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DOI: 10.1596/978-1-4648-0950-7

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Contents

xiii Foreword
xv Acknowledgments
xix Abbreviations

1 Overview: World Development Report 2017:


Governance and the Law
2 Improving governance to meet todays development challenges
5 Drivers of effectiveness: Commitment, coordination, and cooperation
12 Levers for change: Contestability, incentives, preferences and beliefs
19 Drivers of change: Elite bargains, citizen engagement, and international influence
29 Rethinking governance for development
32 Navigating this Report
33 Notes
34 References

39 Part I: Rethinking governance for development:


A conceptual framework
40 Chapter 1: Governance for development: The challenges
40 Understanding development policy: Proximate factors and underlying determinants
43 Development objectives . . . and constraints
48 Governance for the bottom half
48 Notes
48 References

51 Chapter 2: Enhancing governance for development: Why policies fail


52 Diverse pathways to success: Moving beyond institutional transplants
53 Drivers of effectiveness: Commitment, coordination, and cooperation
58 Policy effectiveness in the presence of power asymmetries
65 Levers for change: Incentives, preferences and beliefs, and contestability
72 A dynamic process: Drivers of change and the role of law
73 Notes
73 References
77 Spotlight 1: Corruption
80 Spotlight 2: The governance challenges of managing risks

v
83 Chapter 3: The role of law
84 Law and the policy arena
86 Ordering behavior: The command role of law
91 Ordering power: The constitutive role of law
93 Ordering contestation: The role of law in change
95 Getting to the rule of law
98 Notes
98 References
102 Spotlight 3: How do effective and equitable legal institutions
emerge?

109 Part II: Governance for development


110 Chapter 4: Governance for security
110 Can governance solve the problem of violence in society?
111 Security, governance, and power are tightly interlinked
116 Governance can improve security in four ways
123 Conclusion
123 Notes
124 References
130 Spotlight 4: Wartime governance
133 Spotlight 5: Crime

137 Chapter 5: Governance for growth


137 How policy capture slows economic growth
138 How governance matters to growth: A microeconomic perspective
141 How policies are affected by undue influence from powerful groups
145 Policy design under risk of capture
146 How the design of public agencies mediates the influence of powerful groups
150 Finding the right approach
152 Notes
153 References
159 Spotlight 6: The middle-income trap
163 Spotlight 7: Public-private partnerships

167 Chapter 6: Governance for equity


170 Two key policy areas that matter for equity: Investing in public goods and
expanding opportunities
171 Equity and institutional functions: The role of commitment and cooperation
173 How policies to promote equity can be affected by power asymmetries
178 Leveling the playing field and making governance more responsive to all
182 Improving policy effectiveness by taking into account asymmetries in bargaining
power
183 Notes
184 References
189 Spotlight 8: Service delivery: Education and health

195 Part III: Drivers of change


196 Chapter 7: Elite bargaining and adaptation
196 Understanding elite bargains
203 Elite bargains and uneven state capacity

vi | CONTENTS
205 Broadening the policy arena to enhance elite power
207 When binding rules for accountability serve as political insurance
208 When elites adapt through rules-based mechanisms
212 Entry points for change through elite adaptation
213 Notes
213 References
217 Spotlight 9: Decentralization
220 Spotlight 10: Public service reform

225 Chapter 8: Citizens as agents of change


226 Bringing change through the ballot box
230 Bringing change through political organization: The role of political parties
234 Bringing change through social organization
239 The role of induced participation and public deliberation
241 Entry points for change: Understanding citizen agency as a collective action
problem
241 Notes
242 References
247 Spotlight 11: From transparency to accountability through citizen
engagement
252 Spotlight 12: The media

257 Chapter 9: Governance in an interconnected world


257 Transnationalism and the domestic policy arena
259 Transnational rules and regulations: Enhanced cooperation and focal points for
change
266 Foreign aid and governance
273 Notes
274 References
278 Spotlight 13: Illicit financial flows

Boxes
O.1 3 What is governance? O.10 21 Who are elites, and what do they do?
O.2 4 Governance for what? Achieving Results from a survey of elites in 12
countries
the goals of security, growth, and
equity O.11 25 Direct democracy delayed womens
voting rights in Switzerland
O.3 8 The idea of power and the power of
ideas O.12 28 Domestic resource mobilization,
foreign aid, and accountability
O.4 10 Why some people see red when they
hear green growth O.13 30 What does the WDR 2017 framework
mean for action? The policy
O.5 12 The need to strengthen incentives to effectiveness cycle
gather development data
O.14 31 Lessons for reformers from the rules
O.6 14 Legal and normative pluralism game: How is legitimacy ultimately
O.7 15 Transitions to the rule of law built?
O.8 18 The rules game: Paying attention to 1.1 41 What is governance?
where the action is 1.2 43 Governance for what? Achieving the
O.9 20 Elites and citizens: Who is who in the goals of security, growth, and equity
policy arena? 1.3 46 Discontinuities of the state

CONTENTS | vii
2.1 53 The microfoundations of commitment, 5.1 143 Why some people see red when they
coordination, and cooperation: A hear green growth
perspective from game theory 5.2 152 Participatory mechanisms in policy
2.2 55 Trust in institutions stems from design: The Bulldozer Initiative in
delivering on commitments Bosnia and Herzegovina
2.3 59 Game theory and the roots of political 6.1 168 What is equity?
power 6.2 169 A vicious cycle: How inequality begets
2.4 60 Who is who in the policy arena: The inequality
case of Bolivias social policy 6.3 174 Efforts to expand and secure access to
2.5 62 Transaction costs, incomplete contracts, land often lead to capture
and political agreements: Why land 6.4 175 Defining and measuring clientelism
redistribution policies often fail
6.5 181 Local elites can capture public spending
2.6 63 How capacity and norms influence and despite participatory programs
are influenced by power asymmetries
6.6 183 Designing social safety nets to account
2.7 64 The rules game: Paying attention to for asymmetries in bargaining power
where the action is
7.1 198 Expert survey to identify elites
2.8 65 Factors that make sustaining
cooperation over time more likely 7.2 202 When do elites have incentives to
introduce rules for contestability and
2.9 66 Voluntary compliance and the building accountability?
blocks of legitimacy
7.3 204 Pockets of effectiveness in Nigeria
2.10 67 How an international commission
enabled a credible commitment to fight 7.4 211 Female elites and female leaders
criminals impunity in Guatemala 8.1 236 Social movements and bottom-up
2.11 69 How the introduction of electronic pressures for reform: Right to
voting in Brazil reshaped the policy information legislation in India
arena and led to more pro-poor policies 8.2 237 The mobilization of women and
2.12 71 The rules game: Lessons for reformers promotion of gender-based policies in
postconflict settings: The case of Sub-
3.1 84 What is law? Saharan Africa
3.2 85 Legal and normative pluralism 9.1 262 Legitimizing the second-best:
3.3 87 Legal origins: Theory and practice Governance options for global public
goods and the Paris Agreement on
3.4 96 Transitions to the rule of law climate change
3.5 97 Understanding the role of law in 9.2 266 Aid as a delivery mechanism for
context transnational rules and ideas
4.1 112 How modern governance was born 9.3 270 The impact of aid on domestic resource
offers lessons for todays fragile mobilization: What does the evidence
countries say?
4.2 114 The persistent links among gender- 9.4 271 Beyond technocratic approaches:
based violence, power, and norms Opening the door to considerations
4.3 115 Several factors can cause conflicts, and of politics and power in development
they often combine policy

Figures
O.1 6 Long-term growth is less about how O.5 16 Recruitments of civil servants increased
fast one grows than about not tripping exponentially in Tunisia and the Arab
along the way Republic of Egypt in the aftermath of
O.2 9 A more even balance of power is the Arab Spring uprisings of 2011
associated with positive security O.6 17 Formal avenues for broad-based
outcomes participation in regulatory decision
O.3 9 The value of political connections: making are limited in low- and middle-
Indonesia during President Suhartos era income countries
O.4 11 Principals, agents, and clients: O.7 19 WDR 2017 framework: Governance, law,
Accountability for sale and development

viii | CONTENTS
BO.10.1 21 Elite actors within national ruling 4.1 111 Violence inflicts a high cost on
coalitions vary greatly across countries development
and over time 4.2 111 Violent conflict is associated with a
O.8 24 Electoral democracies are spreading, but reduction in GDP per capita
the integrity of elections is declining 4.3 118 An even balance of power is associated
O.9 26 After decades of progress, civic space is with positive security outcomes
shrinking globally 4.4 119 Constraining state power ensures
O.10 27 Aid is a large share of GDP and security
government revenue in many 4.5 121 Recruitment of civil servants increased
developing countries
exponentially in Tunisia and the
BO.13.1 30 The policy effectiveness cycle Arab Republic of Egypt in the aftermath
1.1 41 Despite declining under-5 child of the Arab Spring uprisings of 2011
mortality rates, inequality among and S5.1 134 Homicide rates across Europe have
within countries is still sizable declined dramatically over the last 800
1.2 45 Economic growth requires security years
2.1 52 Despite similar rules for the 5.1 138 Length of time needed for firms to
management of natural resource obtain a construction permit varies
revenue in Chile and Mongolia, Chiles widely
expenditure patterns reveal a stronger 5.2 139 Per capita income and governance are
commitment to compliance correlated
B2.2.1 56 Welfare is higher for citizens under 5.3 140 Medium-term growth and governance
commitment in the lab game are not correlated
B2.4.1 60 Formal and actual policy networks in 5.4 142 In Indonesia, the stock value of
Bolivia, 2010 politically connected firms fell when
B2.11.1 69 An electronic ballot made it much easier the connection was jeopardized
than a paper ballot for those with little 5.5 149 Formal checks and balances are weaker
or no education to cast their vote in in low- and middle-income countries
Brazil
5.6 150 Formal avenues for broad-based
B2.11.2 70 Electronic voting reduced the number participation in regulatory decision
of invalid votes in Brazil making are limited in low- and middle-
2.2 72 WDR 2017 framework: Governance, law, income countries
and development S6.1 159 Many countries have not converged
S1.1 79 Development accounts for only about toward higher incomes
half of the variation in control of S6.2 161 Checks on corruption and
corruption accountability institutions improve
B3.3.1 87 Changes in investor protection and more in countries that escape upper-
creditor rights have little impact on middle-income status to achieve high-
economic outcomes income status than in countries that are
3.1 91 Constitutions have become ubiquitous, non-escapees
but they are often replaced or amended S7.1 164 Private participation in infrastructure
3.2 92 In every country, there is a gap between projects in developing countries
the laws on the books and the laws remains limited
implemented, but high-income OECD 6.1 168 States can improve equity by
countries generally do better than low- intervening in the distribution of final
and middle-income countries outcomes through taxes and transfers
3.3 96 The rule of law is strongly correlated and by providing access to basic
with high income services
S3.1 103 Although high-income OECD countries B6.2.1 169 Capture is associated with lower levels
generally have well-functioning legal of commitment
institutions, the relationship between 6.2 171 When commitment is low, countries
institutional quality and income varies exhibit low compliance (high shadow
in developing countries economy)
S3.2 105 The correlation is weak between 6.3 172 Fear of sanctions and participation in
de jure and de facto measures of judicial decision-making processes promote
independence cooperation

CONTENTS | ix
6.4 175 A politician can become an agent of the for citizen engagement, dominant
provider in clientelist settings parties place de facto limits on electoral
6.5 176 In some countries in the Middle East competition
and North Africa, a large proportion of 8.6 231 Programmatic parties perform better
citizens believe that connections are as than clientelist parties in improving the
important as or even more important quality of public services, especially in
than professional qualifications in competitive party systems
obtaining a government job
8.7 232 Programmatic parties tend to emerge
6.6 177 Unofficial payments for education at higher levels of development,
and health services are widespread in but significant variation exists
Europe and Central Asia among countries at similar stages of
6.7 181 Empowering parents with school-based development
management training helps lessen 8.8 233 Dominant party systems are less
capture (teacher absenteeism) in Kenya likely than competitive systems to
B7.1.1 198 Elite actors within national ruling introduce legal provisions for public
coalitions vary greatly across countries funding, suggesting efforts to reduce
and over time contestability
7.1 200 Preferences of economic elites predict 8.9 234 Political parties are on average the least-
policy adoption more than do citizen trusted political institution worldwide
preferences in the United States 8.10 235 After decades of progress, civic space
7.2 201 When the cost of losing power is high, is shrinking globally, driven by higher
elites are more likely to reject electoral government restrictions on media and
results that support the opposition and CSO entry
are less likely to move toward rules- 8.11 235 Taking advantage of the digital
based contestability and accountability
revolution, social movements are
B7.2.1 202 The interaction between political increasingly organized across national
uncertainty and the cost of losing boundaries
power
B8.2.1 237 The rate of political participation of
7.3 205 Horizontal and vertical accountability women is higher in countries emerging
become more common as party from conflict
institutionalization increases
B8.2.2 238 In Africa, postconflict countries have
7.4 210 Greater ideological unity among been more likely to integrate womens
elites is associated with greater rights in their constitutions
cohesion of the ruling coalition, as
well as more institutionalized elite 8.12 240 In Brazil, online voting in participatory
interactions budgeting can reinforce existing
inequalities
7.5 212 When economic power maps onto
political power, there are fewer S11.1 248 Transparency is not enough: Three
institutional checks on power conditions for the effectiveness of
information initiatives
8.1 227 In Kenya, elections changed the
incentives of the ruling elites, reducing 9.1 258 International actors can affect the
the scope of ethnic favoritism domestic policy arena by changing the
dynamics of contestation, shifting actor
8.2 227 Electoral democracies are spreading, but incentives, or shaping actor norms
the integrity of elections is declining
9.2 260 Regulations and legal agreements have
8.3 228 Although citizens value elections proliferated across borders
as an important route to economic
development, less than half of 9.3 264 The Rights Revolution has led to a
respondents worldwide have global spread of rights-related norms,
confidence in the integrity of elections facilitated and supported by global
treaties and agreements
8.4 228 Voter turnout worldwide from 1945
to 2015 indicates unequal citizen 9.4 265 Human rights treaties are spreading,
participation and the risk of biased but de facto changes in state
representation of policy preferences performance are lagging behind
8.5 231 Although the spread of multiparty 9.5 265 Gender quota laws have spread
systems has increased opportunities worldwide since 1990

x | CONTENTS
9.6 268 Aid makes up a large share of GDP and 9.7 268 Low- and lower-middle-income
revenue in many developing countries countries vary greatly in the amount of
aid received and improvement in GDP
per capita

Maps
1.1 44 Violence is a major problem in 9.1 267 Aid flows amounted to over US$161
37 countries billion from donor countries to
B1.3.1 46 State presence in Bolivia in selected recipient countries in 2014
intervention domains and composite
density, circa 2010

Tables
O.1 7 Three institutional functions 2.1 71 Three principles for rethinking
commitment, coordination, and governance for development
cooperationare essential to the S11.1 249 Positive and negative outcomes of
effectiveness of policies citizen engagement
O.2 29 Three principles for rethinking 9.1 261 Transnational actors, instruments, and
governance for development mechanisms for influencing domestic
B2.1.1 53 Coordination and cooperation as governance through incentives,
modeled in game theory preferences, and contestability
B2.2.1 55 Sources of trust S13.1 279 Actions generating illicit financial flows
B2.3.1 59 Payoffs to cooperation or
noncooperation

CONTENTS | xi
Foreword

Leaders, policy makers, and development professionals often worry that well-intentioned
policies designed to improve the lives of their communities will fail to deliver results.
The global development community needs to move beyond asking What is the right
policy? and instead ask What makes policies work to produce life-improving outcomes?
The answer put forward in this years World Development Report is better governancethat
is, the ways in which governments, citizens, and communities engage to design and apply
policies.
This Report is being launched at a time when global growth and productivity are con-
tinuing to slow, limiting the resources available to help the worlds poorest and most vulner-
able. Yet, peoples demands for services, infrastructure, and fair institutions are continuing
to rise. Given strained government budgets and development aid, it is vital that resources
be used as effectively as possible. We can do this by harnessing the finance and skills of pri-
vate businesses, working even more closely with civil society, and redoubling our efforts in
the fight against corruption, one of the biggest roadblocks to effective, lasting development.
However, coordinating the efforts of this diverse set of groups requires clarity on the
roles and responsibilities of each group, along with effective rules of the road to reach and
sustain agreements. Without paying greater attention to stronger governance, the World
Bank Groups goals of ending extreme poverty and boosting shared prosperity, as well as
the transformational vision of the United Nations broader Sustainable Development Goals,
will be out of reach.
Based on extensive research and consultations conducted in many countries over the
past 24 months, this Report draws attention to the importance of commitment, coordina-
tion, and cooperation as the three core functions needed to ensure that policies yield their
desired outcomes. The Report also offers a helpful framework for approaching and resolv-
ing the challenges faced by our partners. Specifically, it explores how policies for security,
growth, and equity can be made more effective by addressing the underlying drivers of
governance.
Moving beyond the traditional concerns about implementation, such as limited state
capacity, the Report then digs deeper to understand how individuals and groups with dif-
fering degrees of influence and power negotiate the choice of policies, the distribution of
resources, and the ways in which to change the rules themselves.
As the Report shows, positive change is possible. Although reform efforts must be driven
by local constituencies, the international community can play an active role in supporting
these endeavors. In particular, we need to ensure that our future development assistance
fosters the fundamental dynamics that promote better, more sustainable development.

xiii
I hope the insights presented in this Report will help countries, their communities,
development institutions, and donors succeed in delivering on our shared vision to end
extreme poverty and boost shared prosperity.

Jim Yong Kim


President
The World Bank Group

xiv | FOREWORD
Acknowledgments

This Report was prepared by a team led by Luis Felipe Lpez-Calva and Yongmei Zhou. Lead
chapter authors were Edouard Al-Dahdah, David Bulman, Deborah Isser, Marco Larizza,
Ezequiel Molina, Abla Safir, and Siddharth Sharma. The extended core team was composed
of Kimberly Bolch, Lidia Ceriani, Samantha Lach, Bradley Larson, Annamaria Milazzo, and
Evgenia Pugacheva. Brnagh Murphy and Jason Victor served as the production and logis-
tics team for the Report. Mart Kivine led partner relations and provided strategic advice and
support for resource mobilization. Stephen Commins provided consultations support and
advice on the green cover consultation. The team received excellent research assistance
from Yanina Eliana Domenella, Simona Ross, and Hari Subhash. This work was carried out
under the general direction of Kaushik Basu, Shanta Devarajan, and Indermit Gill. The team
is also grateful for comments and suggestions from Paul Romer.
The team received guidance from an advisory panel composed of Pranab Bardhan,
Dr. Boediono, Mauricio Crdenas, Francis Fukuyama, Avner Greif, Rebeca Grynspan, Tarja
Halonen, Joel Hellman, Karuti Kanyinga, Karl Ove Moene, Benno Ndulu, James Robinson,
Tharman Shanmugaratnam, and Xixin Wang.
The team would also like to acknowledge the generous support provided for prepara-
tion of the Report by Global Affairs Canada, Finlands Ministry of Foreign Affairs, Norways
Ministry of Foreign Affairs, and Swedens Ministry of Foreign Affairs, as well as the French
Development Agency, German Corporation for International Cooperation (GIZ), Knowledge
for Change Program, and Nordic Trust Fund.
Consultation events were held in Argentina, Chile, China, Colombia, Estonia, Finland,
France, Germany, Ghana, India, Italy, Kenya, Mexico, the Netherlands, Norway, the Philip-
pines, Spain, Sweden, Tajikistan, Tanzania, the United Kingdom, the United States, Uruguay,
and Vietnam, with participants drawn from many more countries. The team thanks those
who took part in all of these events for their helpful comments and suggestions.
Bilateral and multilateral consultation events were held with the Asian Development
Bank, CAF Development Bank of Latin America, European Commission, French Develop-
ment Agency, German Federal Ministry of Economic Cooperation and Development, GIZ,
Inter-American Development Bank, International Court of Justice, Norwegian Agency for
Development Cooperation, Organisation for Economic Co-operation and Development,
Swedish International Development Cooperation Agency, U.K. Department for International
Development, United Nations Development Programme, and U.S. Agency for International
Development.
The team also met with representatives from think tanks and civil society organizations,
including the ABA Rule of Law Initiative, Afrobarometer, Berghof Foundation, Centre for
Global Constitutionalism, Centro de Estudios Espinosa Yglesias, Civicus, Eurasia Founda-
tion, Global Partnership for Social Accountability, Hague Institute for Global Justice, Inno-
vations for Successful Societies at Princeton University, InterAction, International Food
Policy Research Institute, International Institute for Democracy and Electoral Assistance,

xv
Latin American Public Opinion Project, Mexican Competitiveness Institute, Mxico Cmo
Vamos?, OpenGov Hub, Oxfam-UK, Partnership for Transparency Fund, Peace Research
Institute Oslo, Stockholm International Peace Research Institute, Transparencia Mexicana,
and Transparency International.
The initial findings of the Report were also discussed at several conferences and work-
shops, including the 2015 annual meeting of the American Political Science Association;
2015 Annual Bank Conference on Africa: Confronting Conflict and Fragility in Africa, hosted
by the University of California at Berkeley; 2015 Annual Bank Conference on Development
Economics; XXVIII Annual Congress of the Italian Society of Public Economics, Governance
and Development: The Case of Politically Connected Businesses in Europe and Central Asia
(in collaboration with the World Banks Office of the Chief Economist, Europe and Central
Asia Region); Implementing SDG 16: Good Governance Reloaded or New Opportunities
for the Support of Democratic Governance? hosted by the German Development Institute;
2016 International Civil Society Week; 2016 International Conference on Inequality: Trends,
Causes and the Politics of Distribution, hosted by the Friedrich-Ebert-Stiftung Foundation;
2015 International Policy Workshop on Governance and the Law, hosted by GIZ; 2016 Think-
ing and Working Politically Community of Practice, hosted by the Carnegie Endowment for
International Peace; WDR 2017 Law Symposium, Cuentas Claras: Governance for Growth
and Equity in Latin America (in collaboration with the World Banks Office of the Chief
Economist, Latin America and the Caribbean Region); 2015 World Bank Law, Justice and
Development Week; and 2016 World Justice Project Scholars Conference on the Rule of Law,
Non-law, and Social Order, hosted by Stanford University. Several universities sponsored
events to provide feedback on the Report, including Ateneo de Manila University, Beijing
University, Columbia University, Cornell University, East China University of Political
Science and Law, Leiden University, Oxford University, Renmin University, Torcuato
Di Tella University (Buenos Aires), University of los Andes (Bogot), and University of the
Republic (Montevideo).
A green cover consultation was held before submission of the draft Report to the Board
of the World Bank. The team made the draft available online and explicitly contacted a set
of key partners in the development community to request feedback. The team received
and incorporated comments, criticism, and suggestions from members of civil society, aca-
demia, and think tanks.
Nancy Morrison was the principal editor of the Report. Sabra Ledent copyedited the
Report. Bruce Ross-Larson provided editorial guidance. And Kurt Niedermeier was the
principal graphic designer. Phillip Hay, Mikael Reventar, Anushka Thewarapperuma, and
Roula Yazigi provided guidance on a communication and dissemination strategy. Special
thanks are extended to Mary Fisk, Patricia Katayama, Stephen Pazdan, and the World Banks
Publishing Program. The team would also like to thank Vivian Hon, Surekha Mohan, Dirk
Peterson, and Claudia Seplveda for their coordinating roles.
This Report draws on background papers, notes, and spotlight inputs prepared by Izak
Atiyas, Sheheryar Banuri, Paolo Belli, Jrgen Ren Blum, Carles Boix, Tessa Bold, Alejandro
Bonvecchi, Sarah Botton, Laurent Bouton, Juan Camilo Crdenas Campo, Fernando Carrera,
Francesco Caselli, Gonzalo Castaeda, Micael Castanheira, Simon Commander, Aline
Coudouel, Manuel Eisner, Thomas Fujiwara, Scott Gates, Garance Genicot, Gal Giraud,
Alfredo Gonzlez-Reyes, Helene Grandvoinnet, Ruth Guilln, Stphane Hallegatte, Sbastien
Hardy, Michael Jarvis, Patricia Justino, Daniel Kaufmann, Mushtaq H. Khan, Jenni Klugman,
Sarwar Lateef, tienne Le Roy, Andrei Levchenko, Brian Levy, Stphanie Leyronas, Staffan
Lindberg, Anna Lhrmann, Ellen Lust, Nora Lustig, Yasuhiko Matsuda, Frdric Maurel,
Valeriya Mechkova, Jonathan Mellon, Alina Mungiu-Pippidi, Hamish Nixon, Ragnhild
Nordas, Hvard Mokleiv Nygrd, Daniel Oto-Peralias, Tiago Peixoto, Doug Porter, Franck
Poupeau, Peter Reuter, Halsey Rogers, Dominique Rojat, Diego Romero, Martin Schmidt,
Fredrik Sjoberg, Michael Stanley, Hvard Strand, Shawn Tan, Benno Torgler, Trang Thu
Tran, John Wallis, Michael Walton, Leonard Wantchekon, and Michael Watts.

xvi | ACKNOWLEDGMENTS
The team received expert advice during several rounds of reviews from chapter advisers
Carles Boix, Franois Bourguignon, Francesco Caselli, Deval Desai, Avinash Dixit, Manuel
Eisner, Thomas Fujiwara, Patrick Heller, Patricia Justino, Philip Keefer, Herbert Kitschelt,
Andrei Levchenko, Brian Levy, Mara Ana Lugo, Rohini Pande, Doug Porter, Nigel Roberts,
Carlos Scartascini, Brian Tamanaha, John Wallis, Leonard Wantchekon, and Michael Watts.
The team would like to acknowledge a number of people for their insightful discussions,
feedback, and collaboration: Sakuntala Akmeemana, Martin Ardanaz, Omar Arias, Kathleen
Beegle, Paolo Belli, Samuel Berlinski, David Bernstein, Robert Beschel, Bella Bird, Jrgen
Ren Blum, Tessa Bold, Laurent Bouton, Miriam Bruhn, James Brumby, Hassane Cisse,
Denis Cogneau, Walter Cont, Cristina Corduneanu, Aline Coudouel, Shanta Devarajan,
Quy-Toan Do, Eduardo Engel, Peter Evans, Francisco Ferreira, Chloe Fevre, Deon Filmer,
Varun Gauri, Tom Ginsburg, Markus Goldstein, lvaro Gonzlez, Duncan Green, Zahid
Hasnain, Arturo Herrera, Joan Serra Hoffman, Robert Hunja, Ravi Kanbur, Daniel
Kaufmann, Asmeen Khan, Mushtaq H. Khan, Stuti Khemani, Rachel Kleinfeld, Stephen
Knack, Stefan Kossoff, Aart Kraay, Paul Lagunes, Sylvie Lambert, Ellen Lust, Nora Lustig,
Syed A. Mahmood, Martha Martnez Licetti, Magdy Martnez-Solimn, Yasuhiko Matsuda,
Sebastin Mazzuca, Nicolas Menzies, Samia Msadek, Gerardo Munck, Alina Mungiu-
Pippidi, Kaivan Munshi, Makau Mutua, Roger Myerson, Ambar Narayan, Sara Nyman,
Thiago Peixoto, Andre Portela, Gal Raballand, Vijayendra Rao, Martin Ravallion, Nathaniel
Reilly, Bob Rijkers, Daniel Rogger, Joe Saba, Audrey Sacks, Renaud Seligman, Mitchell
Seligson, Harris Selod, Giancarlo Spagnolo, Jan Svejnar, Rob Taliercio, Jeff Thindwa,
Florencia Torche, Benno Torgler, Dominique van de Walle, Nicolas van de Walle, Andrs
Villaveces, Lorena Vinuela, Michael Walton, Deborah Wetzel, and Alan Whaites.
Many people inside and outside the World Bank Group provided helpful comments,
made other contributions, and participated in consultative meetings. The team would
like to thank the following: Sophie Adelman, Om Prakash Agarwal, Yayha Amir, Armando
Ardila, Robert Bates, Vernica Baz, Radia Benamghar, Najy Benhassine, Luis Benveniste,
Alexandra C. Bezeredi, Deepak Bhatia, Denis Biseko, Helena Bjuremalm, Eduardo
Bohrquez, Francesca Bomboko, Sarah Botton, Carter Brandon, Michael Bratton, Chiara
Bronchi, Lszl Bruszt, Ruxandra Burdescu, David Caldern, Claudia Calvin, Oscar
Calvo-Gonzlez, Juan Camilo Crdenas Campo, Enrique Crdenas, Kevin Carey, Tom
Carothers, Michael Chege, Donald Clarke, Roland Clarke, Pedro Conceio, Jill Cottrell,
Philipp Dann, Bill Dorotinski, Alain Durand Lasserve, Ute Eckertz, Yara Esquivel, Mike
Falke, Frederico Finan, Luis Foncerrada, Harald Fuhr, Bernard Funck, Yash Ghai, Frederick
Golooba-Mutebi, Kristf Gosztonyi, Donald Green, Jane Guyer, Gillian Hadfield,
Jeffrey Hammer, Lucia Hanmer, Tazeen Hasan, Finn Heinrich, Hans-Joachim Heintze,
Rogelio Gmez Hermosillo, Benjamin Herzberg, Ingrid-Gabriela Hoven, Alan Hudson,
William Hurst, Gabriela Inchauste, Edna Jaime, Michael Jarvis, Melise Jaud, Erik Jensen,
Melissa Johns, Patrick Keuleers, Anouar Ben Khelifa, Hannah Kim, Francis Kiwanga,
Stephan Klasen, Anne-Lise Klausen, Verena Knippel, Matthias Ktter, David D. Laitin,
George Larbi, Margaret Levi, Alberto Leyton, Doris Likwelile, Stefan Lindemann,
Kathy Lindert, Mariana Llanos, Ernesto Lpez Crdoba, Anna Lhrmann, Christian
Lund, Bentley MacLeod, Beatriz Magaloni, Alexander Makulilo, Ernest Mallya, Sumit
Manchanda, Richard McAdams, David McKenzie, Craig Meisner, Rudolf Mellinghoff,
Mauricio Merino, Edward Miguel, Omar Mohamed, Rui Monteiro, Mara Elena Morera,
Fred Mufulukye, Ana Mara Muoz, Mike Mushi, Per Norlund, Silas Olang, Virginia
Oliveros, Jan Michiel Otto, Juan Pardinas, Haydee Prez Garrido, Guillermo Perry,
Lant Pritchett, Christine Qiang, Balakrishnan Rajagopal, Rita Ramalho, Juan Mauricio
Ramrez, Juliana Ramirez, Viridiana Ros, Christophe Rockmore, Carlos Rodrguez-Casteln,
Lourdes Rodrguez-Chamussy, Csar Rodrguez Garavito, Halsey Rogers, Grard Roland,
Pallavi Roy, Eliana Rubiano, Elizabeth Ruppert Bulmer, Caroline Sage, Indhira Santos,
Phillip Shelkens, Animesh Shrivastava, Dumitru Socolan, Michael Stanley, Albrecht
Stockmayer, Hvard Strand, Harold Sunguisa, Hani Syed, Miguel Szkely Pardo, Attilio

ACKNOWLEDGMENTS | xvii
Tagalile, Will Taylor, Fletcher Tembo, Katy Thompson, Charles Undeland, Deus Valentine,
Ingrid van Engelshoven, Roberto Vlez Grajales, Eric Verhoogen, Andrea Vigorito, Tara
Vishwanath, Anya Vodopyanov, Stefan Voigt, George Mukundi Wachira, Waly Wane,
Fredrick O. Wanyama, Asbjorn Wee, Barry Weingast, Jennifer Widner, George O. William,
Oliver Williamson, Michael Woolcock, World Bank 1818 Society, Kaifeng Yang, Abdulqawi
Ahmed Yusuf, and Davide Zucchini. We especially thank Rogier van den Brink for the
very useful conversations we had in Manila and for bringing to our attention the work
on fiscal management in Mongolia, including the reference to the film Amka and the
Three Golden Rules, which we reference in chapter 2.
Despite efforts to be comprehensive, the team apologizes to any individuals or organiza-
tion inadvertently omitted from this list and expresses its gratitude to all who contributed
to this Report.

xviii | ACKNOWLEDGMENTS
Abbreviations
ADR alternative dispute resolution
ASEAN Association of Southeast Asian Nations
CDD community-driven development
CICIG International Commission against Impunity in Guatemala (Comisin
Internacional contra la Impunidad en Guatemala)
CPA Comprehensive Peace Agreement (South Sudan)
CPC Communist Party of China
CSO civil society organization
DAC Development Assistance Committee (of the OECD)
EU European Union
FATF Financial Action Task Force
FDI foreign direct investment
FGM female genital mutilation
FRC Financial Reporting Centre (Kenya)
GATT General Agreement on Tariffs and Trade
GBV gender-based violence
GDP gross domestic product
GNI gross national income
ICAC Independent Commission Against Corruption (Hong Kong SAR, China)
ICTs information and communication technologies
IFFs illicit financial flows
IMF International Monetary Fund
MDAs ministries, departments, and agencies
MDGs Millennium Development Goals
MFA Multi Fibre Arrangement
MITI Ministry of Trade and Industry (Japan)
NAFDAC National Agency for Food and Drug Administration and Control (Nigeria)
NAFTA North American Free Trade Agreement
NCPRI National Campaign for Peoples Right to Information (India)
NGO nongovernmental organization
NPM New Public Management (movement)
ODA official development assistance
OECD Organisation for Economic Co-operation and Development
OIRA U.S. Office of Information and Regulatory Affairs
OSA Official Secrets Act (India)
PPD public-private dialogue
PPP purchasing power parity
PPPs public-private partnerships
PRI Institutional Revolutionary Party (Partido Revolucionario Institucional; Mexico)
SAR special administrative region
SBM school-based management

xix
SDGs Sustainable Development Goals
SDIs Service Delivery Indicators
SEZ special economic zone
SOE state-owned enterprise
SPC Professional Career Service (Servicio Profesional de Carrera; Mexico)
StAR Stolen Asset Recovery Initiative
TAI transparency and accountability initiative
TFP total factor productivity
TVEs Township and Village Enterprises
UNFCCC United Nations Framework Convention on Climate Change
WDR 2017 World Development Report 2017
WHO World Health Organization
WTO World Trade Organization

Country and economy codes


AFG Afghanistan COM Comoros
AGO Angola CPV Cabo Verde
ALB Albania CRI Costa Rica
ARE United Arab Emirates CYP Cyprus
ARG Argentina CZE Czech Republic
ARM Armenia DEU Germany
AUS Australia DJI Djibouti
AUT Austria DNK Denmark
AZE Azerbaijan DOM Dominican Republic
BDI Burundi DZA Algeria
BEL Belgium ECU Ecuador
BEN Benin EGY Egypt, Arab Rep.
BFA Burkina Faso ERI Eritrea
BGD Bangladesh ESP Spain
BGR Bulgaria EST Estonia
BHR Bahrain ETH Ethiopia
BHS Bahamas, The FIN Finland
BIH Bosnia and Herzegovina FJI Fiji
BLR Belarus FRA France
BLZ Belize GAB Gabon
BMU Bermuda GBR United Kingdom
BOL Bolivia GEO Georgia
BRA Brazil GHA Ghana
BRB Barbados GIN Guinea
BRN Brunei Darussalam GMB Gambia, The
BTN Bhutan GNB Guinea-Bissau
BWA Botswana GNQ Equatorial Guinea
CAF Central African Republic GRC Greece
CAN Canada GRD Grenada
CHE Switzerland GTM Guatemala
CHL Chile GUY Guyana
CHN China HKG Hong Kong SAR, China
CIV Cte dIvoire HND Honduras
CMR Cameroon HRV Croatia
COD Congo, Dem. Rep. HTI Haiti
COG Congo, Rep. HUN Hungary
COL Colombia IDN Indonesia

xx | ABBREVIATIONS
IND India NZL New Zealand
IRL Ireland OMN Oman
IRN Iran, Islamic Rep. PAK Pakistan
IRQ Iraq PAN Panama
ISL Iceland PER Peru
ISR Israel PHL Philippines
ITA Italy PNG Papua New Guinea
JAM Jamaica POL Poland
JOR Jordan PRT Portugal
JPN Japan PRY Paraguay
KAZ Kazakhstan ROM Romania
KEN Kenya RUS Russian Federation
KGZ Kyrgyz Republic RWA Rwanda
KHM Cambodia SAU Saudi Arabia
KIR Kiribati SDN Sudan
KNA St. Kitts and Nevis SEN Senegal
KOR Korea, Rep. SGP Singapore
KSV Kosovo SLB Solomon Islands
KWT Kuwait SLE Sierra Leone
LAO Lao PDR SLV El Salvador
LBN Lebanon SOM Somalia
LBR Liberia SRB Serbia
LBY Libya SSD South Sudan
LCA St. Lucia STP So Tom and Prncipe
LIE Liechtenstein SUR Suriname
LKA Sri Lanka SVK Slovak Republic
LSO Lesotho SVN Slovenia
LTU Lithuania SWE Sweden
LUX Luxembourg SWZ Swaziland
LVA Latvia SYR Syrian Arab Republic
MAC Macao SAR, China TCD Chad
MAR Morocco TGO Togo
MDA Moldova THA Thailand
MDG Madagascar TJK Tajikistan
MDV Maldives TKM Turkmenistan
MEX Mexico TLS Timor-Leste
MKD Macedonia, FYR TTO Trinidad and Tobago
MLI Mali TUN Tunisia
MLT Malta TUR Turkey
MMR Myanmar TWN Taiwan, China
MNG Mongolia TZA Tanzania
MOZ Mozambique UGA Uganda
MRT Mauritania UKR Ukraine
MUS Mauritius URY Uruguay
MWI Malawi USA United States
MYS Malaysia UZB Uzbekistan
NAM Namibia VEN Venezuela, RB
NER Niger VNM Vietnam
NGA Nigeria VUT Vanuatu
NIC Nicaragua YEM Yemen, Rep.
NLD Netherlands ZAF South Africa
NOR Norway ZMB Zambia
NPL Nepal ZWE Zimbabwe

ABBREVIATIONS | xxi
WORLD DEVELOPMENT REPORT 2017

Overview

OVERVIEW | 1
OVERVIEW

World Development Report 2017:


Governance and the Law

The past 20 years have seen enormous progress violence, slowing growth, corruption, and the natu-
around the world in socioeconomic indicators. The ral resource curse, to name a fewrequires rethink-
rapid diffusion of technology and greater access to ing the process by which state and nonstate actors
capital and world markets have enabled economic interact to design and implement policies, or what
growth rates that were previously unfathomable, this Report calls governance (box O.1). Consider some
and they have helped lift over 1 billion people out recent cases that have attracted global attention.
of poverty. And yet increased flows have also led to State building in Somalia and Somaliland. Somalia,
rising inequality, both within and across borders, and one of the worlds most fragile countries, has been
to greater vulnerability to global economic trends wracked by violence for more than two decades.
and cycles. Indeed, although the global spread of cap- Insurgent attacks and regional conflicts have pre-
ital, technology, ideas, and people has helped many vented the emergence of a centralized state with a
countries and people move forward, other regions monopoly over the legitimate use of force. Warring
and populations appear to have been left behind, and factions, many with their own regional sources of
they are still facing violence, slow growth, and limited power, have been unable to reach a credible deal that
opportunities for advancement. determines the makeup and responsibilities of the
As ideas and resources spread at an increasingly central state. By contrast, in Somalias autonomous
rapid rate across countries, policy solutions to region of Somaliland, an area with similar tribal and
promote further progress abound. However, poli- clan tensions, 20 years of stability and economic
cies that should be effective in generating positive development have followed a 1993 clan conference
development outcomes are often not adopted, are that brought together leaders from both the modern
Ultimately, poorly implemented, or end up backfiring over time. and traditional sectors, successfully institutionalizing
confronting Although the development community has focused a these clans and elders into formal governing bodies.
the challenges great deal of attention on learning what policies and Confronting corruption and the resource curse in
faced by todays interventions are needed to generate better outcomes, Nigeria. In 2010, just a year after a decade-long bounty
developing it has paid much less attention to learning why those of windfall revenues from high oil prices, Nigeria
countries requires approaches succeed so well in some contexts but fail was requesting budget support from its develop-
rethinking the to generate positive results in others. ment partners. From a long-term perspective, it is
process by unclear how much of Nigerias oil wealth has been
which state and saved to invest in the future, although a Sovereign
nonstate actors Improving governance to Wealth Fund was established in 2011 to address these
interact to design meet todays development concerns. According to a former governor of the
and implement central bank, the country has lost billions of dollars
policies, or what
challenges to corruption by the National Petroleum Company.
this Report calls Ultimately, confronting the challenges faced by Indeed, 2015 data from the Afrobarometer survey
governance. todays developing countriespoor service delivery, indicates that 78 percent of Nigerians feel that the

2 | WORLD DEVELOPMENT REPORT 2017


Box O.1What is governance?

For the purpose of this Report, governance is the process in the literature to denote organizations and rules) that
through which state and nonstate actors interact to design enforce and implement policies. Also depending on the con-
and implement policies within a given set of formal and text, state actors will play a more or less important role with
informal rules that shape and are shaped by power.a This respect to nonstate actors such as civil society organizations
Report defines power as the ability of groups and individ- or business lobbies. In addition, governance takes place at
uals to make others act in the interest of those groups and different levels, from international bodies, to national state
individuals and to bring about specific outcomes.b institutions, to local government agencies, to community
Depending on the context, actors may establish a gov- or business associations. These dimensions often overlap,
ernment as a set of formal state institutions (a term used creating a complex network of actors and interests.

Source: WDR 2017 team.


a. The general definition of governance used in this Report is consistent with the World Banks corporate definition, which emphasizes formal institutions
and the role of state actors.
b. Dahl (1957); Lukes (2005).

government is doing badly in fighting corruption. been blocked by the actors that benefited from early
Ultimately, the institutional context was unable growth and have few incentives to join coalitions for
to safeguard natural resource revenues in order to further reforms. Going forward will involve address-
reduce fiscal volatility and promote a macroeconomic ing these governance challenges.
environment conducive to long-term investment. Slums and exclusion in Indias cities. Urban devel-
Several countries have demonstrated that this kind of opment that stems from coordinated planning and
natural resource cursethe paradox that countries investment by coalitions of developers, bureaucrats,
with abundant natural resources face slower growth citizens, and politicians can lead to cities that are
and worse development outcomes than countries centers of growth, innovation, and productivity.
without resourcescan be avoided through effective Planners can help ensure that infrastructure meets
economic and fiscal policies. the demands of investors who seek to maximize land
Chinas growth performance and growth challenges. rents; businesses that need connectivity to consum-
For four decades, China, while increasingly integrat- ers, employees, and other firms; and citizens who
ing its economy with the global economy, grew at want access to services and jobs. But many cities fail
double-digit rates and lifted more than 700 million to deliver on these promises. In India, massive urban
people out of poverty. This successful track record slumsabout 49,000 at the latest count, with tens of
of economic growth is well known. Yet, according millions of inhabitantsrepresent failures to align
to many frequently used indicators, Chinas institu- public investments and zoning with the needs of a
tional environment during this period would seem diverse set of urban constituents. Poorly designed
not to have changed. Does this imply that institu- cities with misallocated investments have limited
tions do not matter for growth? No. Rather, a deeper connectivity among housing, affordable transporta-
understanding of Chinas development shows what tion, and utilities, driving workers into informal set-
these indicators miss: the adaptive policy decisions tlements, often in peripheral areas. Many developers
and state capacity that enabled economic success and politicians have exploited the system to generate
were facilitated by profound changes to mechanisms rents for themselves, but this uncoordinated urban
of accountability and collective leadership. Chinas development has prevented cities from achieving
experience highlights the need to pay more attention their growth potential, leading to large slums where
to how institutions function and less to the specific most citizens are deprived of basic services.
form they take. Meanwhile, today China faces a slow- Demanding better services in Brazil. In 2013 the world
down in growth. Maintaining rapid growth requires watched when protests erupted in Brazils streets
political incentives to switch to a growth model based about the quality of public servicestransport, edu-
on firm entry, competition, and innovation. In many cation, and healthas the FIFA World Cup soccer
middle-income countries, this transformation has tournament approached. Brazil had gone through

OVERVIEW | 3
12 years of inclusive and sustained growth, which had and political integration is not, however, exclusive
lifted more than 30 million people out of poverty and to this region. In countries throughout the world,
strengthened the middle class. These same middle populist parties have campaigned against trade and
classes that contributed with their taxes to the pro- integration, some of them enjoying unprecedented
vision of public services were now demanding better electoral success. These parties often prey on citizens
quality and coverage, including FIFA standards increasing feelings of disenfranchisement and exclu-
for their schools. Why did this change come about? sion from decision making, as well as on a growing
Brazils social contract had historically been weak perception of free-riding by specific groups. Even in
and fragmented. The poor received low-quality public countries that have undoubtedly benefited from inte-
services, while the upper-middle classes relied on pri- gration, the unequal distribution of such benefits and
vate services and were thus unwilling to contribute to perceived ineffectiveness of voice have led many
the fiscal system. The creation of an expanded mid- citizens to question the status quo, which could have
dle class and the reduction of poverty paradoxically consequences for social cohesion and stability.
heightened the perceptions of unfairness as the new What do these examples have in common? This
middle class expected more than low-quality public Report assumes that all countries share a set of
services for its contributions. development objectives: minimizing the threat of
Brexit and the growing discontent with economic violence (security), promoting prosperity (growth),
integration. In June 2016, voters in the United King- and ensuring that prosperity is shared (equity), while
dom elected to leave the European Union (EU). The also protecting the sustainability of the development
economic consequences for the country in particular process for future generations (box O.2). But poli-
and Europe in general have become a source of uncer- cies do not always translate into these development
tainty in policy circles. Dissatisfaction with economic outcomes in the expected ways. As the previous

Box O.2Governance for what? Achieving the goals of security, growth,


and equity

Many aspects of governance are valuable in and of them- aspire to achieving these goals in environmentally sustain-
selvesthat is, they have intrinsic valuein particular, the able ways. This Report, then, assesses governance in terms
notion of freedom. In economic terms, freedom can be seen of its capacity to deliver on these outcomes.
as an opportunity set, and development can be seen as the This approach is consistent with the transition from a
removal of various types of unfreedoms (exclusion from dialogue based on ideology to the dialogue based on ideals
opportunities), where these unfreedoms reduce peoples that has transpired in the global development commu-
capacity to exercise their reasoned agency.a As essential nity over the past few decades. The establishment of the
as such an intrinsic value as freedom is, its instrumental Millennium Development Goals (MDGs) in 2000 and the
value also matters because of the effectiveness of freedoms recent ratification of the Sustainable Development Goals
of particular kinds to promote freedoms of other kinds.b (SDGs) by member countries of the United Nations are
These positive relationships are what economists call com- examples of the efforts to set common goals for social and
plementarities. This Report acknowledges the intrinsic value economic advancement. SDG 16 calls for promoting peace,
of various dimensions of governance, as well as the notion justice and strong institutions, and it is explicitly related
of development as positive freedom, while also recognizing to governance. Nevertheless, as this Report will argue,
their instrumental value to achieving equitable development. beyond the intrinsic value of SDG 16, it also has important
The analysis in this Report starts from the normative instrumental value because the attainment of the goal will
standpoint that every society cares about freeing its aid in the attainment of all the other SDGs. Indeed, the
members from the constant threat of violence (security), achievement of all the development goals will require a
about promoting prosperity (growth), and about how such solid understanding of governance to enable more effective
prosperity is shared (equity). It also assumes that societies policies.

Source: WDR 2017 team.


a. Sen (1999, xii).
b. Sen (1999, xii).

