for had served the PRI well: the prospect of landing a pub- middle- and high-level positions in the federal public lic job mobilized citizens for its electoral campaigns, administration. As of early 2015, only a tiny fraction and the system permitted it to deliver on presidential (1.8 percent) of all federal public servants were part of agendas, recruiting both expertise and loyalty while the SPC (World Bank 2016). co-opting dissenters. Public services have yielded to reformers, but only A context of growing electoral competition, and slowly and incrementally. Change has been messy thus a growing risk of losing power, enabled cross- and nonlinear—new color added to an old painting, party support for adoption of the SPC by Mexico’s not a fresh canvas. This pattern holds regardless of the Congress. The law had been conceived by an elite direction or objectives of change—whether reformers coalition of presidential advisers, academics, and leg- were fighting against patronage1 and for a merito- islators. Legislators from all major parties supported cratic, (politically) neutral, and stable Weberian-style the SPC law. career public service2 (Weber 1956), or hoping to Implementation of the SPC encountered resis- make rule-bound bureaucracies more responsive and tance, however, and was rapidly subverted. The initial performance-oriented, such as during the New Public challenges did not assuage the critics: it often took Management (NPM) movement in the 1980s. Why months to fill vacant positions under the new recruit- has it been so difficult to change institutional logics ment processes. Managers, accustomed to the flex- within the public service? What does this imply for ibility afforded by patronage, felt overly constrained reformers’ strategies? and unable to build their own teams. Ministries, departments, and agencies (MDAs) bypassed the SPC law by appointing large numbers of staff to temporary positions and advisory roles. In 2007 new regulations gave the MDAs autonomy to run the SPC recruitment Prepared for WDR 2017 by Jürgen René Blum. process themselves, which the Ministry of Public 220 | World Development Report 2017 Service (MoPS) had originally conducted centrally. and well organized. Within elite circles, legislators Today, the SPC remains alive. In early 2015 it covered must commit to tying their own hands and giving up about 79 percent of the positions that it should cover patronage. This is more credible when electoral com- under the law (World Bank 2016). But challenges petition makes future changes in power likely, such as persist. For example, the MDAs continue to exploit a after Mexico’s 2000 election (Geddes 1994). In this case, loophole in the SPC legislation (Article 344) to bypass meritocracy can serve as insurance that partisans will its competitive process. In 2014 about 45 percent of all retain their jobs (see chapter 7). Meritocracy can also SPC appointees entered through this loophole. help politicians credibly commit to policies beyond their own time in office. President Franklin Roosevelt, for example, expanded merit protection to his liberal Adverse politics appointees out of fear that his New Deal policies might As in Mexico, reformers have frequently capitalized not outlast his administration (Horn 1995, 103). on moments of crisis or political change to advocate Programmatic political parties can help overcome for enacting new public service legislation (Grindle these collective action problems by disciplining legis- 2012, 256). In Mexico, the opportunity was presented lators to act collectively in their party’s interest (chap- by the increasing party competition. In the United ter 8), as, for example, in Mexico. Statistical analysis States, the Pendleton Act was passed only after of over 160 World Bank civil service reform projects President James Garfield was assassinated by an around the world supports these findings. Cruz and infuriated benefactor of the spoils system,5 although Keefer (2015) find that these projects on average per- voters’ discontent with politicians buying and selling formed better where programmatic political parties offices had been growing beforehand (Wilson 1989, were present.6 Concentrated decision-making power 239). Advocates of meritocratic reform have depended can also help.7 Several states with centralized power, on such rare windows of opportunity because the bal- ranging from Prussia to Rwanda, have employed con- ance of power has often been skewed against it, facing centrated power to enforce meritocratic reforms. opposition from powerful veto players. Patronage—or deals-based—systems have served political elites and their constituents well in many Reinterpreting ambiguous ways. Patronage, employed rightly, can drive govern- rules ment performance. It can enable political principals to Even when new public service rules are adopted, pick the most able and loyal candidate for the job. But notoriously vast gaps between paper and practice it can also serve to reward constituents with public tend to persist. In Mexico, much of the battle over the jobs, helping politicians survive in office (as in Mex- SPC was fought over the (re)interpretation of the new ico before 2000), especially when a politician’s base is rules after they had been signed into law. Public ser- narrow (see chapter 6). As Robinson and Verdier (2013) vice rules are vulnerable to such “political skirmish- argue, the promise of revocable public jobs is a polit- ing” (Mahoney and Thelen 2009, 12) because they are ically attractive form of clientelistic transfer because ambiguous (compared with, for example, a change in it ensures mutual commitment. Politicians can easily tax rates) and because of principal-agent problems fire disloyal constituents, and constituents can easily (Schneider 1999). observe whether they receive the promised jobs in Public servants—the very agents asked to imple- return for votes. Short electoral cycles also favor clien- ment the new rules—may be reluctant to follow them telism. A public job is an immediate and secure reward because they do not reflect the social norms (and for constituents, whereas political investments in beliefs) that shape their identities—that is, the pre- meritocratic principles may translate into better ser- vailing informal institutions. Identities can be slow vices only in the distant—and uncertain—future. to adapt, despite changes in formal rules. In Austria, Meritocratic reforms have had to be politically con- for example, about a decade after the adoption of structed because they require collective action (Schnei- NPM-style reforms, 58 percent of surveyed officials der 1999; Grindle 2012). They have rarely figured prom- continued to identify themselves as “servants of the inently in electoral platforms because they benefit a state,” consistent with long-standing bureaucratic- dispersed and disorganized broad electorate (Schnei- legalistic (Rechtsstaat) virtues rather than managerial der 1999). Meanwhile, reform opponents—political ones (Meyer and Hammerschmid 2006). and public service elites and civil servants them- Not least, political principals themselves may seek selves—tend to be powerful veto players, concentrated to only partially implement reforms in a hunt for Public service reform | 221 legitimacy rather than performance (DiMaggio and to violence (Blum, Ferreiro-Rodriguez, and Srivastava Powell 1983). Moynihan (2006), for example, docu- 2016). ments that U.S. states only partially adopted perfor- Skillfully bundling public service reforms with mance management reforms in the 1990s. Managers other policies can help mobilize a broader electorate were held to account more tightly for results, which beyond a small elite of reformers (Schneider and were politically attractive to announce. But in the face Heredia 2003, 18). Reformers in Argentina and Bra- of union resistance, among other factors, many states zil, for example, framed administrative reforms as failed, in return, to give managers more discretion essential to making popular stabilization programs over their staff. viable (Schneider 1999). Such bundling may, however, come at the price of tying the longer-term prospects of public service reform to the “fortunes of the larger Implications for public agenda” (Schneider 1999). Especially where political cohesion is weak, selec- service reform strategies tive and asymmetric reform strategies can reduce In summary, public service reform paths have been resistance, seeking to build “islands of effectiveness” nonlinear and messy because reform initiatives often in selected agencies. Indonesia’s Bureaucracy Reform, face adversity and because new rules risk being sub- for example, successfully increased pay and account- verted in practice. What does this imply for reform ability for performance in a few priority agencies, and strategies? it was later gradually rolled out to others (World Bank Above all, realistic public service paths and 2014). In Afghanistan in 2003, reformers adopted an strategies depend on context. Paths vary because of asymmetric reform approach to rebuilding the admin- distinct points of departure. Historical legacies— istration, recognizing that political divisions made beyond political institutions—have limited the room comprehensive administrative reforms impossible in which reformers can maneuver. Pollitt and Bouck- (Hakimi and others 2004, 11). Yet, selective strategies aert (2011, 94), for example, highlight how administra- are risky and no panacea. They can entail general- tive traditions persist. Countries in the Rechtsstaat or ization pressures, as in Afghanistan (Blum, Ferreiro- Napoleonic tradition,8 such as Austria, Germany, and Rodriguez, and Srivastava 2016); interagency compe- France, have been much more cautious in disman- tition for skills, as in Brazil (Shepherd 2003); or well- tling a unified public service and assimilating it with paid jobs becoming the target of political patronage, private sector employment than their Anglo-Saxon as in Uganda’s Revenue Authority (Robinson 2007). “public interest” peers. China’s unique cadre manage- Not least, the process of formulating ideas for ment system has successfully married long-standing reform matters. Where leaders frequently engage norms of loyalty to the Communist Party of China with stakeholders—especially public servants—in (CPC) with meritocratic recruitment and cadres’ defining problems and solutions, public servants accountability for achieving performance targets far may be more prepared to accept and identify with from the apolitical Weberian model (Rothstein 2015). new rules (Andrews 2013). New research corroborates Realistic reform strategies also need to balance the promise of influencing employees’ beliefs and competing and evolving objectives. In member coun- organizations’ cultures, short of changing formal tries of the Organisation for Economic Co-operation practices. In a quasi-experimental study, Blader and and Development (OECD), problem definitions have others (2015) show that merely introducing drivers of shifted from containing patronage through merito- a U.S. trucking company to “lean management ideas” cratic reforms in the 19th century, to ensuring equal that emphasize continual improvement through access and treatment in the 1950s, to increasing teamwork and collective responsibility is associated responsiveness in the 1970s (and performance in the with higher employee engagement and, in turn, bet- 1990s), as reflected in the NPM movement (Blum and ter driving performance. Understanding how public servants’ identities matter and change remains a Manning 2009). Postconflict settings perhaps most promising field for future empirical research. starkly illustrate competing ends: discretion over public jobs may be the price for peace, trumping all concerns over merit. South Sudan’s Comprehensive Notes Peace Agreement (CPA) of 2005, for example, provided 1. Following Reid and Kurth (1988), patronage is defined its 10 states with vast discretion over recruiting public here as the power to hire and fire an employee at will. servants to hold a fragile coalition of formerly war- 2. The key feature of a meritocratic civil service is that it ring tribes together and prevent them from reverting restricts politicians’ power over their administrative 222 | World Development Report 2017 agents. Meritocracy is understood here as broadly Blum, J., and N. Manning. 2009. “Public Management comprising a variety of forms. In the narrow Webe- Reforms across OECD Countries.” In Public Manage- rian sense, it refers to a career-based public service, ment and Governance. 2nd ed., edited by T. Bovaird and with entry through competitive exams, and govern- E. Loffler. London: Routledge. ment by principles of political neutrality. Blum, Jürgen René, Marcos Ferreiro-Rodriguez, and 3. The argument in this spotlight and the opening exam- Vivek Srivastava. 2016. Building Public Services in ple draw strongly on Grindle (2012). Post-conflict Countries: A Comparative Analysis of Reform 4. Article 34 of the Law of the Professional Career Service Trajectories. Washington, DC: World Bank. establishes that in exceptional cases and in cases of Cruz, Cesi, and Philip Keefer. 2015. “Political Parties, public emergencies the ministers or the chief admin- Clientelism, and Bureaucratic Reform.” Comparative istrative officers may authorize the appointment of a Political Studies 48 (14): 1942–73. public servant to a career position without the need DiMaggio, Paul J., and Walter W. Powell. 1983. “The Iron for an open competition and on a temporary basis Cage Revisited: Institutional Isomorphism and Col- (OECD 2011, 195). These exceptions are only vaguely lective Rationality in Organizational Fields.” American defined. Sociological Review 48 (2): 147–60. 5. Reform required a political crisis triggered by the Geddes, Barbara. 1994. Politician’s Dilemma: Building State assassination of Garfield by Charles Guiteau, who Capacity in Latin America. Berkeley: University of killed the president in an act of revenge when Gar- California Press. field refused to appoint him as the U.S. ambassador to Grindle, Merilee S. 2012. Jobs for the Boys. Cambridge, MA: France. Harvard University Press. 6. Project performance is measured based on the Inde- Hakimi, Eklil, Nick Manning, Satyendra Prasad, and pendent Evaluation Group’s project outcome ratings. Keire Prince. 2004. Asymmetric Reforms: Agency-Level These ratings are meant to assess the extent to which Reforms in the Afghan Civil Service. Washington, DC: “there were . . . shortcomings in the operation’s World Bank. achievement of its objectives, in its efficiency or in Horn, Murray J. 1995. The Political Economy of Public Admin- its relevance” on a six-point ordinal scale, ranging istration: Institutional Choice in the Public Sector. Political from “highly satisfactory” to “highly unsatisfactory” Economy of Institutions and Decisions Series. Cam- (World Bank 2005, 1). It is important to note that these bridge, U.K.: Cambridge University Press. ratings have very large caveats. Among others, they Mahoney, James, and Kathleen Thelen. 2009. Explaining are corporate measures of project performance, not of Institutional Change: Ambiguity, Agency, and Power. New government performance; they suffer from endoge- York: Cambridge University Press. neity bias (as objectives are project-specific); and they Meyer, Renate E., and Gerhard Hammerschmid. 2006. inevitably contain elements of subjectivity. “Changing Institutional Logics and Executive Iden- 7. Besides concentration of power and programmatic tities: A Managerial Challenge to Public Adminis- political parties, the literature highlights many contex- tration in Austria.” American Behavioral Scientist 49 (7): tual factors that can influence public service reforms, 1000–14. including the degree of fusion between bureaucrats Moynihan, Donald P. 2006. “Managing for Results in and politicians (Schneider and Heredia 2003) and the State Government: Evaluating a Decade of Reform.” prior influence of class elites in the public service Public Administration Review 66 (1): 77–89. (Grindle 2012). See Pollitt and Bouckaert (2011) for a OECD (Organisation for Economic Co-operation and comprehensive discussion of NPM reforms. Development). 2011. Towards More Effective and 8 . From the Rechtsstaat perspective, the state is a central Dynamic Public Management in Mexico. OECD Public integrating force within society, and its central con- Governance Reviews Series. Paris: OECD. cern is with the preparation and enforcement of laws. Pollitt, Christopher, and Geert Bouckaert. 2011. Public By contrast, the public interest model “accords the Management Reform, a Comparative Analysis: New Public state a less extensive or dominant role within society” Management, Governance, and the Neo-Weberian State. and government is regarded as “something of a neces- Oxford, U.K.: Oxford University Press. sary evil” (Pollitt and Bouckaert 2011, 62). Reid, Joseph D., and Michael M. Kurth. 1988. “Public Employees in Political Firms, Part A: The Patronage Era.” Public Choice 59 (3): 253–62. References Robinson, James A., and Thierry Verdier. 2013. “The Polit- Andrews, Matt. 2013. The Limits of Institutional Reform in ical Economy of Clientelism.” Scandinavian Journal of Development: Changing Rules for Realistic Solutions. New Economics 115 (2): 260–91. York: Cambridge University Press. Robinson, Mark. 2007. “The Political Economy of Gover- Blader, Steven, Claudine Gartenberg, Rebecca Hender­ nance Reforms in Uganda.” Commonwealth and Com- son, and Andrea Prat. 2015. “The Real Effects of Rela- parative Politics 45 (4): 452–74. tional Contracts.” American Economic Review 105 (5): Rothstein, Bo. 2015. “The Chinese Paradox of High 452–56. Growth and Low Quality of Government: The Cadre Public service reform | 223 Organization Meets Max Weber.” Governance 28 (4): Anti-corruption Conference, Seoul, Republic of 533–48. Korea, May 25–28. Schneider, Ben Ross. 1999. “The Politics of Administra- Weber, Max. 1956. Economy and Society. 2 vols. Berkeley: tive Reform: Intractable Dilemmas and Improbable University of California Press. Solutions.” Paper presented at the Federal Reserve Wilson, James Q. 1989. Bureaucracy: What Government Bank of Atlanta’s 1999 Fiscal Conference: Sustain- Agencies Do and Why They Do It. New York: Basic Books. able Public Sector Finance in Latin America, Atlanta, World Bank. 2005. “Harmonized Evaluation Criteria for November 1–2. ICR and OED Evaluations.” World Bank, Washington, Schneider, Ben Ross, and Blanca Heredia. 2003. Rein- DC. venting Leviathan: The Politics of Administrative Reform World Bank. 2014. “Pay Flexibility and Government in Developing Countries. Miami: North-South Center Performance: A Multicountry Study.” Working Paper Press. 88486 (June 1), World Bank, Washington, DC. Shepherd, Geoffrey. 2003. “Civil Service Reform in ————. 2016. Mexico Public Expenditure Review. Report Developing Countries: Why Is It Going Badly?” Paper AUS10694 (March 30). Washington, DC: World presented at the World Bank’s 11th International Bank. 224 | World Development Report 2017 CHAPTER 8 Citizens as agents of change For most of the 19th and 20th centuries in Uruguay, time, political, administrative, and economic reforms the overall quality of public services was low, and increasingly reduced politicians’ opportunities to cap- political connections were the main vehicle for ture state resources for private purposes. accessing the goods and services provided by the The experience of Uruguay illustrates how mul- state. In fact, clientelist (patron-client) practices were tiple mechanisms of engagement can help citizens the norm. Yet, in recent decades, government perfor- influence the policy arena by changing incentives, mance in Uruguay has steadily improved, making the preferences, and contestability to generate more country a rare contemporary overachiever—a society equitable development. Modes of citizen engagement that has succeeded in curbing corruption and promot- include elections, political organizations, social orga- ing a virtuous cycle of institutional change toward nizations, and direct participation and deliberation. better governance (Mungiu-Pippidi 2015; Buquet and Because all these expressions of collective action are Piñeiro 2016). Today, Uruguay is ranked the world’s imperfect, they complement rather than substitute 21st least-corrupt country, according to Transparency for one another. As the example of Uruguay shows, International’s 2015 Corruption Perceptions Index it is their strategic combination that makes govern- (Transparency International 2015). ments more responsive to citizens’ needs and opens What accounts for Uruguay’s successful transfor- up opportunities for sustainable change. mation? Although a complex set of circumstances and Chapter 7 points out that elites are not monolithic; contingencies was ultimately responsible, evolving rather, they engage in bargains that reflect diverse action on the part of Uruguay’s citizens and their preferences and incentives and ultimately shape interaction with elites in the policy arena were essen- policy formulation and implementation. Such differ- tial ingredients. The creation of programmatic parties ences in objectives among elites can open up opportu- after civilian rule was reestablished in 1985 played an nities for citizens to support change. Indeed, import- Important changes important role. Social groups made efforts to build coa- ant changes in history have been driven by coalitions in history have litions with interest groups that shared the same pref- between reforming elites and organized citizens that been driven by erences—such as the urban sector hit by the economic support reform initiatives and overcome the opposi- coalitions between crisis—and to channel popular demands through a tion of other elites (Fukuyama 2014; Fox 2015). reforming elites new coalition of political actors (Frente Amplio) that The ways in which elites and citizens interact to and organized would become a political option to the traditional create coalitions for change are often shaped by exist- citizens that groups in power. The new coalition increased con- ing institutions of vertical and horizontal account- support reform testability and managed to bring into the policy arena ability that define the rules of the game in the policy initiatives. new demands for equitable access to public resources, arena. As discussed in chapter 7, these rules are often accountability, and better-quality services. Eventually, the result of elite-elite bargains that are designed pri- elections rewarded the politicians who delivered on— marily to serve elite interests. As this chapter shows, and credibly committed to—their announced reforms, however, certain accountability institutions can changing the incentives of elites and increasing the perform new functions and create an enabling envi- opportunity costs of old clientelist practices. Over ronment for citizen agency, opening up opportunities Citizens as agents of change | 225 for enhanced contestability and elite-citizen interac- the incentives of local politicians to deliver—including tion in ways often not anticipated by the actors who by curbing corrupt behavior. In China, for example, the originally designed them. Yet, the outcomes of such introduction of village-level elections increased total local institutional reforms are not predetermined. Citizen expenditures on public goods by about 50 percent and agency can help translate favorable conditions into helped curb the rent-seeking behavior of local officials effective reforms that drive positive change. and reduce inequality by promoting land redistribution This chapter focuses primarily on the conditions to local villagers (Shen and Yao 2008; Martinez-Bravo under which citizen engagement can be a driver of pos- and others 2011). Likewise, during the phasing in of itive change, while recognizing that each mechanism decentralization and the shift to direct elections of engagement—elections, political organizations, across districts in Indonesia in the late 1900s, districts social organizations, and public deliberation—has in which governors were directly elected experienced inherent limitations. Indeed, none of these mecha- more efficient revenue collection and spending than nisms is a panacea: at times, elections may legitimize districts ruled by centrally appointed governors socially undesirable policies; political and social orga- (Skoufias and others 2011; Martinez-Bravo 2014). nizations can lead to violence and rent-seeking; and Elections can also curb ethnic favoritism in the deliberation can be captured by private interests and allocation of public resources by placing constraints opportunistic elites. These mechanisms, however, on executive power. In Kenya, for example, during play a fundamental role in the process of interaction the authoritarian period districts that shared the eth- among state and nonstate actors to design and imple- nicity of the president received three times as much ment policies and to bring about changes in formal public investment in roads (figure 8.1). However, rules, particularly in areas that affect minority groups under multiparty electoral democracy this effect has and those generally excluded from the policy arena. disappeared, suggesting that elections successfully When effective, the interaction of these mechanisms constrained the ability of leaders to divert public of citizen engagement can bring about significant resources for partisan goals (Burgess and others changes in governance through nonviolent means. 