Question

Are there inherent cultural and economic limitations when it comes to a successful reform?

Answer 1

1. Introduction
The policy reforms attempted in developing countries over the past 3 decades have yielded varied
results, with some, such as in East Asia, leading to very good outcomes in terms of economic growth.
But, there are many others where it has not been possible to implement reforms or where reforms
have achieved poor outcomes. The record in Papua New Guinea (PNG) and the Pacific island
countries (PICs) has been similar, with good responses to reform attempts in some countries and
disappointing results in others. During this period, ideas about what is important for growth and
development have changed significantly, from the early focus on the notion that the lack of
development was due to a shortage of capital and the need for transfers of savings from wealthy
countries to poor countries, to the subsequent focus on correcting price distortions through
structural adjustment programs, and to the recent focus on the basic institutions underpinning the
economic and political performance of countries (for a discussion of the changes in development
thinking over the past 30 years or so, see Duncan and Pollard 2002).
Within the past decade, development agencies have expressed awareness of the need to
undertake development assistance only when it is underpinned by a good understanding of the local
context of the individual countries. However, until recently little emphasis has been placed on
gaining this kind of understanding, which presumably relates to an appreciation of a country’s
economic, political, social, and cultural characteristics and the interactions between them. Within
the communal societies of the Pacific, cultural characteristics are more important than they appear to
be in the more advanced societies. Therefore, increased attention needs to be given to understanding
the cultural characteristics of Pacific economies and how they relate to economic and political
factors.
Economic reform can mean changing existing institutions, policies, legislation, and
regulations. Generally, such change will not be easy, since these elements have been shaped by
existing political, economic, and cultural forces. Hence, understanding the “local context” to provide
assistance in the design, acceptance, and implementation of reform also implies some knowledge of
how to change the status quo.
Understanding the economic, political, social, and cultural characteristics of a society and
the interactions between them is broadly the field of political economy. Because of the different aspects of society that are involved, political economy is inevitably a field of interdisciplinary study.
Economists, political scientists, lawyers, sociologists, and anthropologists—and perhaps other
disciplines—can usefully collaborate in developing the needed understanding.
This project on the political economy of PNG, PICs, and Timor-Leste therefore draws on
the views of economists, political scientists, sociologists, and others. The Asian Development Bank
(ADB) funded the study to increase the effectiveness of the assistance that it provides to these
countries by improving understanding of their political economy.
An increasing amount of research on the political economy of developing countries has
recently been undertaken. Even more recently, research has been initiated on the political economy
of reform processes. However, very little research has been conducted on the political economy of
reform processes in the PICs. This project was established to fill these gaps.
2. The Role of Political Economy in Economic Reform
Adrian Leftwich’s (2008) definition of what he calls “politics” (but earlier called political economy) is
a good description of political economy for our purposes:
... all the many activities of cooperation, conflict and negotiation involved in
decisions about the use, production and distribution of resources. (p. 6)
As Leftwich notes, these activities may be formal or informal, public or private (or a mixture
of both), and undertaken at every level of society, from individual households and businesses to all
strata of government.
As a field of study, political economy dates back to at least the 17th century, with writers
such as Adam Smith, David Ricardo, Thomas Malthus, and later, Karl Marx, being some of its most
influential English-language proponents. The field now very broadly refers to interdisciplinary
studies, drawing mainly on the disciplines of economics, politics, and law, to explain how
institutions, politics, and the economic system interact, whether nationally or internationally, to
produce economic outcomes. Other disciplines such as sociology, anthropology, and human
geography also make contributions to the broad field of political economy.
There are many more analytical approaches to the study of political economy than the
number of disciplines involved, as the practitioners of each discipline usually bring their preferred
theoretical framework to their research. For example, economists doing political economy studies
may have a classical, neo-classical, neo-Marxian, or new institutional economics view of economic
behavior, while political scientists may use rational choice theory or traditional inductive approaches.
The new institutional economics (NIE) approach pioneered by North (1990) has played an
important role in recent studies of the political economy of developing countries with respect to
economic reform. The NIE approach focuses on the basic institutions and the rules of behavior that
they establish. These rules provide the incentives to which the various actors involved in the process
react. In this context, institutions may be formal, such as constitutions, electoral systems, and
property rights, or informal, such as the norms of traditional societies or the behavioral norms of
groups such as accountants and real estate agents.
The recent focus on institutions (used in the broad economic sense) has to a large extent
been forced upon analysts and development agencies. As Acemoglu (2008) points out,
... understanding [by the economics profession] on the importance of institutions has
been reached as a result of a large body of theoretical and empirical work. In the
policy world, it has been reached more painfully, as a result of a long stream of aspects of society that are involved, political economy is inevitably a field of interdisciplinary study.