4 | WORLD DEVELOPMENT REPORT 2017


examples illustrate, contradictions occur in the real credible agreements to renounce violence and endow
world. Somalia is a fragile state, whereas Somaliland the state with a monopoly on the legitimate use of
seems to be doing well. Nigeria has an abundance force? In Somaliland, commitment has been achieved
of resources, but it is still a lower-middle-income by establishing institutional arrangements that pro-
country. China grew rapidly, even though many of its vide sufficient incentives for all key groups to work
fundamental institutions did not change. India has within the rules. The commitment is credible because
grown, but it cannot control the propagation of slums. all parties stand to lose if any party reneges on those
Brazil has experienced inclusive growth, but it is now arrangements. In Somalia, by contrast, despite several
facing widespread protests from the middle class. internationally sponsored efforts at state building,
Great Britain had low unemployment, but it voted to polarized groups continue to believe they are better
leave the EU. The common thread running through off retaining their own power or forming shifting
these contradictions appears to be governance mal- alliances with others than conferring the monopoly
functions: ineffective policies persist, effective pol- of violence on a central state. Why? In large part, the
icies are not chosen, and unorthodox institutional nature of the agreements and the proposed institu-
arrangements generate positive outcomes. So, what tional arrangements had failed to serve as effective
drives policy effectiveness? commitment devices. When commitment to deals
is not credible, contending sides walk away from the
bargaining table and violence prevails: warring fac-
Drivers of effectiveness: tions may renege on peace agreements, policy mak-
Commitment, coordination, ers may default on promises to transfer resources to
and cooperation discontented groups or regions, disputants may fail
to abide by court judgments, or the police may abuse
Often, when policies and technical solutions fail citizens instead of protecting them.
to achieve intended outcomes, institutional failure A credible commitment to pro-growth policies
takes the blame, and the solution usually proposed and property rights is also essential to ensure macro
is to improve institutions. But many types of insti- economic stability and enable growth. According
tutional arrangements and trajectories can enable to recent evidence, most long-term growth comes
development, as examples around the world demon- not from episodes of rapid growthas is commonly
strate, whereas often many other best practices fail. believedbut from countries not shrinking in
In some cases, rapid progress comes about suddenly, response to an economic crisis or violent conflict
seemingly unexpectedly. Because of this diversity (figure O.1). Growth requires an environment in which
of paths and perils, it becomes essential to uncover firms and individuals feel secure in investing their
the underlying drivers of policy effectiveness. This resources in productive activities. This commitment
Report identifies commitment, coordination, and coop- may arise in diverse ways. During Chinas take-off
eration as the three core functions of institutions that in the 1980s, growth success depended on a pledge
are needed to ensure that rules and resources yield to local governments, private enterprises, and rural
the desired outcomes.1 farmers that they would be able to keep their prof-
itscredible commitment was thus provided, even if
Form versus function: Underlying it was still in the early stage of securing the protection Commitment
determinants of policy effectiveness of private property rights. By contrast, in Nigeria the enables actors
Commitment. Commitment enables actors to rely on institutional context did not provide the commitment to rely on the
the credibility of policies so they can calibrate their needed to safeguard revenues from natural resource credibility of
behavior accordingly. Consistency over time in pol- extraction in order to support long-term development. policies so they
icies is not easy to achieve. Circumstances change, In the Nigerian context, where perceptions of cor- can calibrate
policy objectives may extend beyond the political ruption were negative, implementing best-practice their behavior
cycle, and resources may fail to match, changing the fiscal rules that worked in other contexts did not con- accordingly.
incentives to implement previously chosen policies. stitute a credible commitment because government
In line with the economic theory of incomplete con- officials were overcome by short-term interests. State
tracts, policies require commitment devices to ensure governors, for example, uncertain about whether
their credibility. resources would still be there in the future, had incen-
Take, for example, securitya foundation of sus- tives to spend them straightaway.
tained development. It is premised most basically on Coordination. Credible commitment alone, how-
commitment. Are conflicting parties able to reach ever, is not sufficient; coordination is also needed.

OVERVIEW | 5
Figure O.1Long-term growth is less about how fast local politicians has prevented an efficient design of
one grows than about not tripping along the way urban areas, hindering many cities from performing
their roles in enhancing growth.
Frequency of economies growing and shrinking years and average rates,
b. Long-term growth is less about how fast you grow
by GDP per capita Cooperation. Finally, policy effectiveness to achieve
than about not tripping along the way equitable development requires cooperation, partic-
100 6 ularly citizens willingness to contribute to public
90 goods and not free-ride on others. The extent to
4 which societies can ensure opportunities for all indi-
80
Frequency of years (%)

viduals depends on their ability to invest in providing

Average rate (%)


70
2 high-quality services such as health, education, and
60
connectivity, and to ensure access to economic oppor-
50 0 tunities. For such investment to take place, resources
40 need to be collected and redistributed. Indeed, no
30 2 high-income country has achieved improvements in
20 equity without significant taxation and public spend-
4
10
ing aimed at protecting individuals against shocks
(such as illness or unemployment) and reducing
0 6
<2 25 510 1020 >20 welfare disparities within and across generations.4 In
US$ (thousands) addition, for individuals to realize the returns of such
investment, they need access to economic opportuni-
Frequency of shrinking years (left axis)
Frequency of growing years (left axis) ties in adulthood, especially access to opportunities
Average growing rate (right axis) that allow them to use the human capital they have
Average shrinking rate (right axis) acquired. For a country to collect the taxes needed to
fund investments in public goods, its citizens must
Sources: WDR 2017 team, based on Wallis 2016, with data from Penn World Table, version 8.0 (Feenstra,
Inklaar, and Timmer 2015). be willing to comply and cooperate. Cooperation is
Note: The figure shows real GDP per capita (constant prices: chain series). Countries are first sorted enhanced by commitment because credible and con-
into income categories based on their income in 2000, measured in 2005 U.S. dollars. Average annual sistent enforcement of laws is also needed to expand
growth rates are the simple arithmetic average for all the years and all the countries in the income
category, without weighting. The sample underlying the figure consists of 141 countries, for which data opportunities and level the playing field.
are available from at least 1970 onward. Sometimes, societies face a breakdown of coopera-
tion. For example, Brazil, whose citizens organized to
For investment and innovation, firms and individuals demand higher-quality public services, faced a prob-
must believe that others will also invest. Institutions lem common to many countries: the fragmentation
can help solve market failures by coordinating both of a social contract. In such cases, the low quality of
investment decisions and the expectations of market service provision spurs the upper-middle classes to
participants. The insight that a failure to coordinate demand private services, which in turn weakens their
investment activity can lead to underdevelopment is willingness to cooperate fiscally and contribute to the
decades old.2 Consider the case in which large-scale provision of public goodsa perverse cycle. At other
factories are more efficient, but investing in them is times, actors potentially affected by policies may be
not profitable for individual firms unless those firms excluded from the design of those policies, thereby
invest simultaneously in a group. Perhaps the size of undermining their incentive to cooperate and weak-
the market is too small to justify large-scale invest- ening compliance. An induced perception that the EU
ments unless all the industries expand together, pro- was engaged in technocratic and exclusionary deci-
viding markets for one another. In such a situation, sion making and that some countries were benefiting
there are two possible outcomes, or equilibria. The disproportionately from the agreement, was among
first is one in which no firms invest in large-scale fac- the reasons that led the United Kingdom to vote for
tories, and efficiency levels remain low. The second, a Brexitand led to the rise of populist parties in the
better outcome, is one in which firms are able to coor- world that challenge further integration.
dinate a simultaneous move to large-scale, efficient Commitment, coordination, and cooperation are
production. Such problems of coordination can occur therefore essential institutional functions for mak-
in many contexts, ranging from finance and adoption ing policies effective and thereby able to achieve
of technology to innovation and industrial clusters development outcomes (table O.1).5 Yet, they are effec-
to urban planning.3 In India, the lack of coordination tively fulfilled under only certain conditions. This
among urban planners, real estate developers, and Report proposes an analytical framework to advance

6 | WORLD DEVELOPMENT REPORT 2017


Table O.1Three institutional functionscommitment, coordination, and cooperation
are essential to the effectiveness of policies
Function Examples of why these functions matter
Commitment Decision makers may want to spend windfall revenues now instead of saving them for others to spend in
the future.
Politicians may resist continuing policies that have been working and prefer to pursue others that are
associated with their political group.
Public service providers may push to renegotiate the terms of their contracts to their benefit when they know
that the political cost of suspending service is high.
Coordination Investment and innovation are induced when individuals believe others will also invest.
Financial stability depends on beliefs about the credibility of policies; failures involve, for example,
bank runs, where everyone believes the rest will rush to withdraw deposits.
Laws serve as a focal point for individuals to behave in certain ways, such as the convention of driving
on the right side of the road.
Cooperation People have incentives to free-ride or to behave opportunisticallyfor example, by not paying taxes while
enjoying the public services that other (tax-paying) individuals are funding.
Some actors potentially affected by policies may be excluded from their design, which weakens compliance
and leads to fragmentation.
Source: WDR 2017 team.

understanding of how governance can help achieve levels. They can be formal (parliaments, courts, inter-
these functions to promote development outcomes. governmental organizations, government agencies),
traditional (council of elders), or informal (backroom
When political will is not enough: deals, old boys networks).
Power, bargaining, and the policy arena Who bargains in this policy arena and how success-
This Report argues that institutions perform three fully they bargain are determined by the relative power
key functions that enhance policy effectiveness for of actors, by their ability to influence others through
development: enabling credible commitment, inducing control over resources, threat of violence, or ideational
coordination, and enhancing cooperation. But why are persuasion (de facto power), as well as by and through
policies so often ineffective in doing so? A typical the existing rules themselves (de jure power). Power is
response among policy practitioners is that the right expressed in the policy arena by the ability of groups
policies exist, ready to be implemented, but that what and individuals to make others act in the interest
is missing is political will in the national arena. This of those groups and individuals and to bring about
Report argues that decision makersthe elites6may specific outcomes. It is a fundamental enabler ofor
have the right objectives and yet may still be unable to constraint topolicy effectiveness (box O.3).
implement the right policies because doing so would The distribution of power is a key element of the
challenge the existing equilibriumand the current way in which the policy arena functions. During pol-
balance of power. Thus the balance of power in soci- icy bargaining processes, the unequal distribution of
ety may condition the kinds of results that emerge powerpower asymmetrycan influence policy effec-
from commitment, coordination, and cooperation. tiveness. Power asymmetry is not necessarily harm-
Ultimately, policy effectiveness depends not only ful, and it can actually be a means of achieving effec-
on what policies are chosen, but also on how they are tivenessfor example, through delegated authority.
chosen and implemented. Policy making and policy By contrast, the negative manifestations of power
implementation both involve bargaining among dif- asymmetries are reflected in capture, clientelism, and
ferent actors. The setting in which (policy) decisions exclusion.
are made is the policy arenathat is, the space in which
different groups and actors interact and bargain over How power asymmetries matter for
aspects of the public domain, and in which the result- security, growth, and equity
ing agreements eventually also lead to changes in Exclusion. One manifestation of power asymmetries,
the formal rules (law). It is the setting in which gov- the exclusion of individuals and groups from the bar-
ernance manifests itself.7 Policy arenas can be found gaining arena, can be particularly important for secu-
at the local, national, international, and supranational rity (figure O.2). When powerful actors are excluded

OVERVIEW | 7
Box O.3The idea of power and the power of ideas

The ideas of economists and political philosophers, British economist. . . . But soon or late, it is ideas, not vested
economist John Maynard Keynes noted in The General interests, which are dangerous for good or evil. In the 18th
Theory of Employment, Interest and Money, both when century, Humes law established that no normative state-
they are right and when they are wrong, are more powerful ment (such as a policy prescription) can be derived from
than is commonly understood. Indeed, the world is ruled by a positive one (observation of facts) without a normative
little else.a The notion of how ideas can influence historical idea as an assumption. Policy prescriptions based on facts
paths in fundamental ways has long been studied by social still require some normative notionthat is, an idea in the
scientists, not only from the perspective of ideology and background. Acknowledging the importance of ideas, this
culture but also from the viewpoint of cultural entrepre- Report discusses the relevance of shaping preferences and
neurship.b It is important, however, to distinguish two beliefs as a means of understanding the policy bargaining
specific waysnot exhaustive but fundamentalin which process.
ideas influence policy making and effectiveness: ideas as It was Eric Wolf who, in 1999, called attention to the
knowledge and ideas as a means of shaping preferences importance of understanding power and ideas as comple-
and beliefs. mentary to understanding social dynamics.c Indeed, follow-
From the perspective of ideas as knowledge, over the ing Michel Foucault, Wolf argues that the ability to shape
past few decades the policy discussion has been influenced other peoples beliefs is a means of eliciting an action
by the principles of capacity building in the form of from another personan action the other person would
knowledge sharing and dissemination of best practices. not otherwise take. The ability to make others act in one
Ideas as knowledge undoubtedly play a role in strengthen- actors interest or to bring about a specific outcomethe
ing the effectiveness of policies and enhancing the capacity definition of power in this Reportis thus closely related to
to deliver on specific policy commitments. the notion of ideas as beliefs.
But ideas also shape preferences and beliefs. Keynes The dichotomy between ideas (ideology and culture)
ended his discussion of ideas by saying that practical and power as a primary determinant of social dynamics is
men, who believe themselves to be quite exempt from any thus a false one. The idea of power cannot be understood
intellectual influences, are usually slaves of some defunct without taking seriously the power of ideas.

Source: WDR 2017 team.


a. Keynes (1936, 383).
b. See, for example, Mokyr (2005) for a discussion of the intellectual origins of modern economic growth.
c. Wolf (1999). See also Barrett, Stokholm, and Burke (2001).

from the policy arena, violence may become the pre- of the population based on ethnic background are
ferredand rationalway for certain individuals and more likely to face armed rebellions.9 The existence
groups to pursue their interests, such as in Somalia. It of norms that exclude certain groups, such as women
can lead to failed bargains between participants in the and minorities, from the bargaining arena where dis-
bargaining arena (such as when peace talks between putes are settled tend to reinforce power asymmetries
rival factions break down, or when disputants fail to and perpetuate inequitable and insecure outcomes.10
reach an agreement). Capture. A second manifestation of power asym-
Exclusion, which can take the shape of lack of metriesthe ability of influential groups to capture
access to state institutions, resources, and services, policies and make them serve their narrow interest
often occurs along identity fault lines. The distribu- is helpful for understanding the effectiveness (or
tion of power among ethnic groups, measured by ineffectiveness) of policies in promoting long-term
their access to central state power, is a strong predic- growth. In the 1990s, for example, some of Indonesias
tor of violent conflict at the national level (whether largest industrial groups had strong connections to
in the form of repression by the state or rebellion President Suharto.11 Between 1995 and 1997, rumors
against the state).8 Cross-country statistical analyses about President Suhartos health circulated on sev-
using the Ethnic Power Relations data set from 1945 eral occasions. During every episode, the closer that
to 2005 indicate that states that exclude large portions industrial groups were to the president, the more

8 | WORLD DEVELOPMENT REPORT 2017


Figure O.2A more even balance of the value of their stock fell (figure O.3). The effects
power is associated with positive of capture can be quite costly for an economy. Polit-
security outcomes ically connected firms are able to obtain preferential
treatment in business regulation for themselves as
4 well as raise regulatory barriers to entry for newcom-
Power distributed by social group score

erssuch as through access to loans, ease of licensing


requirements, energy subsidies, or import barriers.
3 Such treatment can stifle competition and lead to
resource misallocation, with a toll on innovation
and productivity. Between 1996 and 2002, politically
2 connected firms in Pakistan received 45 percent more
government credit than other firms, even though
they were less productive and had default rates that
were 50 percent higher. Based on the productivity gap
1
between firms, the annual cost of this credit misallo-
cation could have been as high as 1.6 percent of the
gross domestic product (GDP).12
0 Although it is possible for economies to grow with-
0.2 0.4 0.6 0.8 1.0
out substantive changes in the nature of governance,
Order and security score it is not clear how long such growth can be sustained.
High-income OECD countries Consider the case of countries apparently stuck in
High-income non-OECD countries development traps. Contrary to what many growth
Upper-middle-income countries theories predict, there is no tendency for low- and
Lower-middle-income countries middle-income countries to converge toward high-
Low-income countries income countries. The evidence suggests that coun-
Sources: World Justice Project, Rule of Law Index 2015, Factor 5, Order and tries at all income levels are at risk of growth stagna-
Security (consisting of Crime is effectively controlled; Civil conflict is
effectively limited; People do not resort to violence to redress personal
tion. What keeps some countries from transitioning
grievances); V-Dem, version 6 (consisting of Power distributed by social to a better growth strategy when their existing growth
group in which a score of 0 indicates political power is monopolized by one
social group, and a score of 4 indicates that social groups have equal political
strategy has run out of steam? With a few exceptions,
power). policy advice for these countries has focused on the
Note: OECD = Organisation for Economic Co-operation and Development. proximate causes of transition, such as the efficiency

Figure O.3The value of political connections: Indonesia during President


Suhartos era
The closer that industrial groups were to the president, the more the value of their stock fell as rumors about the presidents
health circulated
2
Indonesian firms (percentage points)
Change in stock values of

6
1 2 3 4 5
(Firms least connected) (Firms most connected)
Degree of political dependence

Suharto illnesses: 1995: Jan. 30Feb. 1 1996: April 29 1996: July 26


1995: April 21 1996: July 4July 9 1997: April 1April 3
Source: Fisman 2001, figure 1.

OVERVIEW | 9
of resource allocation or industrial upgrading. The often ineffective. Although pro-equity policies can be
real problem, however, may have political roots: pow- potentially beneficial for growth in the medium and
erful actors who gained during an earlier or current long run, they can adversely affect the interests of
growth phase (such as the factor-intensive growth specific groups, particularly in the short term. Those
phase) may resist the switch to another growth model affected by equity-oriented policies may be concerned
(such as one based on firm entry, competition, and about losing rents or about seeing their relative influ-
innovation in a process of creative destruction). ence reduced, and thus they may attempt to under-
These actors may exert influence to capture policies mine the adoption or implementation of those poli-
to serve their own interests. Box O.4 presents an cies. When societies have high levels of inequality,
example of the political challenges in transitioning such inequalities are reflected in the unequal capacity
toward a different growth strategyone that is of groups to influence the policy-making process,
related to investment in environmental sustainability. making inequality more persistent. Clientelism leads
Clientelism. A third manifestation of power asym- to a breakdown of commitment to long-term pro-
metries is clientelisma political strategy character- grammatic objectives, where accountability becomes
ized by an exchange of material goods in return for gradually up for sale.
electoral support.13 This strategy is helpful for under- Clientelism can shape the adoption and imple-
standing why policies that seek to promote equity are mentation of policies in two main ways. In the first

Box O.4Why some people see red when they hear green growth

Green growth is about making growth processes greener approaches, efforts to phase out the subsidy for
resource-efficient, cleaner and more resilient without nec- conventional fertilizers could hurt maize farmers for some
essarily slowing them.a For many reasons, environmental years.b
conservation is also good for long-term economic growth It could be that the groups who stand to lose from green
and development. Economic production depends on the growth policies in the short term have an oversized influ-
stock of natural resources and on environmental quality ence over the policy arena, and so they are able to block
(natural capital). Green growth strategies can increase reforms and undermine commitment. Because the costs are
natural capital by preventing environmental degradation. concentrated and many of the benefits from cleaner tech-
Environmental protection can also contribute indirectly to nologies are intangible and dispersed, the potential losers
growth by correcting market failures. For example, a policy from such reforms are likely better able to organize. They
that addresses market failures leading to urban congestion also can form a strong electoral constituency. For example,
can improve air quality and increase urban productivity. Malawis fertilizer program has been popular among small
Greener growth can also improve well-being directly by farmersan important constituency. At times, switching to
improving air and water quality. greener growth strategies can entail losses for influential
However, switching to greener growth strategies could groups of consumers and firms. For example, South Africa
impose short-term costs on some groups in society. Take announced an ambitious climate change plan in 2010 that
the case of organic fertilizer. Smaller and more targeted would reduce the share of electricity generated by coal-
doses of fertilizer (a green approach) are better for the fired plants in a country in which electricity is in short
environment in the long run, but conventional fertilizer is supply and coal is a relatively abundant source. The plan,
less costly and easier to use. Malawi faced this problem in despite being watered down a year later, has been opposed
2005 when, to cope with food insecurity, it introduced a by consumers, labor unions, and business interests, partic-
fertilizer subsidy for smallholder maize farmers. The inten- ularly those in mining and heavy industry.c As these exam-
sive use of conventional fertilizer did lead to an immediate ples demonstrate, the design of green growth policies must
increase in farm output. However, because small farmers take into account the potential resistance from those who
would not find it easy to adopt more organic fertilizers and will lose in the short term.
Sources: Hallegatte and others (2012); Resnick, Tarp, and Thurlow (2012).
a. Hallegatte and others (2012, 2).
b. Resnick, Tarp, and Thurlow (2012).
c. Resnick, Tarp, and Thurlow (2012).

10 | WORLD DEVELOPMENT REPORT 2017


type of clientelistic setting, the relationship between Figure O.4Principals, agents, and clients:
public officials and voters becomes distorted. Instead Accountability for sale
of a dynamic in which the official is the agent of the
voter, who monitors and sanctions the agent (figure
a. Classic case b. Clientelism case 1 c. Clientelism case 2
O.4, panel a), the interaction becomes a bargain in
which the politician buys votes in exchange for
(usually) short-term benefits such as transfers or sub- Citizens Officials Citizens

sidies (figure O.4, panel b).14 These bargains tend to be


more frequent when individuals have a higher time

Principal
preference for the present with respect to the future.
The poor and disadvantaged are particularly vulner-
able to this sort of exchange because their pressing
needs make their discount rates for the present
higher than those of the better-off. In the second type
of clientelistic setting, politicians become responsive
to those groups that wield greater influencefor
example, favoring the interests of teachers unions Agent

over those of students (figure O.4, panel c). This hap-


Officials Citizens Officials
pens when public officials become dependent on the
support of certain groups for their political survival, Sources: WDR 2017 team, extending World Bank 2003 and Khemani and others 2016.
including the providers of public services. Note: Arrows indicate who is responsive to whom.
The costs of this malfunction can be high. In
exchange for their political support, service providers
may extract rents through the diversion of public Capacity, often considered a prerequisite for policy
resources, or withhold their effort in the form of effectiveness, is certainly important, and in many
absenteeism or low-quality provision, or engage in cases it is even an overriding constraint. At a given
corrupt practices, hampering the delivery of services point in time, it can be thought of as a stock. How
such as education, health, or infrastructure. When and where to use such capacity, however, are also the
groups in charge of providing services capture poli- product of a bargaining process. Even if physical and
ticians, monitoring and sanctioning these providers administrative capacity exists, policies may still be
are no longer credible, leading to a weak commitment ineffective if groups with enough bargaining power
to service delivery. A policy experiment in Kenya have no incentives to pursue implementation. An
illustrates this point. It compared the impact of con- example is the low investment in statistical capacity
tract teachers in interventions managed by nongov- in Africa, which limits the ability to monitor policy
ernmental organizations (NGOs) and interventions effectiveness (box O.5). In addition, the existing
run by the government. Test scores increased only power structures may be reinforced by the prevailing
in the intervention run by NGOs, indicating that social norms, which are persistent shapers of behav-
NGOs were more credible in implementing sanc- ior.17 Such norms may reinforce or undermine policy
tionsthrough firingthan the government.15 When effectiveness.
commitment breaks down systematically, it can erode Thus investing in capacity may not be enough.
peoples incentives to cooperate, and some groups Designing policies to improve security, growth, and
may opt out by demanding private services and look- equity requires understanding the balance of power
ing for ways to avoid contributing to the provision of among different actors. In the presence of powerful
public goods.16 In clientelistic settings, states tend to actors who can block or undermine policies, optimal
have low tax revenues and provide few public goods, policies from a strict economic standpoint (first-best
undermining economic activity and future taxation. policies) may not be the optimal implementable pol-
icies (second-best but feasible). Even when feasible,
Best practice or best fit? Revisiting implementing what seem like first-best economic
the notion of first-best through the policies from a static perspective can lead to worse
bargaining lens outcomes for society when such policies negatively
The development community has largely focused its affect the power equilibrium. For example, where
reform attempts on designing best-practice solutions governments are captured by firms and there is high
and building the capacity needed to implement them. inequality, unions may be the only way for workers

OVERVIEW | 11
Box O.5The need to strengthen incentives to gather development data

For years, the development community has invested heav- capacity. Some elites in African countries consider high-
ily in developing statistical capacity in Africa through eco- quality data systems a tool that the opposition could use
nomic resources as well as technical expertise. The results, to audit their performance. Thus these elites have incen-
however, have been disappointing.a Many countries in the tives to establish either weak statistical offices or partisan
region still lack the data to monitor socioeconomic condi- ones, staffed with political supporters rather than technical
tions such as poverty, inequality, and service delivery. As experts.b But, of course, this practice is not unique to Africa.
a result, demands are growing for more money and more The argument for using existing capacity is as valid as it is
capacity building to solve this problem. And yet, forgotten for building such capacity. In Latin America, a region well
is that to develop statistical capacity, countries need the known for its capacity for data collection, there are several
political incentives to do so. examples where the political dynamics led to a weakening of
In many countries, political incentives lead those in the credibility of official statistics.c
power to avoid investing in capacity or to actively undermine

Source: WDR 2017 team.


a. Devarajan (2013).
b. Beegle and others (2016).
c. Economist (2012); Noriega (2012); Roitberg and Nagasawa (2016).

to solve their collective action problem,18 even if rep- by the Gini coefficient) based on individuals market
resentation is not perfect. In such cases, passing a law income is 0.47 for developed countries and 0.52 for
to make labor contracts more flexible may undermine developing countries. After the effects of taxes and
union membership and lead to more inequality, which transfers are taken into account, the corresponding
in turn can perpetuate the power of the wealthy.19 coefficients drop to 0.31 and 0.50, respectively. If the
effect of publicly provided services (in particular,
education and health) is also included, inequality falls
Levers for change: further: to 0.22 in developed countries and to 0.42 in
Contestability, incentives, developing countries.21 The quantifiable redistribu-
tive capacity of these countries can be interpreted in
preferences and beliefs different ways. It can be interpreted as the relative
From the perspective of power asymmetries, efforts ability of different actors to influence and contest
to strengthen the ability of institutions to effectively decisions about how resources are distributed in a
enable commitment, coordination, and cooperation given country. It can be interpreted as the incentives of
call into question many traditional practices of the governments to commit to the collection of taxes and
development community. Anyone seeking to design allocation of spendingmore checks and balances on
more effective policies may find it helpful to recog- power are associated with more redistribution.22 Or it
nize how the distribution of power in the policy arena can be interpreted as the preferences for redistribution
could affect policy design and implementation and in a given country.
to consider how the policy arena can be reshaped to Contestability. Who is included and who is excluded
expand the set of policies that can be implemented. from the policy arena are determined by the relative
Reshaping the policy arena occurs when changes power of the competing actors, as well as by the barri-
are made in who can participate in decision-making ers of entry to participation (that is, how contestable
processes (the contestability of the policy arena), when the process is). A more contestable policy arena is one
incentives to pursue certain goals are transformed, and in which the actors or groups who have reason to
when actors preferences and beliefs shift.20 As an illus- participate in the decision-making process have ways
tration, consider how countries are more or less effec- to express their interests and exert influence. Because
tive at redistributing income through the fiscal sys- contestability determines who is included and who
tem. The average measure of inequality (as captured is excluded from the bargain, it is closely linked to

12 | WORLD DEVELOPMENT REPORT 2017


the notion of inclusion. However, it also emphasizes to promote accountability, and also to change the
the barriers to participation. Although the inclusion rules of the game to foster more equitable bargain- A more
of more actors in the decision-making process is not ing spaces. Effective laws are those that are able to contestable policy
necessarily a guarantee of better decisions, a more shape bargaining spaces that increase contestability arena tends to be
contestable policy arena tends to be associated with by underrepresented actors; that provide incentives associated with
higher levels of legitimacy and cooperation. When by changing payoffs to lower the cost of compliance higher levels of
procedures for selecting and implementing poli- (or increase the cost of noncompliance); and that shift legitimacy and
cies are more contestable, those policies tend to be preferences by enhancing substantive focal points cooperation.
perceived as fair and to induce cooperation more around which coordination can occur. State law, When procedures
effectively. however, is but one of many rule systems that order for selecting and
Incentives. The incentives that actors have to com- behavior, authority, and contestation. Such legal and implementing
ply with agreements are fundamental to enabling normative pluralism (box O.6) is neither inherently policies are more
commitment in the policy arena. Credible commit- good nor bad: it can pose challenges, but it can also contestable, those
ment requires consistency in the face of changing generate opportunities. policies tend to be
circumstances. Incentives for actors to commit to Law can play a role in making the policy arena perceived as fair
agreements are thus crucial for effective policy more contestable. Enhancing the contestability of the and to induce
design and implementation. Stronger incentives to arena encompasses both ex ante procedures (which cooperation more
hold policy makers accountable can also strengthen relate to the means by which law is made and the effectively.
voluntary compliance because repeatedly delivering extent to which it is participatory and transparent)
on commitment helps build trust in institutions. and ex post ones (the extent to which law is applied
Preferences and beliefs. The preferences and beliefs consistently and fairly). If various actors believe the
of decision-making actors matter for shaping process is exclusionary or reflects only the interests
whether the outcome of the bargain will enhance of certain groups, they may not comply, or they may
welfare and whether the system is responsive to the outright oppose it. Public hearings, stakeholder con-
interests of those who have less influence. Aggre- sultations, social audits, and participatory processes
gating preferences, for example, can increase the are some examples of instruments that can make
latters visibility. Because the preferences and beliefs the policy arena more contestable.23 In this case, law
of actors shape their policy goals, an important con- serves as a tool to promote accountability, change the
dition for policy effectiveness is the coordination of rules of the game, or both. This function is embod-
actors expectations. ied, for example, in the advocacy to adopt right-to-
This Report explores in depth how changes in information laws.
contestability, incentives, and preferences and beliefs Law can play a role in shaping the incentives of
can enhance policy effectiveness for security, growth, actors to comply with agreements by, for example,
and equity. Depending on the primary functional providing a credible threat of punishment or a cred-
challengethat is, whether a policy needs to enable ible commitment to delivering the reward for com-
commitment, coordination, or cooperationthese pliance. Law orders behavior through rules ranging
entry points may be different. Because the functional from prohibiting bribery, to establishing licensing
challenges are interdependent, the entry points act as fees and business registration, to banning child
complements. marriage, as well as through the means to enforce
these rules. Following Harts classic legal theory, laws
The role of law in shaping the policy arena induce particular behaviors of individuals and firms
Law is a powerful instrument for reshaping the policy through coercive power, coordination power, and
arena. Although laws generally reflect the interests legitimating power.24
of those actors with greater bargaining power, law Law can effectively reshape preferences and coor-
has also proven to be an important instrument for dinate expectations about how others will behave,
change. By its nature, law is a device that provides serving as a focal point. In this way, law can act as a
a particular language, structure, and formality for signpostan expressionto guide people on how to
ordering things, and this characteristic gives it the act when they have several options, or (in economic
potential to become a force independent of the initial terms) in the presence of multiple equilibria.25 Law
powers and intentions behind it. Law, often in combi- provides a clear reference in the midst of diverging
nation with other social and political strategies, can views. People comply with the law because doing so
be used as a commitment and coordination device facilitates social and economic activities.

OVERVIEW | 13
Box O.6Legal and normative pluralism

The phenomenon of legal pluralismthe coexistence A further source of normative pluralism is the less visi-
of multiple legal systems within a given community or ble but highly influential social normsgenerally accepted
sociopolitical spacehas existed throughout history and rules of behavior and social attitudes within a given social
continues today in developing and developed countries grouping. A vast literature documents how social norms
alike. Modern forms of legal pluralism have their roots in derived from communal and identity groups, professional
colonialism, through which Western legal systems were associations, business practices, and the like, govern the
created for colonists, while traditional systems were vast majority of human behavior.a Social norms are a fun-
maintained for the indigenous population. As is well doc- damental way of enabling social and economic transactions
umented, that traditional or customary law still dominates by coordinating peoples expectations about how others
social regulation, dispute resolution, and land governance will act. Social sanctions, such as shame and loss of repu-
in Africa and other parts of the developing world. In some tation, or, in some cases, socially sanctioned violence, are a
cases, customary law, including a variety of traditional and powerful means of inducing cooperation to prevent what is
hybrid institutional forms of dispute resolution, is formally regarded as antisocial and deviant behavior.b
recognized and incorporated into the legal system, such Yet another source of normative pluralism is generated
as in Ghana, South Africa, South Sudan, the Republic of by todays globally interconnected world in which a mul-
Yemen, and several Pacific Island states. In other cases, titude of governmental, multilateral, and private actors
such forms continue to provide the primary means of social establish and diffuse rules about a wide range of transac-
ordering and dispute resolution in the absence of access to tions and conduct (see chapter 9). Increasingly, local expe-
state systems that are perceived as legitimate and effective, riences of law are informed by these broader interactions
such as in Afghanistan, Liberia, and Somalia. Customary covering topics such as trade, labor, environment, natural
legal systems reflect the dominant (yet evolving, not static) resources, financial institutions, public administration,
values and power structures of the societies in which they intellectual property, procurement, utility regulation, and
are embedded, and as such are often seen to fall short of human rights. These interactions can take the form of
basic standards of nondiscrimination, rights, and due pro- binding international treaties and contracts (hard law)
cess. The extent to which they are considered legitimate or voluntary standards and guiding principles (soft law).
and effective by local users is an empirical question and a These rules may reinforce, complement, or compete with
relative one in light of the available alternatives. state law to govern public and private spaces.c

Source: WDR 2017 team.


a. Ellickson (1991); Sunstein (1996); Basu (2000); Posner (2000); Dixit (2004).
b. Platteau (2000b).
c. Braithwaite and Drahos (2000); Halliday and Shaffer (2015).

Ultimately, the rule of lawthe impersonal and bolster the effectiveness of development policies can
systematic application of known rules to government ultimately move countries on a trajectory toward a
actors and citizens alikeis needed for a country stronger rule of law.
to realize its full social and economic potential. But
as Gordon Brown, the former prime minister of the Enhancing policy effectiveness for
United Kingdom, noted, In establishing the rule of security, growth, and equity: Entry points
law, the first five centuries are always the hardest. The for reform
ideal of the rule of law emerges from a home-grown How can strengthening the role of law to change
(endogenous) process of contestation that shapes contestability, incentives, and preferences and beliefs
societies adherence to the principles of the rule of enhance policy effectiveness for security, growth,
law over timesometimes a very long time. Box O.7 and equity? Take the case of security. Whether for-
discusses the challenging process of transitioning mally or informally, institutions of governance can
to the rule of law. Pragmatic policy design that takes solve commitment and cooperation problems in
into account how these different roles of law can ways that create incentives to not use violence. Four

14 | WORLD DEVELOPMENT REPORT 2017


Box O.7Transitions to the rule of law

Compared with the extensive literature on transitions to normative framework that makes elites respect the law as
democracy, a surprisingly small amount of systematic such. Subsequent respect for law depends heavily on the
work has been done on transitions to a modern rule of law. degree of independence maintained by legal institutions
History reveals three separate types of transitions which that persist even after their normative foundations have
one can learn from, while other paths might be possible: disappeared.
(1) the shift from a customary, informal, and often highly Finally, as for the importation of foreign legal systems,
pluralistic system of law to a unified modern one; (2) how perhaps the most important variable determining success
powerful elites come to accept legal constraints on their is the degree to which indigenous elites remain in control
power; and (3) how countries successfully adapt foreign of the process and can tailor it to their societys own tradi-
legal systems to their own purposes. tions. Thus Japan experimented with a variety of European
The shift from a customary or pluralistic system (or systems before settling on the German civil code and
both) to a codified modern one is usually motivated, at Bismarck constitution at the end of the 19th century. Later,
base, by actors who view a single formal system as better in the 20th century, China, the Republic of Korea, and other
serving their interests, particularly their economic interests Asian countries similarly adapted Western legal systems
in expanded trade and investment. Scale matters: at a to their own purposes. In other countries and economies,
certain point, the personal connections that characterize such as Hong Kong SAR, China, India, and Singapore, the
customary systems become inadequate to support trans- colonial power (Great Britain) stayed for a long time and
actions between strangers at great remove. However, the was able to shape the local legal norms in its own image.
transition costs are high, and the customary rules are often Even so, India today practices a far higher degree of legal
preferred by the existing stakeholders. Therefore, political pluralism than does the United Kingdom itself as part of
power is critical in bringing about the transition. the process of local adaptation. Less successful were coun-
Formal law is usually applied first to nonelites (rule tries in Sub-Saharan Africa, where customary systems were
by law); the shift to rule of law occurs when the elites undermined by colonial authorities but not replaced by
themselves accept the laws limitations. Some have argued well-institutionalized modern systems.
that constitutional constraints become self-reinforcing Much more research is needed on the question of legal
when power in the system is distributed evenly and elites transitions. It is clear that a fully modern legal system is not
realize that they have more to gain in the long term through a precondition for rapid economic growth; legal systems
constitutional rules.a What this theory does not explain, themselves develop in tandem with modern economies.
however, is why these same elites stick to these constraints It may be that the necessary point of transition from a
when the power balance subsequently changes and one customary to a formal legal system occurs later in this
group is able to triumph over the others. Similarly, inde- process than many Western observers have thought. But
pendent courts are always a threat to elite power; why do relatively little is known about the historical dynamics of
rulers come to tolerate them when they have the power to that transition, and thus there is too little by way of theory
manipulate or eliminate them? This finding suggests that to guide contemporary developing countries as they seek
constitutionalism needs to be underpinned by a powerful to implement a rule of law.

Source: Francis Fukuyama for WDR 2017.


a. See North, Wallis, and Weingast (2009).

main governance mechanisms matter for improving guarantee the representation of all factionscan
security outcomes: power sharing, resource redis- reduce the incentives to engage in the use of force
tribution, dispute settlement, and sanctions. Power by raising the benefits of security. Power-sharing
sharing and resource redistribution are highlighted arrangements are especially relevant for societies
in the illustrations that follow. divided along ethnic and religious identity lines,
Power sharing and resource redistribution can reduce such as in Bosnia and Herzegovina, Northern Ire-
exclusion and the incentives to engage in violence. Just land, Kenya, Lebanon, and South Africa, but also in
as exclusion may lead to violence, mechanisms that countries in which the conflict is a legacy of opposing
encourage power sharingsuch as legislatures that ideologies. Power-sharing bargains that lead to peace

OVERVIEW | 15
and security typically take place between elites. Such than second-best ones. Adopting an implementable
bargains encourage cooperative behavior by provid- second-best design could therefore be more effective
ing elite groups with the incentives to compromise than choosing the seemingly first-best policy prone
with one another and to inspire inclusion among to capture. Moreover, when considering alternative
their followers, and by offering alternative avenues policy designs, the possibility of future capture can be
for contesting power. reduced by anticipating the possible effects of a pol-
Mechanisms to redistribute resources can also icy on the balance of decision-making ability among
reduce violence by reordering power and changing the actors involved.
incentives. Redistributive arrangements include The experience of the Russian Federation and
budget allocation, social transfers, and victim com- eastern European countries in their transition to
pensation schemes. Some government interventions market economies is illustrative.26 Compelled by the
to reduce urban crime in Latin America follow a then-dominant economic argument that the pri-
common pattern of increasing security by reducing vatization of state-owned enterprises (SOEs) was of
poverty and inequality. Employment in the public first-order importance in enhancing economic effi-
sector could also bring about stability by ensuring ciency, Russia and many eastern European countries
the loyalty of key constituencies. An example is the focused on rapid, large-scale privatization of their
dramatic increase in the numbers and salaries of SOEs. Although this approach may have made sense
public employees following the uprisings in the on purely economic grounds, the way in which the
Arab world in 2011 (figure O.5). Although this kind of privatization wave was implemented created a new
political patronage can solve the first-order problem class of oligarchs that resisted the next generation of
of violence, it can also lead to corruption and can pro-competition reforms. As a result, many of these
have ruinous effects on budgetary sustainability and economies are still struggling with inefficient, oligop-
administrative efficiency. olistic industries. This is consistent with the view that
Implementable policies can help reduce capture, enhanc- reforms that create an initial concentration of gains
ing growth. Security is a precondition for prosperity, may engender strong opposition to further reform
but it is not enough; economic growth must follow. from early winners.27 By contrast, Poland chose to
When it comes to growth, if the possibility of capture focus first on reforms that made it easy for new firms
looms large, policies that are first-best on the basis to enter, and to privatize the existing firms more grad-
of economic efficiency may be less implementable ually. This sequencing created a class of young firms

Figure O.5Recruitments of civil servants increased exponentially in Tunisia and the Arab
Republic of Egypt in the aftermath of the Arab Spring uprisings of 2011
a. Tunisia, 200014 b. Arab Republic of Egypt, 200014
Tenured government employees (millions)

50,000 20,000 6.4

6.2
Total/civil servants recruited

40,000 15,000 6.0


Workers recruited

5.8
30,000 10,000
5.6

5.4
20,000 5,000
5.2

Arab Spring 5.0 Arab Spring


10,000 0
4.8
2000 2005 2011 2014 2000 2005 2011 2014
Total recruited (left axis)
Civil servants recruited (left axis)
Workers recruited (right axis)
Sources: Tunisia: Brockmeyer, Khatrouch, and Raballand 2015; Arab Republic of Egypt: Bteddini 2016, based on figures from Egypts Central Agency for Organization and Administration
(CAOA).

16 | WORLD DEVELOPMENT REPORT 2017


that were collectively interested in further reforms, Mechanisms that control clientelism can enhance
while preventing the sudden emergence of an influ- equity by making commitment to long-term objec-
ential group of large firms that could block reforms.28 tives credible in the political arena. At times, the incen-
Better design of public agencies can help expand tives of elites may be aligned with taxation and public
the set of implementable policies. How public officials spending reforms in favor of the poor. For example,
are selected for service, for example, and the incentive the first antipoverty programs in 19th-century Great
structure they face within their organizations matter, Britain were pushed by the top 1 percent of landed
as does accounting for existing norms of behavior. elites. Against the backdrop of the French Revolution,
Establishing and maintaining greater accountability and possible fear of revolts, these programs aimed
in public agencies can also help in balancing influ- to keep labor in the countryside and prevent it from
ence in the policy arena. Mechanisms that help give migrating to urban areas.29 At other times, an increase
less powerful, diffuse interest groups, for example, a in the participation of disadvantaged groups is needed
bigger say in the policy arena could help balance the to help change the incentives of actors who bargain
influence of more powerful, narrow interest groups. over policies. Increasing the direct representation of
However, participatory mechanisms in regulatory disadvantaged individuals in legislative assemblies
institutions are still relatively uncommon in low- and and other political bodies can improve policy makers
middle-income countries (figure O.6). commitments to reforms that improve equity. Direct
Private interests can at times undermine policy participation in decision making can also improve
effectiveness, but capture is not an inevitable out- cooperation. For example, in Ghana, when businesses
come of close business-state ties. As long as influence are involved in the design of tax policies they are more
and incentives are balanced through robust public likely to pay their taxes.30 Greater transparency and
agency design and accountability mechanisms, firms better information can also help to change incentives
and business groups can have a positive influence on by monitoring the actions of political elites and ser-
policies aimed at economic growth. Contemporary vice providers. For example, an intervention designed
case studies suggest that business associations have to strengthen local accountability and community-
helped governments improve various dimensions of based monitoring in the primary health care sector in
the business environmentsuch as secure property Uganda was remarkably successful in improving both
rights, fair enforcement of rules, and the provision health services and outcomes in the participating
of public infrastructurethrough lobbying efforts or communities.31 However, reforms are often complex
better monitoring of public officials. and involve frequent setbacks.
Controlling clientelism can help solve commitment Over time, policies that effectively improve equity
problems related to delivering on redistributive policies. also reduce power asymmetries, making the policy

Figure O.6Formal avenues for broad-based participation in regulatory decision


making are limited in low- and middle-income countries
Percentage of citizens participating

100

75

50

25

0
East Asia Europe and Latin America Middle East High-income South Asia Sub-Saharan
and Pacific Central Asia and the and OECD Africa
Caribbean North Africa countries

Provide impact assessments Publish notice Publish regulations Request comments Report results
Source: WDR 2017 team, using data from the World Banks citizen engagement in rulemaking data.
Note: OECD = Organisation for Economic Co-operation and Development.

OVERVIEW | 17
arena more contestable. After a period of inclusive of game theory. The discussion highlights how devel-
growth with greater income mobility, the growing opment reform involves playing games at two dif-
middle class in Latin America began demanding ferent levels, and actors in the quest for change often
better-quality services and demonstrating in the tend to neglect the game that really matters.
streets for better governance.32 Conversely, inequit Figure O.7 synthesizes the conceptual framework
able growth and the concentration of wealth in the presented in this Report. It illustrates the dynamic
hands of a few led to consolidation of power and a interaction between governance and development. At
perception of unfairness, and thus to weaker incen- its center is the policy arena, the space where actors
tives for cooperation and coordination by those bargain and reach agreements about policies and
excluded from the benefits of development. It is thus rules. Given a set of rules, the right-hand side of the
necessary to understand how existing inequalities framework shows how commitment, coordination,
can be modified by reforms. and cooperation among actors lead to specific devel-
The nature of the policy arena is crucial to gaug- opment outcomes (the outcome game in box O.8). But
ing whether actors will be able to reach and sustain actors can also agree to change the rules, which is
agreements to enact welfare-enhancing policies. The illustrated in the left-hand side of the framework (the
actions that a proposed reform will trigger from other rules game in box O.8). Both changes in development
players in the arena are particularly important. The outcomes (such as the composition of growth or the
process of how reforms take place is embedded in the concentration of wealth) and changes in rules (both
framework of the World Development Report 2017 (WDR formal and informal) reshape the power asymmetries
2017) and is discussed in box O.8 from the perspective manifested in the policy arena.

Box O.8The rules game: Paying attention to where the action is

The framework described in this Report uses game the- way to specify the ultimate goal of development, it is an
orythe branch of social sciences that studies strategic insufficient guide to understanding the actual process of
behaviorto understand the dynamics of power, policy, development. Mechanism design suggests that a reform
and reform. Although policy makers may not consciously is a once-and-done jump that takes place when someone
think in terms of game theory, they play strategy games imposes the ideal rules. It ignores the second-level rules
every day, and their actions can be understood using the game, the diversity of preferences and incentives, and the
precision and objectivity of game theoretic models. The fact that different actors can have very different influences
framework laid out in this Report aims at understanding in the rules game. Moreover, in the process of reform and
how governance affects development over time. For that development, the rules game is where the action is.
purpose, the framework involves games played at two lev- Indeed, the rules game is where power asymmetries are
els. The first-level game (the outcome game) takes place manifested, whereby some actors have more direct influ-
when, given a certain set of rules and policies, actors react ence (elites) and others have only indirect influence such
by making decisions about investing, consuming, working, as through voting (citizens). It has long been recognized
paying taxes, allocating budgets, abiding by the rules, and that power is an important determinant of how a society
so on. Those decisions lead to the realization of outcomes functions and how the gains of economic activity are
(security, growth, equity). The framework suggests that shared within and across nations. With game theory, one
there is, in addition, a second-level game (the rules game) is able to formalize some of these difficult concepts and, in
in which actors bargain to redefine the policies and rules particular, the idea that, in the end, power depends on the
that shape subsequent reactions by actors in future reali- circumstances, beliefs, and mores of ordinary people.
zations of the games.a A key lesson that emerges from this approach is that
In the abstract, the rules and policies chosen should rules that let players commit, coordinate, and cooperate
lead to the socially desired outcomes. Economists refer to tend to enhance efficiency in the outcome game. Ultimately,
the case in which someone can pick the ideal rules for the commitment devices allow actors to transform the game so
outcome game as the mechanism design approach, and that their incentives are aligned. To achieve coordination,
the rules selected are those that a benevolent dictator policies need to create common knowledge that everyone
or social planner would pick. Although this is a useful will take the desirable action. Sometimes, this requires

(Box continues next page)

18 | WORLD DEVELOPMENT REPORT 2017


Box O.8The rules game: Paying attention to where the action is
(continued)

providing incentives for some actors to take the desirable improves the efficiency of the outcome game by letting
action first so others will follow. To induce cooperation, players commit to specific future actions.b When actors
policies need to put forth a credible mechanism of reward agree to a contract voluntarily, the result of a noncooper-
or penalty conditioned on players actions to prompt other ative interaction can lead to better outcomes for all. This
actions yielding the jointly preferred outcome. analysis is also closely related to the concept of a social
Over time, repeated play of the rules game can lead to contract that goes back to ancient Greek thinkers. Social
the establishment of a government that is better able to contracts that induce actors to abide by the rules volun-
enforce the rules impersonallyfor example, by employing tarily tend to be more efficient and sustainable. Underlying
legislators, judges, and police officers who can administer a all stable societies is some form of social contract, which
formal legal order, in particular by administering a system enables individuals to anticipate the behavior of others and
of contract law. Contract law is a system of formal rules that react accordingly.

Source: WDR 2017 team.


a. In the WDR 2017 framework depicted in figure O.7, the right-hand side of the figure refers to the outcome game and the left-hand side to the rules game.
b. In a small social group, an informal system of rules can also encourage commitment. For example, if actor 1 does not follow through on an agreement
with actor 2, actor 2 can punish actor 1 by gossiping about how actor 1 cheated.