2015). Likewise, a comparison of fertility rates across 28 countries in Sub-Saharan Africa reveals that multi­ Bringing change through the party elections and leadership changes associated with electoral mechanisms significantly reduced ballot box infant mortality rates through improved health care Elections are among the most well-established mech- (Kudamatsu 2012). anisms available to citizens to strengthen account- Encouragingly, opportunities for citizens to When effective, ability and responsiveness to their demands.1 When engage in the public decision-making process through elections . . . effective, elections can help improve the level and voting have increased substantially over the last half- can help citizens quality of services provided by the state by selecting century. At the beginning of the so-called Third Wave overcome and sanctioning leaders based on their performance of democratization in 1974, there were only about 40 collective action in providing public goods. They can help citizens electoral democracies in the world, mostly confined to problems so they overcome collective action problems so they can give the industrialized Western world (Huntington 1991). can give leaders leaders incentives to support the public goods favored Today, the number has more than doubled (to about incentives to by the majority of citizens. However, elections can be 100), with more than half of the world’s countries support the public an unhealthy form of citizen engagement when they choosing their leaders through elections in which a goods favored by instead serve to select and sanction leaders based on change in government is a real possibility. Elections the majority of their provision of private goods (Khemani and oth- have become a fast-spreading norm to legitimize state citizens. ers 2016). Elections can be subject to manipulation, authority and organize human societies (Diamond fraud, violence, vote buying, and patronage, which 2008). Even in places where open contestation at the undermine their effectiveness in holding leaders to national level is absent or restricted, elections have account, resulting in perverse incentives. been introduced at the local level to improve oversight of local officials, opening opportunities for participa- How elections strengthen vertical tion and contestation of public policies (Gandhi and accountability and responsiveness to Lust-Okar 2009). citizen demands Despite the global spread of elections, the space Elections can be particularly effective at the local level, for effective citizen engagement is compromised by where voters might be better able to coordinate and shape the perception that, on average, the quality of the 226 | World Development Report 2017 electoral process is declining worldwide (figure 8.2). Figure 8.1 In Kenya, elections changed the incentives Although regular elections can improve the overall of the ruling elites, reducing the scope of ethnic level of economic policies by disciplining leaders, favoritism this structural effect is conditional on the quality of 3 those elections (Chauvet and Collier 2009). Newly Ratio of road expenditure to population established democracies in low-income countries are especially vulnerable to electoral manipulation. Indeed, the experience of many developing countries suggests that the principle of one person, one vote is 2 often undermined in practice by incumbent leaders who seek to minimize the risk of losing power. Elites can resort to multiple strategies of manipulation that undermine the integrity of the electoral process, 1 including the use of legal instruments that ban cer- tain political parties or individual candidates from joining the electoral contest, the adoption of com- plex voting registration regulations that effectively 0 disenfranchise certain groups of voters, the resort to 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 electoral fraud, and, in extreme cases, voter intimida- tion and physical repression of political opponents Coethnic districts Transition to autocracy (Schedler 2002). Not coethnic districts Transition to electoral democracy Challenges to free and fair elections are reflected Source: WDR 2017 team, based on Burgess and others 2015. in the widespread dissatisfaction and disillusion- Note: The figure covers the years 1963–2011. The share of road development expenditure and the share ment among citizens. While on average almost 90 of population are relative to district populations in 1963. A district is defined as coethnic if more than 50 percent of its residents are from the same ethnic group as that of the president in the given year. A ratio percent of respondents worldwide view free and fair above 1 indicates the presence of ethnic favoritism. elections as an important instrument for improving economic conditions in their country, they often do Figure 8.2 Electoral democracies are not trust their quality. Less than half of respondents spreading, but the integrity of elections to the latest world Gallup survey, on average, have is declining confidence in the integrity of the electoral process; mistrust is especially high in Europe and Central Asia 100 and in Latin America and the Caribbean (figure 8.3). These perceptions matter because they shape citizen 90 engagement and citizens’ propensity to vote (Birch Number and percent 2010). Figure 8.4 is consistent with this claim, show- 80 ing that voter turnout is declining worldwide. More- over, the lack of electoral integrity and a persistent 70 climate of mistrust over time undermine the legiti- macy of the political system, fueling protests, mass 60 demonstrations, and, in extreme cases, outbreaks of electoral violence and civil war.2 The 2007 Kenyan 50 election, with an estimated 1,200 deaths and the dis- placement of more than 300,000 people, dramatically 40 illustrates this point. 1985 1990 1995 2000 2005 2010 2015 Number of electoral democracies Percentage of elections that are free and fair Changing incentives: Transparency, Sources: WDR 2017 team, using data from the Center for Systemic Peace, information, and the media Polity IV (database), various years (number of electoral democracies) and Transparency and the provision of timely and rele- Bishop and Hoeffler 2014 (free and fair elections). vant information can help improve the quality and Note: Over time, there is a larger number of countries where elections are the main instrument to select leaders; the decline in the share of “free and effectiveness of elections (Khemani and others 2016). fair” elections could be partially driven by the incorporation of new, less The average voter may not have the information developed electoral systems, but that is unlikely to explain the total decline. Citizens as agents of change | 227 Figure 8.3 Although citizens value elections as an required to properly assess government performance important route to economic development, less than and clearly assign responsibilities. Giving voters half of respondents worldwide have confidence in the accurate and credible information from trustworthy integrity of elections sources such as independent media or oversight institutions can change the prevailing social norms, East Asia and Pacific thereby reducing information asymmetries and increasing voters’ willingness to punish incumbents Europe and Central Asia for poor performance and bad practices such as cor- ruption. For example, in 2003 the federal government Latin America and the Caribbean of Brazil launched a national anticorruption program that targeted municipal governments with random Middle East and North Africa audits by the national audit agency. The results were publicly disseminated through the media (radio, South Asia television, and newspapers). When the audit reports disclosed information about corrupt practices, cor- Sub-Saharan Africa rupt mayors were punished at the polls, while mayors with no irregularities were rewarded with reelection. OECD countries These effects were stronger in municipalities with 0 20 40 45 60 80 88 100 local radio stations, pointing to the important role Share of respondents (%) played by the media in amplifying and disseminating campaign messages (Ferraz and Finan 2008). Similar World Values Survey: Importance of elections for economic development results have been reported in Mexico and Puerto Rico, Gallup World Poll: Confidence in the honesty of elections using information disclosed in audit reports (Larre- guy, Marshall, and Snyder 2015; Bobonis, Cámara Global averages Fuertes, and Schwabe 2016), and in India, using report Sources: WDR 2017 team, using data from World Values Survey, Wave 6, 2010–14, and Gallup Organiza- cards on the performance of incumbent politicians tion, Gallup World Poll, 2010–15. (Banerjee and others 2011). Note: The World Values Survey covers a sample of 41 countries, and the Gallup World Poll covers a sample of 142 countries. OECD = Organisation of Economic Co-operation and Development. Information can strengthen the quality of citizen engagement even in countries in which partisan loyalties are strong and a dominant party has been entrenched for some time. In Sierra Leone, increased Figure 8.4 Voter turnout worldwide from 1945 to 2015 access to information about local politicians through indicates unequal citizen participation and the risk of radio campaigns had a significant effect in shaping biased representation of policy preferences behavior and increasing voters’ willingness to cast their ballot for a politician of a different party and 80 175 outside their own coethnic group (Casey 2015). 150 However, as discussed in the World Development (% of voting-age population) Report 2016: Digital Dividends (WDR 2016), when the Average voter turnout Number of elections 125 information disclosed is not salient to voters or 70 when attributing individual responsibility is difficult, 100 the incentives of politicians to respond with better 75 service provision remain low, and transparency can 60 have no effect on vertical accountability (see spotlight 50 11 on transparency and accountability initiatives). In Uganda, the provision of scorecards on the perfor- 25 mance of members of the parliament did not have 50 0 any impact on politicians’ selection or performance 1945 1955 1965 1975 1985 1995 2005 2015 (Humphreys and Weinstein 2012). Likewise, radio- Voter turnout (left axis) Elections (right axis) based information campaigns on public health and Source: WDR 2017 team, using data from International IDEA, Voter Turnout Database, various years. primary education in rural Benin had no effect on Note: The line refers to average voter turnout using locally weighted smoothing, while the bars indicate shaping politicians’ incentives to improve health and absolute number of elections in a given year. education services, despite reducing voters’ support 228 | World Development Report 2017 for patronage practices (Keefer and Khemani 2014). (2008) goes a step further and argues that citizens Sometimes, politicians can respond to the disclo- demand policies based on ideological positions with- sure of information by increasing their vote-buying out considering the trade-offs and costs they might efforts, thereby preempting its potential effect on vot- entail: voters not only lack information, but they also ing behavior. In the Philippines, an initiative to share have systematic biases in favor of economic policies information about a large public spending program that have been proven wrong empirically. The per- ahead of municipal elections prompted incumbent sistence of popular demands for energy and fuel sub- politicians to increase vote buying. In the end, the sidies despite their proven fiscal and environmental campaign had no discernible effect on voting behav- costs illustrates how these behavioral dynamics are ior (Cruz, Keefer, and Labonne 2015). also relevant for many developing countries, under- In the presence of preexisting preferences and mining the opportunity to bring change through entrenched social norms, transparency alone is elections alone (Clements and others 2013). unlikely to trigger change—and might even lead to more polarized preferences (see spotlight 12 on the Enhancing contestability: De facto media). In these circumstances, citizen engagement enfranchisement of voters through sustained processes of policy deliberation Even where de jure voting rights exist and direct elec- might increase the likelihood of better results (as dis- toral manipulation is limited, elections may fail to cussed later in this chapter). effectively sanction and select leaders when citizens opt out. Voter turnout is not uniform and is often Overcoming the challenge of persistent biased toward certain income groups, which leads to preferences unequal influence in the policy arena. In this sense, Citizens’ expectations of what politicians can and the extent to which citizens engage in the electoral should deliver can also be shaped by social norms and process is an important determinant of the effect of so-called mental models, as discussed in the World elections. In high-income countries, wealth and liter- Development Report 2015: Mind, Society, and Behavior acy rates predict turnout, suggesting that poor voters (World Bank 2015).3 These norms and mental mod- face constraints that reduce their propensity to vote.5 els can lead to inefficient demands. To cite a nota- The lack of engagement of disadvantaged groups in ble example, many societies are organized around turn shapes politicians’ incentives to adopt pro-poor, patron-client (or clientelist) exchanges, in which redistributive policies, thereby reducing social spend- voters expect politicians to deliver private benefits in ing and reinforcing existing inequalities (see chapter return for political support, and they reward or pun- 6 of this Report). ish politicians based on these expectations (see chap- This logic implies that the de facto enfranchise- ter 6).4 An attempt by either party involved to break ment of disadvantaged voters can improve account- the terms of the exchange is costly and likely to fail. ability by better capturing their policy preferences. In the terminology of this Report, these relationships In Brazil, for example, the introduction of electronic often constitute self-reinforcing equilibria. A field voting technology has simplified the process of cast- experiment during the 2001 presidential elections in ing ballots and substantially reduced the number Benin illustrates this point. National candidates who of error-ridden and undercounted votes among the adopted clientelistic messages were more effective poor. The intervention effectively enfranchised 11 in mobilizing electoral support than competitors percent of the electorate, mainly the poorest and less who used broad-based policy messages (Wantchekon educated, and contributed to higher spending on pub- 2003). lic health care, which in turn increased the access of Recent empirical studies on voting behavior in poor pregnant women to prenatal care and reduced the United States illustrate the perverse effects that the incidence of underweight births (Fujiwara 2015). citizens’ beliefs can have in shaping public policies, Enfranchising poor voters, however, is not suffi- thereby challenging the conventional logic of dem- cient to change public policies. In fact, in developing ocratic theory. Achen and Bartels (2016b) argue that countries poor people are more likely to vote than the average citizen has little incentive to study com- wealthy citizens. This finding implies that higher plex political issues, engaging in what public choice levels of turnout may not necessarily reflect greater theorists call “rational ignorance.” As a result, voting political mobilization by the poor but rather their behavior is based not on policy preferences but on cit- tendency to be more receptive to the clientelist izens’ social identities and partisan loyalties. Caplan practices used by elites to mobilize them (Pande Citizens as agents of change | 229 2011; Beramendiz and Amat 2014). Consistent with Bringing change through this logic, Kasara and Suryanarayan (2015) find that in poor societies rich voters are less likely to vote political organization: because the state’s extractive capacity is low, and the The role of political parties threat of wealth redistribution through taxation is Through voting, individual actions can shape collec- not credible. However, as the bureaucratic capacity of tive outcomes. Citizen collective action—for exam- the state improves and political competition becomes ple, through political organizations—can also shape primarily programmatic in nature, the better-off are outcomes. Political parties are a mechanism that can more likely to engage and influence fiscal policies solve collective action problems and can represent through voting. In other words, the effect of poor vot- and articulate citizens’ collective interests, aggregate ers’ enfranchisement on public policy is contingent their preferences, and channel their demands in the on the nature of political competition, the specific policy-making process (Sartori 1976; Kitschelt and mobilization strategies adopted by political parties, Wilkinson 2007).6 and the presence of “credible political alternatives for marginalized citizens” (Kasara and Suryanarayan Enhancing contestability: Why political 2015, 624). Programmatic political parties and social parties matter movements play an important mediating role in this By solving citizens’ coordination problems and provid- respect, as discussed later in this chapter. ing them with the information cues needed to evaluate the performance of incumbents, political parties play Why elections alone are not enough to a critical role in strengthening vertical accountability bring change (Aldrich 1995). By recruiting and socializing political These analyses suggest that the common belief that leadership, political parties also play an important elections are a sufficient mechanism to produce social function in integrating citizens into the polit- responsive and accountable government is based ical process and allowing different social groups to on questionable assumptions. Even when elections have a stake in supporting the system, thereby pro- are more effective in changing voters’ preferences moting a culture of compromise and reducing societal and the incentives of politicians, they are a limited tensions through enhanced contestability (Diamond instrument of control. Voting is an individual action, and Gunther 2001, 7–8; Randall and Svåsand 2002). Citizens face and ­citizens face significant coordination challenges In Tanzania, for example, the power-sharing agree- significant when considering whether to remove poorly per- ments within the Chama Cha Mapinduzi party were coordination forming governments, thereby limiting the credibil- instrumental (before the demise of Julius Nyerere) in challenges when ity of the threat to punish elected officials (Manin, accommodating the demands of various ethnic and considering Przeworski, and Stokes 1999). Moreover, even when religious groups, allowing power to alternate between whether to remove citizens manage to remove politicians whose per- Christian and Muslim leaders (Ezrow and Frantz 2011). poorly performing formance is poor or diverges from their preferences, This arrangement helps explain why the country was governments, elections alone offer no credible guarantee that, once not plagued by the ethnic conflicts that prevailed in thereby limiting elected, new leaders will not shirk their electoral many countries in the region, despite the presence of the credibility promises and credibly commit to citizens’ demands. more than 140 distinct ethnic groups. of the threat to Overcoming the limits of collective action and Over the last 40 years, the global landscape of punish elected electoral representation requires organizations that political party systems has changed. Across all income officials. represent citizens’ collective interests, including polit- groups, unelected legislatures and single-party sys- ical parties, interest groups, and civic associations. tems have become rare, and multiple political orga- These organizations have the potential to strengthen nizations are increasingly allowed to enter the policy the ability of citizens to monitor government perfor- arena, articulating societal interests and citizens’ mance, thereby increasing the costs for politicians demands. However, a closer look reveals important shirking their electoral promises and making polit- differences: in many developing countries, competi- ical commitments more credible (Ashworth 2012; tion is constrained de facto by the dominant nature Keefer 2013). As Achen and Bartels (2016a, 275) point of the party system (figure 8.5). Where one party out, “Ordinary citizens’ interests are likely to matter dominates the legislative and executive offices, the only insofar as the organised groups representing ability of citizens to influence the policy-making pro- those interests . . . are themselves politically engaged, cess through representation is reduced (Sartori 1976; well-resourced, and internally accountable.” It is to Manin, Przeworski, and Stokes 1999, 48). Although, these organized groups that this chapter now turns. as discussed in chapter 7, dominant party systems 230 | World Development Report 2017 may continue to facilitate cooperation and commit- Figure 8.5 Although the spread of multiparty systems ment among elites, they undermine citizen collective has increased opportunities for citizen engagement, action by reducing the attractiveness of electoral poli- dominant parties place de facto limits on electoral tics as a mechanism to alter power asymmetries. Over competition time, the exclusionary nature of this bargaining could undermine the legitimacy of the political system. Low-income 1975 countries 2015 The strategies adopted by political parties to mobi- lize voters have important implications for devel- Lower-middle-income 1975 opment because they directly shape the nature of countries 2015 elite-citizen bargaining. On one end of the spectrum— Upper-middle-income 1975 as discussed in chapter 6—clientelistic political parties countries 2015 mobilize support through targeted transfers, cash payments, pork barrel public investment projects, High-income 1975 patronage jobs, and other private goods (Kitschelt non-OECD countries 2015 and Wilkinson 2007). On the opposite end of the High-income 1975 spectrum, programmatic political parties maintain a OECD countries 2015 coherent position on key policy issues, stick to these policy commitments over repeated electoral rounds 0 20 40 60 80 100 as their main appeal to attract votes, and deliver on Percentage of countries (at each income level) them once in office.7 Nonrepresentative Single party Because the electoral success of programmatic Dominant Competitive parties—and their own political survival—depends Source: WDR 2017 team, based on Database of Political Institutions (Cruz, Keefer, and Scartascini 2016). heavily on the credibility of their policy commitments, Note: Income groups of countries reflect the latest categorization by the World Bank. A party system these parties are more likely to develop organizational is classified as dominant when incumbents control 75 percent or more of seats in the legislature. OECD = Organisation for Economic Co-operation and Development. arrangements that prevent free-riding and shirking by party members, and so they are more likely to deliver on their electoral promises. Consequently, the quality Figure 8.6 Programmatic parties perform better than of public services is significantly higher in countries clientelist parties in improving the quality of public in which the main parties (government and oppo- services, especially in competitive party systems sition alike) exhibit programmatic characteristics, School enrollment, primary (net) and the effect is larger under conditions of electoral 100 competition (figure 8.6). Likewise, programmatic par- 90 ties increase the possibility that public sector reforms Completeness of School enrollment, will be adopted and successfully implemented (Keefer birth registration 80 secondary (net) 2011, 2013; Cruz and Keefer 2013). 70 60 Shaping preferences and incentives: How programmatic parties emerge Newborns protected Improved water source against tetanus Unfortunately, entrenched clientelistic political par- ties can be difficult to remove. They can become a self-reinforcing equilibrium as they deliver on their Improved sanitation facilities commitment to provide private benefits to constit- uents. Under these circumstances, increased party Programmatic and competitive competition can lead to more—not less—clientelism Not programmatic and competitive because poorer voters are more vulnerable to vote Programmatic and not competitive buying and therefore less likely to demand programs Not programmatic and not competitive or policies. The experience of many low-income coun- Sources: WDR 2017 team, based on Keefer 2011, 2013; Database of Political Institutions (Cruz, Keefer, and tries in Sub-Saharan Africa is consistent with this Scartascini 2015); and World Bank, World Development Indicators (database), various years. argument and illustrates how multiparty competition has fueled, rather than reduced, clientelism.8 benefits promised by each party. To be viable, pro- Voters selecting between a programmatic party grammatic parties must successfully deliver on their and a clientelistic party must weigh the credibility promises. However, even well-intended politicians of each party’s commitments and also compare the often cannot credibly commit to deliver because Citizens as agents of change | 231 of weak state capacity and the absence of favorable Figure 8.7 Programmatic parties institutional arrangements—such as strong checks tend to emerge at higher levels of and balances, a well-functioning parliament, and development, but significant variation independent judiciaries—that can sanction leaders exists among countries at similar stages who renege on their promises. Historical evidence of development suggests that where meritocratic civil service recruit- ment predated the development of mass-based 4 political parties, politicians were prevented from cap- turing the bureaucracy for patronage purposes, and programmatic parties were more likely to develop 3 Programmatic effort (Shefter 1977). However, where clientelistic parties already exist, making the commitments of program- matic parties more credible in the short term is diffi- 2 cult because it depends on building state capacity that itself may require the elimination of clientelism. At times, however, a clientelistic equilibrium can 1 be broken by a change in the relative benefits of clien- telistic versus programmatic parties. Indeed, reduc- ing the benefits of clientelism helps explain why developed countries are more likely to have program- 0 matic parties (figure 8.7). At low levels of economic 6 8 10 12 development, the average voters tend to reward cli- Log GDP per capita, PPP (current international $) entelist practices rather than support uncertain pro- High-income OECD countries grammatic platforms because they lack alternative High-income non-OECD countries means to secure basic services and are most vulnera- Upper-middle-income countries ble to adverse economic shocks. However, as societies Lower-middle-income countries develop, the marginal impact of targeted benefits on Low-income countries the welfare of the average voter is negligible relative Sources: WDR 2017 team, using data from World Bank, World Development to the potential benefits they can derive from public Indicators (database), 2016, and V-Dem 2016. policies. Consequently, citizens’ expectations change; Note: Income is represented by the natural log of the average per capita they demand higher-quality services and public income in purchasing power parity (PPP) terms in 2008–09. A given party’s “programmatic effort” refers to the set of “goods” that the party offers goods and become less credible in their commitment in exchange for political support. The ranks range from 0 (= clientelistic to “sell” their vote to politicians (Kitschelt and Wilkin- efforts) to 4 (= policy/programmatic efforts). Intermediate values reflect combinations of both strategies (Coppedge and others 2016, 102). OECD = son 2007; Stokes and others 2013). Organisation for Economic Co-operation and Development. A similar logic explains why political parties tend to diversify their “portfolio” across the national territory and adopt a combination of clientelist and finances—that reconfigured partisan competition programmatic strategies to mobilize voters, depend- around programmatic lines (Hellmann 2011; Wang ing on their expected electoral benefits (Kitschelt and 2012). The outcome of these shocks, however, is not Wilkinson 2007, 30–31). In Argentina and Mexico, for predetermined; worsening economic conditions can example, municipalities that exhibited higher levels also trigger populist appeals that result in political of electoral competition and had a larger middle class outsiders gaining power on the basis of vague policy received the largest influx of public goods, changing proposals. By subordinating the execution of these politicians’ incentives to opt out of clientelism as proposals to the will of a charismatic leader, populism a strategy to maintain political support (Magaloni, undermines the emergence of programmatic parties Diaz-Cayeros, and Estévez 2006; Weitz-Shapiro 2014). and can lead to a shrinking bargaining space, reducing At other times, economic crises or stagnation opportunities for citizens to hold elites accountable.9 can undermine systems of patronage, triggering the Finally, the commitments of programmatic par- emergence of programmatic parties. In the Repub- ties may be more credible at the local level. Decen­ lic of Korea, for example, the financial crisis of 1997 tralization reforms can lower the barriers to the reduced the resource base for clientelist practices entry of grassroots movements and local civic asso- and triggered policy reforms—such as regulations ciations that may be able to compete in elections on aimed at improving transparency in political party a programmatic platform. In Bolivia in the 1990s, 232 | World Development Report 2017 indigenous peoples’ movements took advantage of Figure 8.8 Dominant party systems are less likely than decentralization reforms and newly institutionalized competitive systems to introduce legal provisions spaces for citizen participation to overcome their for public funding, suggesting efforts to reduce divisions, organize collectively through autonomous contestability political parties, and effectively bargain for collec- tive and territorial rights in various municipalities.10 100 These experiences created demonstration effects in fund political parties? (% of countries) Are there legal provisions to publicly other municipalities, strengthening the electoral base 80 of indigenous parties and paving the way for their access to the presidency (Van Cott 2005, 2006). 