Economists, political scientists, lawyers, sociologists, and anthropologists—and perhaps other
disciplines—can usefully collaborate in developing the needed understanding.
This project on the political economy of PNG, PICs, and Timor-Leste therefore draws on
the views of economists, political scientists, sociologists, and others. The Asian Development Bank
(ADB) funded the study to increase the effectiveness of the assistance that it provides to these
countries by improving understanding of their political economy.
An increasing amount of research on the political economy of developing countries has
recently been undertaken. Even more recently, research has been initiated on the political economy
of reform processes. However, very little research has been conducted on the political economy of
reform processes in the PICs. This project was established to fill these gaps.
2. The Role of Political Economy in Economic Reform
Adrian Leftwich’s (2008) definition of what he calls “politics” (but earlier called political economy) is
a good description of political economy for our purposes:
... all the many activities of cooperation, conflict and negotiation involved in
decisions about the use, production and distribution of resources. (p. 6)
As Leftwich notes, these activities may be formal or informal, public or private (or a mixture
of both), and undertaken at every level of society, from individual households and businesses to all
strata of government.
As a field of study, political economy dates back to at least the 17th century, with writers
such as Adam Smith, David Ricardo, Thomas Malthus, and later, Karl Marx, being some of its most
influential English-language proponents. The field now very broadly refers to interdisciplinary
studies, drawing mainly on the disciplines of economics, politics, and law, to explain how
institutions, politics, and the economic system interact, whether nationally or internationally, to
produce economic outcomes. Other disciplines such as sociology, anthropology, and human
geography also make contributions to the broad field of political economy.
There are many more analytical approaches to the study of political economy than the
number of disciplines involved, as the practitioners of each discipline usually bring their preferred
theoretical framework to their research. For example, economists doing political economy studies
may have a classical, neo-classical, neo-Marxian, or new institutional economics view of economic
behavior, while political scientists may use rational choice theory or traditional inductive approaches.
The new institutional economics (NIE) approach pioneered by North (1990) has played an
important role in recent studies of the political economy of developing countries with respect to
economic reform. The NIE approach focuses on the basic institutions and the rules of behavior that
they establish. These rules provide the incentives to which the various actors involved in the process
react. In this context, institutions may be formal, such as constitutions, electoral systems, and
property rights, or informal, such as the norms of traditional societies or the behavioral norms of
groups such as accountants and real estate agents.
The recent focus on institutions (used in the broad economic sense) has to a large extent
been forced upon analysts and development agencies. As Acemoglu (2008) points out,
... understanding [by the economics profession] on the importance of institutions has
been reached as a result of a large body of theoretical and empirical work. In the
policy world, it has been reached more painfully, as a result of a long stream of reforms around the world that failed mainly because they did not pay sufficient
attention to institutions and governance issues.
Besides stressing that “institutions matter,” Acemoglu also argued that while institutions do
change, we do not know how to change them; however, “our best hope is to understand what
internal dynamics of countries drive institutional changes.”
In an effort to understand how it may be possible to change institutions, Elinor Ostrom and
her research colleagues in the Workshop in Political Theory and Policy Analysis at Indiana
University have placed the NIE in an analytical framework they call Institutional Analysis for
Development (IAD) to gain an understanding of the behavior of the groups that have an influence,
for better or worse, on economic development within a country (Ostrom et al. 2001). The IAD
framework is based on the assumption that most problems in development result from the inability
of people to take the necessary collective action. The delivery of public goods and the effective
management of common-pool resources require collective action by society. However, if the
established incentives, or rules of behavior of the society, provide weak or perverse incentives to
individuals or groups to act collectively for their common good, the delivery of public goods and
management of common-pool resources will be adversely affected.
As Ostrom et al. (2001) correctly point out, it is difficult, if not impossible, to change the
characteristics of public goods or services or to change the culture of a society. Trying to change the
incentives (institutions or rules) faced by the people involved is usually the only avenue open by
which to achieve a different outcome. But as they also point out, any transformation of the “rules in
use” needs to take full account of the characteristics of the community and the physical, economic,
political, and social circumstances. Most importantly, it must be understood that those presently
advantaged by the status quo will resist any changes in the rules that do not benefit them. Further,
aid agencies should be careful not to reinforce perverse incentives or to weaken government
incentives to find better policies and institutions.
The purpose of the so-called “Drivers of Change” approach, largely developed by the
Department for International Development (DFID) of the United Kingdom (UK), is also to assess
the prospects for and constraints on development from a political economy perspective. This
approach also draws to some extent on the NIE framework to study the interactions among the
economic, political, and cultural characteristics of countries by thoroughly examining the society’s
institutions and the incentives they create.