Drivers of change: Figure O.7WDR 2017 framework: Governance, law,


and development
Elite bargains, citizen
engagement, and Power
asymmetries
Power
asymmetries

international influence
Changes in contestability, incentives, and preferences
and beliefs are the key levers for correcting power
asymmetries in the policy arena, leading more effec- Rules
Policy Development
arena outcomes
tively to commitment, coordination, and cooperation.
But how can these changes be brought about? This
Report identifies three encouraging drivers for bring-
ing about significant changes conducive to develop-
ment: elite bargains (which take the distribution of Commitment Commitment
power in the policy arena as a given); citizen engage- Coordination Coordination
Cooperation Cooperation
ment (which tries to change the distribution of power
in the policy arena); and international interventions Source: WDR 2017 team.

(which indirectly affect the distribution of power in Note: Rules refers to formal and informal rules (norms). Development outcomes, in the context of this
Report, refers to security, growth, and equity. The actors in the policy arena can be grouped into elites,
the policy arena)see box O.9. citizens, and international actors.
All countries, regardless of their level of economic
and institutional development, are subject to elite outcome of favorable bargains in the policy bargaining
bargains. Change is unlikely to occur unless powerful process. Moreover, governance does not occur solely
actorselitesin the country agree to that change. within the boundaries of nation-states. Although
When influential actors resist change, suboptimal pol- international actors cannot engineer development
icies and governance institutions that are detrimental from the outside, these transnational actors play an
to development tend to persist. Under certain circum- important role in influencing the domestic bargaining
stances, however, elites may voluntarily agree to limit dynamics by strengthening (or weakening) local coa-
their influence in their own self-interest. Citizens litions for reform.
can also organize to bring about change, playing an Change occurs over time as coalitions are formed
important role in applying pressure to influence the among different actors, but this is often a long and

OVERVIEW | 19
Box O.9Elites and citizens: Who is who in the policy arena?

Participants in the policy arena can be grouped into elites even though the presidents change, the guests are always
and citizens, according to their relative degree of influence the same.
in the policy-making process. What distinguishes elites Certainly, the dichotomy between elites and citizens is
from citizens is elites ability to directly influence the design imperfect because it does not account for different degrees
and implementation of a certain policy. Elites can vary from of relative power among individuals within those groups
one policy to another. For example, a group that is an elite (elites or citizens), nor does it capture how their relative
in the area of health care may not be an elite in the area power differs from one policy to another. As Stephen Jay
of crime control. The source of elites ability to influence Gould notes in his classic text Times Arrow, Times Cycle:
policy comes not only from formal rules such as delegated Myth and Metaphor in the Discovery of Geological Time,
authority (de jure power), but also from other means such Dichotomies are useful or misleading, not true or false.
as control over resources (de facto power). Thus even if They are simplifying models for organizing thought, not
the government changes, those who are able to influence ways of the world.a The reality is much more complex and
decisions may stay the same; they keep their seat at the nuanced.
table. A few years ago, an entertainment magazine in a This Report views individuals as being on a continuum
Latin American country captured this dynamic in an inter- with respect to their position of power in the policy arena,
view with an unlikely political observer, the chef of the and thus its definition of elites and citizens is a positive
presidential residence. After a tight election, the new pres- (rather than a normative) one. Elites are not necessarily
ident and his family had just moved into the residence. The bad or self-interested, and citizens are not necessarily good
interviewer asked the chef whether it was difficult for him and public-spirited. Both groups exercise their influence
to adjust the menu to the new presidential familys tastes. as people do in other spheres of life. Understanding their
It is really not that problematic, he reflected, because motivations is what matters to anticipating their conduct.

Source: WDR 2017 team.


a. Gould (1987, 89).

self-determining endogenous process. For example, political parties to participate openly in Spains polit-
success at achieving security in Somaliland arose ical life. To the surprise of many, the Cortes Genera-
from the collective action of a wide range of tribal lesSpains parliament, which was led by members
and clan leaders. Sharing power among these actors appointed by Francoallowed this referendum, even
helped reduce the incentives for violence by raising though it would surely constrain their power and
the benefits of security. In Nigeria, Muhammadu likely imply the end of the existing regime. Analysts
Buhari won the 2015 election by creating a broad coa- have argued that members of the Cortes accepted the
lition through a campaign platform focused on tack- referendum because it was within the existing legal
ling corruption, potentially indicating an enhanced setting, which they had to protect. Gen. Pita Da Veiga,
ability to overcome corrupt vested interests that a conservative, minister of the navy, and personal
benefit from oil rents. And in India, the Right to Infor- friend of Franco, publicly declared, My peace of
mation and Right to Education Acts, pushed through conscience is rooted in the fact that the democratic
by grassroots coalition movements over many years, reform is being made within the Franquista legality.33
have helped poor citizens demand better services and However, the Franquista legality he was praising was
education for their children, improving living condi- coming to an end precisely because of that reform,
tions within slums. which received overwhelming public support: 97.4
percent of Spaniards voted in favor, with a turnout of
Elites may adopt rules that constrain their 77 percent of registered voters.
own power Just as in the Spanish transition, elites frequently
In December 1976, a year after the death of Gen. Fran- choose to constrain their own power. Changes to the
cisco Franco, who had been in power since the late rules of the game often reflect bargaining outcomes
1930s, a referendum was held in Spain to introduce a that result from elites acting in their own interests
political reform that would allow previously banned (box O.10). While seemingly counterintuitive, reforms

20 | WORLD DEVELOPMENT REPORT 2017


Box O.10Who are elites, and what do they do? Results from a survey of
elites in 12 countries

All social science disciplines and development practitioners The survey reveals that the identity of the influential
recognize the importance of elite actors in determining actors within a ruling elite coalition that decides policy at
development outcomesfrom Aristotles oligarchy, to the national level differs greatly over space, time, and issue
early 20th-century elite theorists,a to recent ambitious area. For example, although national chief executives are
theories of economic and institutional coevolution.b The part of the elite ruling coalition in all 12 countries surveyed
international community is increasingly looking at the con- as of 2015, the other actors vary greatly in both number
sequences of different political settlements, which can and representativeness (figure BO.10.1, panel a). With the
be understood as elite bargaining equilibria that emerge exception of the Russian Federation, Rwanda, and Turkey,
at critical junctures in a countrys development.c Yet, the where the national chief executive monopolizes decision
set of conceptual research tools available to scholars of making, the ruling coalition in the other countries surveyed
elite bargaining and to development practitioners remains is quite varied. For example, in Bolivia the ruling coalition
limited, as does agreement on exactly who are elites. consists of legislators, party elites, local governments, labor
To help fill this gap, as part of the World Development unions, and civil society organizations.
Report 2017, the World Bank, in collaboration with the Ruling elites also differ within countries over time. In the
V-Dem Institute, has conducted expert surveys to generate Republic of Korea, during the Park regime (196379), the
cross-national indicators that enable comparison of who bargaining strength of military actors, bureaucratic actors,
holds bargaining power and how they wield this influence. and economic actors was relatively high (figure BO.10.1,
The surveys cover more than 100 years of data in 12 coun- panel b). The transition to democracy after 1987 resulted
tries across six regions. The data help identify how the in greater strength for new actors, particularly political par-
distribution of elites maps onto the national structure of ties, legislators, and the judiciary, but economic and bureau-
bargaining power and the formulation and implementation cratic actors remained highly empowered. By contrast,
of laws governing the exercise of power. Brazil has experienced much more volatility in empowered
elites, particularly before the 1990s (figure BO.10.1, panel c).

Figure BO.10.1Elite actors within national ruling coalitions vary greatly across
countries and over time
a. Twelve-nation comparison of number of groups in ruling coalition, 2015
6

5
Number of elite groups

0
Brazil Indonesia Korea, Rep. Rwanda Sri Lanka Turkey
Bolivia India Kenya Russian Spain Tunisia
Federation

National chief executive Local government leaders Civil society organizations


National legislators Bureaucratic actors Media
Judicial actors Economic actors (national) Foreign governments
Political party elites Organized labor unions International economic actors and organizations

(Box continues next page)

OVERVIEW | 21
Box O.10Who are elites, and what do they do? Results from a survey of
elites in 12 countries (continued)

Figure BO.10.1Elite actors within national ruling coalitions vary greatly across
countries and over time (continued)

b. Relative strength of elite actors in the Republic of Korea, 1900 2015

4
Elite actor relative strength

0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

c. Relative strength of elite actors in Brazil, 19002015


4
Elite actor relative strength

0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

National chief executive National legislators Judicial actors


Political party elites Local government leaders Bureaucratic actors
Military actors Economic actors (national) Civil society organizations
Media Foreign governments International economic actors
and organizations

Source: WDR 2017 team.


Note: In this figure, relative strength is measured on a 04 scale, ranging from 0 (no power to influence decision making) to 4 (group has a lot of
power to influence decision making on many issues). Panel a shows the number of elite groups that have relative strength greater than 3. For more
information on specific variables and survey methodology, see World Bank and V-Dem (2016) and Coppedge and others (2015).

Source: WDR 2017 team.


a. See Michels ([1911] 1966); Pareto ([1927] 1971); and Mosca (1939).
b. See North, Wallis, and Weingast (2009) and Acemoglu and Robinson (2012).
c. Di John and Putzel (2009); Khan (2010); Parks and Cole (2010).

22 | WORLD DEVELOPMENT REPORT 2017


that limit the arbitrary exercise of power today may in the subsequent period.36 Fiscal transparency, for
be necessary for elites to maintain or enhance their example, ties not only the hands of current elites but
power or to provide insurance against a loss of power also those of successors. This is consistent with the
tomorrow. Formal institutionsmoving from deals to actions of certain states in Mexico: although access to
rulescan enhance the credibility of commitments, information and transparency laws was strengthened
overcome coordination challenges among elite actors, at the federal level after the political change in 2000,
and strengthen the stability of elite bargains. In cases and more recently in 2016, such laws were more likely
of long-term successful transformation, elite actors to be passed at the state level when opposition parties
have adapted to changing circumstances by gener- were stronger and when there was greater executive
ating more capable, contestable, and accountable office turnover.37
institutions, and these institutions themselves have Leaders can also spur elite-driven change by solv-
helped enable further development. ing coordination challenges or by transforming the
To maintain their own power and influence, preferences and beliefs of followers. Transactional
coalitions of decision makers may have incentives leaders use an array of bargaining tactics and strategies
to broaden the policy arena, including adding new to promote coordination among elite actors and reach
actors to formal decision-making bodies and increas- positive-sum outcomes (win-win solutions). These
ing accountability to other elites (horizontal account- leaders change the incentives of other elites by taking
ability). Despite a preference for keeping coalitions into consideration who wins and who loses over time.
small, elites may choose to broaden them to improve By overcoming information and coordination chal-
stability when the potential for conflict rises. Bringing lenges through political strategy, they can help find
new actors into credible institutions for contestation areas of agreement among conflicting parties with-
may be less costly than repressing them, and expand- out necessarily shifting norms or preferences. In the
ing the formal accountability space may help provide 1960s, U.S. president Lyndon Johnsons deals, trades,
internal commitments that facilitate agreement. threats, and ego strokingpolitical strategyhelped
Institutionalizing accountability to citizens (vertical the U.S. Congress overcome a natural aversion to risk
accountability)for example, through the introduction and pass civil rights legislation, a clear example of
of elections or electoral reformsmay also be a rational transactional leadership. Transformational leaders can,
elite strategy to maintain privilege, particularly in the in addition, actually change elite preferences or gain
face of rising demands from the opposing elite. When following by shaping beliefs and preferences. They are
splits develop among elite actors, the introduction of entrepreneurial in coordinating norms and can effect
vertical accountability mechanisms can enhance the large changes in society by changing the environment
bargaining power of one faction. Moreover, when in which politics plays out, often by reducing the
bottom-up citizen movements threaten elite interests, polarization of elites. In the 1990s Nelson Mandela
elites may choose to introduce preemptive vertical provided a vision for South Africa based on charisma
accountability mechanisms to respond to societal and moral persuasion, using powerful symbols to
demands before such pressure reaches a tipping motivate and inspire his fellow citizens during the
point. In Europe in the 19th century, the extension of transition away from the countrys apartheid policies.
suffrage was heralded by the threat of revolution and
social upheaval in the form of revolutionary activity Agency and collective action: Citizens
in neighboring countries34 and strikes in the home influence change by voting, organizing, Although elites
country.35 and deliberating often choose rules
Although elites often choose rules to maintain Individual citizens may not have the power to influ- to maintain their
their position of power, sometimeswhen acknowl- ence the policy arena to generate more equitable position of power,
edging threats to their continued dominancethey development on their own. However, all citizens have sometimeswhen
may adopt rules to constrain their own influence as a access to multiple mechanisms of engagement that acknowledging
type of political insurance. The hope is that those rules can help them overcome collective action problems threats to their
will bind not only them but also their successors. The to coordinate and cooperateby changing contest- continued
adoption of cohesive and constraining institutions ability, incentives, and preferences and beliefs. Modes dominancethey
increases with the likelihood that the incumbent of citizen engagement can include elections, political may adopt rules
government will be replaced. This is an institutional organization, social movements, and direct participa- to constrain their
variation on American philosopher John Rawlss veil tion and deliberation. Because all of these expressions own influence as
of ignorance: design institutions without knowing of collective action are imperfect, they complement, a type of political
whether you will be subject to or master of them rather than substitute for, one another. insurance.

OVERVIEW | 23
Elections are one of the most well-established around a well-defined agenda of policy prioritiesare
mechanisms available to citizens to strengthen associated with a higher likelihood of adopting and
accountability and responsiveness to their demands. successfully implementing public sector reforms.40
When effective, they can help improve the level and However, ordinary citizens and marginalized groups
quality of public goods and services provided by the sometimes find political parties unwilling to repre-
state by selecting and sanctioning leaders based on sent and articulate their demands, acting instead as
their performance in providing these goods.38 This gatekeepers to protect vested interests and existing
effect can be particularly strong at the local level, power structures. This may help explain the disen-
where voters might be better able to coordinate and chantment of citizens with political parties, which
shape the incentives of local politicians to deliver rank globally as the least trusted political institution.
including by curbing corrupt behavior. For example, Social organization can also help solve collective
evidence from Kenya suggests that multiparty elec- action problems by mobilizing citizens around spe-
tions successfully constrained the ability of leaders to cific issues. This mobilization can bring new demands
divert public resources for partisan goals.39 However, and interests into the bargaining space, reshaping the
elections alone are an insufficient mechanism to preferences of actors and expanding the boundaries of
produce responsive and accountable governments. the policy arena around previously neglected issues.
Although they have become the most common mech- Box O.11 explains how pressure from social organiza-
anism to elect authorities around the world, elections tion by international and domestic womens groups
are increasingly perceived as unfair (figure O.8), and contributed to the achievement of female suffrage
they are a limited instrument of control. in Switzerland, which led in turn to other important
Political organization can serve as a complemen- policy changes for gender equality. Actors in civil
tary mechanism to represent and articulate citizens society and the media can play a key role in foster-
collective interests, aggregate their preferences, and ing policies that strengthen transparency and more
channel their demands in the policy-making process. widely disseminate information. Increasing the avail-
For example, through parties, political organization ability of reliable informationsuch as generating
can help solve citizens coordination problems and evidence on the performance of public officialsand
integrate different groups into the political process, increasing the accessibility of that informationsuch
encouraging a culture of compromise. According to as strengthening the independence of media outlets
the evidence, programmatic partiesthose organized or aligning the targeting and timing of information
with the political processcan be fundamental first
Figure O.8Electoral democracies are steps toward promoting greater accountability and
spreading, but the integrity of elections government responsiveness.41 However, global trends
is declining reveal that after its continual expansion over the past
decades, civic space has shrunk in the past few years
100 (figure O.9). Many governments are changing the
institutional environment in which citizens engage,
90 establishing legal barriers to restrict the functioning
of media and civic society organizations and reducing
Number and percent

80 their autonomy from the state.


Although social organization may succeed in giv-
70 ing voice to powerless groups and putting pressure on
public authorities, trade-offs can be associated with
60 the proliferation of competing interests in the policy
arena. Public institutions may be quickly overloaded
50
with multiple pressures, undermining the coherence
and effectiveness of public policies. Moreover, not
40
all social organization is necessarily motivated by a
1985 1990 1995 2000 2005 2010 2015 vision of a more equal and just society. In some cases,
social organization can be used by narrow interest
Number of electoral democracies
Percentage of elections that are free and fair groups for exclusionary or violent purposes.
Public deliberationspaces and processes that
Sources: WDR 2017 team, based on Center for Systemic Peace, Polity IV
(database), various years (for number of electoral democracies), and Bishop
allow group-based discussion and weighing of alter-
and Hoeffler 2014 (for free and fair elections). native preferencescan also help level the playing

24 | WORLD DEVELOPMENT REPORT 2017


Box O.11Direct democracy delayed womens voting rights in Switzerland

Most European countries enfranchised women during the study notes.a The mandatory national referendum took
first decades of the 20th century. However, it was not until place in 1959 when 69 percent of the entirely male elec-
1971 that Swiss women were first allowed to vote in fed- torate voted against the constitutional amendment. Still,
eral elections, 65 years after the first country in Europe women gained the right to vote on cantonal affairs in three
Finlanddid so. And yet Switzerland has had a tradition Swiss cantons (Geneva, Vaud, and Neuchtel) in 195960.
of direct democracy for centuries. What explains the late It was not until 1971 that the majority of Swiss men voted
enfranchisement of Swiss women? in favor of womens suffrage. Reform coalitions among
To change the constitution, the political system required many actors played a significant role in bringing about this
a national referendum in which only men were allowed to change, including international influence and domestic
vote. Several petitions and motions initiated by womens action by womens groups such as the Swiss Association for
groups in the first half of the 1900s were unsuccessful in Womens Suffrage.
achieving womens suffrage. Who participated in the pro- The change in female suffrage in Switzerland made it
cess to change the rules was thus an important determinant possible for new actorswomen, in this caseto partici-
of which rules persisted. But so were the existing social pate in the process of policy design and implementation,
norms and the lack of incentives for change. Reflecting changing the incentives of politicians to be responsive to
those deeply held norms, Switzerland also lagged behind their preferences and interests. It also reflected a change
most Western countries in removing other legal gender in societies norms with respect to womens rights. This
inequalities, notably those preserving the legal authority led to further important policy changes in the 1980s. An
of the husband. amendment to the constitution to guarantee equal rights of
Under heightened international pressure, Switzerland all Swiss men and women was approved in a referendum in
was close to a breakthrough in guaranteeing womens rights 1981. A few years later, in 1985, women were granted equal
in 1957, when, for the first time, the Swiss Federal Council rights in marriage to men, eliminating legal requirements
called for a national referendum on womens suffrage. If such as wives need to have their husbands permission to
Switzerland had not been a direct democracy, womens work outside the home, or to initiate legal proceedings, or
right to vote would have taken effect immediately, one to open a bank account.b

Sources: Stmpfli 1994; World Bank, Women, Business, and the Law (database), 2015.
a. Stmpfli (1994, 696).
b. World Bank (2016a).

field in the policy arena. Citizens participation in local voters; online voters were more likely to be male,
governance can be instrumental in improving the university-educated, and wealthier.44
quality of deliberation and the legitimacy of decisions Ultimately, all expressions of citizens collective
by clarifying the needs and demands of local constit- action, including voting, political parties, social move-
uencies. However, participatory approaches to devel- ments, civic associations, and other less conventional
opment sometimes fail to consider the possibility of spaces for policy deliberation, are imperfect. There-
civil society failures in which, in weakly institutionalized fore, citizens, to strengthen their influence in the
environments, the poor are less likely to participate, policy arena, need to engage through multiple mech-
and participatory mechanisms can be captured by anisms designed to solve collective action problems.
local elites.42 Such failures are not necessarily ame- This strategic combination can maximize the chances
liorated by the availability of new technologies. As to effectively bring about changes in contestability,
discussed in WDR 2016 on the digital divide,43 infor- incentives, and preferences and beliefs.
mation and communication technologies might actu-
ally reinforce socioeconomic inequalities in citizens Change with outside support: International
engagement. In Brazil, for example, the use of internet actors enter the domestic policy arena
voting on municipal budget proposals revealed stark The dynamics of governance do not occur solely
demographic differences between online and offline within the boundaries of nation-states. Countries

OVERVIEW | 25
Figure O.9After decades of progress, labor standards. And they can serve as focal points
civic space is shrinking globally for domestic actors to shift preferences and improve
coordination by changing ideas and diffusing norms.
International agreements on economic integra-
3.0
tion can provide credible commitments that domestic
actors will follow through on economic reforms. The
2.5 success of the European Union integration process
demonstrates the power of these types of induce-
Average score

2.0 ments. Prospective member countries must change


domestic rules to abide by the 80,000 pages of reg-
ulations in the EUs acquis communautaire. For the
1.5
countries that decided to undergo these changes, the
potential economic benefits of joining the EU out-
1.0 weighed any loss of domestic autonomy in specific
areas, and the benefits of accession were used by
0.5 elites to overcome domestic resistance to the required
reforms. Moreover, for member countries, accession
0
10
20
30
40
50
60
70
80
90

00
10
20
0

20
19
19
19
19
19
19
19
19
19
19

20

20
helped change elite incentives by changing the rela-
Government censorship effort (media) tive power of domestic actors because some parties
CSO entry and exit
benefited much more than others. Meanwhile, EU
Source: WDR 2017 team, using data from V-Dem (database), 2016. membership contributed to the institutional con-
Note: The average is based on a sample of 78 countries for which there is solidation of former dictatorships in the European
consistent data for all years presented. The CSO entry and exit variable periphery, such as Greece, Portugal, and Spain in the
is measured on a 04 scale, ranging from 0 (more constrained) to 4 (less
constrained). The government censorship effort (media) variable is 1980s. It also played a role in the transition in central
reversed and measured on a 04 scale, ranging from 0 (less censorship) and eastern Europe after the elimination of the com-
to 4 (more censorship). More information on specific variables and survey
methodology can be found in World Bank and V-Dem (2016) and Coppedge munist regimes in the 1990s and 2000s.
and others (2015). CSO = civil society organization. Since the end of World War II, official develop-
ment assistance (ODA) or foreign aid has been one
today face an interconnected, globalized world char- of the most prominent policy tools used by advanced
acterized by a high velocity and magnitude of flows economies to induce security, growth, and equity
of capital, trade, ideas, technology, and people. The outcomes in developing countries.45 Although the
world nowadays is very different from the one in literature on aid effectiveness is voluminous, it tends
which todays developed countries emerged: in those to be inconclusive. Ultimately, the literature suggests
days, cross-border flows were low; the countries that aid is neither inherently good nor inherently
received no aid; and they were not subject to a prolif- bad for development; what matters is how aid inter-
eration of transnational treaties, norms, and regula- acts with the prevailing power relations and affects
tory mechanisms. For developing countries, the era of governance.
globalization and global governance presents both In some cases, donor engagement supports the
opportunities and challenges. emergence of more accountable and equitable gov-
As the flows across borders expand, so too do erning arrangements that become embedded in
the instruments and mechanisms that are used to the domestic context. For example, evidence from
manage these flows. To influence domestic policies a community-driven reconstruction program in
and governance, international actors can introduce Liberia suggests that introducing new institutions at
transnational rules, standards, and regulations (here- the local level can have an effect on social cooperation
after referred to as transnational rules). These rules can that will persist beyond completion of the program.46
help induce credible commitment to domestic reform In other cases, aid can undermine the relationship
through trade and regional integration incentives. between the state and its citizens by making the
They also can help achieve international cooperation state less responsive to their demands. For example,
on global goods by changing incentivessuch as pre- the more that states rely on revenues from the inter-
venting races to the bottom when countries compete to national community, the fewer incentives they have
attract investment and gain access to markets, leading to build the public institutions needed to mobilize
to reductions in corporate tax or environmental and domestic revenues through taxation. And the less

26 | WORLD DEVELOPMENT REPORT 2017


Figure O.10Aid is a large share of GDP and government revenue in many developing countries
a. Low-income countries b. Lower-middle-income countries c. Upper-middle-income countries
20 100
18 90
16 80

% of government revenue
14 70

12 60
% of GDP

10 50

8 40

6 30

4 20

2 10

0 0
I
L
ZW GO
MD ETH

BE OD
IN
FA
MB

A
MO WI
DI

F
LE

D
LV

B
A
Y
GD

BO KR
MM WZ
MA NM
RM

GH MR
ND

C
GE AO
EN

MR MB
MD SO
EN
GZ
TLS

S
ME RA
KM

I
R
R
OM

CO ZE
US

A
AB

B
MK AM
UN

BIH G
R
ER

CR
NP

CA

PE
BL

JO
MY
UZ

SR
EG
IN
TZ

I RW

LK

W
NI

N
R S
Z B

L S
N G

F A
K U
I B

L M

Y G
R M

O K

A S
V K
T L
R A
V C
B G

Z
G B

X T
A H

D T
A C

G L

N N

B M
L S
T

R V

O D

M B
D
M

E
G

M
A
N

TJK

IRN

A
U
Y

IRQ
ML

HT

R
PH

ZA
NE

LB
GN

AL
PR

LB
PA

CI

KS
TC

SS

EC
UG

NG

DZ
AF

CO

PN
SD

LB
SY

AG
KH

GT

YE

JA
ODA (% of GDP, left axis) ODA (% of government revenue, right axis)
Sources: WDR 2017 team. Official development assistance (ODA) data: Organisation for Economic Co-operation and Development; government revenue data: IMF, World Economic
Outlook, various years.
Note: The graphs show ODA from all donors to all recipients in low- and middle-income countries with a population of at least 1 million. Figures for ODA (percent of GDP) are capped at
20 percent of GDP for the sake of visualization. The underlying uncapped data are Afghanistan, 24.1 percent; Central African Republic, 35.4 percent; Liberia, 37.0 percent; and Malawi,
21.8 percent. Figures for ODA (percent of government revenue) are capped at 100 percent for the sake of visualization. The underlying uncapped data are Afghanistan, 105.2 percent;
Central African Republic, 260.6 percent; Liberia, 126.0 percent; and Sierra Leone, 143.2 percent.

that states rely on their domestic tax base, the more an equilibrium that sustains the outcome the inter-
state-citizen accountability erodes.47 vention attempted to change. These situations can
Currently, aid represents more than 10 percent arise from interventions that do not take into account
of GDP for half of all low-income countries and over the existing power balance.
30 percent of total revenues for 26 countries (figure Such development assistance challenges are
O.10). The empirical evidence linking aid flows to not unavoidable or intractable. Like market failures
decreased taxation is mixed (box O.12). Aid has thus and government failures, they can be addressed.
been likened to a natural resource curse: a windfall Development assistance can be more effective when
of unearned income that may enable inefficient donor engagement supports the emergence of more
government spending, unconstrained by the kind of accountable and equitable governing arrangements
state-citizen social contract that engages citizens in that become embedded in the domestic contextfor
policy discussions and makes the policy arena more example, by making relevant information available
contestable.48 to citizens to strengthen their capacity to hold polit-
For a long time, the need for intervention was jus- ical leaders accountable.50 When and how these pos-
tified on the basis of classic market failures in which itive effects emerge, however, is difficult to predict
governments intervene to produce socially desirable in advance because of the web of intersecting and
outcomes that cannot be achieved by relying solely on evolving factors that determine how donor initiatives
markets. Later, the literature revealed the existence of engage with local political dynamics.
government failures in which government interven- The development community has recently been
tions also failed because of lack of capacity, informa- engaging in efforts to think politically about aid.
tional asymmetries, or distorted incentives.49 One of However, many of the operational imperatives
the issues that this Report analyzes is the difficulties that arise from greater attention to development
faced by the international community when trying assistance challengessuch as the need to increase
to influence change in the presence of government flexibility of implementation, tolerate greater risk
failures. Indeed, many times well-intentioned inter- and ambiguity, devolve power from aid providers to
ventions become ineffective because they reinforce aid partners, and avoid simplistic linear schemes for

OVERVIEW | 27
Box O.12Domestic resource mobilization, foreign aid, and accountability

There is a growing consensus that increasing domestic and tax evasion, consumption taxes are the most likely
resource mobilization can enhance accountability, partic- to be effective, but also the most likely to be regressive.
ularly if such efforts are explicitly linked to the provision Frequently in these cases, domestic resources are mobi-
of public goods. If ruling elites need to depend on broad- lized in ways that may increase povertyfor example,
based taxation, they are more likely to include citizens by increasing consumption taxeswithout enacting
and other elites in policy bargains. But does foreign aid specific offsetting mechanisms of compensation for the
undermine domestic resource mobilizationand thus poor. Indeed, based on household survey data for 2010,
accountability to citizens? fiscal policy itself increased the US$2.50 per day poverty
Studies testing that hypothesis initially showed a neg- headcount ratio in 9 out of 25 countries analyzed.e In other
ative correlation between the two.a More recently, these words, more poor people were made poorer through the
studies have been refuted by the adoption of different data taxing and spending activities of governments than bene-
setsb or different econometric techniques.c Although the fited from those activities.
behavioral effect of aid flows undermining accountability Notwithstanding the importance of mobilizing domes-
has been tested and isolated in experimental settings,d tic resources to expand responsiveness and accountability
in reality the relationship is more complex and seems to citizens, many countries may be too poor to have the
to depend on three factors: the type of aid (for example, capacity to collect enough revenues to address important
whether grant or debt, budget support, or project-specific); development goals; they may harm the poor in the process
the contemporaneous effects of conditional policies asso- of collecting domestic resources; or they may be politically
ciated with the aid; and, more important, the governance unable to pass reforms to increase revenues. In countries
setting specific to each country. Moreover, even if aid were in which poverty rates are higher than 65 percent (mainly
to reduce incentives to mobilize domestic resources, the in Sub-Saharan Africa), for example, there is no feasible
removal of aid may result in societally suboptimal taxation redistribution scheme that allows eradicating poverty only
policies to raise revenues, leaving the poor worse off. by transferring resources domestically from the rich to the
The effects of domestic resource mobilization on poor.f Moreover, in many developing countries poor individ-
accountability depend on how domestic funds are mobi- uals are often impoverished by the fiscal system when both
lized. Many available taxes may not have the capacity to government taxation and spending are taken into account.g
enhance accountability, such as resource taxes, or may Finally, political power might be concentrated in the hands
have strong distortionary effects, such as trade taxes. of a few rich individuals whose interests collide with those
International corporate tax competition and trade liberal- of the poor. In such instances, where there is need to mobi-
ization have also diminished states capacity for domestic lize a larger set of individuals to counterweigh the political
resource mobilization (a race to the bottom). In settings influence in the hands of the few, domestic resource mobi-
with low savings rates or the potential for capital flight lization might be very difficult to achieve.h

Source: WDR 2017 team.


a. Most notably, Gupta and others (2004).
b. Morrissey and Torrance (2015).
c. For example, Clist and Morrissey (2011) invalidate the contemporaneous negative correlation found in Gupta and others (2004) by introducing a lagged
effect of aid and taxation. They conclude that the relationship is negligible.
d. Paler (2013); Martin (2014).
e. Lustig (2016).
f. Ravallion (2010); Ceriani, Bolch, and Lpez-Calva (2016).
g. Lustig (2016).
h. Ceriani, Bolch, and Lpez-Calva (2016).

measuring resultsrun up against long-established beyond technocratic approaches and learning how
bureaucratic structures, practices, and habits. The to take into account the openings and constraints
way forward may require a more adaptive or agile presented by shifting politics are key to the ability of
approach in which strategies are tried out locally foreign aid to induce and sustain governance reforms
and then adjusted based on early evidence. Moving that promote development.

28 | WORLD DEVELOPMENT REPORT 2017


Rethinking governance for action problems that stand in the way of pursuing
further development.
development
More than 70 years after the Bretton Woods Confer- Three guiding principles
ence that launched the World Bank and the Interna- The WDR 2017 proposes three simple principles to
tional Monetary Fund, the international community guide those thinking about reform. First, it is import-
continues to recognize that promoting sustained ant to think not only about what form institutions
development requires taking seriously the underly- should have, but also about the functions that insti-
ing determinants related to governance. Future prog- tutions must performthat is, think not only about
ress will require a new framework and new analytical the form of institutions but also about their functions.
tools to harness the growing evidence on what has Second, it is important to think that, although capacity
worked and what has not. building matters, how to use capacity and where to
Policies do not occur in a vacuum. Rather, they invest in capacity depend on the relative bargaining
take place in complex political and social settings in powers of actorsthat is, think not only about capacity
which individuals and groups with unequal bargain- building but also about power asymmetries. Third, it is
ing power interact within changing rules as they important to think that in order to achieve the rule of
pursue conflicting interests. This Report shows that law, countries must first strengthen the different roles
taking into account how the distribution of power in of law to enhance contestability, change incentives,
the policy arena enables or constrains institutions to and reshape preferencesthat is, think not only about
effectively promote commitment, coordination, and the rule of law but also about the role of law (table O.2).
cooperation is critical to ensuring progress toward When one is facing a specific policy challenge,
achieving security, growth, and equity. what do these principles mean in practical terms?
Past World Development Reports have shed light on This Report identifies four key insights. Box O.13
how to solve some of the most challenging problems offers a simple diagnostic road map for bringing
in key areas of development, such as jobs, gender these insights more concretely into development pro-
equality, and risk management. This WDR is part of gramming in an effort to enhance effectiveness.
a trilogy of recent reports, alongside Mind, Society, and The first challenge is to identify the underlying
Behavior (2015) and Digital Dividends (2016), that exam- functional problem. Diagnostic approaches should
ine how policy makers can make fuller use of behav- home in on the specific commitment, coordination,
ioral, technological, and institutional instruments to and cooperation problems that stand in the way of
improve state effectiveness for development. This achieving socially desirable outcomes, and on the
Report starts by acknowledging that policies such as ways that power asymmetries in the policy arena con-
those to strengthen labor markets, overcome gender strain these functions. In addition to constraints that
barriers, or prepare countries against shocks are often are typically consideredsuch as physical and admin-
difficult to introduce and implement because certain istrative capacitypolicies may still be ineffective if
groups in society who gain from the status quo may groups with enough bargaining power have no incen-
be powerful enough to resist the reforms needed to tives to pursue adoption or implementation. Taking
break the political equilibrium. Successful reforms into account power asymmetries means focusing on
thus are not just about best practice. They require implementable (if not necessarily ideal) policies that
adopting and adjusting institutional forms in ways can generate incremental progress toward inclusive
that solve the specific commitment and collective growth and equitable development.

Table O.2Three principles for rethinking governance for development


Traditional approach Principles for rethinking governance for development
Invest in designing the right form of institutions. Think not only about the form of institutions, but also
about their functions.

Build the capacity of institutions to implement policies. Think not only about capacity building, but also about
power asymmetries.

Focus on strengthening the rule of law to ensure that Think not only about the rule of law, but also about the
those policies and rules are applied impersonally. role of law.
Source: WDR 2017 team.

OVERVIEW | 29
Box O.13What does the WDR 2017 framework mean for action?
The policy effectiveness cycle

This Report argues that policy effectiveness cannot be Step 1.Diagnose. Identify the underlying functional prob-
understood only from a technical perspective; it is also lem (commitment, coordination, cooperation).
necessary to consider the process through which actors
Step 2.Assess. Identify the nature of power asymmetries
bargain about the design and implementation of policies
in the policy arena (exclusion, capture, clientelism).
within a specific institutional setting. The consistency and
continuity of policies over time (commitment), the align- Step 3.Target. Identify the relevant entry point(s) for
ment of beliefs and preferences (coordination), as well reform (contestability, incentives, preferences and beliefs).
as the voluntary compliance and absence of free-riding
Step 4.Design. Identify the best mechanism for interven-
(cooperation) are key institutional functions that influence
tion (R1, R2, R3).
how effective policies will be. But what does that mean for
specific policy actions? Step 5.Implement. Identify key stakeholders needed to
Figure BO.13.1 presents a way to think about specific poli- build a coalition for implementation (elites, citizens, inter-
cies in a way that includes the elements that can increase the national actors).
likelihood of effectiveness. This policy effectiveness cycle
Step 6.Evaluate and adapt.
begins by clearly defining the objective to be achieved and
then following a series of well-specified steps:

Figure BO.13.1The policy effectiveness cycle

1. Diagnose

2. Assess

6. Evaluate
and
adapt Exclusion
Capture
Clientelism

Development
objective

5. Implement 3. Target

International actors Preferences and beliefs


4. Design

First-level rules (R1)


Mid-level rules (R2)
Higher-level rules (R3)

Source: WDR 2017 team.

Source: WDR 2017 team.

30 | WORLD DEVELOPMENT REPORT 2017


The second challenge is to identity the different helpful to consider three levels of rules.51 First-level
levers of change that can help reshape the policy rules, or R1, refer to specific policies (for example, the
arena to expand the set of policies that can be imple- percentage of budget allocated to health care). Mid-
mented. Instead of taking the existing policy-making level rules, R2, refer to organizational formssuch as
environment as a given, reformers would analyze the independency of the judiciary and central bank.
how to lift the existing constraints to expand the Higher-level rules, R3, relate to rules about chang-
space of what is politically feasible. Different levers ing rulesnamely, constitutional and electoral law.
of change can contribute to this shift. In looking The form of policies is certainly not to be ruled out,
at the contestability of the policy arena, reformers but it is also crucial to think about their function.
would take into account that incentives, as well as For example, beyond what a fiscal rule looks like, is
the preferences and beliefs of actors, are instrumental commitment to the rule credible? Some functional
to understanding what agreements are feasible. challenges may require a combination of reforms
The third challenge is to identify the relevant at all three rule levels. Finally, when designing and
interventions or changes in rules that best solve evaluating policies, anticipating opposition and con-
the specific functional challenges. When thinking sidering potential unintended consequences must
about potential reforms of policies, actors will find it be part of the process (box O.14). Particularly when

Box O.14Lessons for reformers from the rules game: How is legitimacy
ultimately built?

This Report encourages reformers to pay attention to acceptance of the rules and compliance with them. The cit-
the details of the rules game so they can avoid two basic izens of a nation may be willing to delegate enough power
mistakes. to their government to make it a dominant player in the
First, an act of reform undertaken by one player in a rules game for the nation, but only as long as they feel that
rules game can backfire if the player does not consider the the governments use of that power is legitimate.
actions the reform will trigger in other players. For exam- The functional approach in this Report allows a clearer
ple, an outsider might advise the legislature on the benefits understanding of the concept of legitimacy. The legiti-
of contract law. In response, the legislature might pass a macy of a government can be derived from three sources.
law that tells the courts to enforce contracts; the executive Repeated commitment builds legitimacy in terms of
head of government might promise to promote judges who outcomes.a When a government repeatedly delivers on
follow the executives instructions to favor some people its commitments, it legitimizes itself, such as by reliably
in court cases; wealthy elites might pay the executive to providing public services. Legitimacy can also come from
receive special treatment in the courts; the executive might a perception of fairness in the way in which policies and
use the money from the elites to finance an upcoming polit- rules are designed and implementedthat is, process
ical campaign; and, as a result, citizens might not trust the legitimacy. Finally, legitimacy can also be relational, where
courts to enforce contract law. Ultimately, this reform did sharing a set of values and norms encourages individuals
not produce the anticipated benefits, and it may have made to recognize authority. Outcome, process, and relational
matters even worse. The courts, which previously offered legitimacy form the three types of legitimacy identified in
equal protection under criminal law, may no longer be able this Report. Legitimacy matters for cooperation and coordi-
to punish wealthy offenders who commit crimes. nation because it implies voluntary compliance with an act
Second, even if it produces better payoffs today, a of authority. Even if a government delivers on its commit-
reform could also backfire if it generates worse outcomes ments and is able to coerce people into complying, there
for the rules game that will be played in the future. This may be legitimacy deficits if the process is perceived
can be particularly important in terms of what political as unfair and people may not be willing to cooperate and
scientists call legitimacy, whose manifestation is voluntary would rather opt out of the social contract.

Source: WDR 2017 team.


a. Outcome legitimacy is related to the notion of trust, which is defined in this Report as the probability that an actor assigns to other actors of delivering
on their commitment, conditional on their past behavior.

OVERVIEW | 31
thinking about evaluation, it must be understood that may nevertheless struggle to adapt to growing citi-
trajectories may not be linear and thus assessment zen demands. Regimes may lose legitimacy when
requires complex methods. Anticipating the chang- decision-making processes are insufficiently inclu-
ing balance of power around the reform process and sive, even when other development outcomes appear
adopting an adaptive approach, such as building coa- successful. For example, even effective growth pol-
litions in anticipation of the reform, can reduce the icies may alienate the population if public voice is
risk of reversal. Driving sustainable change requires lacking in the policy process. Overcoming delegitimi-
considering the potential opportunities presented by zation necessitates greater inclusion in the political
elite interests, the opportunities for citizen collective process.
action, and the role of international influences. A focus on creating conditions, like those dis-
cussed in this Report, that prepare societies to adapt
Creating conditions for adaptability as their needs and demands change over time is crit-
When can meaningful changes be made in the nature ical to ensuring inclusive and sustainable develop-
of governance? The development path is bumpy: ment progress. Traditional development orthodoxy
shocks (such as terms of trade shocks and natural has so far emphasized the centrality of three assump-
disasters) and gradual developments (such as urban- tions in improving governance for development: the
ization or a growing middle class) alter the bargaining form of policies, the capacity to implement them,
influence and preferences of actors, often benefiting and the impersonal application of the rules. These
one at the expense of another. In the face of these assumptions have shaped the conventional solutions
changes, governance arrangements that cannot of the international community to the problem of
accommodate new actors or demands may collapse. policy failure in developing countries: first, invest
For example, violence traps are unstable bargains in in good laws and policies; second, build organiza-
which elites are highly polarized and the costs of los- tional and technical capacity to implement them;
ing control are greatwhen the stakes are sufficiently and third, strengthen the rule of law. This Report
highleading to violent conflict. Middle-income traps moves beyond these approaches and emphasizes
are situations in which interest groups, currently that, although it is important to look at forms that
benefiting by extracting rents, have incentives to have worked in other contexts, gauge what capacity is
oppose new economic conditions and thus prevent needed, and stress the importance of the rule of law,
efficiency-oriented reforms from happening, leading these aspects are not enough.
to an unproductive equilibrium. And inequality traps
are a vicious cycle in which a high concentration of
wealth translates into a disproportionate ability of Navigating this Report
those at the top of the distribution to influence the
policy process in their favor and weakens the percep- Part I. Rethinking governance for
tion of fairness of those at the bottom of the distribu- development: A conceptual framework
tion, who decide to opt out and not to contest in the Part I of this Report presents a conceptual framework
policy arena.52 for rethinking the role of governance and law in devel-
Adaptability to Adaptability to changes in the relative bargaining opment. Chapter 1 motivates by unpacking critical
changes in the power, incentives, and preferences of different actors questions facing the development community today:
relative bargaining matters. Although the conditions that determine in particular, what are the underlying determinants
power, incentives, whether countries will adapt in ways that allow for of policy effectiveness? Chapter 2 proposes a new
and preferences more security, growth, and equity are contingent on analytical approach to answering these questions,
of different actors history and are highly specific to context, there are using a game theoretic approach to argue that the
matters. a few circumstances that make such adaptability functional role institutions play in ensuring credible
more likely. In particular, when elites have reasons commitment, inducing coordination, and enhancing
to find common ground, bargains can expand and cooperation is fundamental to the effectiveness of
adapt. When national institutions produce more policies to promote development. The framework
effective leaders, countries are more capable of presented in the chapter explores how the unequal
long-term development. When countries have more distribution of power in society (power asymmetry)
balanced, diversified, and organized business inter- is a key factor underpinning the effectiveness of
ests, they may be more capable of reforming insti- these functions. Chapter 3 approaches the conceptual
tutions to adapt to changing economic conditions. framework from the perspective of law, explaining
Bargains that can adapt to evolving elite interests the different roles that law plays in shaping and

32 | WORLD DEVELOPMENT REPORT 2017


reshaping the policy arena in which actors bargain 3. Hoff (2000) reviews models of coordination failures
over policy design and implementation. in a wide range of contexts, including social norms
and corruption. Cooper (1999) reviews macro
Part II. Governance for development economic models of coordination failures, and
Rodrguez-Clare (2005) reviews microeconomic
Part II of this Report applies the framework presented
models of coordination failures.
in part I to better understand three core development
4. Barr (2001); Lindert (2004).
outcomes: security (chapter 4), growth (chapter 5), and 5. Including at the subnational level. Preventing crime,
equity (chapter 6). Commitment, coordination, and for example, can be explained from the functional
cooperation fundamentally underlie the effectiveness perspective as part of what local governments pro-
of policies to promote these outcomes, but the unequal vide for the public, as shown in part II of this Report.
distribution of power can constrain policy effective- 6. What distinguishes elites from citizens in this
ness. Moreover, characteristics of development itself Report is their ability to directly influence the design
such as the composition of growth or the level of and implementation of a certain policy. In this way,
elites are defined in a positive (as opposed to a nor-
inequalityinfluence the relative bargaining power of
mative) sense. See box O.9 for further detail.
certain actors. Enhancing contestability in the policy
7. A similar approach has been developed in a pioneer-
arena, effectively changing incentives, and reshaping ing work, The Politics of Policies, in the context of Latin
the preferences and beliefs of different actorsfor America (IDB 2005).
example, through leadershipcan make development 8. However, lack of access to state power is not the only
policies more effective in achieving their objectives. determinant of violence; the capacity to mobilize
against governments also matters (Cederman, Wim-
Part III. Drivers of change mer, and Min 2010), as does the opportunity to mobi-
Part III of this Report explores the dynamics of how lize. On the former, see Fearon and Laitin (2000).
9. Wimmer, Cederman, and Min (2009).
change occurs from the perspective of elite bargains
10. Platteau (2000a).
(chapter 7), citizen engagement (chapter 8), and
11. Suharto was the second president of Indonesia. He
international influences (chapter 9). As discussed in held the office for 31 years, from the ousting of the
part II, to improve policy effectiveness and ultimately first president, Sukarno, in 1967 until his resignation
expand the set of implementable policies, it is neces- in 1998.
sary to reshape the policy arena where actors bargain. 12. Khwaja and Mian (2005).
This can be accomplished by enhancing contest- 13. Stokes (2009).
abilitythat is, by enabling new actors to enter the 14. Khemani and others (2016).
bargaining space, by changing the incentives of the 15. Bold and others (2012).
actors involved, or by reshaping their preferences and 16. Ferreira and others (2013).
17. World Bank (2015).
beliefs. Although the dynamics of governance can be
18. Collective action problems include those solved
very persistent and are highly endogenous, change is through coordination (the coordinated actions
possible over time. In the end, change is manifested among actors based on a shared expectation about
by bringing about new formal rules that reshape what others will do) and cooperation (the coopera-
de jure power. tive behavior among actors, whereby opportunistic
behaviorfree-ridingis limited). Throughout this
Spotlights Report, the term collective action problems refers to
This Report contains 13 spotlights, which apply the these two different types of problems.
conceptual framework described in the Report to key 19. Acemoglu and Robinson (2012).
20. Social norms are the beliefs shared by a group or
policy areas of interest, ranging from service delivery
community. In this way, norms can be understood as
to corruption and illicit financial flows. commonly shared beliefs.
21. See Aaberge, Langrgen, and Lindgren (2010) and
Notes Lustig (2015).
22. See Besley and Persson (2014).
1. The chapters of this Report focus on the specific 23. The evidence for how some of these mechanisms
question of policy effectiveness for achieving these lead to better outcomes, however, is mixed, as fur-
outcomes. The framework, however, can be used to ther discussed in chapter 8.
address broader questions about social dynamics. 24. Hart (1961).
2. See Rosenstein-Rodan (1943). Murphy, Shleifer, and 25. Basu (2015); McAdams (2015).
Vishny (1989) model a more recent version of this 26. Roland and Verdier (1999).
idea. 27. Hellman (1998).