60 Why political parties alone are not enough to bring about change 40 When political parties become tools in elite bargains to help solve coordination and commitment challenges among elites, they may fail to represent and articulate 20 the demands and preferences of ordinary citizens. Political parties can act as gatekeepers, adopting laws 0 and regulations that grant ruling elites special advan- ive ive ive ive ive t t t t t Co nan Co nan Co nan Co nan Co nan tit tit tit tit tit tages and increase the barriers to entry for potential pe pe pe pe pe i i i i i m m m m m m m m m m Do Do Do Do Do challengers. This behavior can undermine vertical Low-income Lower- Upper- High-income High-income accountability because certain groups of citizens (and countries middle- middle- non-OECD OECD the interests they represent) may find themselves sys- income income countries countries countries countries tematically excluded from the policy arena or unable to bargain within a level playing field. In South Africa, No Limited Yes for example, the National Party enforced the apart- Sources: WDR 2017 team, using data from International IDEA, Political Finance Database, 2016, and heid regime through formal legislation from 1948 to Database of Political Institutions (Cruz, Keefer, and Scartascini 2016). Countries are classified based on the presence or absence of legal provisions for direct public funding of political parties. Income groups 1994, denying basic political, social, and civil rights to reflect the latest categorization by the World Bank. the black majority on the basis of ethnic prejudice. Note: OECD = Organisation for Economic Co-operation and Development. Political parties can also deliberately try to reduce contestability in the policy arena by adopting politi- cal financing laws and regulations that work in their of electoral gains are positive and large, ignoring favor. Because of the rising costs of politics and often demands that are salient to only a small segment of in reaction to major political corruption scandals, the electorate or that appear too risky because they many countries across the world have introduced deviate from established social norms. As a result, public funding regulations. These aim to create a level the policy arena can shrink considerably and become playing field, helping new interest groups and small biased against disadvantaged citizens such as women, opposition parties compete on a more equitable basis indigenous people, and ethnic and sexual minorities. with incumbent parties, while also reducing the influ- Taken together, these tendencies often make ence of big corporations and private interests in shap- political parties part of the problem rather than the ing party agendas. However, countries with dominant solution. Public opinion surveys suggest that political party systems are less likely to introduce public fund- parties are now the least-trusted political institution ing regulations (figure 8.8), reducing the level of con- worldwide (figure 8.9). Although significant varia- testability. In Africa, for example, only a minority of tion exists across income groups as well as between countries have adopted and effectively enforced public and within regions, these perceptions highlight an funding laws, contrary to global trends. This regional important crisis of representation for traditional trend is often coupled with limited transparency on representative institutions, forcing citizens to look party financing and a heavy reliance on funding from for alternative mechanisms to organize collectively private—often illicit—sources.11 and bring their demands into the policy arena. The Well-established political parties can also become decline of party activism and membership in the risk averse and opportunistic in the way they artic- Organisation for Economic Co-operation and Devel- ulate citizens’ demands. They may “sponsor” societal opment (OECD) is consistent with this argument preferences only when the expected returns in terms (Whiteley 2011). However, through social movements, Citizens as agents of change | 233 Figure 8.9 Political parties are on movements can broaden policy debates and push average the least-trusted political for new laws and policies that rebalance access to institution worldwide (and distribution of) power among groups within societies, including gender equality laws, indigenous 60 territorial rights, and transparency and right to infor- 52 mation laws. However, social organization can also Percentage of respondents lead to undesirable social outcomes such as oppos- 40 ing reform, creating violence, and reinforcing rent- seeking for specific clientelistic groups. The discus- 32 sion that follows emphasizes ways in which social organization creates positive change.13 20 Understanding the operating environment of social organizations: Recent trends 0 Across the world in recent years, thousands of citi- Low-income Lower- Upper- High- High- countries middle- middle- income income zens have taken to the streets to question the legiti- income income non-OECD OECD macy of fiscal austerity policies, condemn corruption countries countries countries countries scandals, and protest the failure of governments to Trust in political parties address the growing inequalities within societies, Trust in public institutions among other issues (Ortiz and others 2013; Carothers Global averages and Youngs 2016).14 Sources: WDR 2017 team, using data from Afrobarometer, Round 6, 2014–15; These trends suggest that ordinary citizens are Arab Barometer, Wave 2, 2010–11; Center for East Asia Democratic Studies, National Taiwan University (located in Taiwan, China), Asian Barometer, increasingly willing and able to mobilize peacefully Wave 3, 2012–14; European Commission, Eurobarometer, 2015; Vanderbilt to hold government accountable and voice their dis- University, Latin American Public Opinion Project, 2014. content when their confidence in public institutions Note: “Average trust in public institutions” is the average of trust in the government, legislature, judiciary, police, and army. Trust is calculated as is undermined and when they perceive that the for- the sum of all positive answers. Trust in parties also decreases as societies mal mechanisms of representation—such as elections develop, suggesting growing demands and expectations from citizens. and political parties—have weakened their capacity to articulate their interests and channel their demands.15 This process is not accidental. Social movements— civic associations, and spaces of deliberation, citizens as an example of a specific type of social organiza- can enhance contestability and change the incentives tion—are embedded in broader institutional and of the existing political parties, making them more socioeconomic environments that shape the strate- likely to adapt and respond to new societal demands, gies and choices available to political actors (Tarrow as discussed in the following sections. 1998).16 Over the last 40 years, the institutional envi- ronment for civic activism and social movements has Bringing change through become increasingly more permissive: the spread of democratic norms and practices has widened the civic social organization space, with a growing number of countries enacting By coordinating action among citizens around spe- laws and regulations to enable and support the for- cific issues, social organizations can bring to prom- mation and functioning of autonomous civic society inence new demands and interests (Heller 2013). In organizations. Likewise, government interventions doing so, social organizations can potentially affect to control or censor the media have declined globally the three levers of change—incentives, preferences (figure 8.10), allowing independent media actors to and beliefs, and contestability. First, they can change bring new issues into the national debate, publicizing the incentives of elites by increasing the political cost of the claims of social movements, and magnifying their opposing specific policies. Second, they can reshape demands (see spotlight 12 on the media). The diffu- the preferences and beliefs of actors through the creation sion of new information and communication tech- of new collective identities and the integration of nologies (ICTs) has further enabled citizen collective new interests in the policy arena. And, third, they action by facilitating access to information, lowering can enhance contestability by aligning with actors transaction costs for the creation and development that can effectively challenge the existing elites and of associational networks, and providing effective limit their bargaining power.12 In these ways, social coordination tools for disadvantaged groups across 234 | World Development Report 2017 Figure 8.10 After decades of progress, Figure 8.11 Taking advantage of the civic space is shrinking globally, driven digital revolution, social movements are by higher government restrictions on increasingly organized across national media and CSO entry boundaries 1,200 3.0 1,000 2.5 Average score Number of TSMOs 800 2.0 600 1.5 400 1.0 200 0.5 0 10 20 30 40 50 60 70 80 90 00 10 20 0 0 20 19 19 19 19 19 19 19 19 19 19 20 20 1953 1963 1973 1983 1993 2003 Government censorship effort (media) CSO entry and exit Source: WDR 2017 team, based on Smith 2008. Note: The bars measure the number of Transnational Social Movement Source: WDR 2017 team, using data from V-Dem (database), 2016. Organizations (TSMOs), defined as organizations that combine activists from Note: The average is based on a sample of 78 countries for which there is multiple countries around common social change goals. consistent data for all years presented. The “CSO entry and exit” variable is measured on a 0–4 scale, ranging from 0 (more constrained) to 4 (less constrained). The “government censorship effort (media)” variable is the policy space and limit the channels available to reversed and measured on a 0–4 scale, ranging from 0 (less censorship) to 4 (more censorship). More information on specific variables and survey citizens to engage and influence the policy arena. methodology can be found in World Bank and V-Dem (2016) and Coppedge and others (2015). CSO = civil society organization. Changing incentives: How social organizations can effectively build the globe (Bennett and Segerberg 2012). As a result of coalitions for change these processes, social movements are now increas- Differing incentives and preferences among elite ingly organized across national boundaries (figure actors open opportunities for social organizations to 8.11)—see Goodwin and Jasper (2015, 157). support change by forming coalitions with reforming Evidence from the last decade, however, suggests elites (Fukuyama 2014; Fox 2015). When economic cri- that the global trend may be a shrinking civic space ses or other external shocks shift the incentives and (figure 8.10). Many governments are changing the relative power of elite actors, they may be more likely institutional environment in which citizens engage, to defect from the ruling coalition and build alliances establishing legal barriers to restrict the functioning with excluded citizen groups. In the Philippines, for of media and civic society organizations, and reducing example, business elites that originally supported their autonomy from the state. For example, in the Ferdinand Marcos’s coup in 1972 began to defect case of media, governments may award broadcast under the pressures of economic decline. When a frequencies on the basis of political motivations, major event—the assassination of the main opposition withdraw financial support of media organizations leader in 1983—triggered a wave of protests, grassroots and activities, or enforce complex registration require- associations forged an anti-Marcos reform coalition, ments that raise barriers to entry into a government- the People Power movement, comprising members controlled media market. In the case of nongovern- of the private sector, representatives of the opposi- mental organizations (NGOs), governments might tion, religious leaders, and civic organizations. The resort to legal measures to restrict public and private mobilization culminated in peaceful demonstrations financing or pass stricter laws that restrain associ- that brought millions of citizens to the streets, forcing ational rights (Carothers and Brechenmacher 2014). Marcos to resign in 1986 and paving the way for the Although these initiatives are sometimes motivated by restoration of democratic institutions (Blitz 2000). legitimate concerns for public order and national secu- In the absence of an identifiable shock, social rity, they can be used by elites as a strategy to narrow organizations may be able to shift elite incentives Citizens as agents of change | 235 Box 8.1 Social movements and bottom-up pressures for reform: Right to information legislation in India Since independence, the Indian government has operated on behalf of wage workers and small farmers. The rural under the colonial Official Secrets Act (OSA) of 1923. poor were often cheated and not paid their full wages, Officially conceived as a legal instrument to prevent the and they could not challenge the paymasters because disclosure of information that can affect security and they were denied access to attendance registers. The national sovereignty, in practice the OSA has empowered movement eventually spread nationwide, leading to the authorities to withhold information from citizens at the formation of the National Campaign for Peoples’ Right government’s discretion. This situation has created a to Information (NCPRI) in 1996. Members of NCPRI built culture of secrecy that characterizes administrative and strategic alliances with other societal groups, including political practices, undermining the accountability of state journalists, lawyers, and human rights activists, thereby institutions. Despite several attempts at reform by technical creating a strong constituency for reform that moved working groups and parliamentary commissions, the OSA demands for transparency to the forefront of the political has never been repealed (Mander and Joshi 1999). agenda and eventually succeeded in pushing adoption In the 1990s, a rural-based social movement emerged of the Right to Information Act in 2005 (Bari, Chand, and in the state of Rajasthan, demanding access to information Singh 2015). Source: WDR 2017 team. to form a coalition through sustained efforts over gender quota for elections to the National Constitu- a longer period of time. In India, for example, the ent Assembly, boosting women’s representation in Right to Information Act (RTIA) was passed in 2005 the Assembly to 26 percent. This initial success in after a 10-year struggle (box 8.1). Factors such as ide- turn allowed women’s organizations to change elite ology, religion, leadership, and provision of selective preferences—shaping the agenda of political parties— incentives can help sustain commitment to social which led to the integration of gender provisions in movements despite lack of short-term success. Labor the new constitution (O’Neil and Domingo 2016). unions, for example, may provide members with Major political events such as wars and post- services to sustain participation in the aftermath of conflict constitutional design processes can also failed bargains. alter the balance of power within societies, playing the role of coordination devices to enable collective Changing preferences: How social action among marginalized groups to mobilize and organizations can bring new interests into influence the policy arena (box 8.2). In Afghanistan, the policy arena for example, sustained efforts over the last decade Elite bargains can have unintended consequences, as by domestic women’s organizations, in collaboration discussed in chapter 7. Sometimes, they can create with international donors and NGOs, played a key the conditions for social movements to emerge and role in changing the preferences of members of par- bring new interests into the policy arena. In Tunisia, liament and state officials within the bureaucracy. for example, progress on gender equality following That change influenced the drafting of a controversial independence was largely a by-product of an elite law on the Elimination of Violence Against Women, bargain—between political and business elites to which introduced criminalization of gender violence recruit skilled labor for the growing manufacturing for the first time in Afghan history (Larson 2016).17 sector—rather than the outcome of feminist mobili- zation. The top-down policy choices associated with Changing contestability: How social this bargain then created an enabling environment organizations use the law to claim rights in which women’s organizations emerged and were Law plays different roles in society (see chapter 3). It strengthened over time. In 2011 the Jasmine Revo- orders behavior, legitimating social hierarchies and lution provided women’s organizations with a win- power relationships. It can also be used by citizens dow of opportunity to leverage their organizational to contest power and make legal claims to challenge strength and lobby successfully for a mandatory the status quo and push the boundaries of citizenship 236 | World Development Report 2017 Box 8.2 The mobilization of women and promotion of gender-based policies in postconflict settings: The case of Sub-Saharan Africa Across the world, women’s political representation is on in parliaments is almost double the level in countries average higher in postconflict countries than in countries with no conflict. Tripp (2015) provides a possible expla- that have not experienced conflict (figure B8.2.1).a This nation for these patterns, focusing on Sub-Saharan Africa trend is particularly evident in the Middle East and North where postconflict countries have been more successful Africa and Sub-Saharan Africa, where women’s presence in promoting gender equality laws across multiple policy Figure B8.2.1 The rate of political participation of women is higher in countries emerging from conflict 35 30 Share of seats held by women in national parliaments (%) 25 20 15 10 5 0 East Asia Europe and Latin America Middle East South Asia Sub-Saharan and Pacific Central Asia and the and North Africa Africa Caribbean No-conflict countries Postconflict countries Sources: WDR 2017 team, using data from UCDP/PRIO, Armed Conflict Dataset, 2015; World Bank, World Development Indicators (database), 2016. Note: The figure indicates the proportion of seats held by women in national parliaments. Postconflict countries are those that had at least one year of conflict after 1985 with more than 1,000 deaths. Countries with ongoing conflict as of 2014, and high-income members of the Organisation for Economic Co-operation and Development (OECD), were excluded. areas—including integrating women’s rights in their con- played a critical role in the Rwandan Patriotic Front (RPF), stitutions (figure B8.2.2). Rather than looking at a single holding executive positions within the movement while in driver, Tripp highlights the interaction among three drivers. exile. In the postconflict period, women activists have been The first is the disruption in gender relations that is specific powerful agents of transformation, advocating for greater to conflict-prone countries; women take over many of the responsibilities in light of the leadership roles played by traditional tasks of men, leading to shifts in gender norms women in the armed struggle. Even before the establish- (see chapter 4). The second is the rise of domestic women’s ment of quotas, women held nearly 50 percent of the seats movements, facilitated by the inclusive and competitive that the RPF controlled in the parliament (Powley 2005). nature of the postconflict environment. The third is the Moreover, women’s involvement in the constitution-making influence of international processes and actors involved in processes and later in the parliament provided them with the promotion of gender laws and international norms on the organizational strength and legitimacy to advocate for gender inclusion (further discussed in chapter 9). the passage of many gender equality and antidiscrimination The experience in Rwanda reflects the interplay and laws, including the 1999 inheritance law, the 2004 National relative strength of these three factors. In Rwanda, women Land Policy, the 2005 Organic Land Law (Powley 2005), (Box continues next page) Citizens as agents of change | 237 Box 8.2 The mobilization of women and promotion of gender-based policies in postconflict settings: The case of Sub-Saharan Africa (continued) Figure B8.2.2 In Africa, postconflict countries have been more likely to integrate women’s rights in their constitutions Average Citizenship of children Land and property Violence against women Positive measures Status of customary law Quotas/representation Labor Antidiscrimination Equality clause 0 20 40 60 80 100 Percent No-conflict countries Postconflict countries Source: Tripp 2015, 1275. Note: The figure shows the percentage of African countries with constitutional provisions related to women’s rights. and the 2009 legislation against gender-based violence. target, becoming a front-runner of gender equality and This influence also explains why—once the new 2003 women’s political participation in the world, with 64 per- constitution introduced a quota of 30 percent women in cent of total seats in the parliament occupied by women, all decision-making bodies—Rwanda far exceeded the followed by Bolivia (53 percent) and Cuba (49 percent).b Source: WDR 2017 team. a. This box largely relies and builds on Tripp (2015). b. Hunt (2014). For the world classification, see http://www.ipu.org/wmn-e/classif.htm. rights (McCann 2004). It is not a coincidence that the and citizenship rights, forging the collective identi- most transformative cases of social movements of the ties of disadvantaged citizens and raising the salience 20th century—including labor, women’s rights, and of individual grievances (Peruzzotti and Smulovitz civil rights, and, more recently, indigenous and envi- 2006; Fox 2015). Moreover, the ability to achieve legal ronmental movements—have all explicitly adopted victories in court can boost confidence among social the language of law and the discourse of rights as legal actors, strengthening the commitment to organize entitlements, creating a “shared normative base” that by effectively using legal instruments in their favor. has facilitated collective action (Heller 2013, 4). Mass media campaigns are often used as a comple- Legal institutions of horizontal accountability mentary strategy to publicize court victories and put such as national courts and ombudsmen offices can the news at the forefront of the national agenda (see also be a strategic asset for organized groups of cit- spotlight 12 on the media). As the history of U.S. civil izens. By activating these institutions, social move- rights movements suggests, legal mobilizations have ments can raise awareness of collective entitlements often generated a “contagion effect,” transforming 238 | World Development Report 2017 local victories into nationwide struggles for rights discussed later in this chapter, “civil society failure” (McCann 1994). Similar dynamics are also spreading is also possible—the risk that social groups “may also in developing countries. In Botswana, for example, face significant problems of coordination, asymmet- women’s groups successfully challenged discrimina- ric information, and inequality, which may limit their tory customary laws and pushed for the implemen- ability to respond to and resolve market and govern- tation of gender equality principles enshrined in the ment failures” (Mansuri and Rao 2013, 285). When constitution by adopting litigation strategies that cul- social movements are captured by narrow interests, minated in a series of victories in far-reaching cases they may reinforce existing inequalities rather than before national courts (Hasan and Tanzer 2013). overcome them. Even when not captured, social orga- The effectiveness of legal strategies, however, nizations may be decidedly “uncivil” and specifically