Conceptual Underpinnings

1.1 What is political economy analysis

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).

The government’s guide to political economy analysis (PEA) brings together the best materials that are available on the components of PEA, different varieties, and tools for conducting PEA, into one easily accessible document.

This paper assesses the ‘good enough governance’ agenda and presents several analytical frameworks that are designed to improve decision making regarding what governance interventions should be undertaken in particular country contexts.

This paper explores how elements of public authority are created through complex processes of bargaining between state and society actors, and the interaction of formal and informal institutions.

This blog post introduces a dynamic typology (a trajectories framework) to facilitate thinking about the interactions between governance and development policymaking over time and how these differ with different types of political settlement.

This report argues that there is an urgent need to go beyond the mantra of the good governance agenda but that this entails going beyond a simple mantra that the institutional challenges of development are complex and that every country is unique.

This book builds on the innovative “working with the grain” approach to governance reform and development policymaking and investigates how, over time, virtuous circles can link inclusive growth, positive expectations, and ongoing institutional improvement.

1.2 A rapidly evolving discipline

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.

This paper claims that political economy analysis approaches, to date, lack the analytical tools that are required to understand the inner politics of development. Instead, the authors offer an alternative framework for pursing “political analysis”.

In this paper, Rodrik argues in favour of a renewed focus on ideas as key in defining interests and shows how they can be used to relax political constraints.

Hudson and Marquette argue that demonstrating the impact of PEA has been challenging due to four key gaps that have undercut the practical impact of political economy analysis: (1) conceptual, (2) operational, (3) evidential, and (4) organisational.

This report reveals that governance can mitigate power asymmetries to bring about more effective policy interventions that achieve sustainable improvements in security, growth, and equity. It draws attention to commitment, coordination, and cooperation as the three core functions of institutions that underlie policy effectiveness.

This paper explores how DFID’s application of political economy analysis into their practices has evolved to focus on politics and power and how these changes have influenced important policy decisions.

This paper reflects on the experiences of policy researchers to ask “Under what conditions does an understanding of political economy strengthen aid-supported development efforts?”

This paper presents a Problem-Driven Iterative Adaptation (PDIA) approach to development, that directly responds to the failures of a ‘best practice’ reform approach which has frequently discouraged the development of state capabilities.

1.3 Institutions matter

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.

This paper analyses the following question: Why are there huge differences in average incomes between the world's richest and poorest countries? It tests three alternative explanations for varying development performances.

This paper presents a discussion around institutions and economic development concerning two issues: how do economies come to be dysfunctional, and what can be done about it?

This paper argues that pursuing “best practice” institutional reforms in developing countries may not achieve the desired ends and can backfire.  Sometimes "second-best" institutions take into account context-specific market and government failures may be more appropriate.

Through a review of the ‘New Institutionalism’ literature, Bates and Galiani reflect on the nature and influence of institutions, and ultimately their value in promoting economic development.

This paper presents a Problem-Driven Iterative Adaptation (PDIA) approach to development, that directly responds to the failures of a ‘best practice’ reform approach which has frequently discouraged the development of state capabilities.

By drawing from a wide range of examples in Latin America, this book analyses the function of informal institutions and how they support or weaken democratic governance.

This paper provides a current overview of the evidence – comprising of historical studies, statistical evidence and structural analyses - on institutions and growth by exploring how and to what extent particular institutions matter in particular contexts.

By drawing on the literature of the political economy of growth and development, this paper aims to address the lack of knowledge surrounding how institutions are maintained overtime by exploring processes of institutional reform and transformation in Asia.

1.4 The political settlement

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.

This paper distinguishes between two basic types of political and economic system: limited access order and open access orders, and sheds light on how societies can make the transition between the two.

This paper analyses the ‘political settlement’ with the aim of providing an analytical framework that can evaluate the strength of institutions and governance in developing countries.

Using comparative research to theorize about the politics of industrial policy in countries in the early stages of capitalist transformation, this book provides four in-depth African country studies that illustrate the challenges to economic transformation and the politics of implementing industrial policies.

This paper explores whether best-practice reforms are suitable for positive development outcomes within a developing country such as Uganda, due to the changes its political settlement dynamics have had in recent years.

By building on previous research regarding political settlements and drawing from a new typology, this paper attempts to provide an improved definition of what a political settlement is.

This paper compares the experience of Rwanda, Bangladesh, Uganda and Ghana in reducing maternal mortality by relating their policy commitments and implementation to the underlying balance of power structures and institutions, or political settlement, that make up these countries politics.

Kelsall and vom Hau review existing debates around political settlement analysis and propose a new and revised definition of political settlements with two key dimensions: social foundation and political configuration.

By drawing on theories of rents and rent-seeking and theories of political settlements, this paper attempts to assess both the developmental impact of specific anti-corruption strategies and the feasibility of implementing these strategies.

1.5 Effects of political competition

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. 

This article examines whether democracy is necessary for development (as opposed to being preferable for a host of other reasons), and hence the relationship between markets, states, and democracies in developing countries.

This paper identifies and explains systematic performance differences between younger and older democracies: younger democracies are more corrupt; exhibit less rule of law, lower levels of bureaucratic quality and lower secondary school enrolment; and spend more on public investment and government workers.

Kitchelt and Wilkinson describe and explain different forms of clientelistic politics and contrast this with the usual assumption of programmatic political completion that claims that political parties compete for citizens votes by offering alternative platforms.

This article focuses on three political market imperfections that help to understand the incentives governments have for providing services to less fortunate citizens: (1) lack of information among voters, (2) social fragmentation among voters, and (3) lack of credibility of political promises to citizens.

This article explores the origins, dynamics and elements of clientelism, focusing on the relationships between clientelism and democracy and between clientelism and development.

This article aims to develop an alternative perspective to the relationship between clientelistic politics and economic development by exploring election campaigns and the importance of societal constraints in rural and provincial capitals in Indonesia.