OVERVIEW | 33
28. Jackson, Klich, and Poznanska (2005). Barr, Nicholas. 2001. The Welfare State as Piggy Bank:
29. Lindert (2004). Information, Risk, Uncertainty, and the Role of the State.
30. Joshi and Ayee (2009). Oxford, U.K.: Oxford University Press.
31. Bjrkman and Svensson (2009). Barrett, Stanley R., Sean Stokholm, and Jeanette Burke.
32. Ferreira and others (2013). 2001. The Idea of Power and the Power of Ideas: A
33. Preston (2003). Review Essay. American Anthropologist 103 (2): 46880.
34. Aidt and Jensen (2014). Basu, Kaushik. 2000. Prelude to Political Economy: A Study of
35. Kim (2007). the Social and Political Foundations of Economics. Oxford,
36. Rawls (1971) proposes that citizens in an original U.K.: Oxford University Press.
position behind a Kantian veil of ignorance, igno- . 2015. The Republic of Beliefs: A New Approach
rant of their lot in lifesuch as class, race, social sta- to Law and Economics. Policy Research Working
tus, distribution of assets, genderwould opt for a Paper 7259, World Bank, Washington, DC.
society that maximizes the level of welfare achieved Beegle, Kathleen, Luc Christiaensen, Andrew Dabalen,
by the worst-off person in society (Maximin princi- and Isis Gaddis. 2016. Poverty in a Rising Africa. Wash-
ple) as the accepted social contract. ington, DC: World Bank.
37. Berliner and Erlich (2015). Berliner, Daniel, and Aaron Erlich. 2015. Competing
38. Khemani and others (2016). for Transparency: Political Competition and Institu-
39. Burgess and others (2015). tional Reform in Mexican States. American Political
40. Keefer (2011, 2013); Cruz and Keefer (2013). Science Review 109 (1): 11028.
41. Khemani and others (2016). Besley, Timothy, and Torsten Persson. 2014. Pillars of Pros-
42. Devarajan and Kanbur (2012); Mansuri and Rao perity: The Political Economics of Development Clusters.
(2013). Princeton, NJ: Princeton University Press.
43. World Bank (2016b). Bishop, S., and A. Hoeffler. 2014. Free and Fair Elec-
44. WDR 2017 team, based on Spada and others (2015). tionsA New Database. CSAE Working Paper
45. Foreign aid refers to official development assis- WPS/2014-14, Centre for the Study of African Econo-
tance as defined by the Organisation for Economic mies, Oxford, U.K.
Co-operation and Development (OECD). Bjrkman, Martina, and Jakob Svensson. 2009. Power to
46. Fearon, Humphreys, and Weinstein (2009). the People: Evidence from a Randomized Field Exper-
47. Moore (2004). iment on Community-Based Monitoring in Uganda.
48. The aid curse argument is made by Moss, Petters- Quarterly Journal of Economics 124 (2): 73569.
son, and van de Walle (2006); Collier (2007); and Bold, Tessa, Mwangi Kimenyi, Germano Mwabu, Alice
Djankov, Montalvo, and Reynal-Querol (2008). Nganga, and Justin Sandefur. 2012. Scaling-KEN-1.
49. Devarajan and Khemani (2016). International Growth Centre, London School of Eco-
50. Devarajan and Khemani (2016). nomics and University of Oxford.
51. Acua and Tommasi (1999). Braithwaite, John, and Peter Drahos. 2000. Global Business
52. Levy and Walton (2005). Regulation. Cambridge, U.K.: Cambridge University
Press.
Brockmeyer, Anne, Maha Khatrouch, and Gal Raballand.
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OVERVIEW | 37
PART I

Rethinking governance
for development:
A conceptual framework

1. 2. 3.
______________________________________ ______________________________________ ______________________________________

Governance for Enhancing The role of law


development: governance for
The challenges development:
Why policies fail
CHAPTER 1

Governance for
development:
The challenges

Societies worldwide have made enormous progress 20 percent of the population of India is approximately
in improving the socioeconomic conditions for large 25 years behind the wealthiest 20 percent (figure 1.1,
groups of people over the last century. Just in the panel b).
last 20 years, more than 1.2 billion people have been
lifted out of poverty (World Bank 2015). Nobel Laure-
ate Angus Deaton labels this achievement the great Understanding development
escape: the story of mankinds escaping from depri- policy: Proximate factors
vation and early death, of how people have managed
to make their lives better, and led the way for others to
and underlying determinants
follow (Deaton 2013, ix). Explanations of such vast disparities in development
Such a positive performance hides, however, great performance typically focus on proximate factorsfor
heterogeneity within and among countries and regions example, the provision of health services, connectiv-
in important aspects of the quality of life. Extreme ity infrastructure, or access to finance. The intensive
poverty is still a reality for about 1 billion people, or study of the problem of economic development,
14 percent of the total global population. Inequalities Hirschman (1958, 1) noted almost six decades ago,
are strikingand in many cases increasing. This per- has had one discouraging result: it has produced
sistent disparity in social and economic achievement an ever-lengthening list of factors and conditions, of
has long concerned policy makers, academics, and obstacles and prerequisites. This Report argues that,
Although development practitioners, particularly in todays although proximate factors such as access to finance
proximate factors world, where the links among countries are stronger or the provision of health services are indeed crucial
such as access and technology diffusion can be fast and cheap. for development, the adoption and implementation
to finance or Consider, for example, the under-5 child mor- of successful pro-development policies often depend
the provision of tality rate. This indicator is regarded as one of the on deeper underlying determinants. Ultimately, con-
health services most significant measures of how a society is doing fronting the challenges faced by todays developing
are indeed crucial in addressing the needs of its population because it countriesto name a few, poor service delivery, vio-
for development, reflects the quality and incidence of service provi- lence, slowing growth, corruption, and the sustain-
the adoption and sion (Buckley 2003; Andrews, Hay, and Myers 2010). able management of natural resourcesrequires a
implementation Despite substantial improvements over the last rethinking of the process by which state and nonstate
of successful 45 years, developing countries still lag many years actors interact to design and implement policies
pro-development behind the rate in developed countries for this indi- that is, what this Report calls governance (box 1.1).
policies often cator. For example, the child mortality rate in Sierra An understanding of governance as an underlying
depend on Leone matches Portugals rate 58 years ago (figure 1.1, determinant of development is useful in examining
deeper underlying panel a). Moreover, within countries individuals at cases of the successful and unsuccessful adoption
determinants. the bottom of the income distribution systematically and implementation of policies in pursuit of secu-
lag behind those at the top. For example, the poorest rity, growth, and equity, and helps explain apparent

40 | World Development Report 2017


Figure 1.1Despite declining under-5 child mortality rates, inequality among and
within countries is still sizable
a. Child mortality rates in developing countries b. Child mortality rates of the poorest and the
and regions compared with the trajectory of richest 20 percent in India compared with
Portugal since 1955 the national average since 1950
150
Under-5 mortality rate (per 1,000 live births)

Under-5 mortality rate (per 1,000 live births)


320
ne
Leo
rra
Sie 280
li
Ma
p.
Re
m.
De 240
o,
ng
100 Co
nis
tan
ha
Afg itania
ur n 200
Ma kista
Pa go
To

160
Portugal
50 ia
Ind wan
a 120
ds Poorest 20 percent, 200506
Bo
ts lan n
ll Is bb
ea
ha
rs ua ari
Ma q rag go e C
Ira a N ica Toba d th
n ud
a 80
eri nd a a arb
AlgNiue ad a eric s dB
nid Am evi a an land
Tri atin s N u a
L isia do and ntig Ze
Tunarba Kitts ait A New 40
B St. uw ia in
K Latv hra Richest 20 percent, 200506
Ba
0 0

1955 1965 1975 1985 1995 2005 2015 1950 1960 1970 1980 1990 2000 2010 2020

Source: WDR 2017 team, using data from UN Inter-agency Group for Child Sources: WDR 2017 team, using data from UN Inter-agency Group for Child
Mortality Estimation (IGME). Mortality Estimation (IGME) and on Indias Demographic and Health Survey
(DHS) for data by quintile.
Note: Data for all comparator countries are from the most recent year
available (circa 2015).

Box 1.1What is governance?

Governance is the process through which state and non- and rules) that enforce and implement policies. Also
state actors interact to design and implement policies depending on the context, state actors will play a more or
within a given set of formal and informal rules that shape less important role with respect to nonstate actors such
and are shaped by power.a This Report defines power as the as civil society organizations and business lobbies. In
ability of groups and individuals to make others act in the addition, governance takes place at different levels, from
interest of those groups and individuals and to bring about international bodies, to national state institutions, to local
specific outcomes (Dahl 1957; Lukes 2005). government agencies, to community and business associa-
Depending on the context, actors may establish a gov- tions. These dimensions often overlap, creating a complex
ernment as a set of formal state institutions (organizations network of actors and interests.

Source: WDR 2017 team.


a. This general definition is consistent with the World Banks corporate definition, which emphasizes formal institutions and the role of state actors.

contradictions in the development trajectories of over the legitimate use of force. Warring factions,
countries around the world. Some recent cases have many with their own regional sources of power, have
attracted global attention. been unable to reach a credible deal to determine the
State building in Somalia and Somaliland. Somalia, makeup and responsibilities of the central state. By
one of the worlds most fragile countries, has been contrast, in Somalias autonomous region of Somali
wracked by violence for more than two decades. Insur- land, an area with similar tribal and clan tensions, 20
gent attacks and regional conflicts have prevented years of stability and economic development have
the emergence of a centralized state with a monopoly followed a 1993 clan conference that brought together

Governance for development: The challenges | 41


leaders from both the modern and traditional sectors, Slums and exclusion in Indias cities. Urban devel-
successfully institutionalizing these clans and elders opment that stems from coordinated planning and
into formal governing bodies. investment by coalitions of developers, bureaucrats,
Confronting corruption and the resource curse in Nige- citizens, and politicians can lead to cities that are
ria. In 2010, just a year after experiencing a decade- centers of growth, innovation, and productivity.
long bounty of windfall revenues from high oil prices, Planners can help ensure that infrastructure meets
Nigeria was requesting budget support from its the demands of investors who seek to maximize
development partners. From a long-term perspective, land rents, businesses that need connectivity to their
it is unclear how much of Nigerias oil wealth has been consumers, and citizens who want access to services
saved to invest in the future, although a Sovereign and jobs. But many cities fail to deliver on these prom-
Wealth Fund was established in 2011 to address these ises. In India, massive urban slumsabout 49,000
concerns. According to a former governor of the cen- at the latest count, with tens of millions of inhabi-
tral bank, the country has lost billions of dollars to cor- tantsrepresent failures to align public investments
ruption by the National Petroleum Company. Indeed, and zoning with the needs of a diverse set of urban
according to 2015 data from the Afrobarometer survey, constituents. Underinvestment in housing and inac-
78 percent of Nigerians feel that the government is cessible or unaffordable transportation options have
doing badly in fighting corruption. Ultimately, the driven workers into informal settlements, often in
institutional context was unable to safeguard natural peripheral areas. Although many developers and poli-
resource revenues in order to reduce fiscal volatility ticians have exploited the system to generate rents for
and promote a macroeconomic environment condu- themselves, this uncoordinated urban development
cive to long-term investment. Several countries have has prevented cities from achieving their growth
demonstrated that the natural resource curse potential, leading to large slums where most citizens
the paradox that countries with abundant natural are deprived of basic services.
resources face slower growth and worse development Demanding better services in Brazil. In 2013 the world
outcomes than countries without resourcescan be watched when protests erupted in Brazils streets,
avoided through effective economic and fiscal policies. with citizens complaining about the quality of public
Chinas growth performance and growth challenges. servicestransport, education, and healthas the 2014
For four decades, China, while increasingly integrat- FIFA World Cup soccer tournament approached. Brazil
ing its economy with the global economy, grew at had gone through 12 years of inclusive and sustained
double-digit rates and lifted more than 700 million growth, which had lifted more than 30 million people
people out of poverty. This successful track record out of poverty and strengthened the middle class.
of economic growth is well known. Yet, according But these same middle classes that contributed with
to many frequently used indicators, Chinas institu- their taxes to the provision of public services were
tional environment during this period appears not now demanding better quality and coverage, includ-
to have changed. Does this imply that institutions do ing FIFA standards for their schools. Why did this
not matter for growth? No. Rather, a deeper under- change come about? Brazils social contract has histor-
standing of Chinas development shows what these ically been weak and fragmented. The poor received
indicators miss: the adaptive policy decisions and low-quality public services, while the upper-middle
state capacity that enabled economic success were classes relied on private services and thus were less
facilitated by profound changes to mechanisms of willing to contribute to the fiscal system. The creation
accountability and collective leadership. Chinas of an expanded middle class and the reduction of
experience highlights the need to pay more attention poverty paradoxically heightened the perceptions of
to how institutions function and less to the specific unfairness as the new middle class expected more than
form they take. Meanwhile, today China faces a low-quality public services for its contributions.
slowdown in growth. Maintaining rapid growth and Brexit and the growing discontent with economic
avoiding a middle-income trap require the polit- integration. In June 2016 voters in the United King-
ical will to switch to a growth model based on firm dom elected to leave the European Union (EU). The
entry, competition, and innovation. In many middle- economic consequences for the country in particular
income countries, this transformation has been and Europe in general have become a source of uncer-
blocked by the actors that benefited from early growth tainty in policy circles. Dissatisfaction with economic
and have mixed incentives to join coalitions for fur- and political integration is not, however, exclusive
ther reforms. Going forward will involve addressing to this region. In countries throughout the world,
these governance challenges.

42 | World Development Report 2017


populist parties have campaigned against trade and unemployment, but it voted to leave the EU. The com-
integrationsome of them enjoying unprecedented mon thread running through these contradictions
electoral success in both developing and developed is governance, which helps explain why ineffective
economies. These parties often prey on citizens policies persist, why effective policies are often not
increasing feelings of disenfranchisement and exclu- adopted or implemented, and why unorthodox insti-
sion from decision making, as well as on a growing tutional arrangements may nevertheless generate
perception of free-riding by specific groups. Even in positive outcomes. In other words, governance drives Governance
countries that have undoubtedly benefited from inte- policy effectiveness. This is the main theme of this drives policy
gration, the unequal distribution of such benefits and Report. effectiveness.
perceived ineffectiveness of voice have led many
citizens to question the status quo, which could have
consequences for social cohesion and stability. Development objectives . . .
As these examples illustrate, contradictions and constraints
occur in the real world. Somalia is a fragile state,
while Somaliland seems to be doing well. Nigeria This Report assumes that all countries share a set
has an abundance of resources, but it is still a lower- of development objectives: minimizing the threat of
middle-income country. China grew rapidly, even violence (security), promoting prosperity (growth),
though many of its fundamental institutions did and ensuring that prosperity is shared (equity), while
not change. India has grown, but it cannot control also protecting the sustainability of the development
the propagation of slums. Brazil has experienced process for future generations (box 1.2). But policies
inclusive growth, but it is now facing increasing do not always translate into these development out-
demands from the middle class. Great Britain had low comes in expected ways.

Box 1.2Governance for what? Achieving the goals of security, growth,


and equity

Many aspects of governance have intrinsic value, in par- prosperity is shared (equity). It also assumes that societies
ticular the notion of freedom. In economic terms, freedom aspire to achieving these goals in environmentally sustain-
can be seen as an opportunity set, and development can able ways. This Report, then, assesses governance in terms
be seen as the removal of various types of unfreedoms of its capacity to deliver on these outcomes.
(exclusion from opportunities), where these unfreedoms This approach is consistent with the transition from a
reduce peoples capacity to exercise their reasoned dialogue based on ideology to the dialogue based on ideals
agency (Sen 1999, xii). As essential as such an intrinsic that has transpired in the global development commu-
value as freedom is, its instrumental value also matters nity over the last few decades. The establishment of the
because of the effectiveness of freedoms of particular Millennium Development Goals (MDGs) in 2000 and the
kinds to promote freedoms of other kinds (Sen 1999, recent ratification of the Sustainable Development Goals
xii). These positive relationships are what economists call (SDGs) by member countries of the United Nations are
complementarities. This Report acknowledges the intrinsic examples of the efforts to set common goals for social and
value of various dimensions of governance, as well as the economic advancement. SDG 16 calls for promoting peace,
notion of development as a positive freedom, while also justice, and strong institutions, and it is explicitly related
recognizing their instrumental value to achieving equitable to governance. Nevertheless, as this Report will argue,
development. beyond its intrinsic value, the SDG 16 goal also has import-
As noted, the analysis in this Report starts from the nor- ant instrumental value because its attainment will aid in the
mative standpoint that every society cares about freeing its attainment of all the other SDGs. Indeed, achievement of all
members from the constant threat of violence (security), the development goals will require a solid understanding of
promoting prosperity (growth), and ensuring that such governance to enable more effective policies.

Source: WDR 2017 team.

Governance for development: The challenges | 43


The first condition that societies want to establish 2015). At the end of 2014, 57.7 million persons world-
in the pursuit of development is securitythat is, peo- wide were displaced (UNHCR 2015). As these figures
ple are safe from violence and the threat of violence. regrettably reflect, policies to achieve security are too
It is a fundamental dimension of well-being and a often ineffective; indeed, certain policies and their
first-order characteristic of development (UNDP 1994; poor implementation can cause or exacerbate the
Sen 1999). societal problems contributing to violence.
More secure Yet, in 2014 more than 1.4 billion people lived in More secure societies are also more prosperous
societies are also countries affected by violence (OECD 2015, 31). Vio- (figure 1.2, panel a). Most of the relatively faster growth
more prosperous. lence is a major problem in 37 countries (map 1.1).1 of higher-income countries between 1950 and 2011
The list includes not just fragile low-income states resulted not from experiencing faster growth but
such as Afghanistan, Somalia, and South Sudan, but rather from shrinking lessand less oftenfrom crises
also rising economic giants such as Brazil, Mexico, or wars than lower-income countries (figure 1.2, panel
and South Africa. More than 740,000 people die b). In the even longer run, annual data on 14 European
each year as a result of armed violence. Remarkably, countries and the United States starting in 1820 show
the majority of these deathsabout 490,000occur a sharp reduction in the frequency of the shrinking
in countries not affected by ongoing wars (Geneva of economic growth after 1950the period following
Declaration Secretariat 2015). Homicides claimed an World War II, which was the last mass-scale episode of
average of 377,000 lives between 2007 and 2012.2 Civil organized violence in these countries (Wallis 2016).
wars, rebellions, and other forms of political violence Security, however, is not sufficient to achieve
caused 101,400 fatalities in 2014 alone (UCDP/PRIO growth. In their quest for prosperity, countries

Map 1.1Violence is a major problem in 37 countries


Violent deaths per 100,000 residents per year, 200812

79.0
26.5
13.4
9.5
6.8
4.8
3.4
2.0
1.4
1.0
0.3
No data

IBRD 42495 | SEPTEMBER 2016

Sources: WDR 2017 team, based on World Bank 2011; Pennsylvania State University, Correlates of War Project (COW), 2015; Geneva Declaration Secretariat 2015.
Note: Violent deaths comprise organized violence and homicide deaths.

44 | World Development Report 2017


require sustained improvements in efficiency and Figure 1.2Economic growth requires security
investment to spur economic growth. Low-income
a. Countries with fewer episodes of violence are more prosperous
countries tend to grow as surplus labor is reallocated
from agriculture to industry. Once the gains from 30,000
this early industrialization process are exhausted,
however, new sources of growth are needed. Eco-
nomic growth arises from accumulationsuch as the

GDP per capita (PPP)


a. Countries with fewer episodes of violence are more prosperous
10,0000
mobilization of savings for industrial investment
and efficiencyhow well inputs are being put to 30,000
use. And yet, many middle-income countries appear
incapable of achieving gains in either accumulation 3,000

GDP per capita (PPP)


or efficiency, becoming stuck instead in low-growth 10,0000
traps. Indeed, in contrast to the predictions of several
growth theories, there is no evidence that low- and
1,000
middle-income countries tend to converge toward
high-income ones (Jones 2015). 3,000 1960 1970 1980 1990 2000 2010
Several countries have managed, though, to escape
Number of coups by year
this middle-income trap. How? The evidence suggests
High-income OECD countries Lower-middle-income countries
that the continual reallocation of resources across
High-income
1,000 non-OECD countries Low-income countries
sectors and firms is a substantial source of efficiency
Upper-middle-income countries
(total factor productivity, or TFP). In a dynamic set- 1960 1970 1980 1990 2000 2010
Sources: WDR 2017 team, based on data from Archigos database (Goemans, Gleditsch, and Chiozza
ting in which new companies enter the market while 2009) forb. High-income
number of coups andcountries Number
Penn World are of
Table,better coups
versionoff by year
not because
8.1 (Feenstra, Inklaar,they grow2015), for
and Timmer
uncompetitive firms exit, inputs reallocate between level of GDP per capita.
faster when they grow, but because they shrink less frequently
High-income OECD countries Lower-middle-income countries
firms, giving way to innovation, competition, and Note: The size of theand
High-income
circlesatonaeach
slower
non-OECD
rateisthan
time series low-income
relative to the numbercountries
of coups per country for
Low-income countries
each income group in a given year. GDP =countries
gross domestic product; OECD = Organisation for Economic
productivity. Countries that escape the low-growth Upper-middle-income countries
Co-operation and Development; PPP = purchasing power parity.
100 6
trap also tend to have a diversified export base in
which coordination between domestic companies 90
b. High-income countries are better off not because they grow
4
and governments contributes to shaping industrial 80 faster when they grow, but because they shrink less frequently
of years (%)

investment. Indeed, the literature and policy forums and at a slower rate than low-income countries

Average rate (%)Average rate (%)


70
2
are filled with discussions about the right sets of pol- 60
100 6
icies that can enable efficient resource allocation and 50
90 0
Frequency

investment upgrading. Nevertheless, as the persistent


40
80 4
stagnation of many middle-income countries around
(%)

30 2
the world reflects, very often these policies are not 70
Frequency of years

2
20
adopted or fail to achieve the expected results. 60 4
In addition to seeking prosperity, societies care 10
50 0
about being equitable. In the United States, the Occupy 0
40 6
<2 25 510 1020 >20
movements slogan, We are the 99%, denounced the 30 2
US$ (thousands)
concentration of wealth among the top 1 percent. As
20
these and other movements around the world reflect, Frequency of shrinking years (left axis) 4
10 Frequency of growing years (left axis)
concerns about increasing inequality are growing.
The evidence indicates that these concerns are not 0 Average growing rate (right axis) 6
<2 25 shrinking
Average 510
rate (right1020
axis) >20
without foundation. Even though there are signs US$ (thousands)
that global income inequality is falling, inequality
within countries is on the rise, and the concentration Frequency of shrinking years (left axis)
Frequency of growing years (left axis)
of income at the top has increased over recent years
Average growing rate (right axis)
(World Bank 2015). In addition to normative concerns, Average shrinking rate (right axis)
a more equitable distribution of income is associated
with positive outcomes, including stability and eco- Sources: WDR 2017 team, based on Wallis 2016, with data from Penn World Table, version 8.1 (Feenstra,
Inklaar, and Timmer 2015).
nomic growth. So how do countries become more
Note: The figure shows real GDP per capita (constant prices: chain series). Countries were first sorted
equitable? into income categories based on their income in 2000, measured in 2005 U.S. dollars. Average annual
Inequality and growth are structurally linked. growth rates are the simple arithmetic average for all the years and all the countries in the income
category, without weighting. The sample underlying the figure comprises 141 countries, which have data
Making growth more equitable involves policies that available from at least 1970 onward. GDP = gross domestic product.

Governance for development: The challenges | 45


look at the bottom half of the income distribution. groups of people relying on agricultural activities
Consider the differences in the structure of eco- but rather heterogeneous public servicesconnec-
nomic activity and public services in low- compared tivity is uneven, and the availability and quality of
with high-income countries. Traveling across a low- services such as education and health vary dramati-
income country, one frequently observes a pattern of cally from the rural to urban sectors (box 1.3). Quality
homogeneous economic activityfor example, large and access are much lower for low-income people.

Box 1.3Discontinuities of the state

Distribution of income is not the only factor associated with (ODonnell 1993, 2003). When some regions or social groups
the heterogeneous coverage and quality of the provision of are systematically neglected, geography becomes a prom-
services and public goods. Circumstances such as gender, inent dimension that reflects inequities. State discontinuity
ethnicity, and location are also associated with the differ- can be approximated by a measure of the unequal density
ential capacity of groups to influence the distribution of of the presence of the state in the different geographical
resources and the design of policies to address their needs. regions of a country.
Location, in particular, is an important dimension because In Bolivia, a subnational analysis of the countrys nine
of its correlation with other circumstances. As Kanbur and departments (departamentos) reveals that a few regions
Venables (2005, 3) note, Spatial inequality is a dimension are systematically affected by a low state presence, as mea-
of overall inequality, but it has added significance when sured in terms of public services provided in that specific
spatial and regional divisions align with political and ethnic area. Map B1.3.1 shows the level of the state presence in
tensions to undermine social and political stability. health, education, and basic services (panels a, b, and c,
In this sense, the state can be said to be discontinuous respectively), for each region, and the composite density of
in terms of its presence and therefore its ability to respond the state (panel d) for these indicatorsthat is, the average
effectively to the needs of citizens in specific territories presence across dimensions. The departments of Santa

Map B1.3.1State presence in Bolivia in selected intervention domains and


composite density, circa 2010
a. Health b. Education

PA NDO PA N D O

BENI BENI

LA PA Z L A PA Z

LA PAZ LA PAZ
COCHA BA M BA SA NTA CRU Z CO CH A B A MB A S A N TA CRU Z

OR UR O O RU RO

POTOS POTOS
CHUQUI SA CA CH U Q U ISA CA

TA RI JA TA RIJ A

IBRD 42499 | SEPTEMBER 2016 IBRD 42500 | SEPTEMBER 2016

(Box continues next page)

46 | World Development Report 2017


Box 1.3Discontinuities of the state (continued)

Map B1.3.1State presence in Bolivia in selected intervention domains and


composite density, circa 2010 (continued)
c. Access to water d. Composite density

PAN D O PA N D O

BENI BENI

LA PAZ L A PA Z

LA PAZ LA PAZ
C O CHA BA M BA SA NTA CR UZ CO CH A B A MB A S A N TA CRU Z

ORURO O RU RO

P O T OS POTOS
CHUQUI SA CA CH U Q U IS A CA

TA RI JA TA RIJ A

IBRD 42501 | SEPTEMBER 2016 IBRD 42502 | SEPTEMBER 2016

Sources: WDR 2017 team elaboration based on data from Bolivias National Statistical Institute (census, 2012) for education and access to water and on
data from the Demographic and Health Survey Program (2008) for health.
Note: The indicators for assessing the level of state presence are under-5 child mortality (health), share of literate adults (education), and share of
households with access to piped water inside their homes (access to water). The degree of shading indicates the degree of coverage of services. The
darker purple shading (panels ac) represents a higher presence for that dimension (a better outcome or a higher coverage). State density (panel d) is
the composite indicator of the different layers of state presence or coverage. The darker orange shading represents higher state density.

Cruz and Potos are at the opposite ends of the density local resources (for example, with GDP per capita). Such
spectrum: Santa Cruz has the highest state density, Potos differences in regional development could be a result of
the lowest. However, in Bolivia the overall discontinuity of the uneven responsiveness of the state, most likely over
the state has decreased over time. Using a measure of the a long period of time, to different geographical areas and
inequality of the density across regions, the analysis finds socioeconomic groups. In Bolivia, for example, the least
that the presence of the state across regions in Bolivia has dense region (Potos) is also the region with the highest
become more homogeneous over time.a incidence of indigenous population, who historically have
The level of state density in different regions is posi- been underrepresented in state institutions and in policy
tively, although not perfectly, correlated with the level of making until the recent past.b

Source: WDR 2017 team, based on Ceriani and Lpez-Calva (2016).


a. W
 DR 2017 team estimates, based on data from Bolivias National Statistical Institute for education (census, 1992 and 2012) and access to water (census,
2001 and 2012) and on data from the National Survey on Demography and Health (1994) and Demographic and Health Survey (2008) for health.
b. According to Bolivias latest census (2012), Castellano was not the main language spoken in Potos by 54 percent of the population, 6 years and older, as
opposed to, for example, 15 percent in Santa Cruz and 8 percent in Tarija.

Governance for development: The challenges | 47


Indeed, a low commitment to providing quality pub- regardless of their circumstances. Even though power
lic services is one of the main characteristics of the is distributed unequally in every societyan inev-
most inequitable countries in the world. The opposite itable factpromoting governance for the bottom half
tends to be true in advanced countries, where one means promoting a process through which develop-
finds a more diversified economic structure and a ment dividends can still be equitably distributed.
rather homogeneous coverage and quality of public
goods and services, independent of individuals cir-
cumstances. The quest for development could thus Notes
be summarized as the transition toward more diver- 1. This is the number of countries in the first quintile of
sified economic opportunities and a more homoge- map 1.1, where the incidence of violence is measured
neous response of public services to all individuals. by the number of deaths in armed conflict, in addition
The provision of public goods and services as a to the number of homicides.
way to level opportunities and to reduce poverty is 2. WDR 2017 team, based on the Global Burden of Armed
Violence Report 2015: Every Body Counts (Geneva Declara-
undisputed. These and other social policies allow
tion Secretariat 2015). These figures are for intentional
individuals to increase their stock of assets and the
homicides. The number rises to 3,864,000 if unin-
opportunity to use them, and they protect the most
tentional homicides are included. The World Health
vulnerable. Fiscal policies enable the public spending Organization (WHO) defines homicide as injuries
behind these social transfers through taxation and inflicted by another person with intent to injure or
help reshape the distribution of resources. Yet, policies kill, by any means.
to achieve equity are often not adopted, or they fail.

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Governance for development: The challenges | 49


CHAPTER 2

Enhancing governance
for development:
Why policies fail

Amka and the Three Golden Rules (2014) is a beautifully reserve fund (Chimeddorj 2015). Thus no matter how
crafted film about a Mongolian child, Amka, whose well policy makers designed the future generations
life turns into a nightmare after he finds a golden coin fund, unless the interests of the powerful groups in
and hops onto a path of overspending, abandoning society were to change, the commitment to a policy of
family duties and taking on unmanageable levels of fiscal prudence would continue to fail and the coun-
indebtedness. Under pressure to repay his debts, he try would remain in debt. The process to reach and
runs away, through the astounding Mongolian land- sustain agreements among decision makers on these
scape, to settle with an eccentric uncle who teaches policies had not created the conditions for people to
him the three golden rules of life. be willing to cooperate and coordinate actions around
The Mongolian newspaper UB Post noted in 2014 specific long-term goals.
that the story is in many ways a symbol of how Mon- The parallels between Mongolias state of affairs
golia must decide its own fate to manage its grow- and the story portrayed in the movie were not a coin-
ing levels of debt.1 Indeed, as the movie was being cidence. The metaphor in Amkas tale was a deliberate
released, the country was undergoing a third attempt attempt, supported by opinion leaders and artists,
to establish the rainy-day Future Heritage Fund to to create awareness in Mongolian society about Policy making
manage its windfall from mining revenues (mining is the importance of prudence in the management of does not take
the countrys largest source of revenue). The attempt resources (in Amkas story, the golden coin). The movie place in a vacuum.
to transplant the design of a future generations was viewed as an instrument to reinforce peoples val- It is the result of a
fund from international best practices had already ues of prudential management of wealth in an effort bargaining process
failed twice. to coordinate support for the pursuit of the long-term among actors,
Experts from around the world had visited Mon- goal of fiscal sustainability in Mongolia. who frequently
golia over the previous decade, providing advice on As this example illustrates, policy making does have diverse and
the best existing rules for the distribution and man- not take place in a vacuum. It is the result of a bar- even opposing
agement of revenues from natural resources. Tech- gaining process among actors, who frequently have preferences and
nical solutions were available, and political will was diverse and even opposing preferences and interests. interests.
palpable among several state actors. Yet, since 2007, More important, the bargaining power of those actors
attempts to establish rules for the use of mining reve- differs, derived from a variety of sources such as the
nues had been thwarted by political pressures. Hard- existing formal rules, informal norms, their ability
fought parliamentary elections prompted Mongolias to represent and mobilize other groups in society, or
political parties to promise to increase spending on their control over resources. The complex process in
programs such as cash allowances, untargeted social which actors bargain over the design and implemen-
benefits, and investments in specific regions in order tation of policies, in a very specific social, historical,
to garner support. However, such promises could be and economic context, is what in this Report is called
fulfilled only by depleting the resources going into the governance.

Enhancing governance for development: Why policies fail | 51


Diverse pathways to success: of fiscal policy to manage volatility has been viewed
as a key role of institutions seeking to promote long-
Moving beyond institutional term development, the form that those institutions
transplants took in Mongolia was not enough to affect outcomes
(Gill and others 2014). Political constraints, pressures
For decades, academics as well as practitioners
from interest groups, existing social opinions about
have acknowledged the importance of institutions
organizations and rulesto development. Countries the need to accelerate progress in specific areas, and
that are more secure, prosperous, and equitable tend to historical inertia had eroded the credibility of the
rank higher on the existing indicators that emphasize commitment to prudential management of mining
certain institutional forms. This pattern has created resources.
a perception that certain types of institutions unam- Contrast Mongolia with those countries viewed
biguously determine higher levels of development, as examples of effective management of natural
and it has led many well-intentioned policy makers resources such as Chile and the Netherlands. Chile and
and development agencies to promote institutional Mongolia have the same institutional forms for the
reforms that aim at achieving those institutional allocation of revenues from the extractive industry
standardsoften referred to as institutional transplants. Mongolia followed the Chilean examplebut very
In other words, in acknowledging that governance different outcomes. Fiscal spending in Mongolia is
matters for development, one implicitly accepts the considerably more procyclical in spite of having the
fact that the effects of governance are determined by same rules (see figure 2.1, panel a). Meanwhile, Chile
the characteristics of formal institutions. and the Netherlands have very different institutional
However, institutional forms are not enough. Con- forms, but they are similarly effective in managing
sider the challenge that Mongolia faced in following resources (for Chile, see panel b). What do the Chil-
its own golden rules. The Mongolian government ean and Netherlandic cases have in common? Many
decided to adopt international best practices to man- factors determine effectiveness, but certainly the fact
age fiscal revenues from natural resource extraction, that actors are willing to accept and follow the rules,
but it failed to administer them with a long-term per- or act collectively, is one of them. In Chile, political
spective. Although the countercyclical management agreements since the return to democracy in the

Figure 2.1Despite similar rules for the management of natural resource revenue
in Chile and Mongolia, Chiles expenditure patterns reveal a stronger commitment
to compliance
a. Procyclical management in Mongolia b. Countercyclical management in Chile
Steeper regression line reveals a weaker Flatter regression line reveals a stronger
commitment to complying with rules commitment to complying with rules
60 60

40 40
Expenditures (% change)

Expenditures (% change)

20 20

0 0

20 20

20 0 20 40 60 20 0 20 40 60
Exports (% change) Exports (% change)
Sources: Mongolia: Mongolia Statistical Information Services, monthly data, 200515; Chile: World Bank, World Development Indicators (database), 19602014.

52 | World Development Report 2017


1990s have included a long-term perspective on eco-
Drivers of effectiveness:
nomic management, a principle accepted by all actors
in the political spectrum. In the Netherlands, the basic Commitment, coordination,
principles of fiscal management have been broadly and cooperation
accepted within the Netherlandic political culture for
years, reinforced by the experience of living through This Report identifies commitment, coordination, and
a period of mismanagement and the so-called Dutch cooperation as the three core functions of institutions
disease in the second half of the 20th century.2 that are needed to ensure that rules and resources
Often, when policies and technical solutions fail yield the desired development outcomes. Policy effec-
to achieve the intended outcomes, blame falls on tiveness can be explained by whether and how well
institutional failure, and the proposed solution is to institutions are performing these functions. Commit-
improve institutions. But development can occur ment is about supporting consistent policies over time
under a wide variety of institutional trajectories, as to ensure that promises are delivered. Coordination is
examples around the world and throughout history about shaping expectations to enable complementary
demonstrate. Thus it then becomes essential to action. And cooperation is about limiting opportunis-
uncover the underlying drivers of policy effective- tic behavior to prevent free-riding. Coordination and
ness. What makes some policies work while others cooperation imply voluntary compliancethat is, the
fail? In addition to the type of institutions that matter, preferred social action is the one that individuals are
it is relevant to ask what those institutional forms are actually willing to take. Box 2.1 discusses the ways in
trying to achieve, or what functions they are meant to which commitment, coordination, and cooperation
perform. can be understood from the perspective of game

Box 2.1The microfoundations of commitment, coordination, and


cooperation: A perspective from game theory

The framework of this World Development Report (WDR) action A when actor 1 does as well. In the top right gray
highlights commitment, coordination, and cooperation as cell, the first number (0) is actor 1s payoff when that actor
the key institutional functions that shape the effectiveness decides to take action A, but actor 2 decides against it.
of policies for development. Those terms come from game The second number (x) is actor 2s payoff when that actor
theory and are better explained using its language.a Table decides not to take action A, but actor 1 decides to take it.
B2.1.1 presents an example. The actors payoff values can be read in the other scenarios in
The table can be read in the following way. The top the same way. According to the matrix of payoffs, the value
left gray cell symbolizes the net benefits (payoffs) for of x will determine whether the game is a coordination or a
actors when both of them decide to take action A such as cooperation one. Both are collective action problems.
mobilize, pass a law, or monitor a provider. The first num-
ber (2) is the payoff of actor 1 when that actor decides to Coordination
take action A and actor 2 does the same. The second num- If x < 2, the actors are engaged in a coordination game.
ber (2) is actor 2s payoff when that actor decides to take In this game, the actors incentives are aligned, but their

Table B2.1.1Coordination and cooperation as modeled in game theory

Actor 2
Take action A Do not take action A
(A) (NA)
Take action A 2, 2 0, x
(A) (A, A) (A, NA)
Actor 1
Do not take action A x, 0 1, 1
(NA) (NA, A) (NA, NA)

(Box continues next page)

Enhancing governance for development: Why policies fail | 53


Box 2.1The microfoundations of commitment, coordination, and
cooperation: A perspective from game theory (continued)

actions depend on their expectations about what the other the group payoff. In game theory, this is referred to as a
will do. Both of them prefer to take the same action; both prisoners dilemma game, where the collective gain would
outcomes(A, A) and (NA, NA)are equilibria of this be greater if the actors could cooperate, but each actor
game. The problem is how to achieve the equilibrium that is individually has a greater incentive to free-ride (take action
efficient and yields the highest payoff (A, A) because each NA). To induce cooperation, policies would have to put forth
actor is unsure about what the other one will do. In game a credible mechanism of reward or penalty conditioned on
theory, this game is known as the assurance game, where it players actions in order to prompt actions yielding the
is in each actors own interest to take a particular action (Y) jointly preferred outcome.
if there is assurance that everyone else is also taking action
Y. To achieve coordination, policies need to create common Commitment
knowledge that everyone will take the desirable action. Commitment refers to the ability of actors to enforce
Sometimes, this requires providing incentives for some agreements. For example, if the actors were allowed to
actors to take the desirable action first so others will follow. communicate with one another, they would have incentives
to promise to take the action that maximizes the groups
Cooperation payoff. However, because there are no mechanisms to
If x > 2, the actors are engaged in a cooperation game. In enforce those agreements (commitment devices), it is still
this game, actors incentives are not aligned. In equilibrium, in the interest of the actors to renege on their promises.
both of them do not take action A(NA, NA)which is Commitment devices allow actors to transform the game
the worst outcome from the point of view of maximizing so that their incentives are aligned.

Source: WDR 2017 team.


a. Example adapted from Weber (2008) and reprinted in Bartolini (2013).

theory. Although policy makers may not think in policies must include commitment devices to ensure
terms of game theory, they play these games every their credibility. Commitment devices help ensure
day, and the models lend precision and objectivity to the credibility of policies over time, even in the face
understanding their actions. of changing circumstances. In this sense, institutions
can be thought of as technologies that allow society
Commitment: Backing consistent policies and individuals to engage in the pursuit of long-term
over time to ensure promises are delivered goals, even in the face of changing circumstances.
Policies are not spot transactions such as buying a In all countries, but mainly in low-income or
book or using a taxi; they require consistency over fragile contexts, commitment is a fundamental con-
time. However, reaching and sustaining agreements dition to prevent the escalation of conflict to violence.
can be difficult because economic and political con- Whether conflicting parties are able to reach credible
ditions may change, and the incentives for policy agreements to renounce violence and endow the state
makers to deviate from established goal-oriented with a monopoly on the legitimate use of violence is
policies can be strong. To promote sustained devel- a crucial condition to prevent escalation (see chapter
opment, it is particularly important to ensure that 4). When commitment to deals is not credible, con-
those in power can credibly deliver on promises made tending sides tend to walk away from the bargaining
to citizens beyond the political cycle. Imagine that a table and violence prevails: warring factions may
worker would like to save for retirement by contrib- renege on peace agreements, policy makers may
uting funds to a pension. If that worker does not default on promises to transfer resources to discon-
believe the government can credibly commit to not tented groups or regions, disputants may fail to abide
expropriating those funds and returning them in the by court judgments, or police officers may abuse
future, he or she will likely choose not to save. In line citizens instead of protecting them. The influence of
with the economic theory of incomplete contracts, commitment is not exclusive to security. Economic

54 | World Development Report 2017


growth requires an environment in which firms and coordinate, following rules in response to the belief
individuals feel secure in investing their resources in that others will follow as well. Theoretically, deliver-
productive activities. Credible commitment to pro- ing on commitments builds trust in institutions over
growth policies and property rights is, in this way, time and strengthens voluntary compliance (box 2.2).
also essential to ensure macroeconomic stability and Empirical results from lab experiments carried out for
to enable growth. this Report are consistent with this notion, whereby
Peoples perception of the credibility of com binding commitments lead to greater cooperation
mitments can also increase their willingness to and more redistribution of resources among players
cooperatesay, through tax complianceand to (Banuri and others 2016)see box 2.2.

Box 2.2Trust in institutions stems from delivering on commitments

Trust is a central aspect of strengthening governance and Institutional trust refers to societys trust in orga-
delivering on development. Trust is related to positive out- nizations, rules, and the mechanisms to enforce them.
comes in terms of economic growth,a as well as government Institutional trust can arise from elements based on rela-
performance (Putnam 1993; La Porta and others 1997). But tionships, or it can be a function of repeated commitment
what exactly is trust, where does it come from, and why (table B2.2.1). This Report focuses on institutional trust,
does it matter? This Report defines trust as the probability built by repeatedly delivering on commitments, such as
that an actor assigns to other actors of delivering on their by enforcing contracts or not defaulting on pledges and
commitment, conditional on their past behavior. In the obligations. This type of trust is important because it
game theory literature, this is known as reputation. The strengthens the capacity to commit (outcome legitimacy),
literature distinguishes between two key kinds of trust: and ultimately it enables cooperation and coordination by
interpersonal trust and institutional trust. inducing voluntary compliance (box 2.9).
Interpersonal trust refers to trust among individuals. It The importance of trust for enabling collective action
can arise from their relationships such as shared ties, or it can be illustrated in the context of game theory. In the
can be present as a social norm (table B2.2.1). The notions traditional prisoners dilemma game, even though it would
of bonding social capital and bridging social capital are be in the best interest of both prisoners to cooperate
relevant to interpersonal trust (Putnam 2000). Bonding refusing to confessthe inability to trust that the other
social capitalthe horizontal ties within communities and party will indeed cooperate means that the outcome for
among organizationscan bring about a sense of purpose purely rational prisoners is to defect, betraying each other
and identity, encouraging social cohesion. Bridging social (in a one-off game). Game theory predicts that cooperation
capital consists of the cross-cutting ties that breach social comes into play in repeated games. Axelrod (1984) finds
divides, such as economic class, ethnicity, and religion. If that the most successful strategies in the basic prisoners
the bridging of social capital is missing, it can lead to bal- dilemma game are related to mutual trust, engendered
kanized societies in which strong ties within communities from paying support with support and defection with
actually work against the collective interest, holding back defection. This finding is supported by a lab game played
development (Portes and Landolt 1996). for this Report (figure B2.2.1).

Table B2.2.1Sources of trust

Type of trust
Institutional trust Interpersonal trust

Source of trust Relationships Relationships


Commitment Norms

Source: WDR 2017 team, based on Lach and Lpez-Calva 2016.

(Box continues next page)

Enhancing governance for development: Why policies fail | 55


Box 2.2Trust in institutions stems from delivering on commitments
(continued)

Figure B2.2.1Welfare is higher for citizens under commitment in the lab game
a. Citizens b. Policy makers

60 60

50 50

40 40
Earnings

Earnings
30 30

20 20

10 10

0 0
Baseline Cheap talk Binding talk Baseline Cheap talk Binding talk
Experiment type Experiment type

Source: Banuri and others 2016.


Note: In preparation for the World Development Report 2017, a series of lab experiments was carried out to explore the behavioral responses of agents
in terms of cooperation and redistribution under different protocols. In the basic lab game are three citizens and one policy maker. The citizens provide
resources for a group account, which the policy maker is in charge of distributing. The policy maker observes the total amount in the group account
and can then distribute the resources in any manner he or she sees fit. The game is repeated over 20 periods. In the cheap talk treatment, the policy
maker makes public the intended distribution rule prior to citizens contributions, but the rule is not binding and can be modified after citizens make their
contributions. In the binding talk treatment, the policy maker again makes public the distribution rule prior to citizens contributions, but in this case
the policy maker cannot amend the rule after citizens make their contributions. In this second case, there is a credible commitment because the public
announcement is binding.
Significance levels: ** = significantly higher earnings of citizens in binding talk compared with baseline (p < .05), but not compared with cheap talk (and
cheap talk is not different from the baseline). *** = significantly lower earnings of policy makers in binding talk (p < .01) relative to both the baseline and
cheap talk (p < .01). Cheap talk is not significantly different from the baseline (p = .133).

Source: WDR 2017 team.


a. Knack and Keefer (1997); Whiteley (2000); Zak and Knack (2001).