The analytical framework designed by Hausmann, Rodrik, and Velasco (2004, 2005, and
2006) to uncover the “binding constraints” to economic growth in developing countries is closely
linked—and could even be considered a precursor—to the study of the political economy of reform.
The Hausmann et al. framework focuses on the economic constraints to growth and development.
This approach recognizes that there may be many constraints to economic growth in a country but
that some constraints will dominate others; therefore, unless the dominant or most binding
constraint(s) is overcome, it is useless to attempt to remove others. The framework is similar to the
economic logic of linear programming, which identifies the most binding constraint as the one with
the highest shadow price or opportunity cost. Therefore, relaxing that constraint will have the
highest payoff. Once it is relaxed, another constraint will become the most binding. The expected
outcome of this diagnostic approach is a listing of priorities of where to focus economic reform
efforts when attempting to establish a favorable environment for investment and growth. The framework Hausmann et al. (2004) suggest for diagnosing the most limiting constraint
is in the form of a decision tree. Recognizing that investment is the most critical factor in growth, the
purpose of the decision tree is to identify whether the most binding constraints on growth are factors
contributing to inadequate returns to investment, poor private appropriability of the returns to
investment, or the high cost of finance for investment. Within each of these categories of possible
limiting factors is a subset of factors, any of which could be the main obstacle to investment and
growth.
This diagnostic framework has been extended from identifying the economic constraints to
growth as suggested by Hausmann et al. to investigation of the possible underlying causes of those
constraints. Recognizing that underlying institutional factors may be the binding constraints to
growth rather than the more obvious proximate factors affecting investment and growth, Sugden
(2008) suggests extending the decision tree to include an additional “institutional branch,” rather
than including institutional factors at the bottom of their decision tree, as do Hausmann et al.
Sugden suggests that more emphasis be given to institutional determinants (such as effective
constitutions, well-defined and enforced property rights, impartial enforcement of contracts, and law
and order) as underlying causes of poor economic performance than do Hausmann et al. (2005, p.
7), who place emphasis on proximate causes. This extension of the framework essentially takes the
analyst to a study of the political economy.
Sugden’s “preliminary, subjective assessment” (2008, pp. 234–235) of the importance of
proximate factors and institutional factors in affecting economic performance in PICs is that “only
Cook Islands and Samoa could be thought of as having an institutional environment conducive to
economic growth,” so that for these countries “the binding constraints are more likely to be at the
proximate level.” For Fiji, the Marshall Islands, Palau, Tonga, and Tuvalu, the necessary institutional
environment for private investment and economic growth may exist, so that the constraints to
economic growth are more likely to be proximate constraints on private sector development. For the
Federated States of Micronesia, Kiribati, PNG, Solomon Islands, Timor-Leste, and Vanuatu,
Sugden’s preliminary assessment is that “the institutional environment is so weak that the binding
constraints to economic growth are very likely to be found at the underlying level.”
However, it could be observed that the existence of some of these obstacles to good
economic performance needs to be explained. What explains why an effective constitution is not in
place? What explains why a country is aid-dependent, or why aid is ineffective? It appears that we
have to dig deeply into a country’s psyche to explain these issues.
The IAD framework of Ostrom et al. (2001) provides a framework within which the
influence of the broader institutional or political economy issues on economic performance may be
examined. Therefore, Duncan (2009) and Bulatale and Duncan (forthcoming) have combined the
IAD framework with the diagnostic framework of Hausmann et al. (2005) to analyze the possible
economic constraints in Kiribati and the broader political economy issues in Fiji that may be
inhibiting economic performance. The results of these recent studies of PICs are discussed below.

3. Early Studies of the Political Economy of Reform in
Developing Countries
Two early political economy research projects on economic reform in developing countries were
Bates and Krueger (1993) and Williamson (1994). In the Bates and Krueger project, eight pairs of
economists and political scientists examined the history of economic reform in eight developing
countries, some of which had been successful reformers (Chile and the Republic of Korea), some
which had been reasonably successful (Ghana and Turkey), and others that had little success with
reform despite several attempts (Brazil, Ecuador, Egypt, and Zambia). For each country, the
researchers were asked to examine the impact of interest groups on the success of the reforms and the
institutional context in which the reforms were carried out.
In the Williamson project, nine economists (most of whom held key government positions)
wrote about the experience of policy reform in developed, developing, and transitioning countries.
The economists were asked to focus on how they managed to get the reform programs accepted.
Subsequently, a conference was held where political scientists who had been writing on economic
reform programs (and most of whom had been involved in the earlier Bates and Krueger project)
were asked to comment on the country papers. The country authors were also asked to discuss the
applicability of 13 often-competing hypotheses in explaining when policy reform is possible. These
hypotheses included the idea that policy reform is most likely following a crisis, when opposition to
the reform is discredited, when the reforming government has won a mandate for change, when
there is a visionary leader, or when there is an authoritarian or rightist government.
