Political economy analysis (PEA) refers to a wide body of theory and practice concerned with the interaction of political and economic processes, and how these influence continuity and change in development outcomes. A useful starting point for basic definitions and conceptions can be found in ‘A beginners guide to PEA’ from the National School of Government International (Whaites, 2017).
Many of the basic ideas of PEA can be linked to a critique of the normative assumptions of the ‘good governance’ agenda. There is an increasing recognition that development agencies must be more sensitive to local context and local politics, and not merely focussed on technical fixes. This critique is particularly associated with Merilee Grindle’s writings on ‘good enough governance’ (Grindle, 2011); Sue Unsworth’s ‘upside down view of governance’ (IDS, 2010); Brian Levy’s call for a shift from ‘best practice’ to ‘good fit’ (Levy, 2011), and the need to ‘work with the grain’ (Booth, 2012; Levy, 2014).
Over the past decades, political economy analysis has undergone rapid development and has evolved in response to an assessment of the results of early analysis and vigorous debate on the utility of the approach. An influential paper by Hudson and Leftwich (2014) criticises early PEA for failing to analyse adequately the ‘inner politics of development’, meaning power, interests, agency, ideas, political manoeuvring to build and sustain coalitions and take advantage of opportunities created by events. The paper helpfully focuses attention on how change can happen, countering the tendency of some early PEA studies to limit the analysis to explaining why reforms are blocked by vested interests. A paper by Dani Rodrik also challenges the notion that vested interests are fixed and well-defined. Instead, it focuses on the key role of ideas in defining interests and changing actors’ interpretations of their interests (Rodrik, 2014).
Hudson and Marquette (2015) explore what is missing in PEA and why policy making is still not politically informed. They highlight conceptual gaps within some PEA tools, notably how PEA often underplays the importance of power. The Work Bank’s World Development Report (2017) focusses on governance and the law. It argues that – through elite bargains and greater citizen engagement – it is possible to shift the incentives of those with power towards better outcomes, taking into account the interests of previously excluded participants.
The challenge of ensuring that an appreciation of power structure and dynamics influences policy and practice is explored by Piron et al. (2016), who shows how DFID’s use of PEA has evolved throughout the years. While attention has always been given to politics and power, the authors found little evidence to suggest that a politically-informed approach was influencing changes in DFID policies. They evaluate the steps that DFID has taken to incorporate politics into its operations and how successful this has been.
Finally, there has been a noticeable shift towards promoting PEA as a means to ‘think and work politically’ within development practice. Booth et al. (2016) situate this transition within a broader shift in development practice towards Problem-driven Iterative Adaptation (PDIA) (Andrews et al. 2013). Recent practice has shown how PEA is an essential element of the PDIA approach because it enables development actors to become more problem-driven, more self-aware about their own interests, more realistic about their level of influence, more tactical in exploring the room for manoeuvre to promote change, and more interested in learning and adaption. See the Online Library section on Thinking and Working Politically for more on this.
Political economy analysis draws on a well-developed literature on the role of institutions in shaping development (Rodrik & Subramanian 2002; North, 2003). While asserting the primacy of institutions, this literature stresses the need to avoid a deterministic and normative view of “best practice” institutional forms, and to recognise that development can be served by a variety of institutional arrangements, which may often appear second-best (Rodrik, 2008). There has been a shift towards more nuanced analysis of how institutions actually function, and how they are shaped by particular actors (Bates and Galiani, 2014). Andrews et al. (2013) draw attention to the problem of ‘isomorphic mimicry’, whereby developing country governments attempt to comply with ‘best practice’ by undergoing superficial changes in institutional form, while failing to reform the way that institutions actually function.
In response to these insights, political economy analysis has become increasingly focussed on the workings of institutions, and in particular, the relationship between formal institutions (codified laws and officially sanctioned rules) and informal institutions (rules that are created, communicated, and enforced outside of officially sanctioned channels and often through personal, social and ethnic ties). Helmke and Levitsky (2006) provide an analytical framework for interpreting the interaction between formal and informal institutions and the implications for democracy in Latin America.