Coordination: Shaping expectations to actions can lead to better outcomes for all. Since the
enable complementary action classic work on the problems of industrialization in
What makes people choose to coordinate to reach Eastern Europe by Rosenstein-Rodan (1943) and the
socially preferred outcomes? The answer to this idea of the big push formalized by Murphy, Shleifer,
question is at the heart of understanding development and Vishny (1989), coordination has been viewed as a
progress. As Douglass North contends, The disparity central issue in both the economic and noneconomic
in the performance of economies and the persistence realms.
of disparate economies through time have not been Particularly in middle-income countries, coordi-
satisfactorily explained by development economists. nation is required to induce investment and innova-
. . . What has been missing is an understanding of tion. Both depend on firms and individuals believing
the nature of human coordination and cooperation that others will also invest. Institutions can help
(North 1990a, 11). By shaping beliefs3 and coordinat- solve market failures by coordinating investment
ing expectations, institutions can push societies on decisions and the expectations of market partici-
favorable paths toward better development outcomes. pants. Indeed, the insight that a failure to coordinate
When actors are uncertain about what others will investment activity can lead to underdevelopment is
do, they may not make decisions that could induce decades old.4 Consider the case in which large-scale
socially preferred outcomes. By contrast, in the pres- factories are more efficient, but investing in them is
ence of strategic complementarities, coordinated not profitable for individual firms unless carried out

56 | World Development Report 2017


as a group. Perhaps the market size is too small to in the grassland, the grass increasingly fails to grow
justify large-scale investments, unless all industries back fast enough, ultimately depleting it until it is of
expand together, providing markets for one another. no use to anyone. The notion is that rational individu-
In such a situation, there are two possible outcomes, als acting independently, according to their own self-
or equilibria. The first is one in which no firms invest interest, will deplete a shared resource, even if it is
in large-scale factories, and efficiency levels stay low. contrary to the best interest of the group. This type
The second, better outcome is one in which firms are of problem is common in situations in which agents
able to coordinate a simultaneous move to large-scale, immediately benefit from their actions and do not
efficient production. experience the losses from the impacts of their actions
Such problems of coordination can occur in until later. A key notion behind cooperation problems,
many contexts, ranging from finance and adoption which differentiates them from coordination prob-
of technology to innovation and industrial clusters.5 lems, is that the preferable action from a social point
Consider a country that wants to invest in green of view is not necessarily an equilibrium. In coordi-
technologies such as electric cars to improve the nation problems, multiple equilibria exist, and policy
environmental sustainability of its growth process. is a matter of helping make the jump to the optimal
Such an initiative would require the complementary one. Solving cooperation problems, by contrast, typi-
investment of car manufacturers, battery producers, cally requires credible rewards or penalties to prompt
electricity providers, and city planners. If each actor actions that lead to the jointly preferred outcome.
is unsure of the willingness of the others to invest, the In all countries, but particularly those that have
electric cars may never be produced. However, if insti- achieved higher levels of prosperity, the degree to
tutions are able to reduce that uncertainty by creating which prosperity is shared requires cooperation, par-
common knowledge that other firms will also invest, ticularly citizens willingness to contribute to public
or by providing incentives to first movers, they can goods and not free-ride on others. The extent to which
help coordinate investment across firms and push the societies can ensure opportunities for all individuals
adoption of greener technologies (World Bank 2012). relies on their ability to provide high-quality services,
Infant industry protection and other industrial poli- such as health, education, or connectivity, and to
cies are waysnot always effectivein which gov- ensure access to economic opportunities, especially
ernments have provided these types of incentives to access to markets that allow individuals to use the
avoid being trapped in a situation in which everyone assets acquired. Collecting the taxes needed to fund
waits for others to invest first.6 The kinds of instru- investments in public goods depends on individuals
ments policy makers have to coordinate expectations willingness to cooperate. Lack of cooperation is a
and lead societies to socially preferred outcomes will typical cause of segregated outcomes: for example,
very much depend on the kinds of complementarities differential treatment of different ethnic groups. One
involved. group may not be willing to contribute to the provi-
sion of public goods if a different group will benefit.
Cooperation: Limiting opportunistic Willingness will emerge, however, if the commit-
behavior to prevent free-riding ment to the provision of public goods is credible
Another basic type of collective action problem that regardless of which group is in control of the
institutions solve is cooperation, or reducing oppor- resources. Such a credible commitment can be
tunistic behavior. By limiting free-riding, institutions achieved by, for example, constraining the power
can help build more cohesive societies and turn zero- of those to whom authority is delegated or sharing
sum games with no winners into positive-sum games power in decision-making bodies.
in which all parties gain (win-wins)see Ostrom Sometimes, societies face a breakdown of coopera-
(1990). Cooperation problems are often observed in tion, and people opt out or exit, failing to comply with
the provision of public goods (such as collecting taxes the rules or to contribute to the provision of public
to fund public schools or hospitals) or solving environ- goods (Hirschman 1970). Cooperation becomes more
mental concerns related to the overuse of a common difficult to achieve as the number of people involved
resource pool (such as overexploitation of natural increases if there is less information on and greater
resources). Perhaps the most well-known example of uncertainty about others and when the interaction
a cooperation problem is the tragedy of the commons is finite. Inequality may also matter for sustaining
(Hardin 1968). In this example, all herdsmen can graze cooperation. In theory, the relationship between
their animals in open grasslandthe commons wealth inequality and the successful provision of a
without restrictions. As more and more cattle graze common resource pool can be ambiguous. Consider a

Enhancing governance for development: Why policies fail | 57


society in which there is high wealth inequality. On only on what policies are chosen but also on how they
the one hand, a few dominant members of that society are chosen and implemented, the relative degree of
may reap enough benefits from having a public good bargaining power of different actors may condition
that they have incentives to provide and maintain it the kind of commitment, coordination, and coopera-
independently, even if other less wealthy individuals tion that results (box 2.3).
free-ride on it (Olson 1965). On the other hand, some
individuals with better outside options (often the Inside the policy arena: Policy bargaining
rich) may not want to contribute to the provision of and the distribution of power
the public good. Thus there may be higher costs for The processes of policy making and policy implemen-
enforcing cooperation, thereby nurturing distrust tation entail a bargaining process among different
that the other(s) will pay and undermining cooper- actors. The policy arena can be thought of as the set-
ative behavior.7 For example, Brazil, where citizens ting in which (policy) decisions are made; different
organized to demand higher-quality public services, groups and actors interact and bargain over aspects
faced a problem common to many other countries: the of the public space; and the resulting agreements
fragmentation of the social contract. In these cases, eventually lead to changes in the formal rules (law).
the upper-middle class responds to the low quality It is the setting in which governance manifests itself.8
of service provision by demanding private services, Policy arenas exist at the local, national, and interna-
which in turn weakens its willingness to cooperate tional levels. They can be formal (parliaments, courts,
fiscally and contribute to the provision of public intergovernmental organizations, government agen-
goodsa perverse cycle (Ferreira and others 2013). cies), traditional, or informal (backroom deals, old
Although commitment, coordination, and cooperation boys networks). Policy arenas are issue-specific. For
make up core institutional functions that contribute example, the policy arena for defense policy may not
to the effectiveness of policies to achieve develop- be the same as that for health or infrastructure policy.
ment outcomes, these functions are fulfilled effec- Who bargains in this policy arena and how suc-
tively under only certain conditions. cessfully they bargain are determined by the relative
power of the actors. Power is expressed in the policy
arena as the ability of groups and individuals to make
Policy effectiveness in others act in their interest and to bring about specific
the presence of power outcomes. It is the production of intended effects
(Russell 1938). Actors can exercise their power by
asymmetries setting the agenda, by vetoing specific options, or by
As just described, in this Report effective policies are influencing other actors preferences. Agenda-setting
those that perform three key functions to improve power refers to actors abilities to influence the alter-
development: enabling credible commitment, inducing natives from which decision makers choose (Persson
coordination, and enhancing cooperation. But why are and Tabellini 2000). Veto power, by contrast, refers to
policies so often ineffective at doing so? The failure the abilities of actors to block a change from the status
of policies that are good on paper to perform their quo (Tsebelis 2002). In all cases, it is about restricting
intended function and the persistence of bad ones the effective choices of other actors.9
are often not the result of policy makers lack of The policy arena is shaped by both de jure and de
Who bargains resources, will, or knowledge. Consider a society run facto power. De jure power refers to power that is con-
in this policy by a benevolent social planner who cares about secu- ferred on the actors by the formal rules. For example,
arena and how rity, growth, and equity. The planner will choose pol- what the electoral rules are, whether there is a pres-
successfully icies that maximize these three objectives. However, idential or a parliamentary system, whether there
they bargain are as soon as that society deviatesas they do in real is an independent judiciary, or whether the central
determined by the lifefrom the ideals of this monolithic planner, fail- bank is autonomousall are formal rules that confer
relative power of ures to commit, coordinate, and cooperate might take de jure power on different actors. De facto power refers
the actors. it far from the social optimum. Where such a society to the actual power to influence other actors. It has
will end up will depend on the depth of these failures. many sources, including control over resources, con-
One of the keythough not the solecontributing trol over coercive instruments, ideational persuasion,
factors to determining policies and the resulting equi- or the capacity to mobilize. Often, the formal de jure
libria is the unequal distribution of power in society. rules that confer power on actors in the policy arena
This Report refers to such a distribution as a power do not necessarily translate into de facto power rela-
asymmetry. Because policy effectiveness depends not tions (box 2.4).

58 | World Development Report 2017


Box 2.3Game theory and the roots of political power

It has long been recognized that power is an important In the full game, each citizen first decides whether to
determinant of how a society functions and how the gains of display loyalty to the dictator before interacting among
economic activity are shared within and across nations. The themselves. Suppose it is a common belief that if citizens
early writings on power were imprecise as social scientists are not loyal to the dictator, others will not cooperate with
grappled for ways to express these embryonic ideas (Dahl them. It is now entirely possible to become locked into a
1957). But such imprecision began to wane with the rise of societal equilibrium in which everybody displays loyalty to
game theory. Social scientists are now able to formalize the dictator and plays cooperatively among themselves.
some of these difficult concepts and, in particular, the idea Their net return or payoff is 15that is, 20 from the assur-
that, in the end, power depends on the beliefs and mores ance game and 5 from loyalty (or obsequiousness) to the
of ordinary people. Vclav Havel expressed this notion dictator, which props up the dictators power.
beautifully in a paper smuggled out of the prison where All citizens would prefer not to be loyal to D, but they
he was locked up for dissenting against Czechoslovakias fear that, if they dissent, others will not cooperate with
post-totalitarian state in the early 1980s. He argued that, them. It is this triadic interaction that props up power
in modern dictatorships, it is not always easy to separate (Basu 2000). The behavior just described is a Nash equi-
the perpetrators from the victims. In his aptly titled essay libriumbut it is actually more than that. It is what in game
The Power of the Powerless he argued that many of the theory is called a subgame perfect equilibrium, which is
oppressed are complicit in propping up the power of such a Nash equilibrium supported by credible threats. Dictators
regimes (Havel 1991). may not know what a subgame perfect equilibrium is, but
This idea can be formally expressed with game theory. they do know how to create an atmosphere of mutual fear
Consider a society with one dictator, D, and two citizens, that props up the regime.
1 and 2. These two citizens are expected to provide some This example illustrates how power can be modeled
beck-and-call service and display their loyalty to D. without bringing any extraneous assumptions into the
Expressing this loyalty costs each citizen 5. The loyalty of analysis. A pure economic analysis can lead to manifesta-
both to D is what gives D power. tions of power through the interplay of beliefs. But if one
But why will people show loyalty to a dictator when goes a step further and brings behavioral economicsin
it comes at a high cost? The answer lies in the nature of particular, the idea of stigmainto the analysis, many
interaction among the citizens themselves. This can be other phenomena can be modeled, from political mass
captured by assuming that citizens can be cooperative (C) movements to child labor (Lpez-Calva 2003).
or noncooperative (N). The payoffs from such behavior are This analysis is closely related to the concept of the
described in table B2.3.1. social contract, which goes back to ancient Greek think-
This game, labeled the assurance game by Sen (1967), is ers. Underlying all stable societies is some form of social
often also called the coordination game (see box 2.1). Keep contract, which enables individuals to anticipate the behav-
in mind that the assurance game has two equilibriaboth ior of others. The analysis just described can yield insights
players choosing C and both players choosing N. into societal uprisings, such as those in the Arab world in
201011, which can be viewed as shifts in societal equilibria
Table B2.3.1Payoffs to cooperation or (Devarajan and Mottaghi 2015).
noncooperation The analysis is a warning that, because these mani-
festations of power arise from the beliefs and behavior of
N C ordinary people, all societies, even democracies, run the
10, 10 5, 0 risk of having to confront them. The McCarthy era in the
N
(N, N) (N, C) early 1950s in the United States and the Emergency in India
0, 5 20, 20 (197577) are illustrations.
C
(C, N) (C, C)

Source: Kaushik Basu.


Note: C = cooperation; N = noncooperation.

Source: Prepared by Kaushik Basu for WDR 2017.

Enhancing governance for development: Why policies fail | 59


Box 2.4Who is who in the policy arena: The case of Bolivias
social policy

The divergence between the formal rules and the actual the ministries and their deputies. In the figure, the size of
practice of formulating and implementing social policy is each circle represents the importance of the actor in the
clearly illustrated by the process of making social policy in policy-making process.
Bolivia. Officially, ministries are designated as the policy The policy-making dynamics uncovered by this social
initiators in Bolivia because ideas and information flow network analysis reveal two main factors that significantly
from them to CONAPES (National Council for Economic shape the features of social policies. The first factor is that
and Social Policy), to the Council of Ministers, and to the social policy-making units are technically weak: they are
president (figure B2.4.1, panel a). However, studies of the typically staffed not by specialists but by political sup-
actual process of social policy making in the country, based porters who are subject to frequent turnover and do not
on social network analysis, reveal a strikingly different necessarily possess the adequate skills. For example, the
picture (panel b). In the actual policy-making network, average tenure of the interviewees in the Bolivian study
coordination is vertically exercised by the president, min- was 14 months, and 22 percent of them had no prior expe-
istries interact very little, and grassroots organizations rience in any social policy-making capacity. The second
are key actors in the policy arena. Ideas and information factor is that the actors do not have incentives to coordi-
for policy formulation flow not from the ministries to the nate and cooperate with one another. Rather, they compete
Council of Ministers and the president, but from the grass- to influence policy making, often hindering the coherence
roots organizations that constitute the electoral bases of and coordination of policy design as well as the quality of
the government party to the president, and only then to implementation.

Figure B2.4.1Formal and actual policy networks in Bolivia, 2010


a. Formal policy network b. Actual policy network

President

Source: WDR 2017 team, based on Bonvecchi 2016.


Note: CONAPES = National Council for Economic and Social Policy; UDAPE = Analytical Unit for Social and Economic Policies; grassroots organizations
refers to Unified Central Union of Peasant Workers of Bolivia (CSUTCB), National Coordination for Change (CONALCAM), and Movement toward Socialism
(MAS); IFIs [international financial institutions] and international aid refers to Latin American Development Bank (CAF), World Bank, Inter-American
Development Bank (IDB), United Nations Childrens Fund (UNICEF), and cooperation agencies from several industrialized countries.

Source: WDR 2017 team, based on Bonvecchi, Johannsen, and Scartascini (2015). See also Bonvecchi (2016).

60 | World Development Report 2017


Actors in the policy arena can be grouped into instances, actors use informal mechanisms to sustain
elites and citizens according to their relative degree short-term transactions among themselves, but they
of influence. This Report defines elites in a positive are unable to achieve long-lasting agreements. Poli-
(as opposed to a normative) sense in that what distin- cies in these cases will tend not to be consistent or
guishes them from citizens is their ability to directly coherent over time, but rather to reflect which group
influence the design and implementation of a certain has more power at a given moment, deeply under-
policy.10 Thus elites are not necessarily bad or self- mining the institutional function of commitment.
interested, and citizens are not necessarily good and Countries in which violent conflict is ongoing and
public-spirited. Both groups act as people do in other groups are fighting for control over territory, such as
spheres of life: understanding their motivations is in South Sudan, are a compelling illustration of why
important to anticipating their conduct.11 The clas- power gets in the way of the commitment needed
sification of elites and citizens is not intended to be to sustain mutually beneficial agreements. The out-
a strict dichotomy, but rather a spectrum in which look for the groups involved in such violent conflict
different actors have different degrees of influence.12 is far from favorable. At best, they are looking at a
The relative degree of power of actors to influence costly victory, only to inherit a shattered economy.
policy design or policy implementation may vary by An agreement to put a stop to such violent conflict,
issue. For example, although large export firms in encourage productive investment, and share its
some societies may have the power to influence trade benefits in proportion to the power that each group
policy and thus are an elite in this area, they may not currently holds is mutually desirable. So why are such
be an elite in the areas of security or health policy. agreements rarely reached? The reason is a commit-
ment difficulty known as the political hold-up problem.
When power gets in the way: Exclusion, Consider a situation in which the violent groups in
capture, and clientelism control of different territories agree to allow those
The distribution of power in the policy arena can be with business skills to make efficient investments in
a fundamental enabler ofor constraint topolicy their territories in exchange for a fee. Such an agree-
effectiveness. Unequal distributions of power in soci- ment could maximize the size of the benefits while
ety (power asymmetries) are not necessarily harmful, redistributing them in proportion to the strength of
and they can actually be a means of achieving effec- these violent groups. But for this policy to be credible
tivenessfor example, through delegated authority. to potential investors, the violent groups would need
However, in the presence of transaction costs to reach to give up some power and establish, among other
political agreements, it becomes increasingly diffi- things, a system of impartial courts.15 But the fear of
cult to mediate power asymmetries effectively (box not receiving a return to their investment makes it
2.5).13 If powerful actors fear that the outcome may hard for violent groups to give up power.
reduce their relative power now or in the future, they A second manifestation of power asymmetries,
may attempt to block the adoption or undermine the ability of influential groups to capture policies and
the implementation of policies that could enhance make them serve their narrow interests, is helpful
welfare.14 This tendency has especially significant for understanding the effectiveness (or ineffective-
implications for households at the bottom of the ness) of policies in promoting long-term growth.
income distribution and other marginalized groups For example, if a powerful interest group derives its
because their bargaining power tends to be more power from being the most productive firm, it will
limited. Power asymmetries, in these cases, can lead advocate policies that allow it to continue to be pro-
to harmful consequences for society. Some common ductive and reach new markets. On the other hand, if Some common
manifestationsthough not the only onesof how those groups with power have the coercive capacity manifestations
power asymmetries can negatively impact policy to cause economic and social disruption and are in though not the
effectiveness are exclusion, capture, and clientelism. the least productive sector of the economy, they will only onesof
The exclusion of individuals and groups from the advocate policies that protect their economic power how power
policy arena can have particularly important implica- and block competition. The effects of capture can be asymmetries
tions for security outcomes (see discussion in chapter widespread and detrimental to the well-being of soci- can negatively
4). When powerful actors are excluded from the policy ety (see discussion in chapter 5). impact policy
arena, violence may become the preferredand ratio- Consider the case of regulatory capture in the effectiveness are
nalway for certain individuals and groups to pur- building sector, which can undermine the implemen- exclusion, capture,
sue their interests, thereby leading to failed bargains tation of safety standards and risk-sensitive construc- and clientelism.
between participants in the policy arena. In these tion. This is illustrated by the situation in Turkey after

Enhancing governance for development: Why policies fail | 61


Box 2.5Transaction costs, incomplete contracts, and political
agreements: Why land redistribution policies often fail

Land distribution schemes have been triedand have land.b Not only will owning the land increase Surekhas
failedrepeatedly around the world. Why? Consider the control over contingencies, but it may also give her special
case of Surekha, a farmer who owns a large plot of land and social status or political power to control other transactions
must decide whether to lease it to smaller farmers or buy the (Bardhan 2005). For example, Surekha could threaten her
necessary equipment and hire employees so she can farm employeesand if they do not accept her conditions, she
the land herself. If the economies of scale are not significant will influence the village merchants not to trade with them
and there are no transaction costs,a Surekha would be better (Basu 1986).
off dividing the land and leasing it to famers, who would be Suppose a local leader in Surekhas country proposes to
willing to pay more than she would earn if she farmed it by redistribute landholdingsincluding compensating current
herself because they would be more productive. This is a landowners for the value of the landto increase the overall
classic problem in economics. In the absence of transaction productivity of the economy. Why has this type of policy
costs, the initial allocation of property rights should have no failed so often and in so many places? It is because in the
effect on the efficient operation of an economy (Coase 1960). presence of transaction costs and incomplete contracts, the
However, in the real world transaction costs abound as economic and political value of the land for Surekha is higher
institutions do not always allow parties to effectively commit, than the fair compensation. Surekhas bargaining power
coordinate, and cooperate. Because transaction costs exist would be reduced if land were redistributed. As a result, she
and because individuals have a limited cognitive capacity to will have an incentive to block or undermine the policy.
process every possible contingency (bounded rationality) Like economic agreements, political agreements are
contracts will always be incomplete. When there is room for not independent of the distribution of power and are the
interpretationand renegotiationof a contract, the nature result of a bargaining process among a wide set of actors.
of the relationship between the parties changes because they For example, state institutions emerged in history not as a
need to cooperate over time to enforce the contract. The pro- voluntary contract between society members (such as pro-
cess of bargaining, then, never really ends because parties to a ducers willing to pay taxes in exchange for protection from
contract will be continually adjusting their actions in response the local bandits), but rather because some groups imposed
to changing circumstances (Epstein and OHalloran 1999). their coercive power on others (see chapter 4). As a result,
In the presence of high transaction costs, Surekha would institutions and the outcomes of the bargains within those
rather hire labor and buy her own equipment to farm the institutions reflect the power structure in a given society.c
Source: WDR 2017 team.
a. A
 world void of transaction costs is one in which there are no costs to specify, monitor, or enforce contracts between the parties (Dixit 1996). Thus the
owner and the renters can foresee all possible contingencies, such as the probability of a drought or a war. It also means that a third party can observe
and verify that both parties are honoring the contract and can act to enforce it in a dispute.
b. When transaction costs are high, Surekha would rather do the work herself, buying the machinery and hiring employees because ownership of the
assets gives her more bargaining power over her employees when disputes arise than if she just leases the land (Hart and Moore 1990).
c. See Carneiro (1970); Tilly (1985); Boix (2015); and De la Sierra (2015). See also Boix (2016).

the 1999 Kocaeli earthquake, when the government disadvantage current professionals and translate into
was unable to implement a number of innovative higher marginal costs for new construction.
building control regulations because of the strong A third manifestation of power asymmetries is
influence exerted by powerful interest groups. The clientelism, the exchange of goods and services for
new regulations would have introduced higher stan- political support. Clientelism can shape the adoption
dards for building controls, including higher qualifi- and implementation of policies in two main ways.
cation requirements for building designers, certified First, in clientelistic settings commitment to long-
private construction supervision of building design term objectives is hamstrung by the lack of account-
and code compliance, and mandatory 10-year profes- ability of those to whom authority is delegated (see
sional liability insurance for building designers. How- discussion in chapter 6). Accountability is gradually
ever, implementation was undermined by the strong put up for sale. In addition, when commitment breaks
opposition of the building and real estate industries, down systematically, it can erode peoples incen-
which believed that the new requirements could tives to cooperate, and some groups may opt out by

62 | World Development Report 2017


demanding private services and avoiding contribu- policy effectiveness.16 Capacity is certainly important
tions to the provision of public goods (Ferreira and at a given point in time and can explain differences in
others 2013). In clientelistic settings, states tend to performance across countries (Fukuyama 2014), but it
have low tax revenues and provide few public goods, does interact withand can be explained bypower.
undermining economic activity and future taxation. At a given point in time, capacity can be thought of as
a stock. Although in many cases capacity is an overrid-
Best practice or best fit? Reconsidering ing constraint, it is also a proximate cause because it
the notion of first-best through the is an outcome of a bargaining process in which actors
bargaining lens decide how and where to invest (or not) in building
Efforts to strengthen the ability of institutions to such capacity. Even in the presence of existing phys-
effectively enable commitment, coordination, and ical and administrative capacity, policies may still be
cooperation, viewed from the perspective of power ineffective if groups with enough bargaining power
asymmetries, call into question many traditional have no incentives to pursue implementation. An
practices of the development community. example is the low investment in statistical capac-
That community has largely focused its reform ity in Africa that limits the ability to monitor policy
attempts on designing best-practice solutions and effectiveness (box 2.6, case 1). Furthermore, prevail-
building state capacity to implement them. In this ing norms, understood as socially accepted rules of
sense, capacity is often considered a prerequisite for behavior, can reinforce existing power asymmetries

Box 2.6How capacity and norms influence and are influenced by power
asymmetries

Case 1. The need to strengthen incentives to gather Case 2. The reinforcement of existing power asymmetries
development data through norms
For years, the development community has invested heavily Sometimes, norms reinforce existing power asymmetries
in both economic resources and technical expertisein and they can constrain the effectiveness of interventions.
developing statistical capacity in Africa, but the results have For example, in Ghanas small-scale fisheries, men (Fish
been disappointing (Devarajan 2013). Many countries in the Papas) and women (Fish Mamas) have historically had
region still lack the data to monitor socioeconomic conditions different roles in fishing. Because women are not allowed
such as poverty, inequality, and service delivery. As a result, to fish at seaa norm that has been in place for over 200
demands are growing for more money and more capacity years and is respected to this daymen fish while women
building to solve this problem. This view, however, neglects smoke, dry, and cook the fish for sale. Fish Mamas tradition-
the fact that for countries to develop statistical capacity, they ally buy the fish directly from the men and exercise control
must muster the political incentives to do so. over the local market by setting prices and selling the days
In many countries, political incentives push those in catch (Over 1993).
power to avoid investing in capacity or to actively under- A well-intentioned project by the government of Ghana
mine capacity. Some elites in African countries consider supported by the World Bank attempted to improve wom-
high-quality data systems a tool that the opposition could ens livelihoods by making the harvesting and processing
use to audit their performance. Thus these elites have of fish more sanitary and efficient. In particular, they built a
incentives to establish either weak statistical offices or facility where all fish can be processed and sold. However,
partisan ones, staffed with political supporters rather than by pooling the catch in one place and making it easier to
with technical experts (Beegle and others 2016; Hoogeveen process the fish, the project undermined the Fish Mamas
and Nguyen 2016). But, of course, this practice is not unique power to set the prices because it made it easier for men to
to Africa. The argument for the use of existing capacity do both the fishing and selling of the catch. As a result, men
is as valid as the argument for building such capacity. In began selling the fish themselves, thereby reducing wom-
Latin America, a region well known for its capacity for data ens engagement in fisheries management. This project,
collection, there are examples where the political dynamics which aimed at improving womens role in the value chain,
led to a weakening of the credibility of official statistics.a ended up undermining their livelihood (World Bank 2015).
Source: WDR 2017 team.
a. Economist (2012); Noriega (2012); Roitberg and Nagasawa (2016).

Enhancing governance for development: Why policies fail | 63


and further undermine the effectiveness of capacity- and demand better servicewere left with the same
building interventions (box 2.6, case 2). low-quality education. In the end, the government
In the presence of powerful actors who can block spent scarce budget resources on a policy that did
or otherwise undermine a policy, optimal policies not improve learning outcomes. Therefore, as this
from a strictly economic standpoint (first-best poli- example illustrates, the best technical solution was
cies) may not be the optimal implementable policies not necessarily the best-fit solution to enact change in
(second-best but feasible policies). Consider the case view of the distribution of power in the policy arena.
of Kenyas recent education reform. Based on rigorous Even when feasible, implementing what seem to
evidence on best practices (Duflo, Dupas, and Kremer be first-best economic policies from a static perspec-
2015), the government introduced a new policy in tive can lead to worse outcomes for society because
2009 to allow 18,000 contract teachers to be hired. It they affect the dynamics of power. For example, when
was thought that contract teachers, as opposed to civil governments are captured by firms and there is high
servant teachers, would have greater incentives to per- inequality, unions may be the only way for workers to
form well because they were on short-term contracts solve their collective action problem, even if represen-
that, in principle, would be renewed only if their per- tation is not perfect. If so, passing a law that makes
formance was satisfactory. Yet, experimental evidence labor contracts more flexible undermines union
from 64 government-run schools showed that learn- memberships and may lead to more inequality, which
ing outcomes did not improve (Bold and others 2015). in turn can perpetuate the power of the wealthy
A central explanation for why the policy failed is (Acemoglu and Robinson 2013).
that despite the introduction of short-term contracts, The nature of the policy arena is crucial to gaug-
there was no credible commitment in practice to ing whether actors will be able to reach and sustain
sanction underperforming teachers. Once the newly agreements to enact welfare-enhancing policies.
contracted teachers were in place, leaders of the teach- The actions that a proposed reform will trigger in
ers union successfully mobilized to convert those other players in the arena are particularly important.
new teachers into civil servants under permanent This process of how reforms take place (which is
contracts, thereby undermining the reform. The chil- embedded in the framework) is discussed in box 2.7
dren attending those schools and their familieswho from the perspective of game theory. The discussion
had little say and found it more difficult to organize highlights how, even though reform involves playing

Box 2.7The rules game: Paying attention to where the action is

The framework described in this Report aims at explaining In the abstract, the rules and policies chosen should
how governance affects development over time. For that lead to the socially desired outcomes. Economists refer to
purpose, the framework involves games played at two lev- the case in which someone can pick the ideal rules for the
els. The first-level game (the outcome game) takes place outcome game as the mechanism design approach, and
when, given a certain set of rules and policies, actors react the rules selected are those that a benevolent dictator
by making decisions about investing, consuming, working, or social planner would pick. Although this is a useful
paying taxes, allocating budgets, abiding by the rules, way to specify the ultimate goal of development, it is an
and so on. Those decisions lead to the realization of out- insufficient guide to understanding the actual process of
comes (security, growth, equity). The framework suggests development. Mechanism design suggests that a reform
that there is, in addition, a second-level game (the rules is a once-and-done jump that takes place when someone
game) in which actors bargain to redefine the policies and imposes the ideal rules. It ignores the second-level rules
rules that shape subsequent reactions by actors in future game, the diversity of preferences and incentives, and the
realizations of the game. The rules game is where power fact that different actors can have very different influences
asymmetries are manifested, whereby some actors have in the rules game. Moreover, in the process of reform and
more direct influence (elites) and others have only indirect development, the rules game is where the action is.
influencefor example, through voting (citizens).
Source: WDR 2017 team.

64 | World Development Report 2017


Box 2.8Factors that make sustaining cooperation over time more likely

Stability of actors bargaining power. When the actors that Actors certainty about the distributional effects of pol-
interact in the policy arena change frequently, it is more icies. When there is uncertainty about who will benefit and
difficult to sustain cooperation. There are two reasons for who will lose from a policy, it is more difficult to sustain
this: first, actors will be less able to punish those that devi- cooperation. Faced with this uncertainty, actors cannot
ate from an agreement, and, second, building a reputation establish a compensation mechanism (Fernandez and
for honoring agreements becomes less valuable when the Rodrik 1991).
interactions with the same actors are not frequent. Actors structural links. When they bargain on many
Low probability of shocks. In cases in which a high different policy issues, actors interact repeatedly, which
frequency of shocks requires continued policy adaptations, facilitates cooperation in two ways: first, by increasing
cooperation will be harder to achieve. For example, it is eas- the likelihood that there will be some overlapping interest
ier to sustain cooperation on regulating a commodities mar- over a set of policies, and second, by reducing the cost of
ket than a technology market. Because of the rapid innova- punishment because actors can use bargains on various
tion in the technology market, regulations must constantly other policies to punish those that deviate in any one of
adapt to obtain the desired objective. Moreover, shocks may the agreements.
create losers and winners, thereby creating competing and Enforcement technologies. Some policy issues have
shifting interests that make cooperation over time (inter- multiple enforcement technologies. Therefore, actors can
temporal cooperation) more difficult to sustain. choose the one they trust the most, and thus the set of
Transparency. An inability to observe or verify whether issues over which they can cooperate increases. Recent
actors have honored or will honor the agreement makes experience in Guatemala shows that importing a court, the
cooperation more difficult to sustain (Stigler 1964; Green International Commission against Impunity in Guatemala
and Porter 1984). For example, in agreements between (CICIG), can be a way to increase the commitment to
voters and politicians, if citizens cannot observe politicians enforcing the rules and, as a result, increasing the coop-
efforts and must rely on outcomes to infer their actions, eration of potential witnesses, at least in the short term
cooperation will be more difficult to sustain. (box 2.10).
Source: WDR 2017 team.

two games at different levels, actors in the quest for understand what agreements are feasible in the pol-
change often neglect the game that really matters. icy arena and how the policy arena can be reshaped
Certain factors can make sustaining cooperation to expand the set of policies that can be implemented.
more likely. For example, it may be more difficult to The policy arena can be reshaped when changes are
reach lasting agreements in contexts in which the rel- made in the incentives that actors have to pursue cer-
ative bargaining power of actors often shifts, causing a tain goals, in actors preferences and beliefs, and in who
high turnover of actors entering and exiting the policy can participate in the decision-making processes (the
arena, or in which the short-term benefits of reneging contestability of the policy arena).
on promises are high, compared with the benefits of Depending on the primary functional challenge
maintaining a reputation for honoring agreements. that is, whether the institution needs to enable com-
Box 2.8 describes several factors that influence the mitment, coordination, or cooperation)the entry
likelihood that agreements will be sustained.17 point may be different. Because these functional
challenges are interdependent, these entry points act
as complements to one another. In all cases, for the
Levers for change: entry points to be effective they must lead to changes
Incentives, preferences and that induce voluntary compliance from actors. This
beliefs, and contestability process of inducing voluntary compliance can be
thought of as an expression of what the literature
To more effectively enable commitment, coordi- calls legitimacy, which is related to the voluntary
nation, and cooperation, it is important that one acceptance of an act of authority (box 2.9).18

Enhancing governance for development: Why policies fail | 65


Box 2.9Voluntary compliance and the building blocks of legitimacy

Three principal types of legitimacy matter for the effec- to how the content of the law reflects peoples own social
tiveness of interventions: outcome legitimacy, relational norms and views of morality. In these cases, the law can be
legitimacy, and process legitimacy. considered irrelevant because people comply for reasons
Outcome legitimacy is derived from delivering on com- independent of its existence.
mitments, such as those to provide public services, protect Process legitimacy is derived from a perception of
property rights, or respect term limits in elections. It is fairness in the way that decisions, policies, or laws are
related to the degree to which individuals feel that they can designed and implemented. It is related to the degree
trust institutions (see box 2.2 for an extended discussion to which individuals feel represented in the policy arena.
on the notion of trust). In this way, incentives are aligned When procedures for selecting and implementing policies
between government and citizens. A public officer will are more contestable, those policies tend to be perceived
deliver on her promises because citizens will vote for her, as fair and to induce cooperation more effectively.
and citizens will vote for her because they trust that the Process legitimacy can exist to the extent that people
officer will deliver on her promises. Trust is in this way a feel they are represented, independent of the outcome.
building block of outcome legitimacy (the capacity to com- When individuals believe that the process has followed the
mit). An important way to enhance outcome legitimacy is rules, compliance with the law is higher, even if the out-
to enhance ex post accountability, so that actors will face comes are not always those that favor them (Tyler 1990;
consequences if they do not deliver the outcomes of a Tyler and Huo 2002). The oppositeexclusion from the
promised policy or action. Enhancing ex post accountability processleads to lack of legitimacy. Enhancing ex ante
to bring about adverse consequences for not delivering on accountability to enable a more participatory or inclusive
the outcomes of a promised decision is a critical entry point decision-making process can play a key role in strengthen-
for strengthening outcome legitimacy: such accountability, ing process legitimacy.
in effect, acts as a negative reward system. Ultimately, legitimacy is a combined function of out-
Relational legitimacy is derived from the alignment come, relational, and process legitimacy. However, although
between the beliefs held by specific individuals or groups governments cannot always control outcomes directly
and the normative content of the rulesboth formal and or change beliefs quickly, they can control processes.
informalgoverning the power relationship in question. It Investing in strengthening process legitimacy may induce
is related to the degree to which individuals share beliefs more voluntary compliance and enable governments to
either about the qualities of the power holder or the degree deliver on commitments more effectively. Delivering on
to which the power arrangement serves a recognizable commitments feeds in turn back into building trust in
general interest (Nixon, Mallett, and McCullough 2016). In institutions and strengthening outcome legitimacy. Thus
certain extreme cases, even if a process is not fair, a constit- investing in process legitimacy is an important foundation
uency could be willing to accept a governments authority of igniting positive dynamics between governance and
because it shares its values. This arrangement is related development over time.
Source: WDR 2017 team.

Solving commitment problems: Sirens luring song, Ulysses has his sailors bind him
The role of incentives to the ships mast to remove the option of jumping
The incentives that actors have to comply with agree- overboard. To understand why powerful actors would
ments are fundamental to enabling commitment in tie their own hands in this way and whether that
the policy arena. What types of institutional arrange- agreement will be credible, one has to examine the
ments can provide the right incentives to help ensure context of a specific set of actors, rules, and poten-
credible commitment? How can those in power bind tial incentives to break the agreement. For example,
themselves in such a way that their promises become granting independence to the central bank is a mech-
credible, even when it is in their short-term interest anism that governments use to tie their hands in an
to break them? attempt to gain credibility that they will not use infla-
Think of Ulysses in Homers Odyssey. In order to tion to finance public expenditures (Cukierman and
resist the short-term temptation to succumb to the Lippi 1999). Similarly, anticorruption agencies play an

66 | World Development Report 2017


important role in constraining the use of public office changed societys perception about its capacity to hold
for private gain. However, these institutions will be powerful actors accountable (box 2.10).
ineffective if they are unable to alter the existing Often, commitment devices at a certain level may
incentive structure in a way that makes it credible need to be complemented by devices at another level
to enforce the new regulations and the underlying for the commitment to be taken seriously by mar-
contract of the new agency (Acemoglu and others ket players. For example, international and bilateral
2008). Spotlight 1 provides a more detailed discussion agreements, such as multilateral trade agreements
on corruption from the perspective of the WDR 2017 and bilateral investment agreements, can be a com-
framework. mitment device.19 However, the mere presence of
Around the world, different institutional forms such agreements may not lead to a strong commit-
have been established to make commitment credible. ment, as demonstrated by the numerous examples
In Guatemala, for example, in the aftermath of the of violations of the provisions of bilateral investment
peace agreements of the 1990s and after an increase in agreements. Thus complementary arrangements may
the political violence that raised concern among many be needed to provide a stronger signal about commit-
actors, an agreement was reached to turn to interna- ment. An example is the existence of mechanisms that
tional actors and create the International Commission systematically capture investor grievances, especially
against Impunity in Guatemala (CICIG), which has those related to violations of investment agreements,

Box 2.10 How an international commission enabled a credible


commitment to fight criminals impunity in Guatemala

If you are watching this message, it is because I was assas- Fighting impunity meant dismantling these criminal
sinated by President lvaro Colom, with help from Coloms organizations and eradicating their corrupting power within
private secretary Gustavo Alejos. The release of a YouTube state institutions, which were protecting them from being
video in 2009, in which Rodrigo Rosenberg makes this effectively prosecuted. Three of the greatest strengths of
statement accusing the president of Guatemala of his mur- the CICIGs mandate were its independent capacity for
der, precipitated a political crisis in the country. The oppo- criminal investigation; its prosecution capacity through a
sition to the president asked for his immediate resignation, specific fiscalia a of the Office of the Attorney General (AG),
and only a rapid and effective independent investigation of which allowed it to investigate even in the face of internal
the situation prevented an escalation of political instability opposition within the AG; and its independent voice in rela-
in Guatemala. The investigation revealed that the hitman tion to the mass media. These arrangements enabled the
who had killed Rosenberg was not hired by the president, CICIG to credibly commit to prosecuting impunity.
but was in fact hired by Rosenberg himself: Rosenberg had Since 2007, the CICIG has had a deep impact on the
ordered his own assassination. capacity of the Office of the Attorney General to credibly
The investigation was conducted by the International prosecute criminal networks, even leading to the peaceful
Commission against Impunity in Guatemala (CICIG), and it resignation of the president in 2015 after the discovery of
provided the credibility needed to resolve this crisis in a peace- his involvement in La Linea, a criminal network linked to
ful manner. The CICIG, backed by the United Nations, was customs fraud. Moreover, national security forces, judges,
approved in 2007 by Guatemalas Congress of the Republic. It and members of the congress have been empowered in
was mandated to help Guatemalas judicial authorities in their their public roles, and the renewed commitment to pros-
fight against illegal criminal organizations that had infiltrated ecution has increased pressure to reduce participation
the states security and judicial institutions. The approval in illegal activities. The CICIGs political power today is
came after a broad wave of homicides that infuriated citizens well beyond that originally conceived for an international
organizations and the mass media. The growing perception organization, which raises both concerns and enthusiasm
was that the national authorities had lost any capacity to cred- in Guatemala.
ibly prosecute large and powerful criminal networks.

Source: Carrera 2016.


a. A fiscalia is a district attorney or public prosecutor.

Enhancing governance for development: Why policies fail | 67


and help resolve them. The effective working of such of more actors in the decision-making process is not
mechanisms gives investors comfort and strengthens necessarily a guarantee of better decisions, a more
the commitment that governments make when they contestable policy arena tends to be associated with
sign investment agreements. Here, the important higher levels of process legitimacy and cooperation.
thing is the effective working of the grievance mech- The ability of elites and citizens to reach and sus-
anism rather than the particular form it takes. tain agreements is critical to policy effectiveness. In
agreements, actors reach policy compromises that can
Preferences and Solving coordination problems: be enforced, meaning that actors can ensure that the
beliefs play an The role of preferences and beliefs other actors will fulfill their part of the agreement.
important role Preferences and beliefs play an important role in To reach and sustain agreements in the policy arena,
in coordination. coordination. Coordination can help to understand citizens and elites rely on two types of mechanisms.
Coordination can phenomena ranging from discrimination, to corrup- In deals-based mechanisms, personal relations or mech-
help to understand tion, to technological revolutions, to tax compliance anisms such as rent distribution are used to carry out
phenomena (Tirole 1996; Mokyr 2013). For example, when Italian agreements. In rules-based mechanisms, formal laws
ranging from prime minister Silvio Berlusconi said publicly he con- and legal institutions are used to enforce agreements.
discrimination, sidered the tax burden and tax enforcement for entre- Deals-based mechanisms can take many forms, from
to corruption, preneurs to be excessive, he was sending a signal that, gossip and stigmatization, to informal threats, to
to technological as long as he was in charge, tax enforcement would physical injuryeven execution (Boix 2015). When the
revolutions, to tax be weaker, actually leading to lower tax compliance size of the community and its heterogeneity increase,
compliance. by businesses (Raitano and Fantozzi 2015). By con- it becomes more difficult to use relation-based
trast, when citizens of the United Kingdom received mechanisms to enforce agreements and hold actors
letters informing them that most of their neighbors accountable. As social distance increases, societies
had already paid their taxes, tax compliance increased tend to move toward rules-based mechanisms such
(BIT 2012). as courts, legislatures, and political parties to enforce
Consider a society with a significant degree of agreements. Although deals-based mechanisms can
political corruption. The higher the incidence of cor- function well for smaller and more homogeneous
ruption, the lower is the cost of being corrupt in terms groups, rules-based mechanisms become necessary
of damage to the publics perceptions of politicians. In to facilitate cooperation in larger and more heteroge-
such a situation, where corruption has become a norm, neous groups (Li 1999; Dixit 2003, 2004).
policies to deter corruption will be less effective or Removing barriers to entry to the policy arena can
will require high and potentially unfeasible sanctions help to enhance contestability. For example, in Brazil
(Tirole 1996). However, policies to induce coordination the replacement of paper ballots with electronic bal-
can help countries break free from path dependence lots effectively shifted the balance of power toward
and are often needed only as a temporary interven- previously disengaged illiterate voters, reducing the
tion. For example, as Tirole (1996) points out, it may barriers to their participation and increasing contest-
be possible for a temporary anticorruption program ability (box 2.11). The electronic ballots made it much
to move an economy from a high-corruption equilib- easier for those with little or no education to cast
rium (based on expectations of high corruption) to a their vote, thereby de facto enfranchising more than
low-corruption equilibrium (based on expectations of 10 percent of the Brazilian electorate and ultimately
low corruption with respect to the behavior of others). affecting spending on public health care.
Participation and ownership in the design of rules
Solving cooperation problems: can increase voluntary compliance. Consider the case
The role of contestability of managing local water resources in India. In the
Who is included and who is excluded from the policy southeastern Indian state of Tamil Nadu, cooperation
arena are determined by the relative power of the to manage public irrigation systems at the commu-
competing actors, as well as by the barriers to par- nity level is crucial to avoid free-riding and inefficient
ticipationthat is, the contestability of the process. A water use. A large survey conducted in Tamil Nadu
more contestable policy arena is one in which actors was used to study the determinants of cooperation in
or groups who have reason to participate in the these communities. The empirical analysis looked at
decision-making process have ways to express their the effects of institutional, socioeconomic, and topo-
interests and exert influence. Contestability is closely graphic factors on cooperative behavior, measured
linked to the notion of inclusion, but it emphasizes by how well the systems are maintained, the absence
the barriers to participation. Although the inclusion of conflict, and the extent of violations of rules.

68 | World Development Report 2017


Box 2.11How the introduction of electronic voting in Brazil reshaped the
policy arena and led to more pro-poor policies

In many developed countries, the act of filling in a ballot of votersoften more than one-quarter of the votes were
may appear to be a trivial task. One reason is the level of deemed invalid and not counted. However, that situation
education of the average citizen. The same may not be true changed in 1996 with the introduction of electronic voting
of many illiterate or poorly educated citizens in rural and devices. Their simple interface allowed voters to select the
other areas of the developing world. In Brazil, illiterate cit- number of their candidate, and a picture of the candidate
izens were not legally allowed to vote until 1985. A process appeared on the screen before voters validated their vote
that began in 1986 led to enfranchising these groups in the (figure B2.11.1, panel b). This simplification of the voting
1988 constitution. However, until 1996 the system involved procedures greatly reduced the number of invalid votes
a complex paper ballot. Because of the countrys electoral and effectively enfranchised more than 10 percent of the
rules, hundreds of candidates commonly run for state leg- Brazilian electorate, whose votes previously had not been
islatures, making it impossible to list candidates in paper counted.
ballots. Voters were thus asked to write the name (or num- Figure B2.11.2 shows the effect of electronic voting on
ber) of the candidate on the ballot (figure B2.11.1, panel a). valid votes. The analysis exploits the fact that in 1994 all
At the time, roughly one-quarter of Brazilians were Brazilian municipalities used paper ballots. In the 1998
not functionally literate. Thus these complex paper ballots election, smaller towns still used paper ballots, but munic-
led to the de facto disenfranchisement of a large fraction ipalities with more than 40,500 voters had switched to

Figure B2.11.1An electronic ballot made it much easier than a paper


ballot for those with little or no education to cast their vote in Brazil
a. Paper ballot

b. Electronic ballot

Source: Thomas Fujiwara, Voting Technology, Political Responsiveness, and Infant Health: Evidence from Brazil, Econometrica 83, no. 2
(2015): 429. Printed with permission of The Econometric Society. Further permission required for reuse.

(Box continues next page)

Enhancing governance for development: Why policies fail | 69


Box 2.11 How the introduction of electronic voting in Brazil reshaped the
policy arena and led to more pro-poor policies (continued)

Figure B2.11.2Electronic voting reduced the number of invalid votes in Brazil

100

x x x x x x x x x x x x x x x x x x xx x x x x x
90 x x
x x x x x x x x x x
Valid votes (%)

x x

80

70

60

0 20 40 60 80 100
Number of registered voters (thousands), 1996
x Electronic voting, 2002
Paper ballots, 1998 x Electronic voting, 1998
Paper ballots, 1994
40,500 voter threshold

Source: Thomas Fujiwara, Voting Technology, Political Responsiveness, and Infant Health: Evidence from Brazil, Econometrica 83, no. 2 (2015): 435.
Adapted with permission of The Econometric Society. Further permission required for reuse.
Note: Graph shows valid votes/turnoutlocal averages and parametric fit. Each marker represents the average value of the variable in a 4,000-voter bin.
The continuous lines are from a quadratic fit over the original (unbinned) data.

electronic voting. By the 2002 election, electronic voting voters had substantial consequences on policy making and
was the sole method of voting in Brazil. development outcomes.
The effects of the transition are illustrated by the towns These newly enfranchised voters chose more pro-
of Altamira and Paracatu, which were otherwise similar. gressive legislators for the state assemblies, which then
Because Altamira had 40,461 registered voters39 less increased spending on public health care by 34 percent
than the threshold of 40,500 for electronic votingthe from 1998 to 2006. In Brazil, public health care is largely
municipality used paper ballots for the 1998 election, a pro-poor policy because the better-off citizens rely on
whereas Paracatu, just over the threshold with 40,917 private health services. This additional spending then
registered voters, used electronic voting. The electronic increased access to prenatal health care and had an impact
voting led to a significant difference in valid votes: 79 on health outcomes. Fujiwara (2015) estimates that elec-
percent of registered voters in Altamira versus 90 percent tronic voting was responsible for lowering the prevalence
in Paracatu. Multiplied across many towns in Brazil, this of low birth weights (a common measure of infant health)
de facto enfranchisement of millions of previously excluded among mothers without primary schooling by 6.8 percent.

Source: Prepared by Thomas Fujiwara for WDR 2017.

The results from the analysis highlight the impor- Actors marginalized from the decision-making
tance of being involved in the crafting of the rules. process have fewer incentives to comply with the pol-
The study found that when a farmer believes rules icy. In Tylers classic study, individuals comply with
have been created jointly (along with the elite or the law primarily not out of fear of punishment (deter-
government), the farmer is more likely to have a pos- rence) but because they believe it to be fair (Tyler 1990).
itive perception of both the allocation system and the Tyler and Huo (2002) have looked at the role that being
compliance of other farmers with the rules. Similarly, treated fairly plays in individuals acceptance of the
elites violate water allocation rules less when they are legal system. Based on a survey of citizens in Los Ange-
the ones who crafted the rules (Bardhan 2005). les and Oakland, California, who have been in contact

70 | World Development Report 2017


Table 2.1Three principles for rethinking governance for development
Traditional approach Principles for rethinking governance for development

Invest in designing the right form of institutions. Think not only about the form of institutions, but also about their functions.

Build the capacity of institutions to implement policies. Think not only about capacity building, but also about power asymmetries.

Focus on strengthening the rule of law to ensure that those Think not only about the rule of law, but also about the role of law.
policies and rules are applied impersonally.

Source: WDR 2017 team.

with judges, prosecutors, or the police, they found that incentives, reshape preferences and beliefs, and
members of minority groups who perceive that they enhance contestabilitythat is, think not only about
have been treated unfairly are less likely to trust the the rule of law, but also about the role of law (table 2.1).
subsequent decisions of law enforcement authorities In practical terms, these principles mean that
and to cooperate. Being treated with respect and dig- diagnostic approaches should zoom in on the specific
nity and believing that the process has followed the commitment, coordination, and cooperation issues
rules lead to higher compliance with the law, even if that limit the attainment of socially desirable out-
the outcomes do not always favor individuals. comes and on the ways in which power asymmetries
in the policy arena obstruct these functions. Iden-
Three guiding principles tifying the different levers of changeincentives,
First, it is important to think not only about what preferences and beliefs, and contestabilitycan help
form institutions should have, but also about the to reshape the policy arena to expand the set of pol-
functions that institutions must performthat is, icies that can be implemented. This includes taking
think not only about the form of institutions, but also into account the relevant interventions or changes
about their functions. Second, it is important to think in rules, at different levels, to solve the specific func-
that, although capacity building matters, how to use tional challenges. Anticipating the potential opposi-
capacity and where to invest in capacity depend on tion and taking into account the potential unintended
the relative bargaining powers of actorsthat is, consequences are also a central aspect of the process
think not only about capacity building, but also about of designing and assessing policies (box 2.12).
power asymmetries. Third, it is important to think that Figure 2.2 synthesizes the conceptual framework
in order to achieve the rule of law, countries must presented in this Report. It illustrates the dynamic
first strengthen the different roles of law to change interaction between governance and development.