often depends on the presence of a well-functioning designed to deny equal rights to other groups (Heller and independent judiciary and a strong network of 2013). legal aid experts who can support the claims of social organizations and resist pressures to deny them. Unfortunately, judicial independence is often under- The role of induced mined in many countries, leading some scholars to participation and public criticize the faith placed in courts as mechanisms of social change as nothing more than “hollow hope” deliberation (Rosenberg 1991). Other studies, however, contend Social movements drive “organic participation” in that the spread of international courts and legal bod- which citizens contest state policy from outside the ies associated with international human rights laws state. “Induced participation,” in which citizens delib- provide social movements with additional toolkits to erate policies through formal state interventions, is overcome the limitations of state courts and change also important for articulating citizens’ interests and the incentives of elites, pushing for compliance overcoming collective action challenges. In the area with laws and regulations ratified by national gov- of development assistance, induced participation ernments (Keck and Sikkink 1998). The role of these takes the form of decentralization and community- international bodies is explored in chapter 9. driven development, but in a broader context it includes various forms of direct democracy and Why social organizations alone are not public deliberation. Public deliberation—spaces and Public enough to bring change processes that allow group-based discussion and deliberation— Social movements can give voice to powerless groups weighting of alternative preferences—can help level spaces and and put pressure on public authorities, but they often the playing field in the policy arena. In certain con- processes that fail to consider the trade-offs associated with the pro- texts, deliberation can leverage marginalized groups’ allow group- liferation of competing interests in the policy arena. efforts to rebalance power relationships in their based discussion In many developing countries, state capacity is weak favor. And citizen participation can be instrumental and weighting and political parties are unable to perform their func- in improving the quality of deliberation and the of alternative tion to filter these demands and subordinate them to legitimacy of decisions by clarifying the needs and preferences—can higher public priorities. In these circumstances, pub- demands of local constituencies (Heller and Rao 2015). help level the lic institutions could become overloaded with multi- Induced participation and public deliberation not playing field in the ple pressures, undermining the coherence and effec- only increase the contestability of the policy arena, but policy arena. tiveness of public policies. This overloading could also have the potential to aggregate preferences and generate frustrations and discontent among citizens reshape them through dialogue and argumentation. that, if not properly addressed, can eventually lead In Of the Social Contract, Jean-Jacques Rousseau ([1762] to violence, conflict, and political decay (Huntington 2004) argues that participation is not merely a way of 1968)—chapter 4 explores violence as a manifestation reaching a decision, but also a process through which of governance failure. citizens develop a civic consciousness, develop empa- Moreover, citizen engagement through social thy for other views, and learn to take the public interest organizations is not necessarily motivated by a vision into account. In other words, participatory processes of a more equal and just society. On the contrary, can help achieve cooperation by shifting preferences. these organizations can also reinforce social hierar- Public deliberation is most feasible, and thus most chies, be captured by narrow interests, or be used by successful, at the local level, and it is often seen as a reactionary and extremist groups for exclusionary complement to decentralization reforms. In Brazil, purposes (Gaventa and Barrett 2012, 2399–2401). As following decentralization in 1988, the city of Porto Citizens as agents of change | 239 Alegre introduced participatory budgeting in 1990. A When only homogeneous groups of the relatively decade later, participatory budgeting assemblies drew powerful are included, participation neither enhances over 14,000 participants, many of them poor. They led contestation nor serves to shift preferences. More- to improved outcomes, with more money dedicated over, efforts at induced deliberation may be captured to pro-poor investments, resulting in improved sew- by narrow interest groups, whose preferences may erage and water coverage, higher school enrollment, be overrepresented, reinforcing existing inequalities and more affordable housing (Baiocchi 2005). In India, rather than overcoming them. For that reason, efforts the 73rd amendment to the constitution, approved to “export” participatory budget initiatives some- in 1993, mandated village elections at three levels— times do not work (Baiocchi, Heller, and Silva 2011). village councils (panchayats), block councils (block Local-level deliberation may be especially subject to panchayats), and district councils (zila panchayats)—as capture because of the entrenched influence of local well as regular village meetings (gram sabhas) open to elites (Abraham and Platteau 2004). Consequently, the entire village. In the state of Kerala, authorities evidence reveals that the poor often benefit less than subsequently devolved 40 percent of the development the nonpoor from participatory processes, especially budget to village councils, increasing the demand for in communities with high levels of inequality and local participation (Mansuri and Rao 2013). with particularly salient and significant caste, race, or However, participatory approaches to develop- gender disparities (Mansuri and Rao 2013). ment sometimes fail to consider the possibility of civil Such failures are not necessarily ameliorated by society failures, where, in weakly institutionalized the availability of new digital technologies (Gaventa environments, the poor are less likely to participate and Barrett 2012). On the contrary, as discussed in the and participatory mechanisms can be captured by 2016 WDR, ICT instruments may actually reinforce local elites (Devarajan and Kanbur 2012; Mansuri and socioeconomic inequalities in citizen engagement Rao 2013). Contestability depends on de facto partici- (World Bank 2016). In Brazil, for example, the use of pation, but demand-driven participation can exclude internet voting on municipal budget proposals reveals the weakest individuals, groups, and communities, stark demographic differences between online and especially because the poor may face higher oppor- offline voters: online voters are more likely to be tunity costs for participation. Evidence suggests that male, university-educated, and richer (figure 8.12). participants in public deliberations are wealthier, The design of deliberative mechanisms can help more educated, male, and more politically connected. overcome problems of exclusion and capture, partic- Moreover, deliberations often attract similar types ularly when such mechanisms are designed in con- of people and fail to promote cross-group cohesion. junction with other reforms to improve accountabil- ity and transparency. For example, there is evidence that participatory community programs are more Figure 8.12 In Brazil, online voting in participatory likely to be successful when they occur in favorable budgeting can reinforce existing inequalities political environments—that is, when local govern- 60 ments have discretion and are already downwardly accountable (Mansuri and Rao 2013). 50 Providing information on specific policy issues Share of participants (%) 40 and creating conditions favorable to making informed decisions can also change citizens’ preferences and 30 act as an important mechanism to improve the terms of a policy debate and open the way for future changes 20 in public policies. Recent experiences in deliberative polling illustrate this point, providing an innovative 10 approach to ascertain informed, thoughtful, and 0 representative public views on complex policy issues Female Male Elementary Secondary Higher <750 750– 1,500– >6,000 (Fishkin 2011).18 The media can play an important role 1,500 6,000 in providing information and promoting political par- Gender Education level Income level (R$/month) ticipation. For example, recent evidence from Kenya In-person voters Online voters reveals that exposure to a weekly panel discussion Source: WDR 2017 team, based on Spada and others 2015. program aimed at building a national conversation Note: R$ = Brazilian real. on governance in Kenya increased both knowledge 240 | World Development Report 2017 of governance issues and participation in politics Third, coalition-building strategies matter for (Githitho Muriithi and Page 2014). results: chances to promote institutional change and policy reforms are maximized when the incentives of Entry points for change: reformers from above (elites) and mobilization from below (citizens) converge and mutually reinforce Understanding citizen each other against defenders of the status quo (Fox agency as a collective action 2015). This points to the important role that agency problem and leadership play in seizing windows of opportu- nities for action. This chapter has analyzed the role that ordinary citizens play in driving processes of societal transfor- Notes mation and institutional change. Surveying historical 1. This section builds on Khemani and others (2016). and contemporary experiences, it argues that citizens 2. Collier and Vicente (2011); Bekoe (2012); Norris, face collective action problems that prevent them Frank, and Martinez (2015). from bargaining effectively and holding government 3. Mental models include categories, concepts, identi- accountable. To strengthen their influence in the ties, prototypes, stereotypes, causal narratives, and policy arena, citizens need to engage through multi- worldviews (World Bank 2015, 62). ple mechanisms designed to solve collective action 4. Stokes (2005); Kitschelt and Wilkinson (2007); problems, including voting, political parties, social Schaffer (2007); Stokes and others (2013). movements, civic associations, and other less con- 5. Gallego (2010); Fumagalli and Narciso (2012); Mahler, ventional spaces for policy deliberation. Because all Jesuit, and Paradowski (2013). these expressions of collective action are imperfect, 6. As discussed in chapter 7, political parties can also it is their strategic combination that maximizes the be an instrument to solve coordination and commit- ment problems among elites. chances to promote change and make governments 7. In the real world, political parties do not fall into more responsive to citizens’ needs. neat divisions of programmatic or clientelistic. As this chapter shows, citizen-led change is pos- Rather, they are located along a spectrum, and they sible, but it is often a difficult and long-term process may display different strategies simultaneously. The fraught with uncertainties. In India, grassroots orga- focus is on the extent to which a specific strategy nizations spent 10 years scaling up local mobilization prevails over competing alternatives (Kitschelt and efforts, translating rural activism into a multistake- Wang 2014). holder coalition for reform, and finally shifting the 8. Kitschelt (2000); Keefer and Vlaicu (2008); Bates incentives of state authorities toward the adoption and (2010); Kitschelt and Kselman (2013). implementation of right to information legislation. 9. Although programmatic parties can have charis- The analysis in this chapter highlights multiple matic leaders, the organizational strength and auton- omy of the party constrain the power of individual drivers whose interaction can contribute to lower bar- leaders, subordinating them to the party program. riers to collective action and facilitate citizen mobili- Under populism, the relationship is reversed, and zation through the mechanisms just identified. First, the party has no internal mechanisms to sanction institutions that enhance contestability in the policy leaders if they fail to deliver on their programmatic arena—such as media regulations, political finance agenda. This also explains why populist leaders tend regulations, and constitutional provisions that estab- to resist efforts to strengthen the party as an auton- lish mechanisms to protect citizens’ rights—can omous organization, and why such parties are often create an enabling environment for citizen agency by nothing more than electoral machines that disap- facilitating cooperation and promoting more inclu- pear soon after the charismatic leader leaves office sive and equitable bargaining spaces. While often (Mainwaring and Torcal 2005). the outcome of elite bargains, these institutions can 10. The 1995 Law of Local Participation provided legal recognition of the territorial rights of peasant and nevertheless open up opportunities for previously indigenous communities, allowing over 15,000 marginalized groups to mobilize and bargain for their grassroots territorial organizations to participate collective interests. in local planning (Kohl and Farthing 2006, 125–36). Second, external shocks—corruption scandals, Decentralization, however, was a necessary but not economic crises—can act as important triggers that sufficient condition to enable programmatic par- help citizens overcome otherwise unfavorable cir- ties to emerge because its effects were mediated by cumstances and create opportunities for change. the geographic distribution of indigenous groups. Citizens as agents of change | 241 Indigenous mobilization was less successful in Peru because the indigenous population accounted for at Referencesa least one-fourth of the population in only 28 percent Abraham, Anita, and Jean-Philippe Platteau. 2004. “Par- of subnational districts in Peru, compared with 79 ticipatory Development: When Culture Creeps.” In percent of subnational districts in Bolivia (Van Cott Culture and Public Action, edited by Vijayendra Rao and 2005, 218–19). Michael Walton, 210–33. Stanford Social Sciences 11. Pinto-Duschinsky (2002); Van Biezen and Kopecky Series. Stanford, CA: Stanford University Press. (2007); Norris, Abel van Es, and Fennis (2015). Achen, Christopher H., and Larry M. Bartels. 2016a. 12. Defining the impact or success of social organi- “Democracy for Realists: Holding Up a Mirror to the zations continues to be a subject of debate among Electorate.” Juncture 22 (4): 269–75. scholars. On the one hand, social organizations are ————. 2016b. 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Party Politics 13 (2): 235–54. 246 | World Development Report 2017 SPOTLIGHT 11 From transparency to accountability through citizen engagement The increased visibility of social movements and scorecards for health services helped reduce under-5 citizens’ demands for well-functioning governance mortality by one-third (Bjorkman and Svensson over the last decade has been accompanied by an 2009), but community monitoring of health providers increase in transparency and accountability initiatives in Sierra Leone had limited results in light of account- (TAIs) in many countries. Driven by combinations of ability gaps up the chain of command (Grandvoinnet, grassroots organizations, transnational advocacy net- Aslam, and Raha 2015). Interpreted from the perspec- works, and international donors, these initiatives seek tive of this Report, TAIs seek to reshape the policy to harness information and citizen participation to arena by enhancing contestability and, when success- strengthen accountability from public officials. They ful, effectively changing the incentives of decision include citizen monitoring and oversight of public makers in favor of certain outcomes. sector performance, access to and dissemination of information, public complaint and grievance redress mechanisms, and citizen participation in public deci- How power asymmetries sion making. TAIs are supported by the growing num- shape TAI effectiveness: ber, influence, and range of “social intermediaries” Transparency, publicity, (such as nongovernmental organizations, community- based organizations, and the media), and they are and accountability backed by the availability of new modes of commu- Typical approaches to TAIs tend to focus on reducing nication (mobile phones, internet, and social media). information asymmetries. However, as this Report A growing body of empirical evidence and analy­ acknowledges, providing information alone will not sis points to the mixed results of TAIs in terms of be effective in changing outcomes unless the under- improved outcomes.1 For all of the widely touted lying power asymmetries are addressed as well. Infor- success stories, similar interventions have had poor mation asymmetries, while arising from problems of results or even negative consequences in other con- whether actions or outcomes are unobservable, are in texts. For example, participatory budgeting in Porto the end rarely an accident of history. Rather, the lack Alegre, Brazil, has resulted in increased investment of disclosure of information is often the result of pow- in services for the poor (Ackerman 2004), but it has erful actors intentionally withholding information not been successfully replicated elsewhere (Baiocchi, or resisting attempts to make it accessible—in other Heller, and Silva 2011).2 Social audits in the Indian words, information asymmetries are also embedded state of Andhra Pradesh have contributed to com- in existing power asymmetries. bating corruption; however, they have been largely This Report highlights the three key conditions unsuccessful in the state of Bihar (Srinivasan and Park needed for effective information initiatives: trans- 2013; Dutta and others 2014). In Uganda, community parency, publicity, and accountability (Naurin 2006). However, making information available, making it WDR 2017 team, based on inputs from Helene Grandvoinnet. accessible, and ensuring that it leads to consequences From transparency to accountability through citizen engagement | 247 Figure S11.1 Transparency is not enough: Three than confronting the existing power structures conditions for the effectiveness of information (Mansuri and Rao 2013). initiatives Publicity Although transparency laws are a necessary first condition, they are far from sufficient for effectively promoting accountability. Publicity, the second con- Transparency Publicity Accountability dition for effectiveness, requires that the available information be made public and reach the intended actors, particularly those for whom the information matters. Publicity thus activates the potential power of transparency. However, whether information Source: WDR 2017 team, based on Naurin 2006. reaches the intended audiences depends on who has the incentives, the means, and the power to publicize it. Even when laws on paper support transparency, citizens may lack the incentives to pursue publication all involve challenging dynamics related to the nature of information if doing so increases the risk of reprisal of the policy arena (figure S11.1). or the perception that there will be no consequences once the information is publicly available. Transparency The media are a key actor in this regard because Making information available through transparency their de facto power originates from the decisions initiatives is an important first step toward increas- they make on what information is made public (see ing accountability. However, to effectively change the spotlight 12). However, civil society can also play incentives—political costs—of those in power to adopt an important role. Information can be made more such initiatives, citizens need to organize collectively salient through issue framing and perceived as reli- to amplify their bargaining power. Successful reform able through dissemination by respected individ- coalitions often involve various civil society groups uals or groups within society (such as local leaders, collaborating with interested elites, including sympa- grassroots organizations, parent-teacher associa- thetic government agencies such as law courts or an tions, or health committees). The availability of new ombudsman’s office. This type of coalition was a key digital technologies and social media platforms has factor in the successful passage of the Right to Infor- amplified the possibilities for citizens to play a role mation Act in India (see chapter 8) because a coalition in both generating content and publicizing it, espe- of government officials and eminent citizens helped cially when the traditional media channels may have give voice to initially isolated rural activists. limited freedom to do so. Although the social media However, the demand for greater transparency have been powerful in publicizing more egregious per se may not produce incentives powerful enough government scandals such as corrupt high-level pol- to stimulate collective action. Reducing the extent iticians or the excessive use of force by police, they of information asymmetries is not enough. Citizens have been less powerful in mobilizing citizens around frequently possess in-depth knowledge of state weak- everyday issues such as failures in service delivery nesses and failures, and yet in most cases, without a (World Bank 2016). A growing number of civil society process to support their demands, they would rather organizations have emerged around the world pre- exit the system than challenge it (Hirschman 1970). cisely to solve these types of failures by aggregating Supporting the coordination of citizens’ preferences and publicizing information from citizens on issues is therefore essential to catalyzing change. Indeed, such as bribery or teacher absenteeism. However, an citizens are not a homogeneous group with common analysis of 17 such initiatives found that only three preferences, and in coordinating these preferences of them had a high impact in terms of government there is risk of capture by subgroups (see chapters 6 responsiveness (World Bank 2016). and 8). Civil society is not immune to power relations, and different civil society actors may have different Accountability incentives to maintain or to challenge existing rules. Once information is made public, the effectiveness It is not uncommon for representatives to emerge of TAIs to promote government responsiveness voicing demands reflecting special interests rather ultimately depends on their ability to reshape the than the public good, thereby strengthening rather policy arena by rebalancing the power asymmetries. 248 | World Development Report 2017 Responsiveness is a function of the incentives public vary by sector or over time (Bukenya, Hickey, and King officials face in terms of the chances of being held 2012). Some agencies or levels of government are more accountable. Citizen engagement may succeed in amenable than others to partnering with civil society shifting those incentives by applying pressure on to ensure the accountability of other state actors— authorities and increasing the cost of inaction (espe- such as oversight institutions, a central government cially where there is a direct possibility of being sanc- eager to monitor local governments or agencies, or a tioned or being voted out of office). regulatory agency partnering with citizens to check The road from transparency to accountability, the policy of an energy ministry. The judiciary can be however, is not free of hurdles. Depending on its an important actor as well to the extent that it has the nature, citizen engagement can lead to positive or space and incentives to challenge public authorities negative outcomes. Although assessment of these (see spotlight 3 on effective and equitable legal insti- experiences faces the challenge of defining clearly tutions). During Hosni Mubarak’s rule in the Arab the dimension over which results are expected, Republic of Egypt, for example, human rights groups Gaventa and Barrett (2012) propose four dimensions took advantage of an important window of judicial across which to measure these outcomes (table S11.1).3 independence to systematically challenge repres- According to their analysis of over 800 examples of sive legislation through the Supreme Constitutional citizen engagement strategies, the highest percent- Court (Moustafa 2007; Staton 2010). age of positive outcomes for the indicator enhanced Creating coalitions across different levels of the state responsiveness and accountability is the result of policy arena can also be critical for scaling up the multiple engagement strategies (as opposed to a sin- success of localized interventions. For example, when gle engagement strategy).4 local obstacles stem from weaknesses at a higher In addition to multiple engagement strategies, level, improving local accountability alone will not the effectiveness of citizen engagement to promote be sufficient (the different policy arenas in which accountability also depends on the effectiveness of a players interact are not independent of each other). broader set of institutional incentives, mechanisms In Sierra Leone, a process of community scorecards to enforce sanctions, and coalitions with a broad set reached a ceiling when nurses and community mem- of actors (including political elites). For example, the bers proved unable to resolve issues that involved need among elite actors to maintain relationships greater power imbalances or larger institutional both horizontally (with other elite groups) and verti- breakdowns. Strategies of vertical integration, or the cally (with organized social groups) in order to pre- coordination of civil society oversight at different lev- serve their influence can create strong incentives to els of public decision making, are important not only respond (or not) to particular demands, which may for identifying possible (interconnected) entry points Table S11.1 Positive and negative outcomes of citizen engagement Positive Negative Construction of citizenship Increased civic and political knowledge Reliance on knowledge intermediaries Greater sense of empowerment and agency Disempowerment and reduced sense of agency Practices of citizen participation Increased capacities for collective action New capacities used for “negative” purposes New forms of participation Tokenistic or “captured” forms of participation Deepening of networks and solidarities Lack of accountability and representation in networks Responsive and accountable states Greater access to state services and resources Denial of state services and resources Greater realization of rights Social, economic, and political reprisals Enhanced state responsiveness and accountability Violent or coercive state response Inclusive and cohesive societies Inclusion of new actors and issues in public spaces Reinforcement of social hierarchies and exclusion Greater social cohesion across groups Increased horizontal conflict and violence Source: Gaventa and Barrett 2012, table 1. From transparency to accountability through citizen engagement | 249 for reform, but also for strengthening the bargaining 4. The single engagement strategies analyzed include power of actors to actually pressure for reform. The local associations, social movements and campaigns, initiative Textbook Count in the Philippines reveals and formal participatory governance spaces. how this type of strategy was successful in reducing textbook funds lost to corruption as well as improv- References ing the quality, cost, and delivery time of textbooks. However, the initiative also reveals how the challenge Ackerman, John. 2004. “Co-governance for Accountabil- of sustaining such gains relies on the ability to over- ity: Beyond ‘Exit’ and ‘Voice.’ ” World Development 32 (3): 447–63. come power asymmetries that prevent commitment Baiocchi, Gianpaolo, Patrick Heller, and Marcelo Kun- to longer-term reform objectives (Fox and Aceron rath Silva. 2011. Bootstrapping Democracy: Transforming 2016). Local Governance and Civil Society in Brazil. Stanford, CA: Stanford University Press. Transparency and Bjorkman, Martina, and Jakob Svensson. 2009. “Power to the People: Evidence from a Randomized Field Exper- accountability: iment on Community-Based Monitoring in Uganda.” Complements for policy Quarterly Journal of Economics 124 (2): 735–69. Bukenya, Badru, Sam Hickey, and Sophie King. 2012. effectiveness “Understanding the Role of Context in Shaping The road from transparency to accountability via Social Accountability Interventions: Toward an citizen engagement and coalition building requires Evidence-Based Approach.” Social Accountability and Demand for Good Governance Team Report, World an effective reshaping of the policy arena. This can Bank, Washington, DC. be done through two entry points: enhancing con- Dutta, Puja, Rinku Murgai, Martin Ravallion, and Dom- testability and effectively changing the incentives inique van de Walle. 2014. Right to Work? Assessing of decision makers. In other words, transparency India’s Employment Guarantee Scheme in Bihar. Equity and access to information are not effective if the pre­ and Development Series. Washington, DC: World existing relative bargaining power of actors remains Bank. unchanged. Fox, Jonathan A. 2015. “Social Accountability: What Accountability is effective when citizens, acting Does the Evidence Really Say?” World Development 72 individually in response to new information, vote out (August): 346–61. those who are politically responsible for bad policies Fox, Jonathan A., and Joy Aceron. 2016. “Doing Account- (Khemani and others 2016). Accountability is also ability Differently: A Proposal for the Vertical Inte- strengthened by collective mobilization that increases gration of Civil Society Monitoring and Advocacy.” U4 Issue 4 (August), U4 Anti-corruption Resource the cost of inaction for those with the authority to Center, Chr. Michelsen Institute, Bergen, Norway. hold others responsible (Grandvoinnet, Aslam, and Gaventa, John, and Gregory Barrett. 2012. “Mapping the Raha 2015). As experience shows, coalitions between Outcomes of Citizen Engagement.” World Development different groups (citizens and elites) at different 40 (12): 2399–410. levels (local, national, and international) tend to be Gaventa, John, and Rosemary McGee. 2013. “The Impact the most effective ones to bring about change. and Effectiveness of Transparency and Accountabil- ity Initiatives.” Development Policy Review 31 (7): 3–28. Grandvoinnet, Helene, Ghazia Aslam, and Shomikho Notes Raha. 2015. Opening the Black Box: The Contextual Drivers 1. For overviews of the evidence, see Gaventa and of Social Accountability. New Frontiers of Social Policy McGee (2013); Joshi (2013); Fox (2015); Grandvoinnet, Series. Washington, DC: World Bank. Aslam, and Raha (2015); Fox and Aceron (2016); and Hirschman, Albert O. 1970. Exit, Voice, and Loyalty: Khemani and others (2016). Responses to Decline in Firms, Organizations, and States. 2. See chapter 8 for a more in-depth discussion of the Cambridge, MA: Harvard University Press. case of Brazil. Joshi, Anuradha. 2013. “Do They Work? Assessing the 3. Grandvoinnet, Aslam, and Raha (2015) propose an Impact of Transparency and Accountability Initia- alternative set of categories based on within-state, tives in Service Delivery.” Development Policy Review 31 state-society, and within-society outcomes, as well (7): 29–48. as on whether outcomes are more “instrumental” or Khemani, Stuti, Ernesto Dal Bó, Claudio Ferraz, Frederico “institutional.” Finan, Corinne Stephenson, Adesinaola Odugbemi, 250 | World Development Report 2017 Dikshya Thapa, and Scott Abrahams. 2016. Making Pol- Srinivasan, S., and S. Park. 2013. “Conducting Social itics Work for Development: Harnessing Transparency and Audits to Monitor Social Service Delivery: A Guid- Citizen Engagement. Policy Research Report. Washing- ance Note.” Draft paper (October), World Bank, Wash- ton, DC: World Bank. ington, DC. Mansuri, Ghazala, and Vijayendra Rao. 2013. Localizing Staton, Jeffrey K. 2010. Judicial Power and Strategic Commu- Development: Does Participation Work? Policy Research nication in Mexico. New York: Cambridge University Report. Washington, DC: World Bank. Press. Moustafa, Tamir. 2007. The Struggle for Constitutional World Bank. 2016. World Development Report 2016: Digital Power: Law, Politics, and Economic Development in Egypt. Dividends. Washington, DC: World Bank. New York: Cambridge University Press. Naurin, Daniel. 2006. “Transparency, Publicity, Account- ability: The Missing Links.” Swiss Political Science Review 12 (3): 90–98. From transparency to accountability through citizen engagement | 251 SPOTLIGHT 12 The media Under the presidency of Alberto Fujimori (1990–2000) government performance, shaping the incentives of in Peru, the bribing of politicians, judges, and news politicians to deliver, and making governments more media companies was a well-established practice to responsive to voters, thereby improving the quality of weaken accountability and co-opt the opposition. public policies. By making information public, media The architect of the system, Fujimori’s security chief, companies can strengthen the bargaining power of cit- Vladimiro Montesinos, kept a detailed record—both on izens, increasing the costs for public officials to engage paper and on video—of all payments made. However, in rent-seeking behavior (see chapter 8). Indeed, the Montesinos failed to secure the support of one TV media can facilitate the efforts of civic associations channel (Channel N), which continued to publicize to mobilize citizens around an anticorruption agenda independent analysis and investigations of the regime’s and help citizens monitor the quality of government performance (McMillan and Zoido 2004).1 This chan- services, acting as important agents of “social account- nel then made public the first “Vladivideos” in 2000, ability” (Peruzzotti and Smulovitz 2006). In Uganda, thereby revealing the magnitude of the corruption and for example, elite capture undermined public service the rent-seeking behavior of elites. The popular outrage provision, with local schools receiving on average only generated by disclosure of the videos helped opposition 24 percent of the central government grants to which forces mobilize, leading to the disintegration of the they were entitled. After a media campaign publicized regime and the ousting of Fujimori a few months later. the amount the schools were supposed to receive, the This case highlights the central role that the media average funding increased to 80 percent, improving can play as an agent of accountability. By publicizing school enrollment and learning outcomes. The effects information that is reliable and salient for citizens, the were larger in schools that were closer to a newspaper media can change the incentives of elites by increas- outlet (Reinikka and Svensson 2005). ing the costs of certain behavior or policy decisions, Access to media makes government more respon- reshape preferences and beliefs, and make the policy sive to citizens’ needs. For example, a comparison of arena more contestable (Khemani and others 2016). Indian states from 1958 to 1992 found that government But precisely because of their role, the media can be spending was more responsive to local needs in areas captured by powerful interests and undermine— in which newspaper circulation was higher (Besley rather than support—possible entry points for change. and Burgess 2002). However, this type of relationship can also generate biases against citizens who do not Changing incentives: have access to media, especially the poor living in rural areas (Strömberg 2015). For information to reach the The watchdog role of media intended audiences (the publicity condition described The media can play a role as “public sentinels” (Norris in spotlight 11), the media need to make information 2010), generating and publicizing information about accessible to all. According to data from the Gallup World Poll, the media sources that citizens rely on WDR 2017 team. vary dramatically across regions, although television 252 | World Development Report 2017 and radio are consistently more popular than news- shape coverage and content, reducing contestability. papers. Moreover, the means by which citizens can Although it is difficult to quantify the relative impor- access media are also starkly different; despite huge tance of controlling the media compared with other gains in internet penetration rates in recent decades, institutions aimed at ensuring checks and balances, cell phone ownership far outstrips rates of access to in Peru it was estimated that bribing the media was in computers or internet at home (Khemani and others fact 10 times more expensive than bribing legislators 2016; World Bank 2016). and judges during the Fujimori regime. The television channel with the largest viewership received US$1.5 million a month (McMillan and Zoido 2004). Another Reshaping preferences: strategy governments can use is to adopt regulations The agenda-setting role of that favor a specific media outlet or buy advertising the media space in exchange for political support. For example, in Argentina the amount of coverage of corruption As discussed in the World Development Report 2015: scandals significantly declined for newspapers that Mind, Society, and Behavior (World Bank 2015), the received government-related advertising from 1998 media can play an important role in reshaping prefer- to 2007 (Di Tella and Franceschelli 2011). Private inter- ences and social norms within societies.2 Media “both ests can also capture media markets: as of 2016 about entertain and educate, in order to increase audience 6 percent of all the world’s billionaires were involved members’ knowledge about an educational issue, in some media business, reaching peaks of more than create favorable attitudes, shift social norms, and 20 percent in countries such as Mexico, Poland, and change overt behavior” (Singhal and Rogers 2004, 5). República Bolivariana de Venezuela.3 Other research A growing body of studies based on randomized con- shows that media capture by narrow interest groups trolled trials and quasi-experimental design provides is more likely when media ownership is more con- empirical support for this claim, pointing at the trans- centrated and income inequalities are higher (Corneo formative potential of “educational entertainment” (or 2006; Petrova 2008). “edutainment”). For example, in Brazil, watching a soap These findings suggest that more competition opera that shows female characters who have few or no and entry in the media market are fundamental to children has been associated with significant drops in increasing contestability in the policy-making arena fertility rates, changing preferences for family size (La (Khemani and others 2016). Ensuring the media’s Ferrara, Chong, and Duryea 2012). In India, access to independence from government ownership works television has improved gender norms, altered son pref- toward the same effect. However, ownership of the erence, and decreased fertility (Jensen and Oster 2009). media and press freedom are also the by-products In Tanzania, exposure to a particular radio program of elite bargains and power relations, creating an was associated with a significant increase in condom equilibrium that is difficult to change. One important use and reduction in the number of sexual partners factor driving the growth of independent media is (Vaughan and others 2000). In Rwanda, exposure to the advertising market. A study of U.S. newspapers radio programs changed citizens’ attitudes toward in the 19th century revealed that independent media authorities, promoting more pro-social behavior and are more likely to emerge in places with higher adver- more active participation in conflict resolution (Paluck tising revenues (Petrova 2011). When advertising and Green 2009). Ultimately, the role of the media, rang- revenues increase, media outlets have alternative rev- ing from local radio stations to international broadcast- enue sources and therefore are less willing to distort ing networks, in reaching broad audiences and reshap- news coverage to protect the interests of subsidizing ing the demands of what they expect from both their groups, especially if such distortion undermines their government and their media is essential for ensuring ability to secure advertising revenues. the sustainability of progress in promoting more con- The international donor community can also testable and participatory spaces of policy dialogue. provide an alternative revenue stream to media as a means of fostering more independent markets and Changing contestability: The reducing dependency on government funding. For political economy of media example, aid flows to support the independence of the media in Tanzania led to important gains in media capture and competition freedom and the growth of newspapers and tele­ Control of the media is one instrument through vision stations (Tripp 2012). However, international which elites bargain. They can capture the media to funding of the media tends to be limited. In 2014 only The media | 253 0.3 percent of total official development assistance Notes was allocated to media support.4 That said, monetary support of the media is often insufficient to overcome 1. It is unclear whether Montesinos failed to secure the the existing political challenges, and it may in fact support of Channel N because the owners of the chan- lead to unintended consequences. nel rejected the bribe or because Montesinos made a strategic mistake by undervaluing the importance of In some cases, elite bargains can open up opportu- a cable channel with only a few thousand subscribers nities for more competitive media markets and lead (McMillan and Zoido 2004). to unexpected changes in contestability. In Malaysia, 2. This section largely relies and builds on the World for example, ruling elites invested in internet infra- Development Report 2015: Mind, Society, and Behavior structure as a way to attract foreign investment. This (World Bank 2015). A background paper for that led to a “democratizing” effect in the media market, Report, “The Impact of Entertainment Education,” with independent bloggers publicizing news on gov- provides a recent review of the literature, analysis of ernment performance. This development has had an selected cases, and evidence on results. important effect on voting behavior: in districts with 3. WDR 2017 team, based on Forbes, “The World’s Billion- higher internet access, the loss of political support for aires,” http://www.forbes.com/billionaires/. the ruling party has been more pronounced (Miner 4. WDR 2017 team estimates, based on data supplied 2015). Similar effects have been found in the Russian by the Organisation for Economic Co-operation and Federation, where the access to a privately owned and Development. independent television channel (NTS) was associated with a higher propensity to vote for the opposition References (Enikolopov, Petrova, and Zhuravskaya 2011). Ackland, Robert, and Kyosuke Tanaka. 2015. “Develop- Media content is often decided by elites. The effect ment Impact of Social Media.” Background paper, of media bias as an instrument to reduce contestabil- World Development Report 2016: Mind, Society, and ity, reinforce prior beliefs, and increase polarization Behavior, World Bank, Washington, DC. among social groups is well documented in the Bennett, W. Lance, and Alexandra Segerberg. 2012. “The literature (Strömberg 2015, 2016). Elites can also use Logic of Connective Action.” Information, Communica- the media as a coordinating device for propaganda tion, and Society 15 (5): 739–68. purposes and—in extreme cases—for repression. For Besley, Timothy, and Robin S. L. Burgess. 2002. “The example, 10 percent of the reported killings during Political Economy of Government Responsiveness: the genocide in Rwanda have been attributed to radio Theory and Evidence from India.” Quarterly Journal of broadcasting, which facilitated militia targeting of Economics 117 (4): 1415–51. Corneo, Giacomo. 2006. “Media Capture in a Democracy: the Tutsi population (Yanagizawa-Drott 2014). The Role of Wealth Concentration.” Journal of Public Under certain circumstances, new social media Economics 90 (1–2): 37–58. can counteract elite control of the media market. The Di Tella, Rafael, and Ignacio Franceschelli. 2011. “Govern- anti-G-20 movements following the global finan- ment Advertising and Media Coverage of Corruption cial crisis in 2008–09 (Bennett and Segerberg 2012), Scandals.” American Economic Journal: Applied Economics the Occupy Wall Street movement in 2011, the Arab 3 (4): 119–51. Spring that began to spread in early 2011, and the Enikolopov, Ruben, Maria Petrova, and Ekaterina massive protests that erupted in Brazil surrounding Zhuravskaya. 2011. “Media and Political Persuasion: the 2014 World Cup (Lemieux 2015)—all demonstrate Evidence from Russia.” American Economic Review 101 the instrumental role played by the internet and new (7): 3253–85. social media in facilitating citizens’ collective action. Gallup Organization. Various years. Gallup World Poll. The same events, however, also highlight the limita- Washington, DC, http://www.gallup.com/services tions of social media. Social media can be effective in /170945/world-poll.aspx. 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Rogers, Arvind Singhal, Peruzzotti, Enrique, and Catalina Smulovitz, eds. 2006. and Ramadhan M. Swalehe. 2000. “Entertainment- Enforcing the Rule of Law: Social Accountability in the New Education and HIV/AIDS Prevention: A Field Experi- Latin American Democracies. Pitt Latin American Stud- ment in Tanzania.” Journal of Health Communication 5 ies Series. Pittsburgh: University of Pittsburgh Press. (8): 81–100. Petrova, Maria. 2008. “Inequality and Media Capture.” World Bank. 2015. World Development Report 2015: Mind, Journal of Public Economics 92 (1–2): 183–212. Society, and Behavior. Washington, DC: World Bank. —— ——. 2011. “Newspapers and Parties: How Advertising ————. 2016. World Development Report 2016: Digital Divi- Revenue Created an Independent Press.” American dends. Washington, DC: World Bank. Political Science Review 105 (4): 790–808. Yanagizawa-Drott, David. 2014. “Propaganda and Con- Reinikka, Ritva, and Jakob Svensson. 2005. “Fighting flict: Evidence from the Rwandan Genocide.” Quar- Corruption to Improve Schooling: Evidence from a terly Journal of Economics 1. The media | 255 CHAPTER 9 Governance in an interconnected world The dynamics of governance do not play out solely 2008–09 global financial crisis.4 Global interactions within the boundaries of nation-states. Countries can undermine domestic social and economic devel- today face an interconnected, globalized world char- opment by exerting power in ways that prevent the acterized by a high velocity and magnitude of flows adoption of policies fit for the domestic or local con- of capital, trade, ideas, technology, and people. From text or by reinforcing preexisting conditions that sus- 1960 to 2011, global trade’s share of the global gross tain socially undesirable outcomes. The resurgence domestic product (GDP) more than doubled, from 25 today of populist politics and its rejection of trade and percent to over 60 percent.1 The share of foreign direct migration in several Western countries can be seen as investment (FDI) increased from less than 10 percent a reaction to these negative effects. to over 40 percent from 1992 to 2010.2 Meanwhile, foreign debt’s share of the global GDP grew from Transnationalism and the only 11 percent in 1970 to 90 percent in 2010.3 Today, the world is very different from the one in which the domestic policy arena current developed countries emerged: cross-border The policy bargaining framework discussed in this flows were low; they received no aid; and they were Report provides a lens for discerning how to maxi- not subject to a proliferation of transnational treaties, mize the positive impacts of transnational flows and norms, and regulatory mechanisms. For developing international actors to achieve security, growth, and For developing countries, the era of globalization and “global gover- equity. These flows can be critical instruments for countries, the era nance” presents both opportunities and challenges. enhancing the ability of domestic actors to commit, of globalization Globalization can greatly benefit countries in coordinate, and cooperate to advance development and “global search of sustained and inclusive development. The outcomes. But they also can disrupt these functions governance” rapid diffusion of technology and greater access by confusing expectations, competing with social presents both to capital and world markets have enabled annual norms, and undermining citizen-state accountability. opportunities and growth rates of over 7 percent for a subset of devel- Understanding these effects requires in turn under- challenges. oping countries—a previously unfathomable rate of standing how transnational factors shape the incen- growth that helped lift over 1 billion people out of tives of domestic actors, influence their preferences poverty from 1981 to 2012 (Spence 2011). to change outcomes, and affect contestability in the Globalization can, however, also present great policy arena. challenges. By making it possible for domestic actors At times, international actors enter directly into to send money and resources abroad, transnational the policy arena (figure 9.1, panel a). Foreign states, flows increase the capacity for them to opt out of local multinational corporations, development agencies, bargains. These flows have also been associated with a or transnational nongovernmental organizations marked rise in inequality within countries and with a (NGOs) can gain a seat at the domestic bargain- greater vulnerability of countries to global economic ing table as they pursue specific goals or support crises, such as the 1997 Asian financial crisis and the domestic efforts that are aligned with their interests. Governance in an interconnected world | 257 Figure 9.1 International actors can affect the domestic policy arena by changing the dynamics of contestation, shifting actor incentives, or shaping actor norms a. International actors can themselves b. International actors can provide enter the policy arena alternative sites for contestation c. International actors can empower or shape the d. International actors can shift the preferences incentives of citizens and elites by providing resources of citizens and elites International actor Elite Citizen Source: WDR 2017 team. However, international actors and mechanisms Court of Human Rights can bring claims against their largely affect the policy arena indirectly. In doing so, home state. Several international human rights trea- they may change incentives and preferences toward ties require states to report and answer to an interna- enabling or constraining institutional functions for tional expert body. And a vast number of international development and open or foreclose the possibilities and transnational forums exist for the development for contestation. of industry-specific rules, monitoring their applica- International actors can shape the arena in which tion and sanctioning violations to various degrees. policy making and contestation occur by creating The proliferation of these forums raises unresolved alternative spaces in which actors can bargain (figure questions about their functional design, political 9.1, panel b). For example, foreign investors can bring legitimacy, and accountability. For example, as states states to the International Centre for Settlement of increasingly subcontract government functions such Investment Disputes (ICSID) for independent arbitra- as public infrastructure and service delivery, the tools tion rather than rely on the legal mechanisms of the of commercial arbitration may undercut the role of host state. Citizens of countries party to the European citizens in accountability. This challenge is reflected 258 | World Development Report 2017 in contemporary public concerns about the role of reduce the space of public discourse (Lukes 1986). investor-state dispute settlement in bilateral and mul- Development indicators, for example, provide cer- tilateral investment treaties such as the Trans-Pacific tainty and an impression that a clear trajectory exists Partnership. to changing phenomena that are inherently complex Transnational flows and mechanisms can change and contested, such as peace or well-being (Davis, the payoff structure and incentives of domestic actors Kingsbury, and Merry 2012). by providing inducements or threats (figure 9.1, panel This chapter looks at how international actors can c). For example, conditions attached to foreign aid influence domestic governance dynamics through (conditionality) can make assistance dependent on two primary instruments: (1) the introduction and dif- specific behavior by domestic actors. Similarly, the fusion of transnational rules, norms, and regulations desire to attract foreign investment can act as an and (2) the distribution of official development assis- incentive for positive changes in domestic gover- tance or foreign aid. In discussing both instruments, nance. For example, the pursuit of foreign investment this chapter focuses on the mechanisms through in China and Vietnam spurred institutional improve- which these instruments act on the incentives and ments in economic management at the provincial preferences of actors in the policy arena and the con- level, with greater flows leading to even more insti- testability of that