On the relationship between institutions and economic growth, a paper from Durlauf (2018) provides a current overview of the evidence, comprising of historical studies, statistical evidence and structural analyses. The author explores how and to what extent particular institutions matter for growth in particular contexts. Rocha Menocal (2017) explores processes of institutional transformation in Asia. She analyses how political systems, and the political settlements and rules of the game that underpin them, have evolved over time in different contexts in Asia, and what lessons emerge from these experiences about prospects for more inclusive development elsewhere.
In an influential paper, Douglass North et al. (North et al., 2007) introduced the concept of Limited Access Orders, referring to situations in which political elites divide up control of the economy, each getting some share of the rents, and on that basis agree not to engage in violence. They show that, since outbreaks of violence reduce the available rents, the elite factions have incentives to be peaceable most of the time and that, under certain circumstances, Limited Access Orders can deliver strong economic growth.
Khan (2010) developed the idea of a link between limits on violence and agreements around the allocation of rents. He argued that so-called “good governance” is neither necessary nor achievable in developing countries; rather, development is typically realised through a productive sharing of rents between a ruling coalition and an emerging class of capitalist investors. Whitfield et al. (2015) analyse such ‘political settlements’ in African countries and highlight critical factors that have supported or undermined industrial policy. These include the distribution of power within the ruling coalition, whether it is more centralised or fragmented, as well as how power is distributed between the ruling coalition and rival elites. Hickey and Izama (2019) explore whether ‘best-practice’ reforms assist positive development outcomes within developing countries such as Uganda, given recent changes in political-settlement dynamics. They conclude that best practice reforms have resulted in fragmentation of governance.
Kelsall and Hickey also set out a framework for categorising different types of political settlement and show how different kinds of development intervention are likely to be more effective in some settlements than others. Kelsall (2018) provides an example of country-level political settlements analysis for the case of Tanzania. Similarly, Kelsall (2020) provides a sector level political settlements analysis. He compares different African countries experiences in reducing maternal mortality where the ruling party has gained a majority and finds that ‘dominant developmental’ political settlements are most effective for implementing health policies. For more detail on political settlements see (Kelsall and vom Hau, 2021).
When analysing anti-corruption strategies in political settlements, Khan, Andreoni and Roy (2019) argue that feasible anti-corruption strategies in typical developing-country contexts cannot be solely based on the conventional transparency, accountability and enforcement approach. This is because these contexts typically have power dynamics that allow for a wide range of individuals to violate the rule of law. The authors instead call for bottom-up anti-corruption strategies.
Political competition and its effects on development outcomes has been another important focus of political economy analysis. Khan (2005) finds that there is no difference globally between democracies and autocracies in their development outcomes. Other studies find significant variation between different types of democratic system with young democracies tending to act in less developmental ways than well-established democracies (Keefer 2005).
In seeking to understand better the mechanisms by which political competition affects development outcomes, analysts have pointed to the effects of entrenched patron-client relationships in many developing countries. Kitschelt and Wilkinson (2009) explore different forms of clientelism, which they collectively define as “a transaction involving the direct exchange of a citizen’s vote in return for direct payments or continuing access to employment, goods, and services.” Keefer and Khemani (2005) identify mechanisms by which electoral competition can reinforce patronage politics. They analyse this in terms of ‘political market imperfections‘ (incomplete information, social divisions and credibility gaps) that create incentives for politicians to deliver narrowly targeted private goods rather than public goods that are required for development and whose benefits are more widely shared.
Hicken (2011) defines clientelism as being characterised by “the combination of particularistic targeting and contingency-based exchange”. Hicken also explores the different elements of clientelism which they claim are: “dyadic relationships, contingency, hierarchy, and iteration”. Berenschot (2018) analyses different forms of clientelism outside of vote buying and finds that a diffusion of power can restrict clientelist politics by creating a more autonomous civil society that will hold the government to account.