Political economy analysis aims to situate development interventions within an understanding of the prevailing political and economic processes in society – specifically, the incentives, relationships, distribution and contestation of power between different groups and individuals – all of which greatly impact on development outcomes. Such an analysis can support more politically feasible and therefore more effective donor strategies, as well as more realistic expectations of what can be achieved, over what timescales, and the risks involved.
Development agencies now widely acknowledge that pro-poor development is intrinsically linked to good politics and inclusive institutions, and that understanding the political constraints to or opportunities for change is an essential starting point for more effective aid (Adam & Dercon, 2009; Rocha Menocal, 2014). Political economy analysis can focus attention on informal institutions and cultural and social practices that often explain why formal institutions do not work as intended. Such analysis generally cautions against relying on technical fixes, and assuming that formal institutions can be made to work through the transfer of ‘international best practice’ (Williams et al., 2007).
Whilst PEA often highlights a need for greater realism about the sphere of donor influence, it can also suggest the most effective role for outsiders. Specifically, it can help identify where positive change is likely to occur, who stands to benefit from reform, and which aid approaches are likely to have the greatest pro-poor impact, given prevailing interests.
Adam, C., & Dercon, C. (2009). The political economy of development: An assessment. Oxford Review of Economic Policy, 25(2), 173-189.
How do political choices, institutional structures and forms of governance influence the economic choices made by governments and citizens? How are the methods of modern economics being used to deepen understanding of the ways in which political constraints shape economic development? This article summarises recent developments in the study of the political economy of development, introducing papers that illustrate key themes and methodological innovations. Translating research on the political economy of development into policy remains challenging. It is important to link the innovation of modern microeconomic research with broader aggregate analysis.
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Rocha Menocal, A. (2014). Getting real about politics: From thinking politically to working differently. London: Overseas Development Institute.
One of the most important lessons to emerge in international development thinking and practice over the past two decades is that institutions matter for development, and that behind institutions lie politics. The challenge of development lies not so much in what needs to be done (schools or vaccinations) or identifying the right ‘technical fix’, but more fundamentally in how it is done (processes that facilitate or obstruct change). Getting to the ‘how’ requires a solid understanding of the institutional dynamics at work, both formal and informal, and the kinds of incentives they generate.
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Williams, G., Duncan, A., & Landel-Mills, P. (2007). Making the new political economy perspective more operationally relevant for development agencies (Policy Practice brief 2). London: The Policy Practice.
How can donors more effectively put into practice the principles of the New Political Economy Perspective (NPEP)? This policy brief argues that if aid is to be effective, there is no alternative to a careful and long-term approach to development, based on in-depth understanding of the political context. Donors therefore need to address the system of incentives and restraints that affects key change agents.
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