Box 2.12The rules game: Lessons for reformers

This Report encourages reformers to pay attention to the courts to enforce contract law. Ultimately, this reform did
details of the rules game so that they can avoid two basic not produce the anticipated benefit, and it may even have
mistakes. First, an act of reform taken by one player in a made matters worse. The courts, which previously offered
rules game can backfire if the player does not consider the equal protection under criminal law, may no longer be able
actions the reform will trigger in other players. For exam- to punish wealthy offenders who commit crimes.
ple, an outsider might advise the legislature on the benefits Second, even if it produces better payoffs today, a
of contract law. In response, the legislature might pass a reform could also backfire if it generates worse outcomes
law that tells the courts to enforce contracts; the executive for the rules game that will be played in the future. This
head of government might promise to promote judges who can be particularly important in terms of legitimacy. The
follow the executives instruction to favor some people citizens of a nation may be willing to delegate enough
in court cases; wealthy elites might pay the executive to power to their government to make it a dominant player
receive special treatment in the courts; the executive might in the rules game for the nation. But they may be willing to
use the money from the elites to finance an upcoming polit- do so only as long as they feel the governments use of that
ical campaign; and, as a result, citizens might not trust the power is legitimate.
Source: WDR 2017 team.

Enhancing governance for development: Why policies fail | 71


Figure 2.2WDR 2017 framework: Governance, law, which power at a point in time was in the hands of
and development a few have managed to develop into ones that are
Power Power
more open, more prosperous, and more secure (Dea-
asymmetries asymmetries ton 2013; Boix 2015). Political pressure for reform can
come from the top-down (elite bargains) or from the
bottom-up (citizen engagement), and often it is the
result of coalitions between elites and citizens. Elites
Policy Development
and citizens are also influenced by international fac-
Rules arena outcomes tors, which can play a role in influencing the local bar-
gaining dynamics. Although external actors cannot
engineer domestic development, they can play a role
in strengthening or weakening the relative power of
Commitment Commitment different actors. Part III of this Report will explore
Coordination Coordination these dynamics.
Cooperation Cooperation
Moreover, governance and development dynam-
Source: WDR 2017 team. ics are a two-way street: the process of development
Note: Rules refers to formal and informal rules (norms). Development outcomes refers to security, is constantly reallocating resources, conferring new
growth, and equity. The actors in the policy arena can be grouped into elites, citizens, and international
actors. de facto power on actors, and shifting norms over
time.20 This process includes external (exogenous)
At its center is the policy arena, the space where shocks (such as a regional or worldwide financial
actors bargain and reach agreements about policies crisis) and internal (endogenous) structural changes
and rules. Given a set of rules, the right-hand side of (such as a demographic shift) or norm-based changes
the framework shows how commitment, coordina- (such as changes in gender roles). This feedback
tion, and cooperation among actors lead to specific process alters the distribution of power and in turn
development outcomes (the outcome game in box 2.7). affects the ability of different groups of citizens and
But actors can also agree to change the rules, which is elites to solve their collective action problems and
illustrated in the left-hand side of the framework (the influence the policy arena.
rules game in box 2.12). Both changes in development Law is a powerful instrument to reshape the policy
outcomes (such as the composition of growth or the arena because it is the tool through which policies are
concentration of wealth) and changes in rules (both codified and implemented, as well as the tool through
formal and informal) reshape the power asymmetries which power is allocated and contested. Although
manifested in the policy arena. law generally reflects the interests of those actors
with greater bargaining power, it also has proven to
A dynamic process: be an important instrument for change. By its nature,
law is a device that provides a particular language,
Drivers of change and the structure, and formality for ordering things, and this
role of law characteristic gives it the potential to become a force
When can meaningful changes occur in the nature independent of the initial powers and intentions
of governance? Overcoming harmful power asymme- behind it. Law, often in combination with other social
tries by adopting rules that change incentives, reshape and political strategies, can be used as a commitment
preferences and beliefs, or enhance contestability and coordination device to promote accountability,
may be difficult because those currently in power and also to change the rules of the game to foster
have incentives not to introduce reforms that would more equitable bargaining spaces. Effective laws are
limit their power. Moreover, even dramatic shifts in those that are able to change incentives by changing
who has power in the policy arena may not be enough payoffs to lower the cost of compliance (or increase
if the new elites, once in power, have incentives to use the cost of noncompliance), change preferences by
the same mechanisms to extract rents from society enhancing substantive focal points around which
that were used by the previous elites (Acemoglu and coordination can occur, and shape bargaining spaces
Robinson 2008). to increase contestability by underrepresented actors.
However, despite the difficulties, history has The next chapter looks at these various roles of law in
shown that change can happen; many societies in greater depth.

72 | World Development Report 2017


Notes 13. The problem of sustaining cooperation in transac-
tions or agreements is known in the economics and
1. Movie Review: Amka and the Three Golden Rules | political science literature as transaction costs. The
The UB Post, http://ubpost.mongolnews.mn, April term originated with Coase (1960) and Williamson
16, 2014. (1989), and was later expanded to politics by North
2. The importance of fiscal prudence is embedded (1990b) and Dixit (1996).
in the Netherlandic value system, as much as the 14. This is usually called the social conflict view. It
importance of an open debate about policies that emphasizes that policies arise not because they are
involve the use of public resources. Nicolaas Gerard efficient but because of their distinct distributional
Pierson, the Netherlands minister of finance and consequences (Bardhan 1989; Knight 1993; Acemo-
one of the most respected economists in the world glu and Robinson 2006). This section builds on the
toward the end of the 19th century, said more than work of these as well as other scholars, including
120 years ago that taxes should be invested wisely or Buchanan and Tullock (1962); Weingast and Mar-
they would not be justified, and that opportunities shall (1988); Dixit (1996); Acemoglu (2003); Spiller
for investments should be taken when a concur- and Tommasi (2003); IDB (2005); Stein and others
rence of favorable circumstances generates a tempo- (2007); North, Wallis, and Weingast (2009); Besley
rary budget surplus e.g. abundant harvests leading to and Persson (2011).
extra tax revenues (Pierson 1890). 15. Klein, Crawford, and Alchian (1978) note that the
3. Social norms are beliefs that are shared by a group or level of specific investments in a contractual rela-
community. In this way, norms can be understood as tionship depends on the expectation of obtaining
commonly shared beliefs. a fair rate of return on that investment. In this
4. See Rosenstein-Rodan (1943). Murphy, Shleifer, and case, the investment refers to the fact that violent
Vishny (1989) model a more recent version of this groups will need to give up power to pursue growth-
idea. enhancing policies. However, once they give up
5. Hoff (2000) reviews models of coordination fail- power, they fear not obtaining a fair return on their
ures in a wide range of contexts, including social investment. Dixit (1996) extended the reasoning to
norms and corruption. Cooper (1999) reviews political transactions.
macroeconomic models of coordination failures, 16. This includes material (physical and financial)
while Rodrguez-Clare (2005) reviews microeco- resources and technical ability.
nomic models of coordination failures. 17. See Ivaldi and others (2003) and Spiller and Tommasi
6. See Hoff and Stiglitz (2001) for several other (2003, 2007).
examples of coordination problems that are key to 18. The importance of process legitimacy is captured
development. by Levi (2003, 88): [C]itizens are willing to go along
7. Examples of the cohesion and inequality-conflict with a policy they do not prefer as long as it is made
cycle are found in Esteban and Ray (2011) and Gintis according to a process they deem legitimate, and
(2000). Bardhan (2005) discusses cooperation in the they are less willing to comply with a policy they like
context of scarcity and conflict. if the process was problematic.
8. A similar approach has been developed in a pioneer- 19. See Tornell and Esquivel (1997). Also see
ing work, The Politics of Policies: The Role of Political Pro- Gonzlez-Reyes (2016) for a discussion of the North
cess in Successful Public Policies, in the context of Latin American Free Trade Agreement (NAFTA) in the
America (IDB 2005). early 1990s.
20. Hirschman (1958); Streeten (1959); Ray (2010).
9. Lukes (1986) presents an extensive discussion of the
concept of power from different perspectives, as
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and in academic literature, but it is often not defined. Theorem? Social Conflict, Commitment, and Politics.
A search of the word elite returned 913,000 results in Journal of Comparative Economics 31 (4): 62052.
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12. As Gould (1987, 9) notes, dichotomies are either
useful or misleading, not true or false because they a. References to titles of publications that include Taiwan, Hong
are simplifying models for organizing thought, not Kong, and Macau/Macao refer to the regions Taiwan, China;
ways of the world. Hong Kong SAR, China; and Macao SAR, China, respectively.

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76 | World Development Report 2017


SPOTLIGHT 1

Corruption

Corruption is often defined as the use of public office From the perspective of this Report, replicating
for private gain. In the framework of this Report, cor- these reforms may be ineffective if approaches do
ruption is a deals-based way to sustain agreements not also tackle the underlying reasons they are not
among certain individuals or groups. Although in performing their intended function, which is to
the short term corruption may be able to grease the ensure the credible commitment of those in power to
wheels of the economy, in the long term it negatively not abuse that power for private gain. These under-
affects growth by diverting resources from more lying reasons are related to systemic features in the
productive uses and negatively affects equity by dis- policy arena such as entrenched power structures or
proportionately benefiting those in power. Moreover, social norms. Consequently, corruption is less about
it undermines legitimacy because it affects public individual transactions and more about networks of
perceptions of the fairness of the decision-making actors (Schmidt 2016). Thus changes in formal rules
process (Rose-Ackerman 2016). and anticorruption strategies are likely to be effec-
The first generation of high-income member tively enforced only when they are aligned with the
states of the Organisation for Economic Co-operation interests of powerful actors in a country and are able
and Development (OECD) has achieved significant to trigger broader changes in social expectations.
control of corruption through development processes
and institutional forms that many other countries Corruption and social order:
around the world have since tried to replicate without
achieving the desired results. These anticorruption Is corruption inescapable?
strategies often wrongly assume that aggregate lev- The first step in rethinking corruption is to recognize
els of corruption can be reduced through a top-down that corruption is not a social malady or disease
combination of policies that improve enforcement of to be eradicated, but rather a built-in feature of gov-
the rule of law, change the expected returns to corrup- ernance interactions. Countries today are on a contin-
tion (for example, through bureaucratic pay increases, uum of governance between a system in which rules
greater transparency, or harsher punishments), and are applied by virtue of personal status and one in
simplify procedures to reduce the opportunities for which they are applied impersonally. Unfortunately,
corruption. These strategies have generally delivered assuming that a particularistic system is the exception
modest reductions in corruption in contexts in which and an impersonal system is the norm is not histor-
the configuration of social power does not support ically accurate. In fact, the public-private separation
the enforcement of generalized rule-following behav- in public affairs and the complete autonomy of state
ior (Khan 2016). from private interests are relatively recent. All societ-
ies start from being owned by a few individuals who
control all resources. As states develop historically,
WDR 2017 team, based on inputs from Alina Mungiu-Pippidi individual autonomy grows, but so too do the material
and Mushtaq H. Khan. resources available for spoiling (Mungiu-Pippidi 2016).

Corruption | 77
In less-developed societies, powerful groups are which established the principle that public officials
fewer in number and less dependent on competitive- should be chosen on the basis of merit, was passed
ness and market transactions for their revenues. They by Congress.
can feasibly interact with each other in informal or As the incentives of powerful actors change
deals-based ways and generate rents through political throughout the process of development, they can
connections. If the most powerful groups in a coun- feed back into changing social norms, which rein-
try do not want the enforcement of formal rules, it force the existing dynamics of corruption. In this
is unlikely that the rule of law will emerge through sense, corruption can become an equilibrium because
enforcement efforts from above. Policy makers corrupt systems make it very costly for individuals
and political parties in these countries may be able to behave honestly. For example, if the majority of
to raise significant revenues only in informal and government bureaucrats favor their in-group or take
deals-based ways because powerful groups prevent bribes, individuals who do not do so will be criticized
the implementation of formal rules to raise taxation. by their in-group and lose out on an often indispens-
As a result, the most feasible way for policy makers able source of additional income. Thus entrenched
and political parties to reward their supporters is to corruption may lead to a higher tolerance for corrupt
allow them to violate rules. A common manifestation behavior. Because governance interventions affect
is when parties buy political support in exchange development outcomes, which in turn affect gover-
for jobs in the public sector, often undermining a nance constraints, one is confronted with a complex,
commitment to a merit-based performance evalua- coevolutionary transition process that does not fol-
tion. In general, it is difficult for political leaders to low a predictable path and requires continual adap-
exercise the political will to enforce rules when their tive interventions.
tenure depends on doing otherwise (Khan 2016). If
the demand for control of corruption is poor because
spoils are used efficiently to buy off certain strategic
What can be done?
groups, then collective action becomes impossible to The development process plays an important role
achieve and the equilibrium remains, with particular- in reducing corruption by redistributing power and
ism as the norm. changing norms in the policy arena, but development
Countries become more advanced when they have explains only about half of the variation in control
a more diverse set of productive organizations in dif- of corruption (Mungiu-Pippidi 2015). An analysis of
ferent sectors and activities. As an economy becomes a large sample of countries reveals how some coun-
more productive, corruption becomes more costly tries overperform and others underperform in their
because it restricts the functioning of the market. As expected levels of controlling corruption given their
they pay more taxes, fund political parties, and employ levels of development as measured by the Human
more people, business elites have an increasing inter- Development Index (figure S1.1). This heterogeneity
est in the enforcement of the formal rules required in progress suggests that reform is possible, even in
to conduct complex business and transactions (Khan countries with lower levels of development. In con-
2016). Moreover, as countries develop, emergent texts in which levels of development and political
socioeconomic classes can strengthen coalitions to arrangements do not yet allow the effective enforce-
demand better governance. In particular, larger mid- ment of formal rules, anticorruption strategies should
dle classes have historically played an important role sequentially attack corruption at critical points where
in pressuring governments to deliver better public anticorruption measures are both feasible and would
services, such as education and health. These forces have a high impact on development.
are illustrated by the shift of the U.S. political system Anticorruption priorities will depend on the coun-
in the 19th century away from patronage toward mer- try and on the sectors and processes that are most
itocracy (Fukuyama 2014). As economic development important for accelerating development progress. A
advanced, the emerging industrial urban elites began common error is to equate the impact of corruption
to demand more efficient government services. with the magnitude of bribes. An activity with rela-
Moreover, the business elites found an ally against tively small bribes can have a big impact on develop-
corruption in the emerging civil society, with a better- ment if, for example, the bribes prevent the enforce-
educated middle class. When newly elected presi- ment of regulations on food adulteration. Other
dent James A. Garfield was assassinated in 1881 by activities characterized by significant bribes may be
a would-be office seeker, this coalition of new social profit-sharing transfers to politicians with a lower
groups was ready to mobilize, and the Pendleton Act, impact on development if the corruption does not

78 | World Development Report 2017


Figure S1.1Development accounts and to enhance contestability by engaging actors in
for only about half of the variation in civil society and the media. Increasing constraints,
control of corruption for example, by promoting freedom of the media and
freedom of the internet, is key to strengthening an
Predicted control of corruption scores based on Human
Development Index scores, selected countries enabling environment for reform (Mungiu-Pippidi
2016). One particularly promising avenue of action is
Best
3.0
to take advantage of technology. Digitalization helps
DNK transparency and rationalization of fiscal manage-
2.5 NZL
FIN CHE NOR
LUX SWESGP
NLD
ISL DEUAUS
ment on the government side, and it creates empow-
2.0
Absence of Corruption

JPN CAN
ARE AUT BEL
GBR ered citizens on the society side. Internet media in
1.5 URY CHLEST
BTN GEO general and social networks in particular are now
1.0 BWA
indispensable components of citizen empowerment
0.5 VUT NAM
LSO ITA
CZE and collective action.
0 SEN SLB BRN
BFA MWI SWZ
HRV GRC
ROU International actors, such as aid donors, also
0.5 PER PAN
MNG
ECU BLR
BGR
LBR ETH MDVALBMEXKAZ ARG
ERI
MOZ PRYDOM ARM
SRB
TTO
RUS play a key role in the local fights against corruption,
1.0 AZELBN
KHM
SYR UZB
IRQ LBY UKR and they should ensure that they do not increase
1.5
resources for corruption. Meaningful international
2.0
Worst 0.3
anticorruption efforts should coordinate and engage
0.4 0.5 0.6 0.7 0.8 0.9 1.0
Worst Best
with actors outside the state, including local commu-
HDI score nities, nongovernmental organizations, and multi-
Sources: WDR 2017 team, based on data from the United Nations Develop-
national businesses, to support domestic anticorrup-
ment Programme (Human Development IndexHDI scores) and WDR 2017 tion reforms through tools such as the provision of
Governance Indicators for Absence of Corruption, based on Mungiu-Pippidi
2015.
information (reform evaluations and cross-country
Note: Only outliers are labeled. Beige dots above (below) the line represent
data) or legal mechanisms (international treaties and
countries that overperform (underperform) on control of corruption given arbitration)see Rose-Ackerman (2016).
their level of development.

distort policy. A high-impact anticorruption approach References


therefore has to assess anticorruption priorities, but it Fukuyama, Francis. 2014. Political Order and Political Decay:
also has to be feasible. It has to gauge whether strat- From the Industrial Revolution to the Globalisation of
egies can be designed to make enforcement easier by Democracy. New York: Farrar, Straus and Giroux.
aligning with the interests of important stakeholders Khan, Mushtaq H. 2016. Background note on corruption,
or by developing new coalitions (Khan 2016). WDR 2017, World Bank, Washington, DC.
Although this way of looking at corruption con- Mungiu-Pippidi, Alina. 2015. The Quest for Good Gover-
nance: How Societies Develop Control of Corruption. Cam-
trol does not allow for rigid, straightforward policy
bridge, U.K.: Cambridge University Press.
prescriptions, it is possible to identify a series of key
. 2016. Background note on corruption, WDR 2017,
strategies in countries that have managed in recent World Bank, Washington, DC.
times to make progress in controlling corruption. Rose-Ackerman, S. R. 2016. Corruption and Government.
To reduce corruption, reform coalitions will need Cambridge, U.K.: Cambridge University Press.
to change incentives to limit the payoff of corrupt Schmidt, M. 2016.Background note on corruption, WDR
officials through increased accountability of elites 2017, World Bank, Washington, DC.

Corruption | 79
SPOTLIGHT 2

The governance challenges of


managing risks

Tackling environmental and sustainability challenges borne by U.S. households in the 2000s than in the
depends on the availability of commitment mecha- 1970s and 1980s, increasing their vulnerability to
nisms to address natural hazards and to protect the shocks such as illness, unemployment, and retire-
environment and resources for future generations, ment. In western European countries, by contrast,
who are not represented in the policy arena. When there is a tendency for governments to bear some of
it comes to natural resourcesand their links to the risks and protect households from shocks, which
risk managementcooperation is also challenging also has implications for the fiscal sustainability of
because opportunistic overexploitation of resources that social contract, particularly because of the cur-
is the norm in many societies. rent demographic trends (World Bank 2014).
Defining an acceptable level of risk is difficult
What is an acceptable level because of the complexity of the process for deter-
mining its distribution and because of the wide
of risk? differences in preferences, values, and beliefs. Some
Many natural risks are systemicand therefore col- individuals are more risk averse than others and may
lectiveby nature, and governments play a key role prefer a more cautionary approach. Defining a social
in the management of such risks (World Bank 2014). level of acceptable risk is also difficult because of dif-
For example, individuals cannot protect themselves ferences in sensitivityfor example, people have very
against floods independently, and thus they must rely different sensitivity to local air pollution. In the pres-
on what is put in place at the collective level. This is ence of such heterogeneity, designing homogeneous
particularly true in high-density population areas regulations is challenging and highly dependent on
with geographically concentered (agglomerated) considerations of equity (especially when sensitivity
infrastructure. Despite regular claims that disasters is correlated with other social factors). The selected
are unacceptable, removing all risks would be prohib- regulation is also unlikely to satisfy all individuals
itively costly to governments. Thus a certain amount and may require compensatory action, which requires
of risk must be accepted. Decisions on the acceptable a process to decide who deserves compensation and
level of risk that individuals must bear should be to ensure that compensation is proportional to the
made through a collective political process. What losses and does not create long-term irreversible costs.
risks are mitigated through markets and what risks
and whose risksare dealt with through public action
are therefore governance-related decisions.
How can risk be allocated
In The Great Risk Shift, Jacob Hacker (2006) across households and
describes how a larger share of economic risks were over time?
Stphane Hallegatte, based on World Bank (2014) and Fay and When risks are borne by households, existing inequi-
others (2015). ties can be manifested and reinforced. For example,

80 | World Development Report 2017


when a big snowstorm in the Washington, D.C., area exercise carried out using data from developing coun-
leaves many roads blocked and public transportation tries shows that subtracting $100 from fossil fuel sub-
disrupted for two weeks, the option of removing the sidies and redistributing the money equally through-
snow in order to get to work is open only to those who out the population would on average transfer $13 to
can afford to pay for it. Less well-off people are left the bottom quintile of the income distribution and
not only unable to leave their homes, but also unable take away $23 from the top quintile. Redistribution
to generate income because of the lack of mobility, has been shown to significantly increase the odds that
deepening the effects of the shock on their welfare. reforms will succeed. A review of reforms in the Mid-
Risk is distributed not only across households but dle East and North Africa classifies all reforms with
also over time. Even more complicated are cases in cash and in-kind transfers as successful, as opposed
which the benefits of risk management extend over to only 17 percent of those without (Sdralevich and
the very long term. For example, for climate change others 2014).
the beneficiaries are not even born yet to protect their Another factor in the success of reforms is the
interests. Dispersedor unrepresentedinterests are alignment of incentives in the policy arena in such
a classic issue leading to government failures. a way that the commitment to a long-term objective
can be credible. Returning to the example of climate
change policies, consider the role of carbon pricing.
How can political will for risk Carbon prices are critical for the efficiency of the tran-
management be generated sition toward the zero carbon emission economy that
in the face of dispersed is required to stabilize climate change. However, a car-
bon price alone is unlikely to provide enough incen-
benefits? tive to invest in new, radically different technologies
Even when they agree on an acceptable level and allo- or to change long-term investment because the long-
cation of risk, politicians may be reluctant to devote term price signal is hardly predictable and credible.
financial and political capital to risk management Given the expected lifetime of power plants, a credible
efforts because the costs tend to be immediate, con- carbon price pathway would have to be announced
centrated, and observable, whereas the benefits are at least three decades in advance to spur the optimal
longer term, distributed more broadly, and often less amount of investment in low-carbon power plants.
visible. For example, when prohibiting development But doing so is difficult because governments have a
in flood zones, decision makers impose a cost on land- very limited ability to commit over such long periods
owners who will naturally tend to oppose this new (Helm, Hepburn, and Mash 2003; Brunner, Flachsland,
regulatory constraint. On the other hand, the people and Marschinski 2012). Thus to reduce emissions
protected by the regulationfor example, future through investments with long-term consequences
buyers of apartments in the newly developed flood- (such as infrastructure, research and development,
prone areasare often not aware that the regulation and long-lived capital), additional regulations, norms,
may eventually protect them and therefore rarely take or direct investments are needed. Policy makers
action to support it. could, for example, kick-start the transition either by
To garner political support, policy packages need temporarily supporting investments in low-carbon
to be socially acceptable and thus consistent with technologies (Acemoglu and others 2012) or by impos-
a countrys social objectives, such as protecting the ing additional regulations or performance standards
poor. What does this mean in practice for designing (Rozenberg, Vogt-Schilb, and Hallegatte 2014).
policies that are more likely to succeed? Consider The lack of well-accepted indicators for risk makes
countries seeking to adopt climate change policies. it difficult to measure the performance of decision
Although the poor are expected to benefit in the long makers and to make them accountable for their
run from mitigation policies because they are the choices in terms of risk management. However, evi-
most vulnerable to climate change, these types of pol- dence from environmental issues such as asbestos,
icies are not necessarily pro-poor in the short run. It is lead paint, and tobacco use reveals that increasing
therefore critical to use the savings or new proceeds transparency and providing a voice to dispersed
generated by climate policies to compensate poor interests help avoid capture by interest groups and
people, promote poverty reduction, and boost safety improve policy decisions. Contributing factors, such
nets. One way to do that is by recycling revenue from as when civil society organizations are able to develop
carbon pricing instruments through tax cuts and by independent expertise and freely communicate their
increasing transfers to the population. A modeling conclusions through the media, internet, and social

The governance challenges of managing risks | 81


networks, as well as when there is free access to data Hacker, Jacob. 2006. The Great Risk Shift. New York:
and some legal protection for whistle-blowers, can Oxford University Press.
help to strengthen the effectiveness of risk manage- Helm, D., C. Hepburn, and R. Mash. 2003. Credible
ment policies. Carbon Policy. Oxford Review of Economic Policy 19:
43850.
Rozenberg, Julie, Adrien Vogt-Schilb, and Stphane
References Hallegatte. 2014. Transition to Clean Capital,
Acemoglu, D., P. Aghion, L. Bursztyn, and D. Hemous. Irreversible Investment, and Stranded Assets.
2012. The Environment and Directed Technical Policy Research Working Paper 6859, World Bank,
Change. American Economic Review 102 (1): 13166. Washington, DC.
Brunner, S., C. Flachsland, and M. Marschinski. 2012. Sdralevich, Carlo, Randa Sab, Younes Zouhar, and
Credible Commitment in Carbon Policy. Climate Giorgia Albertin. 2014. Subsidy Reform in the Middle
Policy 12 (2): 25571. East and North Africa: Recent Progress and Challenges
Fay, Marianne, Stphane Hallegatte, Adrien Vogt- Ahead. Washington, DC: International Monetary
Schilb, Julie Rozenberg, Ulf Narloch, and Tom Fund.
Kerr. 2015. Decarbonizing Development: Three Steps to World Bank. 2014. World Development Report 2014: Risk
a Zero-Carbon Future. Climate Change and Develop- and OpportunityManaging Risk for Development.
ment Series. Washington, DC: World Bank. Washington, DC: World Bank.

82 | World Development Report 2017


CHAPTER 3

The role of law

Long before the Code of Hammurabi set the law for sometimes they are impossible to implement. Gov-
ancient Mesopotamia, people subjected themselves ernments may be unable to enact good lawsthat
sometimes by cooperative agreement, sometimes is, those reflecting first-best policyor good laws
under threat of forceto rules that would enable may lead to bad outcomes. And law itself may be used
social and economic activities to be ordered. As soci- as a means of perpetuating insecurity, stagnation,
eties evolved from close-knit kinship groups to larger and inequality. For example, for decades South Africa
and more diverse communities with more complex sustained a brutal system of apartheid rooted in law.
activities, the need for more formal rules increased It also has become common for political leaders in
(Fukuyama 2010). In modern states, law serves three illiberal regimes to legitimize nondemocratic rule
critical governance roles. First, it is through law and through changes to the constitution, such as amend-
legal institutions that states seek to order the behavior ments that extend term limits. Every day, actions
of individuals and organizations so economic and that exert power over others, such as displacing the
social policies are converted into outcomes. Second, poor from their land, detaining dissidents, and deny-
law defines the structure of government by ordering ing equal opportunities to women and minorities,
powerthat is, establishing and distributing authority are taken within the authority of the law. In well-
and power among government actors and between documented cases, laws intended to secure prop-
the state and citizens. And third, law also serves to erty rights have served to privilege powerful actors
order contestation by providing the substantive and by allowing them to seize land and register it at the
procedural tools needed to promote accountability, expense of rural farmers, or to perpetuate class sys-
resolve disputes peacefully, and change the rules. tems and power relations.2
It has long been established that the rule of law Law can be a double-edged sword: although it may
which at its core requires that government officials serve to reinforce prevailing social and economic rela-
and citizens be bound by and act consistently with the tions, it can also be a powerful tool of those seeking to The mere
lawis the very basis of the good governance needed resist, challenge, and transform those relations.3 At the existence of formal
to realize full social and economic potential. Empirical local, national, and global levels, states, elites, and citi- laws by no means
studies have revealed the importance of law and legal zens increasingly turn to law as an important tool for leads to their
institutions to improving the functioning of specific bargaining, enshrining, and challenging norms, poli- intended effects.
institutions, enhancing growth, promoting secure cies, and their implementation. By its nature, law is a In many countries,
property rights, improving access to credit, and deliv- device that provides a particular language, structure, laws remain
ering justice in society.1 and formality for naming and ordering things, and unimplemented, or
As everyday experience makes clear, however, the this characteristic gives it the potential to become a they are selectively
mere existence of formal laws by no means leads to force independent of the initial powers and intentions implemented, or
their intended effects. In many developing countries, behind it, even beyond the existence of independent sometimes they
the laws on the books are just that; they remain unim- and effective legal institutions. Law is thus simulta- are impossible to
plemented, or they are selectively implemented, or neously a product of social and power relations and implement.

The role of law | 83


a tool for challenging and reshaping those relations. ordering, requires state-backed coercion, and encom-
Law can change incentives by establishing different passes notions of justice (box 3.1).
payoffs; it can serve as a focal point for coordinating This Report sidesteps these philosophical debates
preferences and beliefs; and it can establish procedures and uses the term law or formal law in its most conven-
and norms that increase the contestability of the policy tional sense to mean positive state lawsthat is, laws
arena. that are officially on the books of a given stateat
the national or subnational level, whether they were
passed by a legislature, enacted by fiat, or otherwise
Law and the policy arena formalized. Law here means the de jure rules. The
Like policy, law does not live in a vacuum. Following operation of law requires a legal system composed
the discussion in chapter 2, the nature and effective- of actors and processes whose function it is to make,
ness of laws are primarily endogenous to the dynam- interpret, advocate, and enforce the law. This system
ics of governance in the policy arena. The ability of includes legislatures, judicial and law enforcement
lawwords on paperto achieve its aims depends institutions, administrative agencies, as well as the
on the extent to which it is backed up by a credible legal profession, advocates, and civil society groups.
commitment in order to coordinate expectations In all societies, state law is but one of many rule
about how others will behave and to induce cooper- systems that order behavior, authority, and contes-
ation to promote public goods. This ability in turn is tation. These rule systems include customary and
shaped by the interests of elites and by the prevailing religious law, cultural and social norms, functional
social norms. normative systems (rule systems developed for the
The task of defining law has captured the minds common pursuit of particular aims such as sports
of legal scholars, philosophers, and sociologists for leagues or universities), and economic transactional
centuries. H. L. A. Hart (1961, 1) observed that few normative systems (Tamanaha 2008). Such legal and
questions concerning human society have been asked normative pluralism (box 3.2) is neither inherently
with such persistence and answered by serious think- good nor bad: it can pose challenges, but it can also
ers in so many diverse, strange and even paradoxical generate opportunities.
ways as the question What is law? Theorists have Plural normative systems can complement state
debated the essence of law for centuries, including laws by providing order where state institutions are
the extent to which law refers to custom and social not accessible, by alleviating the burden on state

Box 3.1What is law?

Countless theorists have attempted to define law. The those rules are made (secondary rules), without regard
definitions generally fall into one of three categories, which for the justness of the law. Under this approach, evil legal
were initially set forth two millennia ago in the Platonic systems count as law, but customary law and international
dialogue Minos: (1) law involves principles of justice and law, which lack centralized enforcement systems, are not
right; (2) law is an institutionalized rule system established considered fully legal. The third category is represented
by governments; and (3) law consists of fundamental cus- by anthropologists and sociologists such as Eugen Ehrlich
toms and usages that order social life. Adherents of the first and Bronislaw Malinowski, who focus on customary law or
category are natural lawyers such as Thomas Aquinas, who living law. They reject the notion that law must consist of
assert that the defining characteristic of law is its moral- an organized legal system and instead recognize that the
ity, justice, and fairness. Evil legal systems or evil laws are central rules by which individuals abide in social interac-
disqualified as law in this view. The second category aligns tions count as law. Three key fault lines run across these
with H. L. A. Hart and other legal positivists, who base their conceptions of law: the first regarding the normative value
definition on the existence of a legal system that consists of of law, the second the systematic form of law, and the third
substantive laws (primary rules) and laws governing how the function of law.

Source: Brian Tamanaha, Washington University in St. Louis.

84 | World Development Report 2017


Box 3.2Legal and normative pluralism

The phenomenon of legal pluralismthe coexistence A further source of normative pluralism is social norms
of multiple legal systems within a given community or generally accepted rules of behavior and social attitudes
sociopolitical spacehas existed throughout history and within a given social grouping. Although they may be less
continues today in developing and developed countries visible than codified laws, they are highly influential. A
alike. Modern forms of legal pluralism have their roots in vast literature documents how social norms derived from
colonialism, through which Western legal systems were communal and identity groups, professional associations,
created for colonists, whereas traditional systems were business practices, and the like govern the vast majority of
maintained for the indigenous population. That traditional human behavior.a Social norms are a fundamental way of
or customary law still dominates social regulation, dispute enabling social and economic transactions by coordinating
resolution, and land governance in Africa and other parts peoples expectations about how others will act. Social
of the developing world is well documented. In some sanctions, such as shame and loss of reputation, or at
cases, customary law, including a variety of traditional times socially sanctioned violence, are a powerful means
and hybrid institutional forms of dispute resolution, are of inducing cooperation to prevent what is regarded as
formally recognized and incorporated into the legal sys- antisocial and deviant behavior (Platteau 2000).
tem, such as in Ghana, South Africa, South Sudan, the Yet another source of normative pluralism is generated by
Republic of Yemen, and several Pacific Islands states. In todays globally interconnected world, in which a multitude
others, such forms continue to provide the primary means of governmental, multilateral, and private actors establish
of social ordering and dispute resolution in the absence and diffuse rules about a wide range of transactions and
of access to state systems that are perceived as legiti- conduct (see chapter 9). Increasingly, the local experiences
mate and effective, such as in Afghanistan, Liberia, and of law are informed by these broader rules covering topics
Somalia. Customary legal systems reflect the dominant such as trade, labor, environment, natural resources, finan-
(yet evolving, not static) values and power structures of cial institutions, public administration, intellectual property,
the societies in which they are embedded, and as such are procurement, utility regulation, and human rights. These
often thought to fall short of basic standards of nondis- rules can take the form of binding international treaties and
crimination, rights, and due process. The extent to which contracts (hard law) or voluntary standards and guiding prin-
they are considered legitimate and effective by local users ciples (soft law). These rules may reinforce, complement, or
is an empirical question and a relative one in light of the compete with state law to govern public and private spaces
available alternatives. (Braithwaite and Drahos 2000; Halliday and Shaffer 2015).

Source: WDR 2017 team.


a. Ellickson (1991); Sunstein (1996b); Basu (2000); Posner (2000); Dixit (2004).

institutions, or by enabling diversity of preferences. certainty reduces incentives to solve disputes peace-
For example, informal mediation of land disputes by fully (Eck 2014). Where formal state laws differ sharply
community authorities, customary or religious deter- from the content of other prevailing social norms and
mination of personal and family matters, and arbi- rule systems, they are less likely to be obeyed and may
tration of contract disputes by business associations undermine trust in the state (Isser 2011).
complement the state legal system in many countries. Finally, pluralism can help pave constructive
However, in some cases multiple rule systems may pathways to development outcomes by enabling con-
create confusion, undermine order, and perhaps lead testation and the shaping of preferences. Throughout
to perverse outcomes. These issues could arise when history, social entrepreneurs and clever interme-
people can no longer rely on the expectation that oth- diaries have proven to be deft at opportunistically
ers will act in accordance with a certain set of rules selecting from among legal and normative claims
(Basu 2000). In West Africa, violent communal land and authorities to advance their aims.4 Thus legal
conflict is 200350 percent more likely where there pluralism can serve to expand the languages and sites
are competing legal authorities because the lack of in which contests over power are waged. In Indias

The role of law | 85


Gujarat and Uttar Pradesh states, advocate groups (factoring in the likelihood of being caught) is higher
established informal womens courts (nari adalat) to than the benefits. Thus state bureaucrats will refrain
provide an alternative legal avenue for women sub- from accepting bribes if the cost and likelihood of
jected to domestic violence. These courts enabled being caught are higher than the benefit of accepting
women to draw on community norms, state law, and the bribe. Manufacturing companies will comply
international human rights to contest unequal power with environmental regulations if there is a high
relations and to shape emerging norms (Merry 2012). likelihood of being fined an amount greater than
The interaction of law, norms, and power is funda- their profit margin gained from noncompliance.
mental to understanding how law works to underlie Families can be induced to send their female children
persistence or change in the dynamics of the policy to school if the consequence of noncompliance is
arena across its three core roles, to which we now sufficiently severe. The converse holds true as well,
turn. such as a law that generates a credible reward for
compliancefor example, a law requiring people to
register for an identity card to gain access to welfare
Ordering behavior: benefits. This finding also extends to state entities.
The command role of law For example, compliance with the regulations of the
European Union, World Trade Organization, or World
In this role, law is an instrument of policy. It is the Bank Group depends on the belief that the rewards of
means by which governments codify rules about how membership will outweigh the alternative.
The coercive individuals and firms are to behave in order to achieve The coercive power of law depends on the
power of law economic and social policy outcomes, including in existence of a credible threat of being caught and
depends on the the criminal, civil, and regulatory domains. What punished or a credible commitment to obtaining a
existence of a makes these lawsessentially words on paperlead reward for compliance. As Basu (2015) argues, that
credible threat to the expected outcomes, or not? How do laws inter- credibility depends on the extent to which the law is
of being caught act with power, norms, and capacity to create incen- able to coordinate peoples beliefs and expectations
and punished tives, change preferences, and generate legitimacy? about what othersfellow citizens and the officials
or a credible Although there is agreement that the legal system who implement and enforce lawswill do (see also
commitment to affects economic performance, there is no consensus Malaith, Morris, and Postlewaite 2001). However,
obtaining a reward in terms of how it affects performance (box 3.3). This three conditions must be met. First, the state needs
for compliance. section draws on the legal, sociological, and economic the technical, physical, and human capacity to carry
scholarship to look at three interrelated ways that law through with consistency. Second, the law must pro-
serves to induce particular behavior, and why these vide strong enough incentives to overcome the gains
may fail. These are the coercive power of law, the coor- from noncompliance, taking into account that many
dinating power of law, and the legitimizing power of law. people may not exhibit rational behavior (World
Although they operate with distinct logic, these three Bank 2015), as well as overcome adherence to any alter-
mechanisms rarely work alone but rather in joint native conflicting normative order. Third, the law needs
ways that interact with power, norms, and capacity to to be in line with the incentives of those with enough
provide the commitment and collective action needed power to obstruct implementation so they will go along
to produce results. with it (unless truly effective restraints on such power
exist). Together, these conditions will create a credible
The coercive power of law: Incentivizing commitment that will induce rational compliance.
behavior change through coercion or Take, for example, a law prohibiting bribery.
sanctions First, people need to believe that the state has the
Perhaps the most conventional reason that people capacity to detect and punish those engaged in the
obey the law is fear of sanctions.5 If people, acting practicethat is, it has effective administrative and
according to their narrow self-interest, do not behave law enforcement institutions. Even if the state does
in a socially desirable way, sanctions can be used to not have adequate reach to detect violations every-
induce cooperation by changing incentives. In other where, it could be aided by private enforcement to
words, the coercive power of law shapes the options the extent the law (in combination with a broader
available to people by making some actions infeasible range of related laws) incentivizes whistle-blowing
or just too costly. The traditional law and economics by those in a position to do so. And finally, the sanc-
approach uses a cost-benefit analysis: people will tion for violating the law must leave the perpetrator
obey the law as long as the cost of noncompliance worse off than any benefits from engaging in bribery.

86 | World Development Report 2017


Box 3.3Legal origins: Theory and practice

One of the most influential explanations of why some strong role of private property as well as the adaptability of
countries have legal systems that support more dynamic the case law system that characterize British common law.
market economies than others is the legal origins theory The legal origins theory sparked a significant effort to
put forward by La Porta and others (1998) and La Porta, reform laws and regulations to imitate common law rules
Lopez-de-Silanes, and Shleifer (2013). This theory posits (Besley 2015). Yet, empirical analysis shows that there is
that countries that inherited a common law rather than a no clear relationship between changes in legal rules and
civil law system from their colonial occupiers have stronger changes in economic outcomes, reinforcing the idea that
investor and creditor rights, lower legal formalism, more changes in the form of laws do not necessarily change
efficiency of contract and debt enforcement, and higher the way the legal systems function (see figure B3.3.1).
judicial independence. These strengths are attributed to the This analysis is further backed by evidence finding only

Figure B3.3.1Changes in investor protection and creditor rights have little


impact on economic outcomes
Effects of changes in legal indexes on financial indicators

a. Investor protection b. Creditor rights


and domestic credit and domestic credit

5 5
Domestic credit (% of GDP)

Domestic credit (% of GDP)

0 0

5 5

0 0.2 0.4 0.6 0 0.5 1


Strength of investor protection index Strength of creditor rights index

c. Investor protection d. Creditor rights


and market capitalization and market capitalization
Market capitalization (% of GDP)

Market capitalization (% of GDP)

20 20

10 10

0 0

10 10

20 20

0 0.2 0.4 0.6 0 0.5 1


Strength of investor protection index Strength of creditor rights index
Source: WDR 2017 team, using data from Oto-Peralas and Romero-vila 2016.
Note: In the graphs, domestic credit extended to the private sector by banks and market capitalization of listed domestic companies are expressed in
percentage of gross domestic product (GDP).

(Box continues next page)

The role of law | 87


Box 3.3Legal origins: Theory and practice (continued)

weak correlations between changes in Doing Business These findings are in line with this Reports argument that
indicators and firm-level enterprise surveys (Hallward- the effect of laws and policies is endogenous to governance
Driemeier and Pritchett 2011). In addition, the degree of dynamics. The extent to which particular laws are able to
legal convergence depends on the application and inter- facilitate commitment and collective action in light of exist-
pretation of law, making the differences based on legal ing power, capacity, and norm constraints is far more pre-
traditions less clear. Indeed, Oto-Peralas and Romero- dictive of economic outcomes than the content of the rules
vila (2014) argue that, empirically, common law does themselves. As critics of the legal origin theory have argued,
not generally lead to legal outcomes superior to those the manner in which legal systems were transplanted and
provided by French civil law when precolonial population adapted over timethat is, whether colonial law became
density or settler mortality or both is high. In addition, embedded in and responsive to local context and demand or
they find that the form of colonial rule in British colonies remained superficialis more indicative of any path depen-
mediates between precolonial endowments and postcolo- dencies than the origin of the law (Berkowitz, Pistor, and
nial legal outcomes. Richard 2003; Oto-Peralas and Romero-vila 2014).
Source: WDR 2017 team, based on Oto-Peralas and Romero-vila (2016).

But getting this formula right is complicated and 2011). Similarly, stricter mandatory arrest laws for
costly. For example, too weak a sanction will be crimes related to domestic violence in the United
absorbed as part of the cost of doing business, while States were found to be associated with higher mur-
too strong a sanction for the behavior of potential der rates of intimate partners because reporting of
whistle-blowers will reduce the number of people episodes of escalating violence to the police decreased
who will engage in private enforcement.6 (Iyengar 2009; Goldfarb 2011). In India, a recent law
But even with the right formula, the law must mandating the death penalty for convicted rapists
contend with powerful interests. To the extent that could have similar effects because of the greater pres-
they benefit from bribery, enforcement will likely be sure now on women not to report a rape (Pande 2015).
blocked or not consistent or credible. Norms may also India has had strong laws on the books prohibiting
compete in ways that undermine implementation. a range of gender-based violence, including child
Several studies have looked at the effect of practi- marriage, sex-selective abortion, dowry payment, and
cal norms or culture on the impact of laws. For domestic violence, but these have barely made a dent
example, laws establishing meritocratic civil service in behavior because the social sanctions associated
have gone unimplemented in Cameroon and Niger with abandoning customary practice to follow the law
because of an overpowering norm that people should are far stronger (Pistor, Haldar, and Amirapu 2010).
not be sanctioned for breaking the rules unless it Here the norm is likely operating at several levels. It
is an egregious violation. The importance of social undercuts the incentive created by the legal sanction,
networks and neopatrimonial logic also undercuts and it also likely undermines a credible commitment
the willingness of officials to sanction workers. As because powerful interests (and individuals in legal
Olivier de Sardan (2015, 3) notes, The gap between institutions) may also adhere to such norms.
official rules and actual behavior is, per hypothesis, Social norms that are not based on deep-rooted
not a space where norms are forgotten or missing, but attitudes can also undercut the intended outcome
a space where alternative norms are in use.7 of a law. As Ellickson (1991) famously documented in
Competing normative orders can lead to perverse the study Order without Law, laws that conflicted with
effects. For example, rigorous prosecution of domes- the social norms developed to regulate cattle herding
tic violence in Timor-Leste during its administration in a California county confused cattlemen and led to
by the United Nations resulted in a significant reduc- increased conflict. A law introduced by the British in
tion in the reporting of domestic violence because colonial India allowing agricultural lenders to enforce
of the devastating social stigma and economic con- debts in court was intended to make credit markets
sequences for women (Chopra, Ranheim, and Nixon more competitive to the benefit of farmers. However,

88 | World Development Report 2017


in practice the law had the opposite effect because it of new norms leads an increasing number of people
undercut the incentives that lenders had under an to reject old norms until a tipping point is reached at
informal enforcement regime to lend at favorable which the old norm elicits social disapproval.
interest rates (Kranton and Swamy 1998). For this process to work, a critical mass of sup-
An effective system of legal compliance based porters of the new norm is needed, and they must
on sanctions is therefore quite difficult to achieve. be able to engage in collective action to push toward
It requires significant investment in capacity and the tipping point. When there are contestations in
infrastructure and careful analysis of the types of local norms, formal law can strengthen the stance of
incentives most likely to work. However, even those those whose norms are most closely aligned with the
measures will not suffice in the face of power and legal rule (Shell-Duncan and others 2013, 824). The
norm constraints. These considerations lead to the more deeply held the old norm and the weaker the
second and third mechanisms through which law supporting coalition for the new norm, the more care
affects behavior, which do not rely on force. is needed to introduce a new norm through law so
it does not backfire. Gradual or partial enforcement,
The coordinating power of law: coupled with education, awareness, and coaxing cam-
A focal point for change paigns, allow time for norms to shift (Acemoglu and
The second way that law leads to economic and social Jackson 2014).
policy outcomes is by serving as a focal point for coor- This process of norm shifting has been analyzed
dinating behavior. This is also known as the expres- and documented by legal anthropologists as a pro-
sive power of law (Cooter 1998; McAdams 2015). Here cess of translation or vernacularization involving
law acts as a signpostan expressionto guide peo- intermediaries who act as bridges between the world Law acts as a
ple on how to act when they have several options, or, of formal law and the real experiences of local people signpostan
in economic terms, when there are multiple equilibria (Merry 2006). For example, the introduction of an expressionto
(Basu 2015; McAdams 2015). People comply with the inheritance law in Ghana that was not in line with guide people on
law because doing so facilitates economic and social customary systems was followed by a slow evolu- how to act when
activities. tion of custom and social change. The formal law they have several
The easy case is when the law establishes rules was not enforced through coercion; rather, it served options.
about a neutral activity to which citizens have no par- as a magnet to provide people with an alternative to
ticular normative attachments. Thus when the law custom (Aldashev and others 2012). Similarly, legal
mandates driving on the right- or the left-hand side prohibition of female genital mutilation in Senegal
of the road, people generally comply, not because they provided an enabling environment for those who
fear punishment but because doing so facilitates road wished to abandon the practice. In Senegal, this legal
safety. The harder question is whether the law in its prohibition, together with a robust education and
expressive role can coordinate behavior around more awareness campaign, shifted more people to this cat-
highly charged issues, where alternative norms and egory. However, among those who adhered strongly
preferences are strong. In such cases, the law would to the practice, the fear of prosecution (even though
need to shift norms and preferences away from alter- no sanctions were carried out) drove the practice
native options in such a way that the law becomes the underground, seriously impairing the health of some
salient focal point. young women (Shell-Duncan and others 2013).
Consider the astonishing success of the ban on This is not to overstate the expressive power of
smoking in public places in many parts of the world law. Law does not do the work of shifting a norm by
even in the absence of rigorous state enforcement. itself, but rather depends on the incentives it provides
Here scholars have demonstrated that the ban has to those who already accept the new law, as well as a
served to empower those personsnonsmokers range of support programs that drive the process of
who adhere to its substantive point to pressure smok- internalizing the new norm more broadly. Although
ers to refrain. In a short period of time, this empow- rigorous enforcement can backfire, sometimes
erment has shifted societal norms so that the wrong enforcement is needed to kick-start the process of
of smoking in public places has become internalized norm shifting and internalization. For example,
(McAdams 2015). In other words, the ban has served to during the first term in which a constitutional
change the balance of power and norms in the policy amendment mandating gender quotas in village
implementation arena by legitimizing the claims of councils in India was implemented, voters attitudes
some over others. Sunstein (1996a) calls this phenom- toward women were generally negative. After two
enon the norm bandwagon in which the lowered cost terms of repeated exposure to women candidates,

The role of law | 89


however, mens perceptions of the ability of women religious law or customary law are fraught with
to be leaders significantly improved (Beaman and deeply political issues, with significant implications
others 2009). Moreover, the aspirations of parents for legitimacy. For example, in Bolivia, Colombia,
and their adolescent daughters for education were and Ecuador constitutional recognition of communal
positively affected (Beaman and others 2012), and rights and indigenous law was critical in expanding
womens entrepreneurship in the manufacturing state legitimacy through a sense of shared citizenship
sector increased (Ghani, Kerr, and OConnell 2014). In (Yashar 2005). Formal incorporation of Islamic law
the United States, a large coercive force was required is at the heart of contests to define national identity
to implement racial desegregation laws in the face of in states and regions with large Muslim populations
mass and even violent resistance, but over time these from Libya to Mindanao. And official recognition of
laws contributed to internalizing the norm change forms of traditional or customary law remains an
(Schauer 2015). important issue in defining state-citizen relations in
One way in which development affects gover- much of Sub-Saharan Africa.
nance is by changing norms. Certain norms are more Process legitimacy (also referred to as procedural legit-
responsive to a higher level of development. The imacy) refers to a situation in which laws are respected
introduction and effectiveness of child labor regula- and observed to the extent that they emerge from a
tions have been shown to be related to income levels; system deemed fair and trustworthy. Many years ago,
as households rely less on childrens incomes, the German sociologist Max Weber (1965) argued that
impact of formal regulations increases (Basu 1999). In rational legal authority (in contrast to traditional or
India, however, child labor regulations led to a decline charismatic authority) depends on a societys belief
in child wages and a shift to greater child labor in the legitimacy of order. In his seminal study, Tyler
among poorer families (Bharadwaj and Lakdawala (2006) offers empirical support for the argument that
2013). Some norms are much more persistent and less people obey laws for reasons other than fear of pun-
responsive to change, such as those founded on some ishment when they believe the laws are the product
religious or philosophical principles. of a system they believe to be legitimate. Legitimacy
here refers to procedural regularity, opportunity for
The legitimizing power of law: citizen input, and the respectful treatment of citizens
Creating a culture of compliance by those in authority, or what this Report refers to
Although sanctions can be used to control deviant as contestability. These findings were confirmed in a
behavior, and law can, under the right conditions, study of cross-country survey data in Africa. Peoples
gradually shift certain norms, these are extremely compliance with the law was found to be related to
costly and ad hoc ways of inducing changes in behav- their normative judgment about the legitimacy of
ior. Ultimately, a culture of voluntary compliance government, based on assessments of government
with the law depends on the legitimacy of the law. competence and performance, but particularly on
Scholars point to three kinds of legitimacy: outcome, perceptions that government is procedurally just
relational, and process legitimacy (as described in (Levi, Tyler, and Sacks 2012).
chapter 2). The latter two are particularly relevant Transplanting laws from one country to another
to the role of law. Relational legitimacy (also referred has often failed in the absence of a process of adap-
to as substantive legitimacy in some strands of the tation and contestability. Based on an econometric
literature) refers to a situation in which the content study of 49 countries that were recipients of foreign
of the law reflects peoples own social norms and law, Berkowitz, Pistor, and Richard (2003) found that
views of morality. In such cases, the law is largely countries that adapted the transplanted law to meet
irrelevant because people would comply for reasons their particular socioeconomic conditions, or had
independent of the existence of the law. Even though a population that was already familiar with basic
the threat of sanctions lurks in the background, it is principles of the transplanted law, or both, had more
primarily there to handle the exceptional cases of effective legality than countries that received foreign
deviance (Schauer 2015). law without any similar predispositions. Similarly,
In heterogeneous societies, for substantive legiti- legal transplants in the context of integration into the
macy the law must strike a balance between recogniz- European Union were more successful to the extent
ing differences in worldviews and enabling society that they were accompanied by efforts to empower a
to function as a cohesive entity (Singer 2006). Thus variety of domestic state and nonstate actors through
debates over how states formally take into account multiple methods of assistance and monitoring, and

90 | World Development Report 2017


that they were able to merge monitoring and learning Figure 3.1Constitutions have become ubiquitous,
at both the national and supranational levels (Bruszt but they are often replaced or amended
and McDermott 2014). By contrast, in parts of south-
Number of countries with constitutions and number of constitutional events,
eastern Europe the transplantation of judicial reform 17892013
and anticorruption laws that bypassed legislative pro- 200
cesses and other forms of adaptation did not produce
the desired effects (Mendelski 2015).