The Williamson volume concluded that the evidence strongly supported the hypotheses
suggesting the need for a strong political base, for visionary leadership, and for a coherent economic
team. It also concluded that authoritarian or right-wing governments are not necessary for successful
reform. However, there is little in the way of insights provided into the political processes or the
institutional arrangements that make effective implementation of reform possible (Duncan 1995).
The Bates and Krueger volume is somewhat more insightful. In response to the observation
that interest groups appeared to have little or no role in initiating reforms, they suggest that the
outcome of reform is subject to such uncertainty that interest groups’ decisions are influenced more
by ideology than by statements about the incidence or impacts of policies. It is concluded that
because of uncertainty about the future size and distribution of the benefits of reform, and the more
immediate and concentrated nature of its costs, the status quo is likely to be maintained unless there
is a change of government. However, there are exceptions to this finding, such as Mexico. The
structure of political competition is also examined. For example, in countries with one-term
presidents, such as Mexico, the president may undertake reforms that would not be considered if
running for office again. Compare this situation to democracies where the political term is not fixed
and leaders struggle to remain in power.
Bates and Krueger find that reform efforts lead to the restructuring of interest group
representation and to changes in political institutions. One change that they highlight is the
strengthening of the executive branch of government and of the finance ministry. An important role
of this restructuring is to protect the technocrats within these core ministries from pressure from
interest groups—except, of course, from the pressure of the interest groups that benefit from the
reforms. Bates and Krueger also point to the importance of a well-trained team of policy advisers
who are somehow protected from interest-group pressure. This conclusion highlights the importance of education in developing cadres of highly skilled, local advisers, as well as the need to understand
countries’ political, cultural, and institutional systems.
4. Recent Research on the Political Economy of Reform
Following the Krueger and Bates and Williamson projects, there was little in the way of political
economy studies of the factors underpinning economic reform and why some reform attempts fail,
until the 1990s’ realization of the importance of institutions in explaining behavior related to
development, and of understanding the local context, if development assistance was to be successful.
Interest in these issues has led to the extensive use of political economy studies of economic reform in
developing countries over the past decade. Initially, the studies focused on the interactions between
economics and politics in the reform process. But these studies led to staff frustration in the
development agencies, particularly officers in the field, who argued that these political economy
issues were reasonably well understood; what they really wanted to know was how to bring about
change. The most recent studies have been more focused on this particular question, which is also
the main question behind this project.
Early in the new millennium, major development agencies began to take more interest in
the interaction between a developing country’s politics and its success in attempts at reform. The
main agencies involved were DFID, the Swedish International Development Cooperation Agency
(Sida), and the World Bank. DFID’s approach to the issue became the Drivers of Change (DOC)
framework; Sida’s approach focused on power relationships within an economy and how they
affected the success of development projects; and the World Bank, which began its Institutional and
Governance Reviews in 1999, was relatively narrowly focused on the institutional roots of
government performance, while still taking account of the country’s political realities.
The first DOC study funded by DFID was on Bangladesh and published in 2002 (Duncan
et al. 2002). All nine of the potential DOCs identified by the study were entities, such the media,
reform-minded public officials, nongovernment organizations, rural-based organizations, and
business organizations; compared with later studies, this was a rather narrow interpretation of
DOCs. The main recommendations in relation to the study’s political economy aspects were
concentrated on how to improve the capacity of these actors to influence change. The impact of the
report is reflected in a 2006 review of the use of DOC analysis in Bangladesh, where it was
concluded that “the political-economy focus of drivers-of-change analysis has had modest apparent
impact overall” (Batkin et al. 2006).
In June 2003, DFID established a dedicated but temporary DOC team within its policy
division to support country-led work on DOC studies. Rather than attempting to set out a particular
methodology, the team set out a series of questions around which to frame analysis of the political
economy of the developing countries (DFID 2004). The DOC team was disbanded in September
2004. Up to 2005, DOC reports were prepared for more than 20 countries. Most of these were sub-
Saharan Africa countries.
In 2005, the Organisation for Economic Co-operation and Development’s Development
Assistance Committee commissioned the Institute of Development Studies Sussex to undertake a
review of the Power and Drivers of Change analyses in development cooperation (Dahl-Østergaard
et al. 2005). Given the early stage of the development of thinking about these issues and the different
points from which they began, it is unsurprising that the report concluded that there was not a
common approach among the agencies toward examining how the policy environment is shaped by
political, economic, social, cultural, and institutional factors.