arena. tutional reforms (Dang 2013; Long, Yang, and Zhang 2015). International trade agreements, by changing the incentives of domestic actors, can serve as a com- Transnational rules and mitment device. At the same time, the incentives and regulations: Enhanced payoffs may be structured in favor of private goods cooperation and focal points rather than global or national public goods. A gov- ernment may sign a trade agreement to tie its hands for change in the face of domestic vested interests that might As the flows across borders expand, the instruments As the flows across induce it to implement suboptimal policies such as and mechanisms used to manage them expand borders expand, high tariffs, or it may use transnational flows as a rea- as well (figure 9.2). Since the late 20th century, an the instruments son to avoid regulating a costly and challenging issue, ever-increasing number of international and transna- and mechanisms such as the environmental damage caused by mines tional efforts have been made to govern the activities, used to manage (Maggi and Rodríguez-Clare 1998, 2007; Shemberg relationships, and behavior that transcend national them expand as 2009). frontiers. These efforts stem in part from the nature well. International actors and transnational interac- of today’s global challenges—such as climate, finance, tions also shape preferences by influencing the ideas and cross-border crime—which require solutions and beliefs of actors in the domestic policy arena that go beyond the traditional state model of reg- (figure 9.1, panel d). Improvements in technology, by ulation. Unlike traditional international relations, facilitating greater global connectivity, have helped these transnational efforts involve a broad array of spread international ideas and norms. Transnational actors—nation-states, multilateral organizations, pri- networks of technical experts can play an important vate actors, and advocacy groups—and cover a wide role in changing preferences and internalizing new range of issues—business transactions, labor, crime, norms through the diffusion of evidence and author- information management, intellectual property, pro- itative expertise.5 In China, the interaction of the curement, utility regulation, human rights, food and National Environmental Protection Agency (NEPA) safety standards, and environmental sustainability with experts resulted in new perspectives, peer stan- (Hale and Held 2011). dards, data, and research findings that NEPA drew on Much of this proliferation of regulation has been to shape the debate over accession to the Montreal in pursuit of further deregulation, as exemplified by Protocol to protect the ozone layer, shifting the views the increasing de jure openness of capital accounts of other political actors and allowing successful bar- (figure 9.2, panel a). Other regulations and treaties are gaining with more domestically grounded agencies, intended to enhance coordination on issues of global including the State Meteorological Administration importance. For example, more than 1,000 multilat- (Economy 2001). Beyond finance and other forms of eral and 1,300 bilateral environmental agreements are leverage, development actors can be most influential now in place (Green 2014). through the dissemination of knowledge and evi- The formation and diffusion of this overlapping dence. But, as Michel Foucault has argued, knowledge web of transnational rules mirror this Report’s frame- and evidence can also reflect particular agendas and work on a transnational level. The nature and content Governance in an interconnected world | 259 Figure 9.2  Regulations and legal agreements have proliferated across borders a. Average (de jure) capital account b. Multilateral treaties deposited with openness across countries, 1970–2014 the United Nations Secretary-General, 1904–2016 0.6 250 0.4 Capital account openness index 200 Number of treaties 0.2 150 0 100 −0.2 50 −0.4 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 05 05 25 35 45 55 65 75 85 95 20 15 15 19 20 20 20 19 19 19 19 19 19 19 19 19 Human rights Environment Other Sources: Panel a: WDR 2017 team, based on updated database from Chinn and Ito 2006; panel b: WDR 2017 team, based on United Nations 2016. Note: The category “human rights” in panel b refers to treaties related to human rights, human trafficking, refugees and displaced persons, and the status of women. of each regime are a product of contestation among improve coordination to overcome collective action multiple actors with varying incentives, preferences, challenges. and relative power. Transnational rules are institu- tionalized in some form of instrument, from author- International cooperation: Changing itative/binding legal instruments to nonbinding incentives to prevent races to the bottom declarations of norms and voluntary standards and In the same way that firms in competitive markets regulatory regimes.6 These instruments perform the lower prices to attract consumers, when goods, ser- functions of commitment, coordination, or coopera- vices, and capital are freely exchanged and move tion through various mechanisms, from coercion to internationally countries have an incentive to adopt socialization (table 9.1). They may directly target state competitive strategies to gain market share or attract governments, as do the European Union’s (EU’s) fiscal investment. To attract productive investments, and monetary rules or labor and tax standards aimed countries may lower taxes on corporate income for at avoiding a race to the bottom. They may bypass foreign companies. Competition among countries state governments to directly regulate private actors, on these forms of taxation has the effect of depleting as do voluntary industry regimes such as the Round- the domestic tax base and considerably decreasing table on Sustainable Palm Oil. Or they may reach out revenue. It also tends to shift taxation onto less directly to citizens by legitimating local grievances mobile factors such as labor. In turn, lower revenue through international rights and norms (Braithwaite means that countries have to shrink spending, with and Drahos 2000; Shaffer 2013). detrimental effects on the well-being of the poorest What follows is a closer look at how transnational and least powerful in society. Moreover, competition rules interact with the policy arena—specifically, to boost exports may result in lax labor and environ- (1) the rules that seek to achieve international coop- mental standards (Chau and Kanbur 2005). These are eration on global goods by changing incentives; examples of races to the bottom. (2) the rules that help induce a credible commitment Once competition pushes countries to a low equi- to domestic reform through trade and regional inte- librium, they have no incentive to change policy. An gration incentives; and (3) the rules that serve as focal attempt by one country to raise taxes on goods and points for domestic actors to shift preferences and services, capital, or corporate income would result in 260 | World Development Report 2017 Table 9.1 Transnational actors, instruments, and mechanisms for influencing domestic governance through incentives, preferences, and contestability Actors Instruments Mechanisms International governmental organizations Legal and rule-based instruments Incentives • United Nations (multiple agencies) • International and regional treaties and • Coercion (economic, military, • International financial institutions conventions political) • World Trade Organization • International and regional standards, • Rewards principles, and guidelines • Reciprocity • International courts and tribunals • Bilateral treaties • Voluntary standards and norm regimes Preferences Regional organizations • Contracts • Knowledge and capacity transfer • European Union • International courts and arbitration • Persuasion • African Union mechanisms • ASEAN • Socialization • OECD • Demonstration Expert knowledge and evidence International nongovernmental Contestability Public and private capital flows organizations • Coalition building • Multinational corporations • Substitution for domestic arena Migration and professional exchanges • Professional associations • Empowerment • Advocacy organizations Security operations • Epistemic communities Domestic actors • Government officials • Political actors • Private sector actors • Local civil society groups • Grassroots organizations Sources: WDR 2017 team, drawing on Braithwaite and Drahos 2000; Hale and Held 2011; and Shaffer 2013. Note: ASEAN = Association of Southeast Asian Nations; OECD = Organisation for Economic Co-operation and Development. a loss of sales or investments. Any intervention that investment or environmental standards, labor stan- could enhance employees’ welfare or the sustain- dards, or tax coordination. If all countries coordinate ability of production would also raise costs and thus and adopt the same policy, such as international labor reduce exports and output. Because of the sensitivity standards (Basu and others 2003), they will all be bet- of global capital to domestic adjustments and per- ter off. For example, in parallel with the creation of ceptions of investment risk, policy makers seeking a common market, the EU set up a Code of Conduct global investment may become largely accountable to prevent countries from engaging in harmful tax to external actors rather than to domestic constitu- competition and to harmonize value added taxes on ents. For example, policy makers seeking to increase goods and services and, less successfully, corporate domestic debt levels to finance an expanded educa- taxes and capital income taxes. tion budget may be prevented from doing so by the Such agreements can strengthen the commitment fear that international ratings agencies will down- of countries to specific minimum standards that grade their country’s sovereign bond rating, leading prevent the occurrence or perpetuation of an undesir- to capital flight. able equilibrium. However, in the absence of credible Global coordination is needed to prevent races to sanctions, incentives to defect are very high. Prevent- the bottom, underprovision of global public goods, ing defection requires recognition that achieving a and negative cross-border externalities. International sustainable agreement is a two-level game, involving actors can strengthen the commitment capacity of both an international bargaining process and a states through agreements on specific issues such as domestic bargaining process (box 9.1). Ultimately, the Governance in an interconnected world | 261 Box 9.1 Legitimizing the second-best: Governance options for global public goods and the Paris Agreement on climate change Climate change is a global public goods problem. Solving damage, financial flows and financing instruments, and it requires universal participation (all countries need to processes for the monitoring and revision of commitments. reduce emissions), but there is an incentive to free-ride in The pledge-and-review scheme has two obvious lim- any agreement. An obvious solution is a global governance itations. First, there is no reason to expect that the sum of body that ensures the participation of all countries and a fair the unilateral commitments will meet the global target of distribution of efforts. From the United Nations Framework maximum temperature change, and indeed they currently Convention on Climate Change (UNFCCC) in 1992 through do not meet the goal of the Paris Agreement (limit warm- the Kyoto Protocol in 1997 and the Copenhagen negoti- ing to 2 degrees and try to achieve 1.5 degrees). The hope ations in 2009, international negotiations have tried to is that commitment revisions will lead to a gradual increase create such a framework to decide on a global target for in ambition (van Asselt 2016). By providing a “ratcheting temperature change, country-specific emission targets, mechanism” that encourages countries to follow the lead of and a set of processes to ensure flexibility and compliance. others in increasing commitments, the Paris Agreement is The Kyoto Protocol failed to achieve universal participa- an important coordination mechanism (Keohane and Victor tion. Developing countries were reluctant to take on com- 2016). But if the problem is one of cooperation—that is, some mitments that could slow their economic growth, and many countries care more about climate change than others—then countries were reluctant to expose themselves to possible such a cycle of revisions could lead to a stagnation of ambi- sanctions from a supranational body (Stewart and Wiener tion, or even to a race to the bottom (Nordhaus 2015). 2003). As predicted by economic theory, in the absence of The second limitation is the lack of a compliance mech- a supranational governance body a credible commitment anism beyond monitoring that enables “naming and sham- was impossible to achieve (Carraro and Siniscalco 1992; ing” of countries that do not deliver on their commitment Barrett 1994). The 2015 Copenhagen conference, however, (Aldy 2014). However, climate negotiations are part of a was a paradigm shift, moving away from the first-best broader network of agreements. Thus failing to deliver on option of sanctions to a system of “pledge-and-review,” climate commitments may not lead to direct sanctions, but by which countries make unilateral commitments that are it could have a cost in other areas such as trade or techno- reviewed and monitored by the international community logical cooperation. Nordhaus (2015) suggests that even a (Barrett, Carraro, and de Melo 2015). minimum trade-related cost for noncompliance would lead These developments led to universal participation in to much greater participation and ambition. the Paris Agreement, underpinned by 162 unilateral com- Even though the Paris Agreement is far from an optimal mitments to contribute to reductions in global emissions. mechanism to govern global public goods (Stiglitz 2015), it The agreement, which went into effect in November 2016, is an attractive second-best option, building on countries’ also includes provisions to facilitate the adaptation to cli- self-interest in implementing climate policy actions at the mate change, support to cope with unavoidable loss and country level (Busby 2016; Keohane and Victor 2016). Source: Prepared for WDR 2017 by Stéphane Hallegatte. preferences and relative power of the relevant domes- will make credible commitments to follow through tic actors determine the credibility of commitment on economic reforms. The success of the EU integra- and the effectiveness of international sanctions. tion process, for example, demonstrates the power of inducements. Prospective member countries have to Transnational rules that provide incentives change their domestic rules to abide by the 80,000 for a credible commitment to domestic pages of regulations in the acquis communautaire. reform: Trade agreements For those countries that have joined the EU, the The desire to attract investment and expand trade can potential economic benefits of joining outweighed also provide incentives for improvements in domes- any loss of domestic autonomy in specific areas, and tic governance. Indeed, international agreements on the benefits of accession were used by elites to over- economic integration can mean that domestic actors come domestic resistance to the required reforms. 262 | World Development Report 2017 EU membership contributed to the consolidation of determined governance dynamics and political democratic institutions in former dictatorships in the reform (Khan 2013). European periphery, such as Greece, Portugal, and Trade agreements can help achieve commitment Trade agreements Spain in the 1980s, and in central and eastern Euro- to domestic reforms by empowering new domestic can help achieve pean countries in the former communist bloc in the actors. For example, workers at a Nike factory in Mex- commitment to 1990s and 2000s. ico succeeded in unionizing by leveraging the corpo- domestic reforms The possibility of accession to the General Agree- rate codes of conduct and transnational advocacy by empowering ment on Tariffs and Trade (GATT) and then its suc- networks that developed after implementation of the new domestic cessor, the World Trade Organization (WTO), has North American Free Trade Agreement (NAFTA)—see actors. induced considerable domestic reforms in nations Rodríguez Garavito (2005). In Cambodia, a surge in that seek to develop through global trade. WTO acces- garment exports to the United States following imple- sion has had the strongest growth-promoting effects mentation of the MFA led to a bilateral trade agree- in countries that undertook deeper commitments as ment in 1999 that used export quotas as a mechanism part of their accession negotiations, including China for improving domestic labor standards, thereby and Vietnam. Moreover, this pro-growth effect of giving greater bargaining power to Cambodian work- accession has been strongest in countries with the ers. Specifically, the United States agreed to increase weakest domestic governance (Tang and Wei 2009). garment quotas by 14 percent a year if working condi- In China, the process of WTO accession at the turn tions complied with international standards, and an of the millennium led to a major restructuring of the International Labour Organization (ILO) project was economy toward more market- and rules-based mech- established to independently monitor workers’ condi- anisms, with accession acting as a “wrecking ball” for tions in Cambodian garment factories. This enhanced the closed command economy (Woo 2001; Jin 2002). commitment led to significant improvements in free- China’s leadership leveraged foreign competition and dom of association following the agreement, with the external commitment to accelerate domestic reforms, share of unionized garment workers rising from only including reductions in tariff and nontariff barriers, 12 percent in 2000 to nearly 50 percent by 2005 (Adler market access for foreign firms, and protection of and Woolcock 2009). intellectual property. China’s commitments to liberal- And yet the substance and institutional design of izing its trade in services have been the most radical trade agreements can harm poor constituencies. At of any country acceding to the WTO (Mattoo 2004). times, they may prompt a regulatory race to the bottom The accession helped China’s leadership overcome for low-wage or casual workers, such as those in Mexi- domestic opposition to reforms, and it also signaled can maquiladoras or the Bangladeshi garment industry to the emerging private sector that reforms were (Carr and Chen 2002; Santos 2012). Policy makers and credible. The reforms enhanced the commercial legal publics are well aware of this problem, and a body environment and forced state-owned enterprises and of transnational law and regulations has emerged state-owned banks to restructure and compete on a to complement the domestic efforts just described. market basis, facilitating a more modern financial These efforts, though, face ongoing institutional system and rapid private sector growth (Lardy 2002). design challenges—in particular, how to build partic- Another example of a trade agreement that led ipatory legitimacy along with effective enforcement. to domestic reforms is the Multi Fibre Arrangement Meanwhile, as these efforts to foster transnational (MFA), which went into force in 1974 under GATT. In coordination proliferate, evidence suggests that the response to pressure by the United States to protect coordination effects of regulatory instruments should the U.S. domestic clothing industry, the MFA set quo- not be overstated. In WTO jurisprudence, whether a tas for textile exports from developing countries, but restriction on imports counts as a legitimate regula- it excluded some of the world’s least-developed coun- tion or a nontariff barrier is indeterminate—a phe- tries from the quota system. As a result, countries nomenon recognized by WTO lawyers and staff them- such as Bangladesh, Cambodia, and Tunisia, which selves. The indeterminacy is part of the strength of the could produce more and set prices higher than their regulatory regime: the concept of the nontariff barrier competitors, received “quota rents.” In Bangladesh, is flexible and potentially context-specific (Lang 2011). this positive shock prompted the government to And yet those players who know how to navigate the facilitate institutional innovations, including back- WTO rulemaking and appeals system will do better to-back letters of credit and the bonded warehouse, than those who do not. Among developing nations, which enabled a transformation of the Bangladeshi this is often those who have the capacity and staff to economy and an evolution of the elite bargain that be repeat players at the WTO (Santos 2012). Governance in an interconnected world | 263 Transnational rules as focal points to shift empty promises that are unable to constrain power or preferences and induce coordination change the behavior of domestic actors (Posner 2014). The last century has witnessed a “Rights Revolution” Explaining why state compliance with human in which global treaties and norms have facilitated the rights treaties and conventions varies requires taking spread of the notion of rights (figure 9.3)—see Pinker a closer look at the interaction between international (2011). International human rights and gender quotas norms and the domestic bargaining process. Once illustrate the ways in which transnational ideas dif- signed, international treaties “empower individuals, fuse and the mechanisms through which those ideas groups, or parts of the state with different rights pref- affect domestic governance arrangements. Although erences that were not empowered to the same extent a range of incentives can lead to the formal adoption in the absence of the treaties” (Simmons 2009, 125). By of such norms, the norms eventually become effec- referring to international norms, ordinary citizens and tive and internalized according to the extent to which disadvantaged groups can strengthen the legitimacy they reshape societal preferences. of their claims and successfully challenge the prevail- Since passage of the Universal Declaration of ing norms, pressuring governments to transform state Human Rights in 1948, human rights have been institutions and reform public policies. Elite resistance increasingly specified and embedded in international frequently increases the incentives for domestic treaties, institutions, and organizations. Country actors to build transnational alliances to support their adoption and participation have been widespread. claims. Often referred to as the “boomerang effect,” However, international treaties are not always effec- this dynamic process increases the costs incurred by tive in changing state behavior and practices. Indeed, state actors when resisting change and eventually a persistent implementation gap exists between the leads to compliance (Keck and Sikkink 1999). The de jure pledge to protect human rights—as measured human rights struggles in Latin American countries by states’ ratification of major international human during military dictatorships illustrate this point, as rights treaties and conventions—and actual compli- well as the mobilization against the apartheid govern- ance (figure 9.4). Some scholars argue that human ment in South Africa. Indeed, the most transformative rights are nothing more than window dressing or social movements of the 20th century—including Figure 9.3 The “Rights Revolution” has led to a global spread of rights-related norms, facilitated and supported by global treaties and agreements a. Use of “rights” terms in English-language b. Countries with policies helping ethnic minorities books, 1945–2008 or discriminating against them, 1950–2003 100 80 Proportion of books (% of 2008 level) 80 60 Share of countries (%) 60 40 40 20 20 0 0 1950 1960 1970 1980 1990 2000 2010 10 45 50 55 60 65 70 75 80 85 90 95 00 05 20 19 19 19 19 19 19 19 19 19 19 19 20 20 Policies that discriminate against Civil rights Children’s rights ethnic minorities Women’s rights Gay rights Policies that favor ethnic minorities Source: WDR 2017 team, using data from Google Books Ngram Viewer, based Source: WDR 2017 team, using data from Asal and Pate (2005). on Pinker 2011. Note: Policies include economic and political policies that discriminate or favor any ethnic group in a given country-year. 264 | World Development Report 2017 Figure 9.4 Human rights treaties are Figure 9.5 Gender quota laws have spreading, but de facto changes in state spread worldwide since 1990 performance are lagging behind 60 90 80 Number of countries 70 40 Percent 60 50 20 40 30 76 80 84 88 92 96 00 04 08 12 16 0 19 19 19 19 19 19 20 20 20 20 20 1990 1994 1998 2002 2006 2010 2014 Percentage nonrepressive (rare + limited) Legislated candidate quotas Reserved seats Percentage of treaties ratified Implementation gap Sources: WDR 2017 team, based on Center for Systemic Peace, Polity IV (database), various years; Norris and Dahlerup 2015; and International IDEA, Source: WDR 2017 team, based on Hafner-Burton and Tsutsui 2005. Inter-Parliamentary Union, and Stockholm University, Global Database of Quotas for Women, various years. Note: “Percentage of treaties ratified” measures the share of six core human rights treaties that the average state has ratified in a given year. “Percentage Note: The figure includes only quotas introduced at the national level. More- nonrepressive” measures the percentage of states that reported very rare or over, it does not include voluntary party quotas (adopted in 32 countries) limited violations of personal integrity rights in a given year, based on data because the adoption year varies across parties in a given country. from the Political Terror Scale (Gibney and others 2016). labor rights, women’s rights, and civil rights, and, more their capacity to influence constitutional reforms recently, indigenous and environmental movements— and lobby for the adoption of gender-sensitive poli- have all explicitly adopted the language and instru- cies. Many countries, however, still face important ments of international rights (Heller 2013). challenges in closing their implementation gap Over the last 25 years, different forms of gender and achieving the level of political participation for quotas for representation in national legislatures— women defined in the quota laws. The gap is larger including legislated quotas, reserved seats, and volun- for legislative quotas. Although these gaps may reflect tary party quotas—have spread to more than 100 coun- in part overly ambitious targets, the short time since tries (figure 9.5).7 These new provisions have helped adoption of the quota, and the weakness of mecha- double the percentage of women in the lower house of nisms to sanction noncompliance, evidence suggests national legislatures from approximately 