Unit 1 The State, Policy-Making and Political Economy

2.1 Defining characteristics of political economy analysis

According to Collinson (ed) (2003):

'Political economy analysis is concerned with the interaction of political and economic processes within a society: the
distribution of power and wealth between different groups and individuals, and the processes that create, sustain and
transform these relationships over time.'

Source: Collinson (ed) (2003) p. 3.

As the name suggests, political economy is concerned with how political forces influence the economy and economic outcomes. However,
the interactions run both ways and political economy is interested in both. Thus, it is economic activity that generates the resources that are
required to sustain political activity, for example, election campaign expenses. Moreover, whilst policy might lead to a certain economic
activity prospering, this success in itself can generate a political constituency with an interest in maintaining the economic activity, because a
sizeable number of people now benefit from it.

As was noted above, the distribution of benefits from economic activity tends to be a neglected aspect of much pure economic analysis.
However, within political economy analysis it takes centre stage. Political economists are very interested in who gains and who loses from
a particular policy. This is likely to provide important clues as to which groups or individuals support the continuation of the policy, as well
as to which groups might be drawn into a coalition seeking to change it.

Using economic tools to examine political phenomena

Another characteristic of political economy analysis is that it uses economic tools to examine political phenomena. As in economics, a
characteristic of political economy analysis is the assumption that individual (political) agents are both self-seeking and rational. Economics
examines how rational individuals use the resources at their disposal (capital, labour, land etc) to maximise some utility function (for
example, maximising profits, income or consumption) by producing goods and services and participating in markets. In a similar vein,
political economy examines how such individuals maximise their utility by participating in political activity. Again they have capital and labour
(time) at their disposal and they can use these to influence political processes so as to generate policy outcomes that benefit them (most
notably, by generating rents for them).

DFID (2009) thus sees political behaviour as being shaped by:

Interests: those with the ability to influence policy do so in such a way as to further their own economic and/or political
interests. Those outside of government may be particularly concerned with economic outcomes. Those inside government might
have their own private economic interests, as earlier discussions highlighted. However, they also have political interests, most
obviously to retain their positions of power.
Ideas: ideology remains an important driver of policy, alongside direct economic or political interests. Where individuals are
constrained by bounded rationality, such that they cannot reliably assess all the possible outcomes from all the different (policy or
voting) choices open to them, ideology gives them a (more or less accurate) guide as to what they should do in order to remain
consistent with their basic beliefs and values in life. Incorporating ideas or ideology into political economy models also allows for
the fact that some political action is motivated by factors other than pure self-interest. Some people do genuinely enter politics
because they want to make the world a better place, although whether that remains their guiding motivation throughout their
political career is another question!
Institutions: as explained by North (1990), institutions are the formal or informal 'rules of the game' that structure human
behaviour. Generally, there are formal political rules, including a constitution, that define matters such as how leaders are chosen
and how a new policy can be introduced. In practice, informal norms and ways of doing things might be as influential in shaping
actual outcomes. All these rules help to structure the incentives facing political actors.

Levels and choices

DFID (2009) describe tools of political economy analysis that are relevant to three levels:

Macro-level or country analysis: at this level one can understand how the big decisions, for example, with respect to the
selection of political leaders or the allocation of budgets, are made. One would expect the most powerful interest groups –
whether they be industrial, ethnic or otherwise – to be visible at this level. Macro analysis might also consider how the highest
level political institutions function: what are the rules of the game facing top political players? One might also expect a country’s
history to shape prevailing ideologies and ideas about how things should work and why.
Sector-level analysis: this examines in more depth the forces shaping policy formation and decision-making at the level of an
individual sector or industry. The more important and prominent the sector is within the national economy, the greater one would
expect the influence of national level forces to be over decision-making within the sector. However, the possibilities facing all
sectors are to some extent constrained by the broader macro context, including budget, macro-economic policy etc. Meanwhile,
one would expect actors who do not feature in high-level political debates and events nevertheless to exert influence over
outcomes in their particular sector. Moreover, sectoral and local rules will be critical to outcomes and hence fiercely contested by
the relevant players.
Problem-driven analysis: this is a highly practical approach that starts from a particular problem that needs solving and
proceeds to examine all the forces (actors and interests, ideas, institutions) that have a bearing on it. According to DFID (2009)
the World Bank developed this approach to understand situations where policy reforms that were desirable from a growth or
poverty reduction perspective seemed to be continually blocked.

By way of illustration, 2.1.1 suggests generic questions that a sector-level political economy analysis might investigate. Note that these
questions reflect the particular interests of an aid donor in a given sector.
 2.1.1 Sample questions for conducting sector-level political economy analysis
Unit 1 The State, Policy-Making and Political Economy
'Roles and responsibilities: Who are the key stakeholders in the sector? What are the formal/informal roles and mandates of
different players? What is the balance between central/local authorities in provision of services?

Ownership structure and financing: what is the balance between public and private ownership? How is the sector financed (e.g.
public-private partnerships, user fees, taxes, donor support)?

Power relations: to what extent is power vested in the hands of specific individuals/groups? How do different interest groups
outside government (e.g. private sector, NGOs, consumer groups, the media) seek to influence policy?

Historical legacies: what is the past history of the sector, including previous reform initiatives? How does this influence current
stakeholder perceptions?

Corruption and rent-seeking: Is there significant corruption and rent-seeking in the sector? Where is this most prevalent (e.g. at
point of delivery, procurement, allocation of jobs)? Who benefits most from this? How is patronage being used?

Service delivery: who are the primary beneficiaries of service delivery? Are particular social, regional or ethnic groups
included/excluded? Are subsidies provided and which groups benefit most from these?

Ideologies and values: what are the dominant ideologies and values which shape views around the sector? To what extent may
these serve to constrain change?

Decision-making: How are decisions made within the sector? Who is party to these decision-making processes?

Implementation issues: Once made, are decisions implemented? Where are the key bottlenecks in the system? Is failure to
implement due to lack of capacity or other political economy reasons?

Potential for reform: Who are likely to be the "winners" and "losers" from particular reforms? Are there any key reform
champions within the sector? Who is likely to resist reforms and why? Are there "second-best" reforms which might overcome this
opposition?'

Source: DFID (2009) p. 12, itself drawing on work by ODI and World Bank.

In a similar way, we can think of basic types of decisions or sets of choices that political economy analysis investigates. The two basic types
of decisions, both of which will be explored in this module, are:

How are political leaders chosen and held accountable? In democratic systems, this relates to the rules and practice of electoral
politics.
Which policies are selected and why? We consider the policy process - how policies are made - in a little more detail in the final
section of this unit. Formal and informal rules shape this process. However, the outcomes - the actual policies that are selected -
are influenced heavily by the interests of the various actors involved and, driven by this, by their engagement in the policy
process.

The two sets of choices - selection of leaders and policies - are linked, albeit imperfectly. Can you explain what the linkage is and
why it is imperfect?