Number of constitutional events


60 150
Ordering power:

Number of countries
The constitutive role of law
In this second role, law plays the more foundational 40 100

constitutive role of defining the de jure governance


process. It is through lawgenerally constitutions8
that states establish and confer power on state actors, 20 50
defining the authority and responsibilities of different
agencies and branches of government and their role
in the policy-making and implementation process, as
0 0
well as formal constraints on their power.9 This task 1800 1850 1900 1950 2000
is typically carried out by drafting provisions that set
New constitutions (left axis) Countries with constitutions (right axis)
out a range of checks and balances, including the hor- Amendments (left axis) All countries (right axis)
izontal allocation and separation of powers between
different branches; by requiring special procedures Source: WDR 2017 team, using data from Comparative Constitutions Project, 2015.

for amendment; by establishing independent super-


visory and review bodies; and, increasingly, by includ- to two kinds of governance failures. The firstas
ing a bill of rights. These formal de jure arrangements, reflected in the short life span of constitutionsis
as modified by informal and de facto arrangements, when the bargain itself fails. The second is when the
establish the nature of the policy bargaining arena. words on paper persist, but the rules are ignored in
In this way, constitutions are effectively rules about the face of power and deal making. In the first failure,
making rules. This section addresses why and when the result could be positive to the extent that it leads
the formal rules in fact determine the allocation and to a new, more stable, bargain. But it also could be det-
limits on power, or act only as parchment barriers, rimental to development outcomes if conflict ensues
as well as the other roles that constitutive laws play in and if chronic failure undermines the credible com-
shaping the dynamics of governance. mitments needed to support investment and pro-poor
policies. Empirical evidence on the extent to which
Constitutions: Rules about making rules constitutional endurance matters is mixed. Elkins,
Constitutions are proliferating (figure 3.1). The grow- Ginsburg, and Melton (2009) demonstrate significant
ing number corresponds to both the increase in the associations between longer-lived constitutions and
number of independent states as well as the mass various social and political goods, including protec-
transition of countries in central Europe and in the tion of rights, democracy, wealth, and stability, but
former East European bloc in the post-Soviet era. It establishing causality is problematic. In any event,
also reflects the fact that constitutions are generally the entrenchment of fundamental principles and its
short-lived. The average life span of a constitution is positive impact on credible commitment and coordi-
19 years, and in Latin America and eastern Europe it nation generally strengthen as constitutions age.
is a mere eight years (Negretto 2008; Elkins, Gins- The second type of failurewidespread diver-
burg, and Melton 2009). Constitutions are thus an gence between constitutional limitations on power
important object of political bargaining and ordering, and actual practiceis more directly associated with
with significant energy invested in designing and poorer development outcomes (figure 3.2). As explored
adopting them. This is true across all types of political in chapters 5 and 6, failure to uphold the security of
regimes (Ginsburg and Simpser 2014). property rights and basic civil, political, and economic
And yet the effectiveness of constitutions in rights has negative impacts on both growth and equity.
constraining power through rules is mixed, leading More generally, failure to enforce rule-based limits on

The role of law | 91


Figure 3.2In every country, there is a gap between facilitate elite cohesion by coordinating which insti-
the laws on the books and the laws implemented, but tutions play which role, thereby minimizing the costs
high-income OECD countries generally do better than of renegotiation and conflict. The so-called entrench-
low- and middle-income countries ment of provisions, requiring a high standard for
change in the form of amendment, provides credibil-
100
ity over time by guarding against shifts in preference,
Framework Score, and implementation gap

thereby enhancing the credibility of commitments


Actual Implementation Score, Legal

(Ginsburg 2010; Ginsburg and Simpser 2014). Once


80
entrenched, the rules become sticky as institution-
alized arrangements develop around them, and it is
far less easy for major interest groups to exit if they
60
become unhappy with the allocation of power. Sig-
nificantly, constitutions also serve as a coordinating
40
device to enable collective action by citizens in the
event of a transgression by those in power.
An analysis of a data set of every constitution
20 since 1789 found that enduring constitutions gener-
ally have certain common characteristics. They need
Countries (from largest to smallest implementation gap) to be sufficiently inclusive to give potential spoilers
High-income OECD countries Upper-middle-income countries an adequate payoff for staying inside the bargain
High-income non-OECD countries Lower-middle-income countries (how to do so is explored further in chapter 4). They
Low-income countries need to be flexible and adaptive so they can be resil-
ient in the face of shocks that can change the balance
Sources: WDR 2017 team, based on data from World Bank, World Development Indicators (database),
2015, and Global Integrity (database), 2012. of power among interest groups. And they need to
Note: The data used are for 200911. Global Integritys Legal Framework Score measures the quality be specific: the degree of specificity appears to cor-
of laws on the books in six categories: (1) nongovernmental organizations, public information, and relate positively with endurance, perhaps because it
media; (2) elections; (3) government conflicts of interest, safeguards, and checks and balances; (4) pub-
lic administration and professionalism; (5) government oversight and controls; and (6) anticorruption reduces the scope for subsequent disagreement and
legal framework, judicial impartiality, and law enforcement professionalism. The Actual Implementation requires more investment in negotiation, giving peo-
Score measures actual practice. These scores range between 0 and 100, with 0 being the worst score
and 100 being perfect. The implementation gap is the difference between the two indexes and thus the ple a bigger stake in success (Elkins, Ginsburg, and
length of the bar. OECD = Organisation for Economic Co-operation and Development. Melton 2009).
How effective constitutions are at enabling citizen
collective action for enforcement is related to the
power skews the bargaining process in favor of elite way in which constitutions act as a focal point. Even
interests. Nevertheless, divergence from the rules may when politicians have little intention of adhering to
also be an important means of holding together elite constitutional provisionssuch as when constraints
bargains. To understand what accounts for divergence on power and rights are adopted as aspirational
between the rules and practice, it is helpful to first or rhetorical appeasementthe words on paper
examine the conditions under which rules stick. can matter to the extent that they enable collective
action. This is particularly important during times
Constitutions as a commitment and of conflict among elites, when constitutions can
coordination device serve as devices of horizontal accountability. Thus,
Why would rulers adhere to constitutional rules on for example, in Tunisia adoption of international
the limits of power? Unlike regular laws that have human rights treaties by the prior regime was largely
organized institutions of enforcement, constitutions seen as an empty gesture. Yet, during the transition
pose the ultimate question of who guards the guard- to a new government, these provisions were seized
ians.10 The answer is that effective constitutions need upon by opposition forces and used to structure that
to be self-enforcing. Constitutions are essentially government. Even when the legal enforceability of
bargains among major interest groups about how to constitutions is limited, the language of constitu-
allocate power. As long as these groups feel they are tional protection has frequently been used as a basis
better off with the rules than without them, the rules for political mobilization by competing elite groups
will stick. Thus effective constitutions establish an (Ginsburg and Simpser 2014). As will be discussed
equilibrium by addressing problems of coordination more fully, constitutions also serve as an important
and commitment (Weingast 2013). Constitutions device of vertical accountability because the special

92 | World Development Report 2017


status accorded to constitutional rights can enable Ordering contestation:
citizen collective action aimed at the fulfillment of
those rights.
The role of law in change
It is true that in history the law can be seen to
Explaining divergence between law mediate and to legitimize existent class relations.
and practice Its forms and procedures may crystallize those relations
A number of studies have sought to demonstrate and mask ulterior injustice. But this mediation,
empirically how various institutional designs opti- through the forms of law, is something quite distinct
mize the coordination and commitment embraced by from the exercise of unmediated force. The forms
different configurations of elite interests. In theory, and rhetoric of law acquire distinct identity which
different political institutionssuch as presidential may, on occasion, inhibit power and afford
versus parliamentary or majority vote versus pro- some protections to the powerless.
portional representationcreate different incentives
that favor certain outcomes.11 Actual outcomes, how- E. P. Thompson (1975, 266)
ever, depend on the extent to which these de jure
rules are in fact used as the main locus of political The role of law in ordering behavior and ordering
activitythat is, whether or to what extent political power is primarily about how elites use law to imple-
actors choose to invest in these institutions so that ment policies and to exercise authority. The third role
they become a self-reinforcing equilibrium (Caruso, of law is about how citizensnonelitesuse law to
Scartascini, and Tommasi 2015).12 challenge and contest the exercise of power. As the
In many developing countriesand to a certain quotation by the historian E. P. Thompson describes,
extent, in developed ones as wellpower is often law is both a product of social and power relations and
Law is both
exercised through a means other than those pre- a tool for challenging and reshaping those relations.
a product of
scribed by law. Such alternative means are sometimes This section examines how law, often in combination
social and power
called alternative political technologies (Caruso, with other social and political strategies, can be used
relations and a tool
Scartascini, and Tommasi 2015) or informal institu- as a commitment and coordination device to promote
for challenging
tions (Helmke and Levitsky 2004; Khan 2010). These accountability, and also to change the rules of the
and reshaping
means include a variety of ways of making bargains game to foster more equitable bargaining spaces.
those relations.
and deals outside the rules, including conventions for In well-developed legal systems, legal institutions
brokering power, clientelism, and purchasing favor promote accountability by imposing horizontal
(bribery, vote buying), as well as nonstate authority checks on authorities and providing a forum for verti-
structures such as traditional or religious mecha- cal claims by citizens. These legal institutions include
nisms. In some cases, the use of a means of exercising courts and associated agencies such as prosecutors
power not based on law is simply a matter of devi- and police; special-purpose adjudicative and oversight
ance and abuse. But often it is serving the purpose of bodies such as ombudsmen, auditors, and anticorrup-
solving commitment and collective action problems tion or human rights commissions; and the public
in ways more in line with elite incentives and the administrative law functions of executive agencies
de facto distribution of power. In such cases, as Khan such as those involved in property allocation and reg-
(2010, 1) explains, informal institutions like patron- istration, the issuance of identity documents, or the
client allocative rules, and informal adaptations to provision of health, education, and sanitation services.
the ways in which particular formal institutions The extent to which these institutions are accessible
work play a critical role in bringing the distribution and effective forums for citizens to challenge the more
of benefits supported by the institutional structure powerful in society varies considerably from country
into line with the distribution of power. In other to country, as a function of historical circumstances
words, divergence between the law and practice as well as the political calculus of elites. Spotlight 3 on
is rarely an absence of rules but rather a matter of effective legal institutions discusses these conditions
replacing law with rules that may be better suited in depth.
under the circumstancesto generating and meeting Even though legal systems in many countries con-
shared expectations in order to uphold basic stability tinue to lack effectiveness and autonomy, there has
through elite bargains (North and others 2013). The been a marked trend toward juridification of social
conditions under which deals-based elite bargains and political contestation across the globe. As Rodr-
evolve into rule-based governance constrained by law guez Garavito (2011, 27475) has noted, The planetary
are the subject of chapter 7. expansion of the law is palpable everywhere: in the

The role of law | 93


avalanche of constitutions in the Global South; in efforts depends to a large degree on the ability of
the growing power of judiciaries around the world; claimants to ground the language of rights in local
in the proliferation of law and order programs and social and political structures of demanda process
the culture of legality in cities; in the judicialization Brinks, Gauri, and Shen (2015) call vernaculariza-
of policy through anticorruption programs led by tion. As Santos and Rodrguez Garavito (2005) argue,
judges and prosecutors; in the explosion of private political mobilization at the localand often inter-
regulations, such as the voluntary standards on cor- nationallevel is a necessary precursor of effective
porate social responsibility; and in the transmutation rights-based strategies for the disadvantaged. Thus
of social movements struggles into human rights efforts to empower the aggrieved to use law and
litigation. Law increasingly provides the common courts must combine legal awareness with broader
language for, and demarcates the arenas of contest strategic coalition building.
among, very different contenders: citizens and states; Law has also proven to be a powerful tool of
multinational corporations and indigenous people; accountability even outside of legal institutions by
states, citizens, and international organizations.13 framing claims and serving as a coordinating device.
For example, in China citizens are increasingly
Law and social rights deploying official laws and policies in efforts to hold
In one example of how law is changing the contest- district officials accountable for illegal extraction,
ability of policy arenas, a majority of developing coun- rigged elections, and corruptiona process dubbed
tries have incorporated social and economic rights rightful resistance. Courts seldom feature in these
into their constitutions, and citizens are increasingly efforts, which tend to operate near the boundary
using these provisions to advance development goals of authorized channels, employ the rhetoric and
(Brinks, Gauri, and Shen 2015). This trend has been commitments of the powerful to curb the exercise
most striking in Latin America, where the courts of power, hinge on locating and exploiting divisions
have been transformedfrom weak, dependent, inef- within the state, and rely on mobilizing support from
fective institutions to central players in issues at the the community (OBrien and Li 2006, 2). The use of
forefront of politics and development. A key reason legal discourse, without recourse to courts, has also
for this shift in role is that judicial actors have been played a central role in tenant associations claims to
emboldened by political fragmentation to assert the adequate housing in Kenya, indigenous groups con-
power of their institutions at the same time that cit- tests over land and natural resources in Mexico, and
izens are demanding this role (Couso, Huneeus, and garment workers efforts to gain fair labor conditions
Sieder 2010; Helmke and Rios-Figueroa 2011). In India, in Bangladesh (Newell and Wheeler 2006). In these
legal institutionsat least at the level of the Supreme cases, the law serves to name and framethat is, to
Courthave also proven to be an important venue for structure dialogue and provide a coordination device
contestation, with an extensive tradition of public for more contentious strategies for accountability.
interest litigation and high-profile legal challenges to
dominant power interests and social norms.14 Indias Legal institutions and credible
Supreme Court has upheld the rights of the disadvan- commitment
taged and has enhanced government accountability Where state legal institutions have lacked the
over issues such as child and bonded labor, environ- capacity for credible commitment, they have at
mental hazards, public health, and nondiscrimination times sought support from international actors. For
(Shankar and Mehta 2008; Deva 2009). Courts in example, aware of its inability to commit to fair anti-
South Africa have also made important judgments corruption procedures against powerful interests,
holding government accountable for the provision of Guatemala sought support from the United Nations
housing and affordable antiretroviral drugs, among to establish the International Commission against
other things (Klug 2005; Berger 2008). Impunity in Guatemala (CICIG). The CICIG has suc-
In social justice litigation, the legal action itself cessfully prosecuted over 150 current or former gov-
need not result in a favorable judgment to be a suc- ernment officials, and in 2015 it charged the sitting
cessful part of a contestation. Even judicial defeats president with corruption, leading to his resignation.
can be leveraged by activists to coordinate collective Other countries, including Bosnia and Herzegovina,
action around rights consciousness (McCann 2004; Cambodia, Fiji, Kosovo, and the Solomon Islands,
Rodrguez Garavito and Rodrguez-Franco 2015). As have allowed international judges and prosecutors
explored further in chapter 8, the success of such in their courts to enhance credible commitment

94 | World Development Report 2017


around sensitive and political cases. Although these to improve working conditions and to unionize in a
initiatives have led to the successful prosecutions of context in which it would have been difficult other-
sensitive war crimes and corruption cases, they have wise to overcome entrenched resistance. Critical to
also been criticized for lack of sustainability in that their success were their links to transnational advo-
they bypass rather than engage directly in the domes- cacy networks that exerted pressure on local govern-
tic bargaining arena. ments (Rodrguez Garavito 2005). Cambodian gar-
Where domestic courts are perceived as weak in ment workers also benefited from international labor
the face of powerful interests, citizens have brought standards that served as a commitment device for the
legal cases to other jurisdictions. This approach has government in order to gain favorable trade condi-
been facilitated by the growing recognition of the tions (Adler and Woolcock 2009). Elsewhere, indige-
concept of universal jurisdiction for severe crimes, as nous groups have been key players in the formation
well as by the increasingly transnational character of of international standards for extractive industries,
powerful interests. For example, local communities in particular the norm of free, prior, and informed
affected by severe environmental damage caused consent (Rodrguez Garavito 2011). In these examples,
by a mining company in Papua New Guinea sought legal standards were converted into institutional
redress in an Australian court, the home jurisdiction of arrangements that enhanced the contestability of
the company. Although the legal case itself was settled the bargaining arena: collective bargaining arrange-
and not wholly successful in containing the damage, it ments, a tripartite labor arbitration council, and
triggered a change in the local bargaining arena, man- procedural requirements for consultations between
dating that community representatives be engaged extractive companies and local communities.
in negotiating community development agreements
with the company and government (Kirsch 2014).
Getting to the rule of law
Transnational legal pluralism In establishing the rule of law, the first
and contestability five centuries are always the hardest.
The legal arena today extends beyond the borders Gordon Brown
of nation-states in other ways as well. As discussed
further in chapter 9, an era of global governance is The rule of law is widely recognized as necessary for The rule of law is
under way. It is characterized by the proliferation and the achievement of stable, equitable development. widely recognized
fragmentation of global, regional, and transnational Indeed, over the last few decades no other governance as necessary for
instruments, including binding laws (so-called hard ideal has been as universally endorsed.15 There is far the achievement of
law, including treaties and conventions) and soft less agreement, however, on what it means. At a min- stable, equitable
law (voluntary guidelines, standards, principles, and imum, the rule of law requires that government offi- development.
codes of conduct). The domains covered by these cials and citizens be bound by and act consistent with
instruments go far beyond relations among nation- the law (Tamanaha 2004; Fukuyama 2014). But this in
states to reach deep into the way national state and turn requires that the law be clear, certain, and public
nonstate actors govern in many areas, including busi- and that it be applied equally to all through effective
ness, labor, crime, information, public financial man- legal institutions.16
agement, intellectual property, procurement, utility Thin versions of the rule of law have largely
regulation, human rights, food and safety standards, given way to thicker versions that move beyond a
and environmental sustainability. The formation of focus on procedure to one on substance requiring
these transnational governance regimes parallels adherence to normative standards of rights, fairness,
this Reports framework: they are the product of and equity.17 The United Nations exemplifies this nor-
contests among multiple actorsstate, private, and mative stance, defining the rule of law as a principle
civicshaped by power, interests, and norms, which of governance in which all persons, institutions and
in turn are shaped and reshaped by the outcomes of entities, public and private, including the State itself,
these rules (Braithwaite and Drahos 2000). This web are accountable to laws that are publicly promulgated,
of legal pluralism creates opportunities for domestic equally enforced and independently adjudicated, and
actors seeking to contest the prevailing power and which are consistent with international human rights
norms. Global factory workers in Mexico and Guate norms and a principle of standards.18
mala appealed to international labor standards and Correlations between indicators of the rule
company codes of conduct and successfully managed of law and income levels are strong (figure 3.3).

The role of law | 95


Figure 3.3The rule of law is strongly correlated with high income
Rule of Law Index versus GDP per capita, 2015

1.0

0.8
East Asia and Pacific
Rule of Law Index

Europe and Central Asia


Latin America and the Caribbean
0.6 Middle East and North Africa
South Asia
Sub-Saharan Africa
High-income non-OECD countries
High-income OECD countries
0.4

R2 =0.79
0.2
0 500 2,000 10,000 50,000

GDP per capita

Sources: WDR 2017 team, based on data from the World Justice Project, Rule of Law Index, 2015, and World Bank, World Development Indicators (database), 2015.

But the direction of causality and the mechanisms that institutionalizing interests or objectives. Attention to
determine this association are less well understood the microfoundations of laws effectiveness can help
(box 3.4). policy makers and citizens design laws and strategies
Meanwhile, this chapter has focused not on the more likely to achieve success (box 3.5). Ultimately, it
rule of law but on the role of lawthe instrumental is through this dynamic between power and contes-
way through which groups and individuals in soci- tation that societies shape their transitions to the rule
ety use law as a means of promoting, enforcing, and of law.

Box 3.4Transitions to the rule of law

Compared with the extensive literature on transitions to expanded trade and investment. Scale matters: at a certain
democracy, a surprisingly small amount of systematic work point, the personal connections that characterize custom-
has been carried out on transitions to a modern rule of law. ary systems become inadequate to support transactions
History reveals three separate types of transitions from between strangers at great remove. However, the transition
which one can learn: (1) the shift from a customary, infor- costs are high, and the customary rules are often preferred
mal, and often highly pluralistic system of law to a unified by the existing stakeholders. Therefore, political power is
modern one; (2) how powerful elites come to accept legal critical to bringing about the transition.
constraints on their power; and (3) how countries success- Formal law is usually applied first to nonelites (rule
fully adapt foreign legal systems to their own purposes. by law). There then is a shift to rule of law when the
The shift from a customary or pluralistic system to elites themselves accept the laws limitations. North,
a codified modern one is usually motivated, at base, by Wallis, and Weingast (2009) have argued that constitu-
actors who believe a single formal system will better serve tional constraints become self-reinforcing when power in
their interests, particularly their economic interests in the system is distributed evenly and elites realize that they

(Box continues next page)

96 | World Development Report 2017


Box 3.4Transitions to the rule of law (continued)

have more to gain in the long run through constitutional Korea, and other Asian countries similarly adapted Western
rules. What this theory does not explain, however, is why legal systems to their own purposes. In other cases such as
these same elites stick to these constraints when the power Hong Kong SAR, China, Singapore, and India, the colonial
balance subsequently changes and one group is able to power (Great Britain) stayed for a long time and was able to
triumph over the others. Similarly, independent courts are shape the local legal norms in its own image. Even so,
always a threat to elite power, and so why do rulers come today India practices a far higher degree of legal pluralism
to tolerate them when they have the power to manipulate than does Great Britain itself, as part of the process of
or eliminate them? These questions suggest that constitu- local adaptation. Less successful have been cases in Sub-
tionalism needs to be underpinned by a powerful norma- Saharan Africa, where customary systems were under-
tive framework that makes elites respect the law as such. mined by colonial authorities but not replaced by well-
Subsequent respect for the law will depend heavily on the institutionalized modern systems.
degree of independence maintained by legal institutions Much more research is needed on the question of legal
the judiciaries, bars, law schools, and other structures that transitions. It is clear that a fully modern legal system is not
have persisted even after their religious foundations have a precondition for rapid economic growth; legal systems
disappeared. themselves develop in tandem with modern economies. It
Finally, as for importing foreign legal systems, perhaps may be that the point of transition from a customary to a
the most important variable determining success is the formal legal system occurs later in this process than many
degree to which indigenous elites remain in control of Western observers have thought. But relatively little is
the process and tailor it to their societys own traditions. known about the historical dynamics of that transition, and
Japan experimented with a variety of European systems thus too little in the way of theory is available to guide con-
before settling on the German civil code and Bismarck con- temporary developing countries as they seek to implement
stitution. Later in the 20th century, China, the Republic of the rule of law.

Source: Prepared by Francis Fukuyama for WDR 2017.

Box 3.5Understanding the role of law in context

As this chapter has argued, law is not an unqualified good. prescribed by law are able to demonstrate commitment
Depending on the context, law might functionally and to induce collective action toward the desired end.
Specifically, effective laws are able to
Empower change actorsorreinforce existing power
Provide order and certaintyorcreate conflict and Change preferences by enhancing substantive focal
exacerbate confusion points around which coordination can occur
Build legitimacyor undermine legitimacy Change incentives by changing payoffs to lower the cost
Structure contestsordistract from real sites of of compliance or increase the cost of noncompliance
contest. Shape bargaining spaces that increase the contestability
of underrepresented actors.
To produce the effects that appear first in each line of
this list, legal interventions should ensure that the forms
Source: WDR 2017 team.

The role of law | 97


Notes decision-making, legal certainty, avoidance of arbi-
trariness and procedural and legal transparency
1. Acemoglu (2003); Galiani and Schargrodsky (2010); (United Nations 2004, 4).
Besley and Persson (2014).
2. See, for example, Thompson (1975); Mattei and
Nader (2008); and Lund (2012). References
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Acemoglu, Daron. 2003. Why Not a Political Coase
Rodrguez Garavito (2011).
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Journal of Comparative Economics 31 (4): 62052.
and Yannakakis (2015).
Acemoglu, Daron, and Matthew O. Jackson. 2014. Social
5. See Schauer (2015) for an extensive argument about
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The role of law | 101


SPOTLIGHT 3

How do effective and equitable legal


institutions emerge?

Closing the gap between law on paper and law in that they are able to compel compliance with their
practice requires well-functioning legal institutions. decisions.
Effective and equitable legal institutions operate as
safeguards against abuses of power and as channels
for the protection of rights and peaceful resolution
Under what conditions do
of conflict. Well-functioning legal institutions are effective and equitable legal
important to elicit voluntary compliance by signaling institutions emerge?
legitimacy. By reducing transaction costs and increas-
ing the predictability of behavior and certainty of All high-income member countries of the Organisa-
process, they underpin credible commitment, which tion for Economic Co-operation and Development
is needed to modernize socioeconomic relations. (OECD) score well on de jure and de facto indicators
of rule of law, including judicial independence,
accountability, and effectiveness. This relationship
What are effective and illustrates the need for such institutions to support
equitable legal institutions? sophisticated and diversified economic models. But
as this Report has emphasized, simply transplanting
Core state legal institutions include those that declare institutional forms to developing countries does not
law (legislatures, government agencies), enforce law work; such forms need to emerge in a homegrown
(prosecutors, regulators, police, prisons), and apply fashion from internal governance dynamics that
law to individual instances (courts). These institu- reflect socioeconomic demands and other incentives.
tions must operate in an integrated fashion with the As shown in figure S3.1, a positive correlation between
cadre of private lawyers, academics, and civil society rule of law and income is observed today, but this does
engaged in legal activitythe so-called legal com- not explain causality or how countries move up the
plex (Karpik and Halliday 2011). They also require an scale. The empirical and theoretical literature point to
appropriate enabling environment, including legal five sets of factors that are most likely to contribute
mandates, functional institutional systems and rules, to the development of equitable legal institutions that
and financial, human, and material resources. Mean- can act as an effective check on power: socioeconomic
while, they need to be physically and financially factors, historical factors, institutional factors, strate-
accessible to the population, while resonating with gic factors, and ideational factors.
peoples needs and perceptions of fairness in order to Socioeconomic factors. Across history and all soci-
generate trust. To act as an effective check on power, eties, informal mechanisms for social order, dispute
courts especially need to be independent of political resolution, and checks on power have arisen in ways
pressure, while remaining accountable and effective in that meet local contexts. As Hadfield and Weingast
(2013) document, predictable systems relying entirely
WDR 2017 team. on communal enforcement arose to bring order to the

102 | World Development Report 2017


Figure S3.1Although high-income OECD countries generally have well-functioning
legal institutions, the relationship between institutional quality and income varies
in developing countries
Various rule of law indexes versus GDP per capita (log scale)

a. Government constraints b. Absence of corruption c. Open governments

1.0 1.0 1.0


Log of GDP per capita

Log of GDP per capita

Log of GDP per capita


0.8 0.8 0.8

0.6 0.6 0.6

0.4 0.4 0.4

0.2 0.2 0.2

250 5,000 100,000 250 5,000 100,000 250 5,000 100,000


Rule of Law Index Rule of Law Index Rule of Law Index

d. Fundamental rights e. Order and security f. Effective regulations

1.0 1.0 1.0


Log of GDP per capita

Log of GDP per capita

Log of GDP per capita


0.8 0.8 0.8

0.6 0.6 0.6

0.4 0.4 0.4

0.2 0.2 0.2

250 5,000 100,000 250 5,000 100,000 250 5,000 100,000


Rule of Law Index Rule of Law Index Rule of Law Index

g. Civil justice h. Criminal justice

1.0 1.0
Log of GDP per capita

Log of GDP per capita

0.8 0.8

0.6 0.6

0.4 0.4

0.2 0.2

250 5,000 100,000 250 5,000 100,000


Rule of Law Index Rule of Law Index

High-income OECD countries Other countries

Sources: WDR 2017 team, based on data from World Justice Project, Rule of Law Index, 2014, and World Bank, World Development Indicators (database), 2016.
Note: GDP = gross domestic product; OECD = Organisation for Economic Co-operation and Development.

How do effective and equitable legal institutions emerge? | 103


seemingly lawless period of the California gold rush rules, systems, and human capacity to protect judges
in the mid-19th century, as well as to solve the con- from political pressure, incentivize efficiency, and
tract enforcement dilemmas of traveling merchants promote access and transparency. These are import-
in medieval Europe (see also Greif 2006). The diver- ant and necessary interventions, but often they are
sification of societies and the increasing complexity insufficient.
of socioeconomic transactions created demands for a As figure S3.2 shows, even the most stringent
more formalized, arms-length mechanism for a state constitutional guarantees of independence and
legal system (Dixit 2004). Even so, a wide range of best-practice forms of judicial appointment often
alternative formal and informal mechanisms continue do not correlate with de facto measures of indepen-
to exist, often proving capable of serving at least some dent judicial behavior (Feld and Voigt 2003; Ros-
functions of an effective legal system. Neighborhood Figueroa and Staton 2012). Moreover, the same formal
mediation practices in urban Papua New Guinea, for rules can produce different incentives, depending
example, manage disputes and maintain order in dif- on broader contextual factors (Helmke and Staton
ficult urban communities in ways that formal police 2011). At the same time, empirical studies show that
and courts have not (Craig, Porter, and Hukula 2016). seemingly minor technical rule changes can have
Tribal and customary courts in Afghanistan, Liberia, major effects on a courts role and assertiveness. For
and South Sudan have brought closure to vengeance example, obscure rules on who has the right to bring
killings, land disputes, and a range of social concerns, a case (standing rules) were instrumental in the rise
whereas the formal mechanisms used in some cases to prominence of the courts in Costa Rica and India.
have exacerbated tensions (Isser 2011). Without dis- In short, rules and capacity matter, but their relation-
counting the important role they can play, such mech- ship to judicial effectiveness in practice is mediated
anisms are often effective precisely because they by strategic and ideational factors (Helmke and Ros-
reflect the social norms and power relations in which Figueroa 2011).
they are embedded. Ultimately, state legal institutions Strategic factors. The first set of strategic factors
are generally needed to promote equity and to serve as relates to the calculus elites undertake to determine
an effective check on power. for what reasons they would endow courts with auton-
Historical factors. One explanation for why some omy and effectiveness, keeping in mind that both
judiciaries emerge as credible and effective while oth- could be used against elite interests. The literature
ers do not is rooted in the historical circumstances points to five key reasons. First, elites may strengthen
in particular, colonial legaciesin which the modern judiciaries to signal a credible commitment to commercial
justice system developed. Where colonial legal sys- investment by raising the cost of political interference
tems and their national aftermaths sought to incorpo- with economic activity, as in several fast-growing
rate, accommodate, and adapt to the contending nor- transition economies. The establishment of robust
mative orders of society, national law and courts have judicial institutions may also be in response to
emerged as relatively effective and legitimate institu- requirements for engagement in international orga-
tions, as in India. By contrast, where colonial systems nizations and transnational trade regimes (Moustafa
created fragmented spaces of Western law and indi- and Ginsburg 2008). Second, elites may endow courts
rect rule through which native authorities were often with capacity in order to use them to enforce central
invented, as in Nigeria and Kenya, national law and policy, control agents, and maintain elite cohesion. This
courts faced an uphill battle in establishing credible was a key goal underlying Mexicos introduction of
commitments to legality. Although these dynamics the mechanism of amparo, which allows citizens to
tend to persist in some ways (through path depen- challenge arbitrary action by individual bureaucrats
dency), they are constantly renegotiated in response (Magaloni 2008). Third, elites may bind their hands
to underlying patterns of social and economic change by establishing powerful courts during periods of
(Daniels, Trebilcock, and Carson 2011).1 political uncertainty as political insurance to protect
Institutional factors. Courts are governed by an their policies from being undermined in the event of
array of rulesconstitutional and otherwisethat a government transition (Ginsburg 2003; Staton and
shape the independence, accountability, and effec- Moore 2011). Fourth, judicial review of legislation can
tiveness of the judiciary. These rules include judicial serve an important information-gathering role for policy
appointment and disciplinary procedures, the scope makers when they are unsure of how laws and poli-
of judicial review, case management systems and pro- cies will play out in practice (Staton and Moore 2011).
cedures, legal standing, and access. Judicial reform Fifth, elites may empower courts in order to channel
efforts often focus on strengthening the formal controversial questions away from executive institutions.

104 | World Development Report 2017


Figure S3.2The correlation is weak between de jure and de facto measures of
judicial independence

a. Independence: How often does the high b. Influence: How often does the government
court make decisions that merely reflect comply with important decisions of the high
government wishes regardless of the courts court with which it disagrees?
sincere view of the legal record?

Always Never

Usually Seldom

About half About half


the time the time

Seldom Usually

Never Always

0 10 20 30 40 50 0 10 20 30 40 50 60
Number of countries Number of countries
Countries with judicial independence Countries where high court decisions are final
Countries with no such constitutional provision

Sources: WDR 2017 team, based on data from V-Dem, 2016, and Comparative Constitutions Project, 2016.

For example, by empowering the Egyptian Supreme The experience of the Supreme Court of India
Constitutional Court to rule on policies related to illustrates this process. At independence, the Court
economic liberalization, the executive was able to was endowed with expansive constitutional powers
pass important reforms without significant political of judicial review and rights protection. During the
fallout (Moustafa 2007). period of emergency rule, the executive sought to
When used strategically by elites in these five curb these powers and pack the Court with govern-
ways, courts may be empowered with autonomy for ment supporters. As India transitioned to multiparty
some types of cases but not othersand that power politics and a coalition government, the Court began
may be taken away when it no longer serves elite to reassert its independence by expanding popular
interests. But even limited autonomy may create access to the Court through public interest litigation.
spaces for judicial actors to assert themselves and to This step served to consolidate the strength of the
strategically expand their role. Judges calculus must Court through popular support and to establish prec-
take into account their institutional powers, but also edent for a more activist role (Mate 2013).
the likelihood of compliance with their rulings. There Ideational factors. Despite their favorable institu-
is strong evidence that judiciaries are more likely to tional rules and strategic opportunities to consolidate
exercise power in cases of political uncertainty or power, some judiciaries remain constrained. The
fragmentation because this reduces the ability of final factor is the so-called legal culturethat is, the
others to put political pressure on the courts. This contested and ever-shifting repertoires of ideas and
factor accounts for the emergence of autonomous behaviors relating to law, legal justice and legal sys-
judicial behavior in Brazil, Indonesia, and Mexico, tems (Couso, Huneeus, and Sieder 2010, 6). Simply
among other countries (Helmke and Ros-Figueroa stated, ideas, norms, beliefs, and values matter. For
2011; Dressel and Mietzner 2012). Public expectations example, judges in Chile have been constrained by a
and demands on courts are also an important factor tradition of legal formalism. By contrast, in Colombia
in this calculus, as is the broader role played by the judges perceptions of their own role have shifted
private bar, legal academia, and other legal actors as indigenous groups have increasingly employed
(Halliday 2013; Shapiro 2013). Judicial autonomy and rights-based strategies (Domingo 2010). A social net-
effectiveness are thus an outcome of strategic inter- work analysis of Mexican judges depicts how profes-
actions among the judiciary, other branches of gov- sional networks can diffuse fundamental ideas about
ernment, and the public (McNollgast 2006). the role of judges (Ingram 2016).

How do effective and equitable legal institutions emerge? | 105


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Transformation of the Supreme Court of India. In Staton, Jeffrey, and Will H. Moore. 2011. Judicial Power
Consequential Courts: Judicial Roles in Global Perspective, in Domestic and International Politics. International
edited by Diana Kapiszewski, Gordon Silverstein, Organizations 65 (3): 55387.
and Robert Kagan. Cambridge, U.K.: Cambridge Uni- V-Dem (Varieties of Democracy). Various years. Database
versity Press. hosted by Gothenburg Institute (Europe) and Kellogg
McNollgast. 2006. Conditions for Judicial Indepen- Institute (United States), https://www.v-dem.net/en/.
dence. Journal of Contemporary Legal Issues 15 (1): 10527. World Bank. Various years. World Development Indi-
Moustafa, Tamir. 2007. The Struggle for Constitutional cators (database). Washington, DC, http://data.world
Power: Law, Politics, and Economic Development in Egypt. bank.org/data-catalog/world-development-indicators.
New York: Cambridge University Press. World Justice Project. Various years. Rule of Law Index.
Moustafa, Tamir, and Tom Ginsburg. 2008. Intro Washington, DC, http://worldjusticeproject.org/.
duction: The Functions of Courts in Authoritarian Yannakakis, Yanna. 2015. Beyond Jurisdictions: Native
Politics. In Rule by Law: The Politics of Courts in Author- Agency in the Making of Colonial Legal Cultures.
itarian Regimes, edited by Tamir Moustafa and Tom A Review Essay. Comparative Studies in Society and
Ginsburg. New York: Cambridge University Press. History 57 (4): 107082.

How do effective and equitable legal institutions emerge? | 107


PART II

Governance
for development

4. 5. 6.
______________________________________ ______________________________________ ______________________________________

Governance Governance Governance


for security for growth for equity
CHAPTER 4

Governance
for security

Sometime around 1775 BCE, Zimri-Lim, the king of When institutions of governancethe specific insti-
the ancient Mesopotamian city of Mari in todays Syr- tutions for making and implementing policysolve
ian Arab Republic, wrote the worlds earliest account cooperation and commitment problems in ways that
engraved on a clay tabletof the use of arbitration create incentives not to use violence, security prevails.
and restitution to settle a dispute between two of his When they do not, violence prevails. In the absence
vassals. He rebuked one of them: You have raided of cooperation, contending sides walk away from the
his country. Everything you took, gather it together bargaining table, and citizens do not comply with gov-
and return it (Munn-Rankin 1956, 95). On another ernment rules. When commitment is lacking, warring
occasion, the same king negotiated a power-sharing factions renege on peace agreements, policy makers
agreement over a contested city with his more pow- default on their promises to transfer resources to dis-
erful rival, King Hammurabi of Babylon. Bargaining contented groups or regions, disputants fail to abide
extended over several yearsRemove [that city] from by court judgments, the police abuse citizens instead
the treaty tablet and I shall commit myself! offered of protecting them, and violence ensues.
Hammurabi at one pointbut no agreement could The framework adopted by this Report emphasizes
be reached, a consequence of the uneven balance of the centrality of three constitutive elements of gover-
power between the two kingdoms (Heimpel 2003, nance for development: (1) the relative distribution
379). Violence ensued, and in 1759 BCE the king of of power among individuals and groups with con-
Violent conflict Babylon destroyed Mari, boasting that he had turned flicting preferences; (2) the bargaining arena where
is the result of the land into rubble heaps and ruins and displaced its conflicting interests are mediated and policy choices
three types of entire population (Heimpel 2003, 177). are made and implemented; and (3) the barriers to
breakdowns in entry to this arena. Accordingly, violent conflict is the
governance: the result of three types of breakdowns in governance,
unconstrained Can governance solve the all rooted in cooperation and commitment problems:
power of problem of violence in (1) the unconstrained power of individuals, groups,
individuals, groups, and governments; (2) failed agreements between
and governments;
society? participants in the bargaining arena; or (3) the exclu-
failed agreements Can dispute settlement, power sharing, restitution, sion of relevant individuals and groups from this
between and other forms of governance solve the problem of arena. Power sharing, resource redistribution, dispute
participants in the violence in society? Yes, under certain circumstances. settlement, and sanctions and deterrence have long
bargaining arena; Violence recedes when individuals, groups, and gov- been identified as potential ways governance can pre-
or the exclusion of ernments have incentives not to use it to pursue their vent, reduce, or end violent conflict, yet they succeed
relevant individuals objectives, and when not using it eventually becomes only when they constrain the power of ruling elites,
and groups from the norm. Institutions create incentives to reach agree- achieve and sustain agreements, and do not exclude
this arena. ments (cooperation) and enforce them (commitment). relevant individuals and groups.

110 | World Development Report 2017


Security, governance, and Figure 4.1Violence inflicts a high cost on
development
power are tightly interlinked
Securitythe security of peopleis freedom from Internet users

violence and the threat of violence (coercion).1 Rather Net enrollment rate, secondary
than representing discrete, opposed situations, secu- Adult literacy rate
rity and violence are on a continuum. For that rea-
Primary completion rate
son, this Report measures security as the reduction
in the incidence of violence.2 The threat of violence, Access to improved water source
however, is more difficult to measure. Compounding Access to electricity
the measurement challenge is the overlapping and Poverty rate at $1.90 a day
coexistence of violence and security.3
Vulnerable employment

Security is a precondition for development 0 20 40 60 80 100


The cost of violence to development outcomes is Share of population (%)
staggering (figure 4.1). In 2015 violence cost the global
Negligible violence
economy US$14.3 trillion, or 13.4 percent of the global Minor violence
gross domestic product (GDP), and this cost has risen Major violence
by more than 15 percent since 2008 (IEP 2015). Violent Sources: WDR 2017 team, using data from World Bank 2011; World Bank, World Development Indicators
conflict has a negative impact on GDP per capita (database), 2015; Geneva Declaration Secretariat 2015; UCDP/PRIO 2015.
(figure 4.2). Civil war reduces economic growth by 2.3 Note: The figure displays median values for all countries, by level of violence, for which data on
development outcomes and violent deaths are available, ranging from 91 countries for poverty ratio
percent a year (Collier 2007; Dunne and Tian 2014). data to 170 countries for access to electricity. Vulnerable employment is expressed as a percentage of
Violent crime hinders economic development as well total employment.
(Dell 2015). A 1.00-point decrease in homicide rates
per 100,000 persons is associated with a 0.070.29 Figure 4.2Violent conflict is associated
percentage point increase in GDP per capita growth with a reduction in GDP per capita
over the next five years (World Bank 2006).
0.4
At the micro level, violence results in changes
in household composition, losses in the productive
Incidence of conflict

0.3
capacities of household members, the destruction of
productive assets and livelihoods, and displacement
(Ibez and Vlez 2008; Justino 2009). Violence and 0.2

its threat also indirectly impede trade, investment,


and growth because of the uncertainty and the loss of 0.1
trust and cohesion they generate (Knack and Keefer
1997; Zak and Knack 2001). For example, violent con- 0
flict directly cost Iraq 16 percent in per capita welfare 0 0.2 0.4 0.6 0.8 1.0
from April 2011 to April 2014 and Syria 14 percent. Percentile of GDP per capita
However, when the foregone benefits of trade integra-
Fan regression 95% upper/lower band
tion between the two countries and their neighbors
Sources: WDR 2017 team, based on Blattman and Miguel 2010 using data
are taken into account, the total cost of war almost from World Bank, World Development Indicators (database), 2015, and
doubles, to 28 percent for Iraq and 23 percent for Syria UCDP/PRIO 2015.
(Ianchovichina and Ivanic 2016). Note: Incidence of conflict = number of violent conflicts in a country that led
to at least 25 battle deaths in a year, between 1960 and 2015. GDP = gross
domestic product.
The states monopoly over violence is a
precondition for security largely helped reduce violence, but security was
In traditional societies, when security was still in the fragile, and the specter of violence always loomed
hands of private individuals and groups, the credible (Bates 2001; North, Wallis, and Weingast 2009). Simi-
threat of violence through retaliation served as a lar security arrangements based on deterrence persist
deterrent against violence, and it was the main deter- in many parts of the developing world (Jacoby and
minant of order and security.4 The threat of revenge Mansuri 2010).