10 percent in that social norms also play a role. In Spain, for exam- 1995 to 22 percent in 2015 (Norris and Dahlerup 2015). ple, a recent study found that political parties nomi- Quotas for women in local government positions, nate female candidates for seats in areas where they as in India, are also increasingly common.8 In early have little chance of being elected in order to reduce adopters—mainly European countries that introduced the risk of losing decision-making power within the voluntary party quotas in the 1980s—domestic social party (Esteve-Volart and Bagues 2012). It is yet to be movements and left-leaning political parties were seen how more recent reform efforts by some parties, especially influential (Ramirez, Soysal, and Shanahan such as the adoption of “zipper systems” in which 1997). By contrast, international nongovernmental male and female candidates are alternated on ballot organizations and multilateral organizations have lists, will influence these dynamics within Spain. become increasingly influential for late adopters Major shocks—such as conflict—can speed up the among developing countries, especially postconflict process of changing norms and create new windows countries largely dependent on international assis- of opportunity for disadvantaged groups. A process of tance (Krook 2006; Celis, Krook, and Meier 2011). “policy learning” can also occur; initially ineffective These processes of international norm diffusion quota laws have been revised to improve their effect interact with domestic factors to strengthen the bar- on the de facto political representation of women gaining power of women’s organizations and improve (Norris and Dahlerup 2015). Governance in an interconnected world | 265 Foreign aid and governance (ODA) has become a means of meeting a range of development, humanitarian, strategic, and commer- Since the end of World War II, foreign aid has been cial goals. In addition to finance, aid includes the one of the most prominent policy tools used by high- transfer of knowledge, expertise, and ideas intended income countries to promote security, growth, and to influence norms, capacity, and power (box 9.2). equity in low-income countries.9 Primarily intended to Between 1960 and 2013, member countries of fill capital shortfalls, official development assistance the Organisation for Economic Co-operation and Box 9.2 Aid as a delivery mechanism for transnational rules and ideas Development actors, especially the international financial Ex post conditionality. In the 1990s, ex ante conditional- institutions, have been among the most influential gen- ity was largely replaced by aid modalities based on princi- erators of transnational rules, norms, and ideas, using aid ples of partnership and ownership, assuming that aid would as a diffusion mechanism. Just as economic orthodoxy has be more effective in good policy environments (World Bank evolved over time—from an emphasis on the role of the 1998; Dollar and Burnside 2000). Many donors adopted a state in planning and investment in the 1960s and 1970s, to form of ex post conditionality under which aid in the form the macroeconomic discipline and market liberalization of of budget support (mostly unconditional funds) would be the Washington Consensus in the 1980s, to poverty allevia- directed to countries that themselves adopted good eco- tion and market institutions in the 1990s, to achievement of nomic and governance policies. Although aid still served as the Millennium Development Goals (MDGs) and improve- an incentive, its primary role was to amplify reform efforts ment of governance institutions in the 2000s—so, too, have and maximize poverty reduction in those places most likely aid modalities evolved in search of more effective means of to achieve results. Yet another feature was an emphasis translating these norms into development outcomes. on social participation in the development of policies, as Ex ante conditionality. Structural adjustment lending introduced in the Poverty Reduction Strategy Paper (PRSP) policies in the 1980s marked the high point of ex ante con- process adopted by the International Monetary Fund (IMF) ditionality—that is, aid transfers depended on the recipi- and the World Bank as a means of enhancing the contest- ent’s adoption of preset conditions. Today, however, this ability of the policy arena. These developments were also approach has been largely regarded as a failure because subject to criticism, most notably around the imperfect conditional loans proved ineffective as a commitment science of measuring institutional performance for pur- device. In theory, the threat of nondisbursement, or reward poses of aid allocation and the questionable concept of of disbursement, was an incentive to government actors to “ownership” in view of the power imbalance both between overcome obstacles to reform because of either opposing donors and recipients and between government elites and objectives or domestic political economy factors. Although other domestic constituencies (Wilhelm and Krause 2008). ex ante conditionality could sometimes strengthen the At worst, such an approach can give rise to enhanced hand of reformist governments that needed to swing legitimacy for governments that go through the motions domestic opinion behind these changes, it proved ineffec- of “ownership,” while in fact reducing the space for local tive in changing incentives and the preferences of opposing contestation and innovation. Some observers questioned elites (Collier and others 1997). This outcome was due in the extent to which this method was an answer to the flaws large part to the lack of a credible threat and the time con- of ex ante conditionality.a sistency problem: more often than not, donors submitted Outcome-based conditionality. The most recent genera- to pressures to disburse despite the failure of recipients to tion of aid instruments seeks to overcome the difficulty of meet the prescribed conditions (Killick 1997; Kanbur 2000). influencing the bargaining arena to yield “good” policies by More fundamentally, the prescribed conditions were often focusing instead on outcomes. Donors have introduced a politically infeasible because they sought to disable the range of results-based approaches, such as the World Bank’s systems of patronage needed to hold coalitions together Performance for Results (PforR) instrument, which disburses (Mbembe 2001). In short, the diffusion of norms through upon achievement of results according to agreed-on perfor- coercion was incapable of changing the much stronger mance indicators. This outcome-based conditionality is par- dynamics of the domestic bargaining arena (Temple 2010). ticularly suited to social sector outcomes such as those set out (Box continues next page) 266 | World Development Report 2017 Box 9.2 Aid as a delivery mechanism for transnational rules and ideas (continued) in the MDGs. In theory, by setting clearly defined objectives, Fragile States, which established a mutual compact between indicators, and verification protocols for programs initiated Organisation for Economic Co-operation and Development by a government, this method seeks to enhance govern- donors and a group of fragile states known as the g7+ to ment accountability to its own goals (Temple 2010). Another support country-led strategies based on a set of overarching noteworthy development is the New Deal for Engagement in peace-building and state-building goals. Source: WDR 2017 team. a. Craig and Porter (2003); van de Walle (2005); Andrews, Pritchett, and Woolcock (2013). Development (OECD) that are also members of the amounted to over US$161 billion (map 9.1). Although Development Assistance Committee (DAC) provided aid has ebbed and flowed over time, its significant some US$3.5 trillion (constant 2009 dollars) in aid. increase over the last two decades coincides with the Non-OECD economies are an increasingly important establishment of the Millennium Development Goals, source of aid: in 2014 the flow of aid to developing as well as with the surge in flows toward conflict- countries from both DAC and non-DAC contributors affected countries in the aftermath of the cold war.10 Map 9.1 Aid flows amounted to over US$161 billion from donor countries (purple) to recipient countries (orange and green) in 2014 Aid flows (US$) 600 100 25 10 0 –10 –25 –100 –1,000 Recipient countries with negative balance –50.792 –1.526 –0.704 No data IBRD 42496 | SEPTEMBER 2016 Source: WDR 2017 team, using data from the Organisation for Economic Co-operation and Development. Note: Data are on a per capita basis as of 2014. Shades of orange denote recipient countries. Shades of purple denote donor countries. The darker the country, the higher is the amount of aid received or transferred. Green countries (China, Indonesia, and Panama) are recipient countries in which the flow of aid received is smaller than the repayment of debts. Governance in an interconnected world | 267 Figure 9.6 Aid makes up a large share of GDP and revenue in many developing countries a. Low-income countries b. Lower-middle-income countries c. Upper-middle-income countries 20 100 18 90 16 80 % of government revenue 14 70 12 60 % of GDP 10 50 8 40 6 30 4 20 2 10 0 0 I L ZW GO MD ETH A BE OD IN FA MB A MO WI DI F LE D LV B A Y GD BO KR MM WZ MA NM RM GH MR ND C GE AO EN MR MB MD SO EN GZ TLS S ME RA KM I R R OM CO ZE US A AB B MK AM UN BIH G R ER CR NP CA PE BL JO MY UZ SR EG IN TZ I RW LK W NI N R S Z B L S N G F A K U I B B L M Y G R M O K A S V K T L R A V C B G Z G B X T A H D T A C G L N N B M L S T R V O D M B D M E G G D M A N M TJK IRN A U Y IRQ ML HT R PH ZA NE LB GN AL PR LB PA CI KS TC SS EC UG NG DZ AF CO PN SD LB SY AG KH GT YE JA ODA (% of GDP, left axis) ODA (% of government revenue, right axis) Sources : WDR 2017 team. Official development assistance (ODA) data: Organisation for Economic Co-operation and Development; government revenue data: IMF, World Economic Outlook, various years. Note: The graphs show ODA from all donors to all recipients in low- and middle-income countries with a population of at least 1 million. Figures for ODA (percent of GDP) are capped at 20 percent of GDP for the sake of visualization. The underlying uncapped data are Afghanistan, 24.1 percent; Central African Republic, 35.4 percent; Liberia, 37.0 percent; and Malawi, 21.8 percent. Figures for ODA (percent of government revenue) are capped at 100 percent for the sake of visualization. The underlying uncapped data are Afghanistan, 105.2 percent; Central African Republic, 260.6 percent; Liberia, 126.0 percent; and Sierra Leone, 143.2 percent. Still, few donors have met the ODA target of 0.7 per- Figure 9.7  Low- and lower-middle- cent of gross national income (GNI), which they first income countries vary greatly in agreed to in 1970. the amount of aid received and Although the volume of aid is increasing, its share improvement in GDP per capita relative to flows of private capital and other sources 80 total, 1960–2014 (constant 2005 US$, millions) of finance is decreasing. In middle-income coun- tries, aid makes up only 1.9 percent of GDP (median), COD compared with 9.6 percent in low-income countries. Net ODA and aid received: Foreign direct investment—largely reflecting new 60 SDN and increased exploitation of natural resources—and KEN NGA remittances have overtaken aid as a percentage of ZMB GDP in 21 out of 43 African countries based on the 40 SEN GHA available data.11 Nevertheless, aid makes up more than CIV CMR 10 percent of GDP for half of all low-income countries MWI BFA MDG RWA and over 30 percent of total revenues for 26 develop- NER 20 TCD MRT ing countries (figure 9.6). BDI LBR BEN A look at the impact of more than five decades CAF SLE TGO LSO of development aid on security, growth, and equity reveals the great variation across regions and coun- 0 tries (figure 9.7). As this Report explores, aid has to be −500 0 500 1,000 understood in terms of how it interacts with the exist- Change in GDP per capita,1960–2014 ing domestic power imbalances and how it affects (constant 2013 US$) the decision-making processes and the allocation of Low-income country resources. Some groups and actors are better posi- Lower-middle-income country tioned to channel foreign aid flows to their benefit or Source: WDR 2017 team, using data from the World Bank, World Develop- to that of their constituencies, whether in or outside ment Indicators (database). government, and thus strengthen their position of Note: GDP = gross domestic product; ODA = official development assistance. 268 | World Development Report 2017 influence. In this way, aid, like other resources, can have contradictory and—most often—unintended reinforce or offset existing power imbalances, result- effects (Paris and Sisk 2007). When aid is granted ing in heterogeneous outcomes when it comes to without making the development objective of the growth and equity, depending on the specific context. recipient country the priority, it is more likely to have negative effects on governance. Understanding the impact of aggregate Another argument focuses on the great poten- aid flows on governance tial for aid funds to be misused by those in power, Two decades ago, an influential study concluded whether through outright embezzlement (perhaps that the link between aid and growth is much stron- best illustrated by the case of Mobutu Sese Seko, ger in countries with sound policy and institutions, former dictator of the Democratic Republic of Congo, leading to calls for donors to direct assistance to who reportedly appropriated $12 billion in aid money) those states that could demonstrate good gover- or through the diversion of aid money—or govern- nance (Burnside and Dollar 2000).12 But what effect ment funds freed up by the injection of aid money—to can aid have on governance? This question has been nondevelopment aims that reinforce extractive, patri- the subject of considerable debate among leading monial, and exclusionary power structures (Ahmed scholars, spawning an array of attempts to measure 2012; Deaton 2013). Several econometric studies have empirically whether aid in the aggregate promotes found a negative correlation between high levels of or undermines the quality of institutions in recipient aid and the accountability of political institutions.15 countries. Some of the pessimists, including Deaton This risk is even greater where aid is unconditional (2013) and Easterly (2006), claim that large amounts and where political elites do not face organized of aid can deepen pathologies in countries with poor opposition (Acemoglu, Robinson, and Verdier 2004).16 governance.13 Conversely, the optimists argue that aid Some investigators have argued that large amounts can help overcome resistance to good policies and of aid may encourage political instability and coup support the development of political institutions, attempts as individuals and groups vie for the oppor- including democracy.14 Unfortunately, the evidence tunity to control aid-financed assets (Grossman 1992). belies clear answers, in large part because of the Underlying these arguments is the claim that aid inherent methodological flaws, including the fact can undermine the relationship between the state that aid aggregations lump together different sources and its citizens by making the state less responsive (bilateral and multilateral); different modalities (bud- to their demands. The more a state relies on reve- get support, project finance, technical assistance); nues from the international community, the fewer different desired outcomes (development, democracy, incentives it has to build the public institutions humanitarian relief); and different local contexts. necessary to mobilize domestic revenues through Ultimately, aid is neither inherently good nor bad for taxation. And the less a state relies on its domestic tax Ultimately, aid is governance. What matters is how aid interacts with base, the more its state-citizen accountability erodes neither inherently the prevailing domestic context and which groups or (Moore 2004). Aid has thus been likened to the nat- good nor bad actors see their influence enhanced. ural resource curse: a windfall of unearned income for governance. Although empirically inconclusive, the literature that enables irresponsible government spending and What matters is converges on a set of analytical arguments that sheds behavior, unconstrained by the kind of state-citizen how aid interacts light on the conditions under which aid can have a social contract thought to lie at the heart of modern with the prevailing positive or a negative impact on governance. Studies democracies.17 However, the empirical evidence link- domestic context of aid in the aggregate include large amounts of bilat- ing aid flows to domestic taxation is mixed (box 9.3). and which groups eral aid, which historically has been used to project or actors see a dynamic mix of the donor’s strategic, commercial, Aid and the policy arena: Incentives, their influence and programmatic priorities. Significant correlations preferences, and contestability enhanced. have been documented between the allocation of aid A growing theoretical and empirical literature is and a range of donor interests, including former colo- examining how development projects interact with nial ties, voting record in the United Nations, business the policy arena to produce three possible outcomes opportunities, and supply-side factors such as a food for governance: no effects, negative effects, or posi- surplus (Alesina and Dollar 2000; Qian 2015). Accord- tive (generative) effects. ing to one argument, in inherently unstable or institu- The first category includes projects that, inten- tionally fragile environments, the multiple purposes tionally or not, miss opportunities to reshape elite often projected through ODA—stability, security, incentives and preferences. Projects that deliver humanitarian assistance, state building—frequently goods directly, and thus circumvent government Governance in an interconnected world | 269 Box 9.3 The impact of aid on domestic resource mobilization: What does the evidence say? There is a growing consensus that increasing the mobiliza- tested and isolated in experimental settings (Martin 2014; tion of domestic resources can enhance accountability, par- Paler 2014), in reality the relationship is more complex ticularly if such efforts are explicitly linked to the provision and seems to depend on three factors: (1) the type of aid of public goods. If policy makers need to depend on broad- (for example, grant or debt, budget support, or project- based taxation—or indebtedness, which implies more taxa- specific); (2) the contemporaneous effects of policies tion in the future—they are more likely to include citizens and associated with the aid; and (3) more important, the gover- elites in policy discussions. The need for revenue to finance nance setting specific to each country. wars led European states to bargain with subject populations The effects of domestic resource mobilization also for greater taxation (Tilly 1990). Once taxed, citizens demand depend on the nature of taxation. Some taxes do not a greater say in state affairs. As 18th-century American col- enhance accountability (resource taxation) or have distor- onists claimed, “Taxation without representation is tyranny.” tionary effects (trade taxes). International corporate tax More recently, in Sub-Saharan Africa paying taxes has been competition has diminished states’ capacity for domestic shown to increase political interest (Broms 2015). resource mobilization (see earlier discussion on races to Does foreign aid undermine domestic resource mobili- the bottom). In environments with low savings rates or the zation and thus accountability to citizens? Studies testing potential for capital flight and tax evasion, consumption that hypothesis initially showed a negative correlation taxes are most likely to be effective, but also likely to be between the two (most notably, Gupta and others 2004). regressive. In 9 out of 25 countries with household survey More recently, these studies have been refuted by the data available for circa 2010, the net effect of all govern- adoption of different data sets (Morrissey and Torrance ment taxing and spending was to leave the poor worse 2015) or econometric techniques.a Although the behavioral off in terms of actual consumption of private goods and effect of aid flows in undermining accountability has been services (Lustig 2016). Source: WDR 2017 team. a. Clist and Morrissey (2011) invalidate the contemporaneous negative correlation found in Gupta and others (2004) by introducing a lagged effect of aid on taxation, concluding that the relationship is negligible. systems, may succeed in the immediate effort (and, legitimacy gains, while evading more fundamental indeed, this can be a worthy result), but they may have reforms to make the functioning of institutions more little to no effect on the quality of governance. Some effective. Not only does this approach leave recipients community-driven development initiatives fall into with unsustainable and dysfunctional institutions, but this category.18 it also may reduce the space for local innovation and Projects that aim to directly improve gover- collective action (Pritchett, Woolcock, and Andrews nance arrangements, such as public sector reform or 2010; Andrews, Pritchett, and Woolcock 2013). demand-side initiatives, may end up creating negative Positive effects are also possible when donor dynamics by providing incentives that reinforce the engagement supports the emergence of more account- preexisting power imbalances. The tendency of donors able and equitable governing arrangements embedded to introduce reforms based on best-practice solutions in the domestic context. Certainly, many projects do that worked elsewhere (with the expectation that tight succeed in doing so, but when and how generative monitoring of top-down implementation will yield effects take place are difficult to predict in advance similar results) has been called an example of isomorphic because of the web of intersecting and evolving fac- mimicry, a term drawn from organizational sociology tors that determine how donor initiatives engage with (DiMaggio and Powell 1983). These reforms focus on local spaces, including the vagaries of internal politics, forms—such as laws, systems, and procedures—with- shocks of various sizes and effects, and a range of con- out paying attention to how they change the nature textual factors. Indeed, many people have been trying of the policy arena. This practice can create “capabil- to think “politically” about aid in order to overcome ity traps” when recipient governments adopt these challenges to its effectiveness (box 9.4). A burgeoning forms to ensure flows of donor financing and to reap literature on ways to increase the chances of generative 270 | World Development Report 2017 Box 9.4 Beyond technocratic approaches: Opening the door to considerations of politics and power in development policy The last 10 years have seen a striking rise in discussions of The recently launched Global Partnership on Collaborative politics and power in development policy circles. This new Leadership for Development seeks to put leadership and focus reflects a reaction against technocratic approaches coalitions at the center of development, and the Global that rely on the provision of capital and injections of tech- Delivery Initiative is developing an evidence base for using nical know-how to overcome development challenges. It principles of the science of delivery. At the U.K. Department grows out of the evolution of governance programming, for International Development, serious attention to how which, after emerging in the 1990s, encountered serious political settlements are established and sustained in frag- limits when well-intended efforts to strengthen governance ile states is a central element of politically smart develop- institutions in poor countries faced entrenched resistance ment work. An informal coalition of practitioners organized to reform and other structural obstacles. under the rubric of “Thinking and Working Politically” aims One result has been the progressive incorporation of to advance innovative efforts to move politics and power political economy analysis by many development organi- from the margins to the core of development thinking and zations and practitioners as a basic tool of program design. action. This approach entails ensuring that attention to Debates over how much the growing use of political econ- these issues extends well beyond their original home in omy analysis is actually resulting in more effective devel- governance work to all major areas of development prac- opment programs remain heated, but most organizations tice, from health and education to transportation and food, are now willing to concede that attempting to operate in among other things. complex, challenging, and diverse national contexts does A strong sense of “At last!” accompanies this push to require at least some concerted efforts to understand the take politics in development seriously—relief that out- local political economy of reform—that is, who are the win- dated, artificial walls created in the early days of develop- ners and the losers and who holds the balance of power in ment assistance are finally being dismantled. Yet, changing such processes. development practices is hard. Many of the operational Potentially, much deeper change involves establishing imperatives that arise from greater attention to politics new types of development programming that embody rec- and power—such as the need to increase the flexibility of ognition of development as an inherently political process— implementation, to tolerate greater risk and ambiguity, to one that consists, in the words of the late Adrian Leftwich devolve power from aid providers to aid partners, and to (2004, 115), of “conflict, cooperation and negotiation in the avoid simplistic linear schemes for measuring results—run way we use, produce, and distribute resources.” Adherents up against long-established bureaucratic structures, prac- of the “Doing Development Differently” manifesto empha- tices, and habits. In addition, taking politics seriously in size the importance of focusing on local solutions advanced development points directly to the need to challenge the by local conveners in processes legitimized at all levels, interests of the power holders that control institutions— while proceeding through rapid cycles of planning, action, something that many development organizations have not and reflection, and managing risks by making small bets. yet decided they are willing to do, especially in the current The Developmental Leadership Program stresses the environment of heightened sensitivity in many countries importance of leadership in development, defining leader- about national sovereignty. The development