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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:

Levels and choices

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

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

'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:

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?

Irrespective of who selects them, leaders are selected at least in part on the basis of the policies that they are expected to pursue if they are given power. However, there are a number of possible reasons why the selection of leaders does not fully determine the selection of policies that are subsequently pursued. These include the fact that those who select the leaders only have imperfect information regarding the policy decisions that those leaders take once they are in power. Hence, leaders are only partially accountable for their policy decisions.

Those who select leaders care more about some policies than others. Thus, leaders' decisions on key policies might be scrutinised carefully, whereas they might enjoy considerable freedom to set policies in other areas - and in these areas be open to the influence of interest groups who were not critical to their original selection as leaders. In addition, circumstances can change during a term of office and/or new information can come to light, such that leaders change their view on the appropriate policy to be followed.

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