Posted by Corinne Rothblum, Steve Rozner and Jay Totte[1]
Over the past decade bilateral and multilateral donors including DFID, the Dutch, SIDA and the World Bank have undertaken political economy analysis (PEA) with the goal of informing their programming strategies and approaches. Building on their methodological tools and experience, in 2014, USAID began testing its own PEA framework, which is organized around four core themes: foundational factors, rules of the game, ‘here and now’, and dynamics. To date, USAID missions in over a dozen countries have used the PEA framework to examine issues in sectors ranging from health to biodiversity to governance. USAID/Washington staff provide technical support and offer headquarters field-based workshops that explore how to use the PEA framework and other approaches to embed ‘thinking and working politically’ in USAID program design and implementation.
In Colombia, for example, the PEA framework helped deepen USAID and implementing partners’ understanding of the motivations of regional actors – both legal and illegal-- and power dynamics among them. With more nuanced insights into local contextual and political challenges faced by local governments and community leaders, USAID/Colombia’s regional governance program is more effectively targeting its technical support and mitigating risks. USAID/Ukraine used the PEA framework to test its assumptions about blockages in its tuberculosis treatment program. The study found that the Soviet-legacy healthcare system privileges hospital-based treatments over more effective, less costly outpatient TB care. In Indonesia, PEA is helping the USAID health team unpack reasons why maternal and newborn health indicators remain dismal, despite significant and sustained donor and government investment.
As a donor signatory to the Addis Tax Initiative (ATI), USAID is expanding its work on domestic resource mobilization (DRM), particularly in countries that have joined the ATI. Assessment tools like TADAT and PEFA are valuable in assessing the de jure capacity and functioning of PFM and tax administration systems. However, the success and sustainability of PFM and DRM reform initiatives also depend on political economy considerations: formal and informal power structures, political relations, economic and personal incentives, and implicit rules of the game that govern institutional behavior.
PEA adds value to project design, project implementation, and the process of monitoring, evaluation and learning for a number of reasons:
First, it brings a deeper understanding of stakeholder incentives that can hinder or support reforms. Mapping vertical accountability arrangements between civil servants and their managers can highlight winners and losers from potential reforms, and identify key allies and entry points for change.
Second, PEA helps paint a clearer picture of possible risks associated with the implementation of DRM/PFM reforms. Whereas TADAT and PEFA can flag institutional weaknesses that facilitate tax evasion or leakages, PEA digs into underlying causes that drive and perpetuate irregularities. It enables a fuller understanding of why certain interventions are likely to fail, why they may reinforce elite capture or conflict, and why they can impose reputational risks on the organization. Additionally, where corruption risks are high, PEA can explain the drivers of a poor fiduciary environment, and define feasible approaches to address them.
Third, embedding a PEA lens into program monitoring and evaluation helps program implementers and managers keep their finger on the pulse of contextual changes - a ruling party’s election loss, the appointment of a new minister of finance or revenue commissioner, the introduction of a surprise tax measure, or a natural disaster – and how they may impact the trajectory of reforms.
USAID’s experience in applying PEA to its PFM and DRM work is still in its early days, but we can share some early observations:
- Many lower income countries (LICs) owe their tax systems to a colonial legacy in which taxes were used to finance colonial administrations, foreign wars, and territorial expansion. In certain places, the vestiges of these tax systems have remained in place including a variety of arcane tax instruments (e.g., stamp taxes) that are both anti-poor and anti-commerce. Partially as a result of these fiscal legacies – not to mention weak institutions – these countries never forged any sort of fiscal contract between government and citizenry.
- As economic structures in LICs change, the old argument about narrow tax bases is no longer as relevant as it used to be. There are now sophisticated and growing industries (e.g. telecoms, extractives, financial services) that are supplanting agriculture as the mainstay of the economy. These and other industries have become major potential contributors to public revenue, yet due to political protection and other factors, many "big fish" escape the tax net.
- Tax systems have been slow to evolve in response to these structural shifts in the economy. In certain LICs, instead of fine-tuning tax policies to harness emerging sources of economic growth, governments by and large opt for the opposite – literally giving away tax breaks to bestow favor on friends, or out of concern that not doing so would drive away investment, or even to win votes. These ‘tax expenditures,’ in turn, deprive governments and their citizens of huge amounts of development resources, sometimes worth as much as the amounts actually collected.
- Heavy dependence on natural resources has not only slowed the development of more sustainable, responsive tax systems - because of Dutch Disease-related effects - but also undermines the economic diversification that would otherwise provide the lifeblood of a more robust, broad-based and equitable tax system.
- An unspoken competition among donors for influence and standing with politicians and ministries of finance to develop politically attractive technical support programs is a driving cause of reform fragmentation.
- An effective way to ensure that a reform program reflects evolving political economy dynamics is embedding advisors in the ministry of finance who work closely with the civil servants responsible for implementing reforms. In this way the program has day-to-day interaction with the implementers and can respond more quickly and flexibly to issues as they arise.
[1] U.S. Agency for International Development (USAID). This article was written by the authors in their personal capacity. The opinions expressed are the author's own and do not reflect the views of the United States Government.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