community is ship as a political process involving authority and a capacity talking the talk of politics. How much it will walk the walk to mobilize people and resources and to forge coalitions. is not yet clear. Source: Prepared for WDR 2017 by Thomas Carothers, Vice President for Studies, Carnegie Endowment for International Peace. outcomes points to a common set of principles, which and social norms is not new. Hirschman documented are discussed in the next section. this observation most eloquently using World Bank projects in his 1967 classic, Development Projects Using aid to foster positive governance Observed. Building on the literature and knowledge dynamics for development base that have emerged over the last few decades, Recognition that development is an inherently con- the framework explored in this Report points to the tentious process that implicates power imbalances following four principles to guide efforts to use aid Governance in an interconnected world | 271 in ways that foster positive governance dynamics for the dissemination of information and bottom-up development outcomes. approaches, but also to focus on creating enabling Diagnose the underlying functional problem. As dis- environments that activate collective action and pro- cussed in chapter 2, diagnoses of development prob- mote a commitment to respond (Fox 2015; Khemani lems—and proposed prescriptions—often focus on and others 2016). proximate causes. The World Development Report 2015: Time frames are critical. Ultimately, aid can only Mind, Society, and Behavior (World Bank 2015) called for nudge or accelerate a development trajectory that is expanding diagnostic methods to identify the indi- determined by a complex set of intricately connected, vidual psychological, behavioral, and social obstacles self-reinforcing factors. Indeed, it may be ill-advised underlying development problems. This Report has for those pursuing development aims that confront emphasized the need to understand the underlying deep-vested interests or threaten a delicate stability to governance challenges that hinder the adoption and use aid in ways that disrupt the existing agreements implementation of policies that can improve security, in the policy arena. Although interventions may have growth, and equity outcomes. Diagnostic approaches little impact within the life span of a project, they can should home in on the specific commitment and col- aim to set in motion a collective dynamic that, over lective action problems that stand in the way of achiev- time, will reduce power asymmetries, effectively ing outcomes and on the ways in which power asym- change incentives, and reshape preferences. Atten- metries in the policy arena constrain these functions. tion to the dynamics of elite bargains, as discussed in Target development cooperation in ways that overcome chapter 7, can help identify strategic opportunities to obstacles in the policy arena. At times, it is most appropri- invest in ways that align with the interest of influen- ate for aid to steer clear of the policy arena in order to tial groups and also bring other actors into the policy deliver direct benefits to populations in need. Emer- arena, enhancing the adaptive capacity of societies in gency and disaster responses, humanitarian aid, and, more inclusive ways. in some cases, direct service delivery may warrant aid Anticipate opposition, shifting interests, and unin- approaches that work in parallel with domestic gov- tended consequences. Over the last few years, develop- ernance.19 However, where aid is intended to support ment practitioners have seized on a principle long sustained improvements in development outcomes, established in the organizational change literature: the most important role it can play is to facilitate complex problems require solutions based on incre- changes in the policy arena that will alleviate exist- mental and adaptive efforts supported by strong ing constraints to the adoption and implementation learning feedback loops (see box 9.4). This principle of development-oriented policies. As emphasized in is particularly important because efforts to change this Report, this means focusing on three key levers the policy arena will often trigger opposition and of change: incentives, preferences and beliefs, and backsliding, and they may yield unanticipated con- contestability. sequences—both positive and negative. It should be The use of financial forms of aid as an incentive assumed that the progress of reform will not be linear, to influence the policy arena is discussed in box 9.2. that adaptations will be necessary, and that domestic Beyond providing monetary support, aid in the form coalitions for reform must be supported to reduce the of technical assistance, analytical expertise, and risk of reversal. knowledge sharing can be a powerful means of chang- Applying such measures will require not only ing preferences, especially where it enables internal particular skill sets and methodologies, but, most Several multilateral debate and adaptation. Supporting the generation of important, an enabling environment within develop- and bilateral evidence about the effectiveness of policies and mak- ment institutions. Several multilateral and bilateral organizations ing such evidence publicly available in transparent organizations are exploring ways in which the devel- are exploring ways will enhance an informed public debate about opment community can implement internal reforms ways in which policy (Banerjee 2007; Devarajan and Khemani 2016). as they seek more agile, more flexible, and more the development Understanding of the role of aid in promoting adaptive projects. Partnerships such as the Global community can contestability is at an earlier stage. The last decade Delivery Initiative also look at the methodologies and implement internal has seen the proliferation of demand-side, partic- approaches available for development practitioners reforms as they ipatory, and multistakeholder donor–funded aid to work more adaptively through citizen engagement seek more agile, initiatives under the rubrics of social accountability, tools and feedback mechanisms, information and more flexible, and legal empowerment, open governance and transpar- communication technologies, and real-time practi- more adaptive ency, and citizen engagement. Evaluations of such tioner exchanges in order to overcome complex prob- projects. programs have pointed to the need to strengthen lems, such as those faced during governance projects. 272 | World Development Report 2017 Look beyond the traditional aid modalities. The declin- 5. Haas (1992, 3) describes an epistemic community as ing role of official development assistance relative to “a network of professionals with recognized exper- other forms of capital and the inherent limitations tise and competence in a particular domain and an of the traditional foreign aid model in dealing with authoritative claim to policy-relevant knowledge many of today’s challenges call for a broader approach within that domain or issue-area.” 6. Transnational rules are similar to the so-called inter- to achieving the United Nations’ Sustainable Develop- national regimes in the international relations and ment Goals. As discussed in this chapter, the increas- international political economy literature. See, for ingly complex and interconnected realm of transna- example, Ruggie (1975) and Krasner (1983). tional rules, agreements, and regulations driven by 7. Legislated gender quotas and reserved seats are typ- the public and private actors has a significant influ- ically introduced through changes in electoral laws ence on domestic governance and the achievement of or constitutions, whereas voluntary party quotas development outcomes. In many cases, the domestic are adopted by individual parties that commit to a policy space for tackling development challenges is specific share of female candidates. significantly constrained by actions and decisions 8. About 40 percent of the world’s countries have some made elsewhere. Control of corruption, crime, and form of gender quota, according to the World Bank’s security at the country level, for example, may depend 2016 Women, Business, and the Law database: 73 on how the flows of goods, capital, and migrants are countries have quotas at the national level, and 65 regulated at the transnational level or in the domestic countries have quotas at the local government level. Some countries have quotas at both the national and policy arenas of other states (see spotlight 13 on illicit local levels; others have one but not both. For exam- financial flows). The impact of foreign direct invest- ple, India adopted a quota at the local level but not at ment on local outcomes may be largely determined the national level. by how multinational corporations are regulated by 9. Foreign aid refers to official development assis- their home states as well as through transnational tance as defined by the Organisation for Economic rules that encourage races to the top rather than Co-operation and Development. the bottom. The growing role of private actors and 10. This increase in foreign aid accompanied the steep finance in a wide range of development activities— rise in peacekeeping operations in the 1990s and the from utilities to education to infrastructure—also post–9/11 interventions in Iraq and Afghanistan. highlights the importance of upstream policy arenas 11. WDR 2017 team, based on data from OECD (ODA); that aim to ensure accountability for the public good. World Bank, Africa Development Indicators, various International actors should enhance efforts to years (FDI/GDP); and World Bank, World Develop- engage in the two-level game, using transnational ment Indicators (database, GDP and remittances/ coordination and commitment devices backed by the GDP). FDI and remittances refer to the latest avail- able data point. promotion of incentives, preferences, and contest- 12. See also World Bank (1998). The findings of Burnside ability in the domestic policy arena to help achieve and Dollar (2000) have been called into question by security, growth, and equity goals. They also might Easterly, Levine, and Roodman (2003). look inward to the ways in which their own policy 13. This leads to the unsettling view that “when the arenas have increasingly significant impacts on ‘conditions for development’ are present, aid is not development outcomes across the globe. required. When local conditions are hostile to devel- opment, aid is not useful, and it will do harm if it perpetuates those conditions” (Deaton 2013, 273). See Notes also Easterly (2006). 1. World Bank, World Development Indicators (data- 14. See, for example, Goldsmith (2001); Dunning (2004); base), various years, sum of exports and imports of Wright (2009); and Dietrich and Wright (2013). goods and services worldwide. 15. Among the cross-country studies that find a nega- 2. Updated and extended version of data set con- tive correlation between aid and governance quality structed by Lane and Milesi-Ferretti (2007). are Braütigam and Knack (2004); Moss, Pettersson, 3. Updated and extended version of data set con- and van de Walle (2006); Djankov, Montalvo, and structed by Lane and Milesi-Ferretti (2007). Reynal-Querol (2008); Bueno de Mesquita and Smith 4. Bourguignon (2015) and Milanović (2016) have (2009); Busse and Gröning (2009); and Rajan and shown that inequality among nations has decreased Subramanian (2011). substantially, whereas inequality within countries 16. But also see Tavares (2003). has soared, with the exception of Latin American 17. The “aid curse” argument is made by Moss, Petters- countries, where income inequality has decreased son, and van de Walle (2006); Collier (2007); and slightly over the last 15 years. Djankov, Montalvo, and Reynal-Querol (2008). Governance in an interconnected world | 273 18. See Casey, Glennerster, and Miguel (2012); Wong Braütigam, Deborah A., and Stephen Knack. 2004. 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IFFs can be classified in offshore companies in more than 40 countries based on whether the actors involved are criminal by wealthy individuals, including public officials.1 organizations, individuals, or corporations (Janský Although holding assets in a tax haven is not illegal 2013). Table S13.1 presents a few examples. per se, the prevailing sentiment expressed in newspa- Although estimates of the size of IFFs are contro- per articles and the reaction from the public mainly versial, the consensus among development scholars took the form of condemnation and criticism of a and practitioners is that IFF outflows on average practice interpreted as powerful economic and polit- actually exceed official development assistance in ical elites concealing taxable income from domestic developing countries (Herkenrath 2014). fiscal authorities, with the assistance of the financial systems of many developed countries. Rethinking the approach to IFFs What are IFFs? IFFs deprive developing countries of resources that These undisclosed accounts are one manifestation could be used at least partially for redistribution, of what has become known as illicit financial flows for financing public goods, and for fostering private (IFFs). The definitions of IFFs vary, but there are two investments in local businesses. In doing so, IFFs main interpretations of what makes these financial support existing inequalities and are particularly det- flows illicit (see Epstein 2005, 7).2 The normative rimental to the poor. IFFs are also deeply connected interpretation suggests that financial flows become to the governance process. Corruption and embezzle- illicit not only because they hinder development, ment thrive in environments in which accountability but also because they are deemed “illegitimate from to citizens is low, which in turn weakens trust in state the perspective of an existing consensus about the institutions. Tax evasion—a manifestation of a lack social (developmental) good” (Blankenburg and Khan of cooperation in society—is fueled by a state’s lack 2012, 32). of commitment to using resources for the delivery of The legal interpretation, on which the empirical public goods. That lack of commitment in turn under- literature on IFFs is predominantly built, suggests mines the outcome legitimacy of the state, which is that IFFs refer to money that is earned, transferred, based on the delivery of public services. Criminality or used in contravention to existing law. In some also flourishes in environments in which trust is cases, this could mean money that is earned legally low and the state fails to provide the means for large WDR 2017 team, based on inputs from Peter Reuter. population groups to effectively participate in the 278 | World Development Report 2017 Table S13.1 Actions generating illicit financial flows Source of earnings Money legally earned Money illegally earned Criminal • Drug trafficking organizations • Human smuggling Actors Individuals • Tax evasion • Corruption involved • Evasion of currency controls • Embezzlement Corporations • Tax evasion • Violation of intellectual property rights • Profit shifting • Illegal exploitation of natural resources Source: WDR 2017 team. legitimate economy. The WDR 2017 framework sheds indeed been recognized as more difficult to overcome light on how to think about approaching reforms to than any legal, institutional, or operational issues in combat IFFs. this context (Stephenson and others 2011). Think not only about the form of Think not only about the rule of law, institutions, but also about their functions but also about the role of law As discussed in chapter 1, importing forms of institu- Incumbents may appear to be complying with inter- tions is not enough to change the facts. Kenya is often national laws and regulations to gain legitimacy, cited as a major destination for the proceeds from while continuing to do business as usual. One impor- piracy in the Indian Ocean and a key transit point for tant requirement of the FATF Anti-Money Launder- terrorist funds to neighboring Somalia. Seeking to ing (AML) regime is to facilitate requests for informa- fight illicit financial activities, especially money laun- tion and cooperation from nations that are pursuing dering and terrorism financing, Kenya established the money laundering cases involving another country’s Financial Reporting Centre (FRC) in 2012. Although nationals (Recommendations 35–40). Most nations creating the FRC enabled Kenya to be removed from have adopted statutes and regulations that conform the list of countries that could be sanctioned for non- to the FATF rules. However, authorities in many compliance by the Financial Action Task Force (FATF), countries have a history of dragging out the pro- little else seems to have changed.3 There was substan- cess of cooperation for so long that, in fact, the laws tial evidence of high-level corruption in the Kenyan are effectively nullified. For example, countries may government at that time, and yet no cases were delay responding to requests by other countries made brought against senior officials for violating money under the aegis of Mutual Legal Assistance (MLA) laundering regulations. To make the FRC meaningful, about where illicit funds are hidden (Chêne 2008). On the administration would have had to pursue many of the other hand, using delays to deny politically moti- its own senior members. vated requests from developing countries through the MLA may be fair in systems that are essentially Think not only about capacity building, corrupt (Terracol 2015). but also about power asymmetries The lack of capacity of developing countries to man- age complex laws and regulations is often cited as A way forward the source of their difficulties in curbing IFFs. Some Fighting the illicit flow of capital abroad is an impor- developing countries do not have any transfer pricing tant development concern. In 2009 Switzerland rules, thereby ensuring that a multinational corpo- returned US$93 million to Peru from the accounts of ration operating in their jurisdiction can transfer as Vladimiro Montesinos, the de facto chief of intelli- much of its profits elsewhere as it wishes.4 However, gence and main adviser to former Peruvian president the low capacity of developing countries is often Alberto Fujimori (1990–2000). In 2004 the Philippines based on power: it is in the interest of someone to recovered US$683 million from the Swiss accounts of keep capacity low because it allows them to extract Ferdinand and Imelda Marcos, the former president rents (Leite 2012). Lack of political incentives has and first lady of the Philippines (1965–86). In both Illicit financial flows | 279 cases, the money recovered would have been enough 3. The FATF is an intergovernmental body established in to fill at least 25 percent of the nation’s poverty gaps 1989 by the ministers of its member jurisdictions to in the same year.5 set standards and promote effective implementation In the aftermath of the 2016 legal document leak of legal, regulatory, and operational measures for combating money laundering, terrorist financing, described earlier, the top five European economies and other threats related to the integrity of the inter- (France, Germany, Italy, Spain, and the United King- national financial system. Currently, it comprises 35 dom) announced actions to improve information member jurisdictions and two regional organizations sharing in order to fight tax evasion and money (the European Commission and the Gulf Cooperation laundering. Of these economies, the United Kingdom Council). As for the situation in Kenya, Findley, Niel- plays a particularly important role in this respect son, and Sharman (2014) find that in that country it because a number of its Overseas Territories and is easier than elsewhere to open an anonymous shell Crown Dependencies, such as the British Virgin company, one of criminals’ preferred devices for Islands and Jersey, derive a substantial share of their transferring money internationally. gross domestic product (GDP) from providing finan- . Multinational corporations are often the initiating 4 cial nonresident depositor services. Recently, all such actors in these matters. See, for example, Global Witness (2006). offshore jurisdictions have joined this initiative and 5. WDR 2017 team estimates, based on the World Bank started to implement rising transparency standards. and United Nations Office on Drugs and Crime’s Panama has also recently taken steps to strengthen its StAR (Stolen Asset Recovery Initiative) database and tax transparency and financial integrity frameworks. the World Bank’s World Development Indicators Fundamental reforms that seemed imaginary just 10 (database). According to the StAR, recovered assets years ago are now being discussed as active proposals amounted to US$5 billion in the 15 years up to 2011 by powerful bodies such as the G-7, G-20, and Organ- (Brun and others 2011). Although “currently no single isation for Economic Co-operation and Development tool or process can effectively establish a comprehen- (OECD). These proposals include country-by-country sive measure of IFFs at the global or country level” reporting of corporate profits, which facilitates detec- (United Nations 2016, 37), such recovered assets tion of transfer pricing abuses and other instruments would be only a tiny share of the total flow according to different estimates—for example, taking the lower to shift profits to low-tax jurisdictions, and the crea- bound estimates of US$20 billion per year from Brun tion of public lists of beneficial ownership to prevent and others (2011), the recovery rate would be just 0.5 concealment through shell corporations.6 percent. That said, each type of IFF featured in table S13.1 6. For a summary of the measures currently adopted involves a different and complex network of actors, and being discussed within OECD and the G-20, see including domestic and foreign state institutions, OECD (2016). domestic and foreign public officials, and foreign financial institutions, all influenced by different factors for moving money abroad and using different References channels (such as bulk cash smuggling, shell corpora- Blankenburg, Stephanie, and Mushtaq Khan. 2012. “Gov- tions, informal value transfer systems, or trade-based ernance and Illicit Flows.” In Draining Development? money laundering). Failure to take into account the Controlling Flows of Illicit Funds from Developing Coun- mutually sustainable relations of incentives among tries, edited by Peter Reuter, 21–68. Washington, DC: all the actors involved in IFFs—and to disaggregate World Bank. Brun, Jean-Pierre, Clive Scott, Kevin M. Stephenson, and the different types of IFFs—risks generating ineffec- Larissa Gray. 2011. Asset Recovery Handbook: A Guide for tive reforms (Reuter 2016). In particular, attempts to Practitioners. Washington, DC: World Bank-United solve the issue should concentrate not only on the Nations Office on Drugs and Crime (UNODC). countries of origin, but also on the countries receiv- Chêne, Marie. 2008. “Mutual Legal Assistance Treaties ing IFFs. and Money Laundering.” U4 Expert Answer (July 29), U4 Anti-Corruption Resource Center, Chr. Michelsen Institute, Bergen, Norway. Notes Epstein, Gerald A., ed. 2005. Capital Flight and Capital Con- 1. Although the legal firm in question was based in trols in Developing Countries. Cheltenham, U.K.: Edward Panama, more than 75 percent of the offshore com­ Elgar. panies were in jurisdictions outside the country. Findley, Michael G., Daniel L. Nielson, and J. C. Sharman. 2. For a recent review of the various definitions found in 2014. Global Shell Games: Experiments in Transnational the literature, see Tropina (2016). Relations, Crime, and Terrorism. Cambridge Studies 280 | World Development Report 2017 in International Relations Series. Cambridge, U.K.: Barriers to Asset Recovery: An Analysis of the Key Barriers Cambridge University Press. and Recommendations for Action. StAR Initiative Series. Global Witness. 2006. “Heavy Mittal? A State within a Washington, DC: World Bank. State: The Inequitable Mineral Development Agree- Terracol, Marie. 2015. “Mutual Legal Assistance and ment between the Government of Liberia and Mittal Corruption.” U4 Expert Answer 17 (September 24), Steel Holdings NV.” Global Witness, Washington, DC, U4 Anti-Corruption Resource Center, Chr. Michelsen October. Institute, Bergen, Norway. Herkenrath, Marc. 2014. “Illicit Financial Flows and Their Tropina, Tatiana. 2016. “Do Digital Technologies Facili- Developmental Impacts: An Overview.” International tate Illicit Financial Flows?” Background paper, World Development Policy, Articles and Debates 5.3, Graduate Development Report 2016: Digital Dividends, World Bank, Institute, Geneva. Washington, DC. Janský, Petr. 2013. “Illicit Financial Flows and the 2013 United Nations. 2015. “Resolution Adopted by the Gen- Commitment to Development Index.” CGD Policy eral Assembly on 27 July 2015, 69/313: Addis Ababa Paper 034 (December), Center for Global Develop- Action Agenda of the Third International Conference ment, Washington, DC. on Financing for Development (Addis Ababa Action Leite, Carlos A. 2012. “The Role of Transfer Pricing in Illicit Agenda).” Document A/RES/69/313 (August 17), United Financial Flows.” In Draining Development? Controlling Nations, New York. Flows of Illicit Funds from Developing Countries, edited by ————. 2016. Addis Ababa Action Agenda: Monitoring Peter Reuter, 235–64. Washington, DC: World Bank. Commitments and Actions. New York: Inter-Agency OECD (Organisation for Economic Co-operation and Task Force on Financing for Development, United Development). 2016. “OECD Secretary-General Nations. Report to G20 Leaders, Hangzhou, China, September World Bank. Various years. World Development Indi- 2016.” OECD, Paris. cators (database). Washington, DC, http://data Reuter, Peter. 2016. “Illicit Financial Flows and Gover- .world bank.org/datacatalog/world-development nance: The Importance of Disaggregation.” Back- -indicators. ground paper, WDR 2017, World Bank, Washington, World Bank and United Nations Office on Drugs and DC. Crime. Various years. The Stolen Asset Recovery Ini- Stephenson, Kevin, Larissa Gray, Ric Power, Jean-Pierre tiative (StAR). Washington, DC, http://star.worldbank Brun, Gabriele Dunker, and Melissa Panjer. 2011. .org/star/. Illicit financial flows | 281 ECO-AUDIT Environmental Benefits Statement The World Bank Group is committed to reducing its environmental footprint. In support of this commitment, we leverage electronic publishing options and print-on- demand technology, which is located in regional hubs worldwide. Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green Press Initiative. The majority of our books are printed on Forest Stewardship Council (FSC)–certified paper, with nearly all containing 50–100 percent recycled content. 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