Governance for security | 111


Modern societies, by contrast, are fundamentally capacitythe stock of material and technological and
characterized by a concentration of security arrange- human resources available to the stateto enforce
ments in the hands of the state, which has a monop- these bargains and deter groups tempted to defect
oly over the means of violence and coercion (Weber or renege on them is uneven and discontinuous over
1965; Mann 1984). At its core, the states monopoly time and space.
over violence is the outcome of a collective agreement
among powerful actorsan elite bargain, reallyover Violence affects governance by changing
who can use violence and when its use is acceptable power and norms
(Wallis 2016).5 The use of violence and coercion under Violence and security change the distribution of
this agreement is organized by the state, which typi- power among groups and consequently affect gov-
cally enforces the agreement. ernancehow these groups interact within a set of
The monopoly over violence is an ideal that few rules, which are themselves a function of the groups
states attain in all places at all times. It is the outcome relative power (see chapter 2 and Tilly 1978).6 One
of complex historical processes that unfold over groups use of force can strengthen or weakeneven
decades, if not centuries (box 4.1). The elite bargains annihilatethe power of other groups almost by
that give rise to this monopoly are contested, rene- definition. Assassinations, mass killings, coups, and
gotiated, and reasserted every day, everywhere. The revolutions do just that. New actors emerge and

Box 4.1How modern governance was born offers lessons for todays
fragile countries

Todays governance is the child of yesterdays violence. into laws. But violence did not disappearon the contrary,
From the earliest records of human societies until the more revenues were available to finance more external
modern era, violence has been the norm (Pinker 2011). It wars. It was now monopolized by these emerging states
was not until violence was constrained by the state that and channeled toward providing law and order, combating
development began to occur on a large scale (North, crime, and protecting property rights (Bates, Greif, and
Wallis, and Weingast 2009). Even the countries that enjoy Singh 2002). Modern governance was born.a
the highest per capita incomes and most peaceful societies Today, millions of people live under the rule of nonstate
in the world, such as most of Europe, emerged from wars armed groups, contemporary equivalents of the medieval
and violent contests for power (Tilly 1985, 1990). They were violence specialists who gave rise to the western European
fragile states for most of their historical trajectory. states.b Wartime institutionsthe rules of the game that
How these countries made this transition from violence result from the interaction between civilians and armed
and underdevelopment to security and prosperity reveals factionshave created new, enduring realities on the
intriguing patterns. As commerce expanded in medieval ground, with profound implications for processes of state
Europe, violence specialistsindividuals or groups that and nation building in the aftermath of violence (Justino
procured resources for themselves primarily through vio- 2016; see also spotlight 4). The relative security of places
lence and coerciontraded the provision of security for such as Somaliland provides a compelling illustration of the
financial resources to finance their wars (Braudel 1966). sustainability of the governance arrangements that arise
They allowed economic activity to flourish under their organicallyand without donor interventionfrom the
protection, founded states, and ceded some power and bargains struck among armed rebels, business communi-
rights to business and other elites (Duby 1991; Bates 2001). ties, and civilians (Bradbury 2008). These arrangements
Later, these rights were gradually expanded and eventually exemplify the significance of these homegrown rules for
conceded to the majority of the population (Acemoglu and the future governance of postwar countriesand the puz-
Robinson 2006). Constraints on unbridled power and other zles they pose to the international development commu-
outcomes of these bargains between elites were formalized nity (Weinstein 2004).
Source: WDR 2017 team.
a. This narrative has been extended by some authors to contemporary states in eastern Africa and Southeast Asia as well. See Weinstein (2005) and
Slater (2010).
b. Gambetta (1996); Weinstein (2007); Mampilly (2011); Ahmad (2015); Arjona, Kasfir, and Mampilly (2015); Sanchez de la Sierra (2015).

112 | World Development Report 2017


gain power from rebellions and wars. Historical and between 1400 and 1700 reveals that it is associated
contemporary examples abound. Indirectly, individ- with more postcolonial violent conflict, in addition
uals and groups can use violence and coercion to to lower levels of trust and a stronger sense of ethnic
concentrate the proceeds of growth and development identity (Besley and Reynal-Querol 2014).
in their hands and increase their relative power by
strengthening networks of patronage or gaining Governance can prevent conflicts from
informational advantages (Levitsky and Way 2012). becoming violent
Moreover, violence also affects norms of behavior Social choices, political change, and development Social choices,
and can shape new values and attitudes, including atti- itself are all inherently contentious and conflictual political change,
tudes toward violence itself (box 4.2). This impact can processes. The status quo benefits some members and development
be positive as well as negative. Exposure to violence of society; any change is likely to benefit others, and itself are all
from war has had surprisingly salutary and persistent conflict ensues (Acemoglu and Robinson 2006). This inherently
effects on altruism (Burundi), empathy (Liberia), and Report defines conflict as an active disagreement or contentious
political participation and social mobilization (Sierra dispute that arises when two or more individuals or and conflictual
Leone). It has also been linked to increased trust in groups believe their policy choices, interests, pref- processes.
government (Uganda), voluntary compliance with erences, or concerns are incompatible. Accordingly,
authority (Liberia), as well as higher levels of social conflict in itself is not necessarily negative, and it
capital, reciprocity, and interpersonal trust (Nepal).7 can even be a constructive force for social change
Exposure to violence can also shape attitudes toward (Keen 1998). It is, in fact, an integral element of
women along several frontsincluding labor force human interactions, and it is found in all societies at
participation, marriage and divorce (Germany after all times.
World War II), political participation (Peru), and bar- Poverty, inequality, and other manifestations of
gaining among household membersand contribute the unevenness of the development process generate
positively to changes in gender roles.8 Violence also tensions and distributive conflicts (Hirschman 1958;
changes identities and beliefs, including as a result of Knight 1992; Bardhan 2005). In addition to uneven
migrations and changes in the composition of house- development, three other broad sets of factors can
holds (Justino, Leavy, and Valli 2009). also cause conflicts: identity and ideology; resources,
The effects of violence on norms and attitudes can including land, water, and extractives; and economic
also be negative. The increased cooperation brought and other shocks. More often than not, these factors
about by exposure to violence is mostly observable combine (box 4.3).9
within groups rather than between groups, leading
to forms of parochialism or identity-based insularity Conflict and violence are not the same
(Bowles and Gintis 2011). This effect could in theory And yet conflicts, no matter what causes them,
generate more violence by reinforcing within-group need not erupt into organized violence. Examples
cohesion based on distrust of others. Indeed, violence are numerous. At the micro level, peaceful protests,
has the observed effect of hardening attitudes toward strikes and lockouts, boycotts, and mass resignations
others and can also help construct identities in more are all examples of nonviolent manifestations of con-
rigid ways (Grossman, Manekin, and Miodownik flicts over any of these sets of drivers. At the country
2015). These new norms and identities increase the level, Australia, Botswana, and Norway all have oil
support for elites who favor the continuation of vio- or mineral wealth, and yet none has experienced
lence to strengthen or extend their hold on power significant violent conflict in generations. Singapore
(Fearon and Laitin 2000; Fearon 2006). The power and and Switzerland are ethnically, religiously, and lin-
resources that accrue to political elites who benefit guistically diverse, but they enjoy some of the lowest
from the use of violence then fuel more violence (Bes- levels of violence anywhere. Belgium recently expe-
ley and Persson 2011). rienced an acute crisis between parties representing
So, violence affects norms, and norms affect its two main ethno-linguistic groups, including 541
violence. Violence affects power, and power affects days without a central government, but no violence
violence. These two-way relationships highlight erupted. Why? Because these countries have effective
the broader point that violence can be persistent institutions of governance. They make all the differ-
and self-sustaining. It tends to occur in interlinked ence in whether and when a conflict turns violent.
episodes, with its intensity subsiding between A main message of this chapter is that institutions
cycles (World Bank 2011). Within-country and cross- of governance can address conflicting interests and
country analysis of historical violent conflict in Africa preferences without recourse to violence.10

Governance for security | 113


Box 4.2The persistent links among gender-based violence, power,
and norms

Gender-based violence (GBV) reflects power inequalities internalized, and violence can even become acceptable for
between women and men. Women and girls are more com- the victims, who may be afraid to challenge shared norms
monly the victims of GBVa manifestation of power imbal- out of fear of backlash (they may not even be aware of
ances tilted in favor of men that characterizes many cultures alternatives to the norm). For example, more positive atti-
around the world, most of them patriarchal. According to tudes toward FGM are typically found in countries where its
Watts and Zimmerman (2002, 1232), Violence against prevalence is higher. Interestingly, support for the continu-
women is not only a manifestation of sex inequality, but ation of FGM is generally similar among women and men,
also serves to maintain this unequal balance of power. and among women greater support is expressed by those
Collectively shared norms about womens subordinate role who themselves have undergone FGM.
in society, which potentially leads to violence against them, Biased formal laws restricting womens economic
perpetuate the power imbalance. opportunities reinforce (and are reinforced by) discrimi-
Female genital mutilation (FGM), sex selection, child natory gender norms, which in turn strengthen the power
marriage, dowry deaths, honor killings, and widowhood imbalance. Although many countries have recently carried
rituals are harmful cultural practices that are supported by out reforms to remove legal restrictions, about 90 percent
various social norms and beliefs. For example, FGM is tradi- of the 173 countries reviewed in a recent study still have at
tionally believed to preserve a girls virginity until marriage; least one legal gender difference on the books, including
not conforming to the practice may lead to social exclusion, laws requiring a woman to seek her husbands permission
stigma, and the inability to find a husband (UNICEF 2013). to work, travel, and register a business, and prohibitions on
Sex-selective abortions, infanticide, neglect of female chil- women working in certain industries or hours (World Bank
dren, and mistreatment of women who did not bear male 2015).
children are manifestations of pervasive son preference, The persistence of these cultural practices depends in
typically grounded in rigid patrilineal and patrilocal family part on reciprocal expectations about the behavior of oth-
systems and the special role of male children in religious ers.b As long as discriminatory norms are broadly shared
rituals.a Dowriesa practice that strengthens son pref- by a critical mass of individuals who expect that others
erence because it leads parents to consider daughters as will conform to the practice, there will be no incentive to
liabilitieshas often been linked to brutally violent acts deviate from them. A shift requires coordination of beliefs
against womensuch as harassment, domestic violence, because each individuals action depends on expectations
murder, and suicideas a way to extract a higher dowry of what the others will do. Strategic interdependence of
from the wifes family (UNFPA 2013). Honor killings involve individual beliefs will maintain the unequal distribution
murders, often committed by close relatives, in the name of of power. Many state laws (such as those prohibiting FGM,
family honor. Such killings of women are a way to sanc- domestic violence, child marriage, sex-selective abortions,
tion the refusal of a female to enter an arranged marriage, and dowries, often introduced under domestic and interna-
an attempt by a female to marry outside her own social tional pressure from womens movements) have not been
group, or the attack of a female by a rapist (UNFPA 2000; effective in reducing the prevalence of harmful practices
Pande 2015). Widows are sometimes victims of violence because of the failure to understand the conditions needed
by in-laws and the object of humiliating rites and isolation to shift norms and the need to translate laws in the context
as part of the mourning process. Such acts are intended of the local culture (see chapter 3). Other forces may lead to
to demonstrate a widows grief and innocence in her hus- persistence that does not depend specifically on reciprocal
bands death (Chen 2000; Sossou 2002). social expectations, but rather on private motives that vary
The continuation of these practices is supported by considerably across individuals and may require specific
both women and men. The power imbalance can become policy interventions (Efferson and others 2015).
Source: WDR 2017 team.
a. Das Gupta and others (2003); Milazzo (2014); Jayachandran (2015).
b. Mackie (2000), with specific reference to FGM.

114 | World Development Report 2017


Box 4.3Several factors can cause conflicts, and they often combine

Identity is perhaps the broadest set of drivers of conflict. access) resources is ubiquitous and has been the subject of
It encompasses ethnicity, race, language, territory, caste, landmark analyses and case studies (Ostrom 1990; Ellickson
gender, sexual orientation, religion, belief, and potentially 1991). Resources also generate rents, which can be used to
all markers of difference between human beings. Identity fuel and sustain conflict (Besley and Persson 2011).
carries the seeds of conflict in its womb: those who share Economic and other shocks may also drive conflict: An
the same identity are part of the in-group, while those external (exogenous) event or condition (such as a drought,
who do not are the out-groupthe others. When people climate change, the discovery of a new trade route, or a hike
acquire a strong and exclusive sense of belonging to a sin- in commodity prices) or an internal (endogenous) event or
gle group, the stage is set for conflict (Sen 2006). Just as condition (such as technological change or demographic
identities are a primary driver of conflict, conflict is the main shifts) can disrupt a stable situation by introducing tension
way identities are shaped (Berman and Iannaccone 2006; in the control of scarce or expanding resources.a
Fearon 2006): There is nothing like conflict to determine, The development process itselfor rather its uneven-
delineate, and accentuate the sense of belonging (Lianos ness in the form of poverty, income inequality, and urban
2011, 4). migrationcan also be a powerful driver of conflict.b
Resources are another major driver of conflict, whether Drivers of conflict can combine. Horizontal inequality
they are natural resources such as oil, minerals, and gem- the confluence of ethnic identity and income inequalityis
stones; common pool resources such as fisheries, forests, a particularly explosive combination (Esteban and Ray
grazing land, and water basins; or private resources such 2008; Esteban, Mayoral, and Ray 2012). Extreme sce-
as agricultural land and cattle. An extensive literature asso- narios feature all drivers. Such was the case of Darfur in
ciates natural resources with the onset of violent conflict Sudan, where local conflicts over land and water resources,
(Caselli, Morelli, and Rohner 2015; Ross 2015). Resources drought, poverty and inequality, and ethnic and religious
can trigger conflict whether they are scarce or abundant polarization all conspired, at a time when local governance
(Collier and Hoeffler 1998; Bardhan 2005). Conflict over the broke down, to turn these drivers of conflict into one of the
mismanagement and overuse of common pool (or open deadliest civil wars of the time (de Waal 2007).
Source: WDR 2017 team.
a. For drought, see Miguel, Satyanath, and Sergenti (2004); for climate change, Burke, Hsiang, and Miguel (2015); for commodity price shocks, Dube and
Vargas (2013) and Bazzi and Blattman (2014); and for demographic shifts, Goldstone (2002).
b. For poverty, see Justino (2009); for income inequality, Fajnzylber, Lederman, and Loayza (2002), Montalvo and Reynal-Queyrol (2008), Stewart
(2008), Enamorado and others (2016), and Ray and Esteban (2016); for urban migration, World Bank (2010).

Violent conflict is the result of a individuals from using violence. The absence of this
governance failure deterrent will likely decrease the cost of the violent
There are converging indications that the use of orga- option. Violent conflict, then, is the outcome of the Violent conflict
nized violence to resolve a conflict is the outcome of a failure of institutions of governance to resolve a con- is the outcome
rational decision: leaders go to war when they believe flict, regardless of what factors or combinations of of the failure of
the expected benefits of a war outweigh its expected factors cause it. Three types of such governance fail- institutions of
costs (Tilly 1978; Fearon 1995), and young men join ures can lead to violent conflicts: bargaining failures governance to
gangs and rebellions when this option is superior to between individuals and groups; the unconstrained resolve a conflict,
the next best opportunity foregone (World Bank 2011). power of the state; and the exclusion of powerful indi- regardless of
Institutions and norms shape behaviorincluding viduals and groups from the bargaining arena where what factors or
violent behavior. They create incentives for individu- policies are made and implemented. combinations of
als and groups to use violence, or refrain from using Bargaining failures. Violence can arise when agree- factors cause it.
it, to resolve conflicts by determining the expected ments between opposing sides break down, such as
gains from each option. These incentives differ in when the states monopoly over violence falls apart
various institutional settings. For example, the exis- (Bates 2008a, 2008b). This violence becomes the pre-
tence of a credible threat of sanctions will discourage ferredand rationalway for certain individuals and

Governance for security | 115


groups to alter the distribution of power in their favor succeeded in avoiding violent conflict. The extent
or to pursue their interests (Fearon 1995; Wagner of groups access to state structures (in the form of
2000; Walter 2009). Such is the case in several fragile jobs in the government and the military) and to state
states, in the peripheral areas of many stronger states, resources (such as land, commercial licenses, and
but also in the so-called ungoverned spaces (which other rents) determines the degree of inclusiveness
are often just differently governed) (Pujol 2016) or exclusiveness of these elite coalitions (Lindemann
(spotlight 4). What these very different places have in 2008, 2010).
common is the failuresometimes localized onlyof
bargaining over who has the monopoly over violence Institutions of governance create incentives
in a territory. not to use violence
Unconstrained power of the state. Although the states Ironically, some of the clearest insights into how insti-
monopoly over violence is a necessary condition of tutions of governance shape incentives to prevent
security, it is by no means sufficient to guarantee the and reduce violent conflict have come from recent
long-term security of people and property. Violent work on the ways violent groups maintain order and
conflict can, and often does, come at the hand of security within their own ranks (Justino 2016). Prison
the state itself, particularly through its military and bands and slum gangs create informal governance
police. Ruling elites often resort to military force and rules to adjudicate disputes, divide resources, and
repression against civilians to avoid having to share enforce sanctions among their members (Venkatesh
power (Acemoglu and Robinson 2006). Police forces 2006; Skarbek 2014). Criminal associations such
may threaten and use unsanctioned violence against as the Sicilian Mafia do so as well (Gambetta 1996).
the population of urban slums instead of protecting Pirate organizations are a fascinating illustration of
them, as occurs in some U.S. and Latin American cit- the emergence of rules of governance aimed at resolv-
ies. Governments, or the private interests that have ing conflicts driven by material inequalities and per-
captured them, often violently expel local communi- ceptions of unfairness and at eliciting cooperation
ties from their land for reasons ranging from grant- among members of the group (Leeson 2011).
ing concessions to mining corporations to expanding Formal and informal institutions of governance
infrastructure projects (Hall, Hirsch, and Murray Li solve commitment and cooperation problems in ways
2011; Moyo, Tsikata, and Diop 2015). that create incentives not to use violence. What these
Exclusion of powerful actors. Violence can also governance institutions are exactly, how they solve
emerge when powerful actors are excluded from these functional problems, and under what conditions
the bargaining arena where policies are made and they work (or fail) to prevent, limit, or end violence are
implementedusually along identity fault lines. The the subject of the rest of this chapter.
distribution of power among ethnic groups, measured
by their access to central state power, is a strong predic-
tor of violent conflict, whether in the form of repres- Governance can improve
sion by the state or rebellion against the state. Cross-
country statistical analyses using the Ethnic Power
security in four ways
Relations data set indicate that countries in which This Report identifies four categories of governance
large portions of the population are excluded from institutions that directly create incentives for individ-
access to the state based on ethnicity are more likely uals, groups, and governments to refrain from using
to face armed rebellions and to experience violent violence to resolve conflicts.11 Other types of institu-
repression by the state (Wimmer, Cederman, and Min tions, such as markets or schools, play only indirect
2009; Rrbk and Knudsen 2015). The level of such roles.
exclusion seems to matter, too: the more excluded
from state power ethnic groups are, the more likely 
Sanction and deterrence institutions. Governance
their members are to initiate violent conflict with institutions that punish and deter opportunistic
the government, especially if they have recently lost behavior reduce incentives for violent behavior by
power (Cederman, Wimmer, and Min 2010). increasing the cost of violence. Over time, they also
Qualitative comparative and case study analyses shift preferences away from violence by changing
of violent conflict in postcolonial Africa share the norms and attitudes toward violence, leading to
same finding that exclusionary elite bargains have led the internalization of new norms (see spotlight 5
to trajectories of civil war, whereas countries in which on crime). Ultimately, they foster a culture of vol-
elites have struck more inclusive elite bargains have untary compliance based on legitimacy (chapter 2).

116 | World Development Report 2017


Examples range from speed limits and penalty fees diminishing returns, capital punishment appears to Governance
to prison sentences. have statistically insignificant effects on crime.12 institutions that
Power-sharing institutions. Governance institutions On the other hand, incarceration has negative balance, divide,
that balance, divide, and share power reduce the effects on recidivism, and the empirical findings and share power
incentives to engage in violence by increasing the are particularly troubling for youth. The experience reduce the
benefits of security. They may increase the contest- of prison appears to create opportunities to build incentives to
ability of policies as well. Examples include consti- criminal capital and deepen criminal social networks, engage in violence
tutions and proportional representation electoral with the result that hardened youth frequently end by increasing
systems. up returning to crime after incarceration and at the benefits of
Redistributive institutions. Governance institu- higher rates with harsher prison conditions. Incarcer- security.
tions that allocate and redistribute resources and ation can also ruin a youths employment prospects,
resource rents are a special case of power-sharing thereby reducing the future opportunity cost of vio-
institutions. They too reduce the incentives to use lence (Mueller-Smith 2015).
violence by increasing the benefits of security. These findings are consistent with various ana-
Examples include budgets, social transfers, and lytical studies suggesting that mano dura approach-
victim compensation schemes. esa set of heavy-handed government policies to
Dispute resolution institutions. Governance institu- combat criminal gangs in Latin Americaare coun-
tions that resolve and arbitrate disputes reduce terproductive (Kleiman 2011). These studies posit
incentives for using violence by stabilizing expec- that heightened police engagement in crime-ridden
tations. They can also shift preferences toward non- communities may increase the risk of police abuse
violent outcomes. Examples include courts, as well of innocent citizens and undermine citizen trust in
as institutions of property rights such as contracts government and community cohesion (Berkman
and titles. 2007; World Bank 2010). Conversely, programs such as
the Youth and the Police project in Belo Horizonte,
Sanctions and deterrence can reduce Brazil, which organized workshops and seminars
violence by changing incentives and between police and youth groups, have been shown in
preferences some preliminary evaluations to improve local police-
Deterrence maintains security by raising the cost of community relations (Berkman 2007).
engaging in violence, whether by preventing crime In Rio de Janeiro, Brazil, Pacifying Police Units
(general deterrence) or by limiting recidivism (spe- (UPPs) combine an increased police presence to
cific deterrence). Sanctions limit opportunities to use regain control of urban territory from armed crimi-
violence by way of incapacitation. Formal institutions nal groups with a new model of proximity policing.
of deterrence and sanction include the array of insti- This program seeks to build closer ties with local
tutions falling under the criminal justice system such residents by holding community meetings and social
as the police, prosecutors office, courts, prisons, pen- events, providing teenagers with soccer lessons, and
alties, and fines. Under the states monopoly over vio- engaging in informal dispute settlement. In addition,
lence, the coercion emanating from these institutions it starkly reverses policemens financial incentives
deters and constrains those tempted to use violence by offering performance bonuses for reducing police
to pursue their objectives. homicides, thereby replacing an earlier policy that
Robust empirical evidence indicates that crime offered higher salaries to police officers who shot
responds to the preventive potential of incentives suspects in acts of legitimate defense. A recent eval-
set by the criminal justice system, which is deter- uation of the impact of the introduction of the UPPs
mined by two main parameters: a (nonabusive) police indicates that homicides by police would have been a
presence and number of policemen and the length of massive 60 percent higher without UPP intervention
prison sentences. More police and more police pres- (Magaloni, Franco, and Melo 2015).
ence have been shown causally to lead to declines in
crime (Di Tella and Schargrodsky 2004; Chalfin and Power sharing can reduce violence by
McCrary 2014). The length of prison sentences has as changing incentives and increasing
well, but to a lesser extent: for the adult population, contestability
the elasticity of crime with respect to length of sen- Power-sharing mechanisms give multiple contend-
tence is small but still positive, whereas youth do not ing elites a stake in the decision-making process and
seem responsive to this incentive. Finally, because can rebalance power in the governance arena. Some
the effects of length of sentence exhibit rapidly form of power sharing aimed at co-opting elites and

Governance for security | 117


constraining majority rule has been attempted to end Figure 4.3An even balance of power
violence in nearly all conflicts within states over the is associated with positive security
last few decades. Power-sharing arrangements are outcomes
especially relevant for societies divided along ethnic
and religious identity lines such as in Bosnia and 4

Power distributed by social group score


Herzegovina, Kenya, Lebanon, Northern Ireland, and
South Africa, but also in countries where the conflict
is a legacy of opposing ideologies. 3
Power-sharing institutions can take many forms.
In one set of forms, particular offices or processes in
national government can lower barriers to the entry
2
of certain groups to the policy arena and increase its
contestability. Examples include ensured representa-
tion of different individuals or factions in executive
1
positions (Iraq, Kenya, Lebanon, Somalia); ensured
minority voice in policy making through vetoes for
minorities in coalition governments or supermajority
requirements; positive action mechanisms such as 0
legal quotas for women and marginalized groups in 0.2 0.4 0.6 0.8 1.0
public office (India); and forms of legislative selection Order and security score
that guarantee the representation of all factions and High-income OECD countries
groups such as electoral systems with proportional High-income non-OECD countries
representation. In a second set of forms, power is Upper-middle-income countries
distributed among groups at the subnational level. Lower-middle-income countries
Examples include federalism (Belgium, Nigeria); Low-income countries
administrative decentralization (Nepal, Sierra Leone); Sources: Power distributed by social group variable: V-Dem, version 6;
or regional autonomy (Aceh, Indonesia; Bougain- order and security variable: World Justice Project, Rule of Law Index, 2015,
Factor 5.
ville, Papua New Guinea; Catalonia, Spain; Corsica,
Note: The power distributed by social group variable is measured on a 04
France)see Gates and others (2016). scale, ranging from 0 (political power is monopolized by one social group)
Cross-country statistical analyses robustly associ- to 4 (social groups have equal political power). The order and security
variable is measured on a 01 scale, ranging from 0 (low score) to 1 (high
ate institutions of power sharing with better security score). This composite variable consists of three dimensions measuring
outcomes (Gurr 1993; Linder and Bchtiger 2005)see whether crime is effectively controlled; civil conflict is effectively limited;
and people do not resort to violence to redress personal grievances.
figure 4.3. Executive power sharing in broad multi OECD = Organisation for Economic Co-operation and Development.
party coalitions, an executive-legislative balance of
power, multiparty systems, and proportional rep-
resentation electoral systems are all significantly identity-driven violent conflict. Where violence has
correlated with less incidence and risk of internal already occurred, they give rebel factions incentives
conflict, and less vulnerability to domestic terrorism, to lay down arms by offering them alternative ave-
after controlling for economic and population charac- nues for contesting power in nonviolent ways, such
teristics. Statistical and empirical evidence in favor of as in Bosnia and Herzegovina, Liberia, and South
decentralized and federal governance institutions is Africa.13 Over time, cooperation builds trust in the
not as strong (Lijphart 2012). power-sharing mechanism and enhances its legiti-
macythe extent to which people voluntarily comply
Power sharing can reduce violence by with institutions and decisions (see chapter 2).
giving the parties in a conflict incentives
to cooperate Cooperation is more likely when parties in a
Mechanisms of power sharing manage conflict conflict can credibly commit to deals
by encouraging cooperative behavior among rival Fighting parties are significantly more likely to
factions. They give leadership elites incentives to cooperate and sign peace agreements to end wars if
collaborate, bargain, and encourage conciliation the deals contain specific assurances to share power
and tolerance among their followers. They also help (Walter 2002; Hartzell and Hoddie 2003). Enshrining
mitigate the effects of the exclusion of minorities power-sharing arrangements in peace agreements
by majorities, reducing the likelihood of the onset of removes motives to continue fighting and has been

118 | World Development Report 2017


negatively and significantly associated with renewed Figure 4.4Constraining state power
violent conflict (Walter 2015). Given the lack of trust ensures security
among warring factions, mechanisms that ensure the
1.0
credible commitment of elites, both to one another

not using public office for private gain score


Government officials (police and military)
and to their followers, play a major role in ensuring
that, once reached, power-sharing arrangements are 0.8

implemented and violence stops (Keefer 2012).


Independent third-party mechanisms are the main 0.6
mechanisms for ensuring the credibility of commit-
ments in general (Schelling 1960; Bates 2008b). The 0.4
same mechanisms can work to credibly commit par-
ties in a conflict in the specific case of implementing
0.2
power-sharing deals. For example, the deployment of
international peacekeepers provided security guar-
0
antees for the agreements that ended the civil wars
in Bosnia and Herzegovina, Liberia, and Sierra Leone.
The commitment of regional and international pow- 0.2 0.4 0.6 0.8 1.0
ers played a similar role in reaching power-sharing
Order and security score
accords in Lebanon, the former Yugoslav Republic of
Macedonia, and Mali. However, third-party external High-income OECD countries
enforcers cannot always ensure that power-sharing High-income non-OECD countries
Upper-middle-income countries
arrangements end the violence and restore order.
Lower-middle-income countries
Under which conditions do power-sharing arrange-
Low-income countries
ments promote order and security, and when do
they fail? Source: WDR 2017 team with data from the World Justice Project, Rule of
Law Index, 2015.
As in the earlier example of ancient Babylon and
Note: The order and security variable (Factor 5) is measured on a 01 scale,
Mari, large power asymmetries between contending ranging from 0 (low score) to 1 (high score). This composite variable consists
factions make it easy for the stronger side to renege of three dimensions measuring whether crime is effectively controlled; civil
conflict is effectively limited; and people do not resort to violence to redress
on its promises and hard for the weaker side to hold personal grievances. Government officials in the police and the military do
it to account for failing to commit (Walter 2009). not use public office for private gain variable (Factor 2.3) is measured on a
01 scale, ranging from 0 (low score) to 1 (high score). Results are presented
Power asymmetries rooted in governments monop- as residuals after controlling for the natural logarithm of income per capita.
oly over taxation of resources explain the likelihood OECD = Organisation for Economic Co-operation and Development.
of violent repression (Besley and Persson 2009). They
also explain why some wars last longer than others Verdier 2004). Budgets then become the true battle-
(Fearon 2004). Conversely, power-sharing institutions ground for distributive conflicts, and they reflect the
can reduce violence when they constrain the power of bargains made among elites and between elites and
ruling elites (figure 4.4). The more accountable a gov- citizens (Dorotinsky and Pradhan 2007).
ernment is to a large share of the population, the eas- Redistributive mechanisms address conflicts
ier it will be able to credibly commit to share power driven by poverty and inequality, usually in combina-
and the fewer incentives the sides will have to return tion with the three other drivers. They can address con-
to violence (Walter 2015; Gates and others 2016). flicts rooted in grievances about the lack of access or
unequal access to land and natural resources; inequal-
Redistributing resources and wealth can ities along identity fault lines (horizontal inequality);
reduce violence by changing incentives and economic or environmental shocks. Redistribu-
Redistributing wealth and sharing power affect tion can also address conflicts stemming from the
security in similar ways. Indeed, they often go hand greed of groups coveting the natural and material
in hand: accessing centers of power and decision resources of the state and the rent extraction opportu-
making opens the door to controlling resources and nities that access to these resources generates.14
extracting rents. But elites can also redistribute wealth Forms of redistributive governance institutions
without having to share power by simply using fiscal and policies include fiscal decentralization, intergov-
policy to transfer resources to groups that threaten ernmental transfers, taxation, social security systems
to use violence to pursue their interests (Bueno de and safety nets, subsidies and cash transfers, funds
Mesquita and others 2002; Acemoglu, Robinson, and such as pension funds and permanent funds, and, by

Governance for security | 119


extension, social services such as health and educa- by way of patronage, a mode of governance in which
tion. Other institutions of governance, such as public politicians, or patrons, confer public jobs and benefits
employment, can serve both redistributive purposes on supporters or clients (Keefer and Vlaicu 2008; Rob-
and productive ones. inson and Verdier 2013). A time series cross-sectional
study of 40 African countries found that expanding
Redistribution can buy peace by the size of cabinets by one additional minister reduces
strengthening the social contract between the risk of a coup more than the effect of a 1 percent
states and citizens increase in GDPsee Arriola (2009).
Historically, governments used social policy and Governments often resort to patronage in public
other broad redistributive programs as a way to main- employment to maintain the stability of coalitions and
tain order and reduce civil unrest. One example is the ensure the loyalty of key constituencies whose dis-
mainstreaming of insurance schemes in 19th-century content could jeopardize security (North and others
Europe in the face of more assertive and better- 2013). During the recent uprisings in the Arab world,
organized labor movements. Much more recently, oil-rich governmentsconfronted with mounting
panel data from 16 Latin American countries reveal dissent at home and concerned about the contagion
that steady increases in government expenditures on from neighboring countriesdecided to hike both the
social welfare between 1980 and 2010 caused gradual numbers and compensation of public employees in an
but significant reductions in political violence in effort to keep the peace and maintain the loyalty and
countries that witnessed reductions in inequality quiescence of a key constituency (Brownlee, Masoud,
(Justino and Martorano 2016). Similarly, government and Reynolds 2013)see figure 4.5.
expenditures on social services such as health, edu- Large increases in the public sector wage bill have
cation, and welfare in 16 states of India from 1960 to deleterious effects on both budgetary sustainability
2011 were associated with a significant decrease in and administrative efficiency. Attempts at curbing
both the outbreak and escalation of riots across the the trends have generally failed or have not been
country (Justino 2015). That such reductions occurred sustained (World Bank 1999). Despite these problems,
in the medium term further suggests that, here as public sector employment can solve the first-order
well, these redistributive social policies are working problem of violence. Timor-Leste is a case in point.
through reductions in poverty and inequality. In both Following widespread unrest in 2006, the new gov-
Afghanistan and India, more government spending ernment used revenues from the oil windfall to
on public services appears to have played a role in increase the budget 14-fold, from US$135 million in
reducing insurgent violence (Beath, Christia, and 2006 to US$1,850 million in 2013. Public employment
Enikolopov 2012; Khanna and Zimmermann 2015).15 spiked from 20,000 to more than 35,000 during the
Government interventions to reduce urban crime same period, along with social transfers to veterans
in Latin America display a comparable pattern of (Srivastava and Blum 2016).
increasing security by reducing poverty and inequal-
ity. Brazils conditional cash transfer program, Bolsa Redistribution can become corruption
Familia, had a strong negative causal effect on urban The rent redistribution and patronage that accom-
crime in So Paulo as a result of increases in house- pany the bargains that are often necessary to maintain
hold incomes and changes in peer group membership security and solve the first-order problem of violence
(Chioda, de Mello, and Soares 2012). Colombias Famil- frequently come at the expense of public integrity
ias en Accin program in Bogot displayed similar (Szeftel 1998). In few countries are these trade-offs
results (Camacho and Meja 2013). between buying the peace and controlling cor-
ruption more salient than in the Republic of Yemen.
Redistribution can buy peace by Before the revolution of 2011, Republic of Yemen tribes
co-opting elites formed a core part of the elite bargain that ensured
Short of committing to universalistic redistribution relative security in this historically weak central state.
usually offered in exchange for citizens abstaining An essential element of these armed tribes loyalty to
from violent contestationgoverning elites can the central government was a vast patronage network,
credibly commit to narrower subsets of the popu- both formal and informal, that benefited the cooperat-
lation, whether groups with a strong capacity for ing tribal elites. The Ministry of Tribal Affairs handed
mobilization or elites with veto power (Acemoglu and out formal monthly stipends to more than 4,500 tribal
Robinson 2006). Bringing these smaller groups, or leaders across the country. In elections, the regime
other elites, into the bargaining arena often happens also favored local tribal elites, who used their position

120 | World Development Report 2017


Figure 4.5Recruitment of civil servants increased exponentially in Tunisia and the
Arab Republic of Egypt in the aftermath of the Arab Spring uprisings of 2011

a. Tunisia, 200014 b. Arab Republic of Egypt, 200014

Tenured government employees (millions)


50,000 20,000 6.4

6.2
Total/civil servants recruited

40,000 15,000 6.0

Workers recruited
5.8
30,000 10,000
5.6

5.4
20,000 5,000
5.2

Arab Spring 5.0 Arab Spring


10,000 0
4.8
2000 2005 2011 2014 2000 2005 2011 2014
Total recruited (left axis)
Civil servants recruited (left axis)
Workers recruited (right axis)

Sources: Tunisia: Brockmeyer, Khatrouch, and Raballand 2015; Arab Republic of Egypt: Bteddini 2016.

as parliamentarians to secure public employment makes them very credible commitment devices
for their followers. Although some of this employ- (Acemoglu and Robinson 2006).
ment was realparticularly in the army and security Such commitment, coupled with the demon-
forcesan informal mechanism awarded government strated and repeated capacity of governments to
jobs to more than 40,000 ghost workersthat is, make good on their promises, could increase trust
clients and relatives of tribal leaders who received sal- in government over time and reduce the chances
aries without being expected to work. This fictitious of choosing the violent option. Conversely, the poor
employment consumed up to 6 percent of the national credibility of governments in committing to the
budget in the education sector alone (Egel 2013). transfer of resources can lead to violence, especially
if the chances of overthrowing the government by
Redistribution can reduce violence by violent means are greater than the probability of it
increasing trust in government and credibly transferring the resources (Acemoglu and
interpersonal trust Robinson 2006; Murshed and Tadjoeddin 2009).
The exact mechanisms by which redistributive Social welfare policies can also reduce political
policies achieve security entail the resolution of conflict by helping to strengthen interpersonal trust
commitment and cooperation problems between gov- between citizens. In both theory and analytical case
ernments and groups pressing for redistribution studies, interpersonal trust has been classically linked
whether these are powerful elites or mobilized to increased social cohesion and thus less social con-
citizens (Addison, Le Billon, and Murshed 2002). flict. Empirically, it is linked to reductions in crime lev-
Sustained and steady increases in government expen- els (Lederman, Loayza, and Menndez 2002). Quanti-
ditures on social welfare, such as those in Latin Amer- tative evidence linking social welfare to interpersonal
ica in the 1990s and 2000s, signaled governments trust is more limited, but empirical studies do show
commitment to the social contract that ties the state that interpersonal trust is higher among members
to its citizensor at least to the groups that would of communities that are economically homogeneous
otherwise threaten elite control over the state (Bueno and more equal. Conversely, participation in social
de Mesquita and others 2002, 2003). The political activities, a close proxy of social cohesion, is lower in
difficulty in rolling back these social welfare pro- places where economic and social inequality are high
grams, which have become seen as entitlements, (Alesina and La Ferrara 2002a, 2002b).

Governance for security | 121


The link between fiscal decentralization and secu- behaviorusually codified into lawsincluding the
rity levels is less well documented. One empirical use of violence and other types of offenses.
before-and-after analysis of 98 districts in Java, Indo- In the absence of strong formal institutions such
nesia, shows that the incidence of routine violence as courts or police, individuals and communities
in the form of neighborhood and village brawls and resort to alternative dispute resolution (ADR) mech-
vigilante justice decreases as fiscal decentralization anismsthat is, a set of informal skills, practices,
is implemented. This analysis suggests that the com- and norms of negotiation and mediation that aim
mitment to devolving resources and autonomy from to help parties reach self-enforcing bargains and
distant central governments to local governments reduce the cost and length of disputes. ADR mech-
may increase the legitimacy of the local government, anisms improve cooperation by building trust and
which in turn translates into more cooperative behav- improving communication and mutual understand-
ior and stronger cohesion among groups (Murshed ing among parties and by cultivating a set of norms
and Tadjoeddin 2008). that encourage them to stay at the bargaining table
(Blattman, Hartman, and Blair 2014). They cause a
Restitution and compensation also reduce shift in preferences away from some options and in
When the incentives to engage in violence favor of others. When the third-party institutions
third-party Governance institutions that recognize and redress that enforce contracts are weak or do not exist, dispu-
institutions that grievances present a special case of redistribution. tants have incentives to renege on their agreements.
enforce contracts They reduce incentives to engage the state through Informal social sanctions can solve this commitment
are weak or do not the use of violence by seeking to right past wrongs, problem (Bardhan 1993). The norms promoted by ADR
exist, disputants which may help avoid repeated conflict (Walter 2015). mechanisms, such as shaming would-be defectors,
have incentives These institutions include truth and reconciliation help enforce the bargains reached.
to renege on commissions such as in South Africa after apartheid; In Liberia, a large education campaign to promote
their agreements. victim compensation schemes such as in El Salvador; ADR mechanisms for settling land disputes in 86
Informal social and an array of material and nonmaterial measures, treated communities in 2009 resulted in a 32 percent
sanctions including symbolic ones, intended to restore peoples decrease in property destruction relative to the con-
can solve this dignity. The latter should not be underestimated. trol group (Blattman, Hartman, and Blair 2014).16 In
commitment Indeed, the desire to restore a sense of dignity and addition to reducing violence, the campaign in Liberia
problem. self-worth as citizens and human beings appears to also had unintended consequences: it exposed more
have been an essential element of the set of factors disputes, reflecting power struggles between village
that triggered the Arab Spring (Brownlee, Masoud, elders and youth, but these were overwhelmingly
and Reynolds 2013). peaceful. This particular finding underscores some of
the main points made in this chapter: that conflict is
Dispute settlement can reduce violence a normal element of the change process and is quali-
by changing preferences tatively distinct from violence, and that what matters
Dispute resolution institutions are critical to secu- for security is not the occurrence of conflict per se but
rity and development. They help reduce violence rather its peaceful resolution by institutions.
and protect property rights. Mechanisms of dispute Dispute resolution mechanisms do not always
resolution include mediation, conciliation, and nego- achieve security. The field experiment in Liberia
tiation, where parties try to reach mutually satisfac- remains an example of self-enforcing dispute reso-
tory, self-enforcing agreements on their own. These lution institutions helping to resolve low-intensity
mechanisms also include litigation and arbitration, communal conflict, where the distribution of power
where disputants rely on a third party such as a judge between parties is relatively even. Such is not the
or a jury for resolution and the credible commitment case in the more acute conflicts over land and water
needed to enforce the resolution. These institutions resources that plague so many developing countries.
can be informal, such as elder councils in a village, These conflicts involve significant power dynam-
or formal, such as courts, ombudsmen, and peace ics such as land grabs by governments and closely
negotiators. Institutions of dispute resolution seek connected local elites or extractive and agricultural
to resolve conflicts over material resources, whether concessions to multinational firms (Hall, Hirsch, and
scarce or abundant, such as land, water, extractives, Murray Li 2011; Boone 2013). An evaluation of a donor-
and movable assets. They also aim to resolve con- funded land mediation program that is also in Liberia
flicts over violations of norms of socially acceptable indicates that once such power dynamics are at play,

122 | World Development Report 2017


self-enforcing dispute resolution mechanisms no lon- that stemming from crime). This chapter does not
ger achieve reductions in violence (Hartman, Morse, discuss other threats, but it recognizes that they
and Kitt 2014). can lead to conflict and even violence. In this chap-
The uneven distribution of power among parties ter, violence is defined as the use of physical force
intended to kill, harm, or destroy.
to a dispute stands in the way of reaching and enforc-
2. Peace, a concept much broader than security, is not
ing mutually satisfactory bargains. The stronger
addressed in this chapter.
disputants have few incentives to make concessions 3. This chapter uses a single frameworka unifying
and relinquish power and resources, and they have model of violenceto address the relationships
many incentives to renege on agreements over time, among governance, security, and development, and
as the rich literature on bargaining power suggests.17 it applies the same framework to all types and actors
Solving disputes and enforcing contracts through the of violence. The many forms of violence, which often
threat or use of force then become the more rational overlap, include violence from civil war, repression,
strategy for a powerful actor because the benefits of rebellion, coups, interstate conflicts, and genocide;
its use outweigh its costs, such as the risk of sanc- violence from gang activity, terrorism, piracy, and
organized crime; communal violence; urban vio-
tions (Schelling 1960; Walter 2015). The existence of
lence, riots, and civil strife; and interpersonal and
norms that exclude certain groups such as women
gender-based violence. A particular characteristic of
and minorities from the bargaining arena where
modern violence is that the lines between forms of
disputes are settled reinforces power asymmetries violence are becoming increasingly blurred (World
and perpetuates inequitable and insecure outcomes Bank 2010, 2011; Geneva Declaration Secretariat
(Platteau 2000). 2015). Similarly, violence has many agents or actors.
Governments, political militias, rebels, criminal
gangs, communal militias, rioters, radicalized indi-
Conclusion viduals and groups, and external armed forces can
As noted in chapter 1, security is a precondition for all be agents of violence. Sometimes, it can be dif-
development. However, using governance to solve ficult to tell them apart; indeed, at times different
actors of violence operate side by side. Finally, vio-
the first-order problem of violence requires reaching
lence mutates from one form to another over time,
and sustaining stable elite bargains, and it inevitably
and so do the identities and affiliations of its perpe-
involves compromises, concessions, and trade-offs trators, making the typologies of actors and forms of
between development outcomes. The rent redistri- violence less useful for the purposes of this Report.
bution that accompanies the bargains necessary to 4. As the British anthropologist E. E. Evans-Pritchard
maintain security can constrain development (North observed in 1940 about the Nuer, an ethnic group
and others 2013; Acemoglu and others 2014). In spe- in todays South Sudan, The very readiness of the
cific cases, power-sharing arrangements between Nuer to employ violence provides a reason, then,
elites have helped avoid violent conflict, but they have that violence so rarely takes place (quoted in Bates
also shackled the economy (Lindemann 2011). Simi- 2001, 45).
5. Max Weber, in his 1965 essay Politics as a Vocation,
larly, elite bargains that enshrine existing inequalities
originally theorized that the monopoly over violence
can ensure security in the short term, but they are not
was a single agreement among powerful groups
sustainable in the long term. How governance can over the use of violence. The authors are grateful to
resolve these trade-offs among growth, equity, and John Wallis for making this important point.
security constitutes a new frontier on the develop- 6. As Tilly (1978, 62) notes, Great shifts in the arrange-
ment research agenda. ment of power have ordinarily producedand have
often depended onexceptional moments of collec-
tive violence.
Notes 7. Bellows and Miguel (2006); Blattman (2009);
1. This chapter is about the security of people, as Gilligan, Pasquale, and Samii (2011); Voors and others
opposed to national security or the security of terri- (2012); Blair (2015); Hartman and Morse (2015).
tories. Because of the particular threat it discusses 8. Caldern, Gfaro, and Ibez (2011); Justino and oth-
violencethe definition of security used here is ers (2012); Buvinic and others (2013); Garca-Ponce
narrower than human security (where threats are (2015); Akbulut-Yuksel, Khamis, and Yuksel (2016).
multiple, ranging from, in addition to violence, loss 9. The World Development Report 2011: Conflict, Security,
of income to food shortages, infectious diseases, and and Development identified a very broad range of
environmental threats) and yet broader than citizen factors associated with violent conflict (World Bank
security (where the threat is violence, but mainly 2011). It referred to them as internal and external

Governance for security | 123


stresses, whether economic, security-related, or Ahmad, Aisha. 2015. The Security Bazaar: Business
political, adding that they can combine and pre- Interests and Islamist Power in Civil War Somalia.
cipitate actual violence. This chapter calls a small International Security 39 (3): 89117.
subset of these factors drivers and shows instead Akbulut-Yuksel, Mevlude, Melanie Khamis, and Mutlu
that they cause all conflicts, but need not result in Yuksel. 2016. For Better or for Worse: The Long-Term
violence. It isolates governance as the precipitating Effects of Postwar Reconstruction on Family Forma-
element that determines whether and when con- tion. Applied Economics 8 (29): 277184.
flicts caused by these drivers turn violent. Alesina, Alberto, and Eliana La Ferrara. 2002a. Partic-
10. Engerman and Sokoloff (2002); Boix (2003); ipation in Heterogeneous Communities. Quarterly
Acemoglu and Robinson (2006); North, Wallis, and Journal of Economics 115 (3): 84758.
Weingast (2009). . 2002b. Who Trusts Others? Journal of Public
11. Some institutions of governance are intended to Economics 85 (2): 20734.
produce and sustain violence, such as concentration Arjona, Ana, Nelson Kasfir, and Zachariah Mampilly.
camps, slavery, or apartheid, but they are not covered 2015. Rebel Governance in Civil War. Cambridge, U.K.:
in this chapter. Cambridge University Press.
12. The authors are indebted to Laura Chioda for Arriola, Leonard. 2009. Patronage and Political Stability
her clarification of the issues addressed in this in Africa. Comparative Political Studies 42 (10): 133962.
paragraph. Bardhan, Pranab. 1993. Economics of Development and
13. Lijphart (2004); Norris (2008); Gates and Strm the Development of Economics. Journal of Economic
(2013). Perspectives 7 (2): 12942.
14. This chapter finds that the traditional distinction in . 2005. Scarcity, Conflicts, and Cooperation: Essays in
the literature between conflicts motivated by greed the Political and Institutional Economics of Development.
and conflicts motivated by grievance cuts across Cambridge, MA: MIT Press.
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distinction useful in concept or in practice. Economy of Development. New York: Norton.
15. Some caveats are necessary. In the case of Afghani- . 2008a. State Failure. Annual Review of Political
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limited in areas with initially low levels of violence. . 2008b. When Things Fall Apart: State Failure in
A related study of insurgency in the Russian Federa- Late-Century Africa. Cambridge, U.K.: Cambridge Uni-
tions North Caucasus also found that in areas where versity Press.
insurgents were intrinsically motivated by the over- Bates, Robert H., Avner Greif, and Smita Singh. 2002.
throw of the government or were receiving external Organizing Violence. Journal of Conflict Resolution 46
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Governance for security | 129


SPOTLIGHT 4

Wartime governance

In recent years, several concepts have emerged to forms of political control. There are abundant exam-
describe the governance arrangements that have ples of such actors: the Revolutionary Armed Forces
arisen in areas where the imprint of the state is weak of Colombia (FARC), the Liberation Tigers of Tamil
or inexistent. What these concepts of hybrid gover- Eelam (LTTE) in Sri Lanka, the Taliban in Afghanistan,
nance, governance without government, twilight the National Union for the Total Independence of
institutions, practical norms, and negotiated state- Angola (UNITA), Al-Shabaab in Somalia, and, more
hood have in common with each other and with the recently, the Islamic State of Iraq and the Levant
framework adopted in this Report is their theorization (DAESH) in the Syrian Arab Republic and Iraq. These
of governance as the outcome of complex bargains actors resort frequently to the use or threat of violence
between different actors and groups, in this case for to maintain their authority through raiding, victimiz-
the purpose of filling gaps in state capacity.1 ing, and plundering contested territories. Yet, not all
Underpinning these concepts is a growing litera armed groups behave in solely destructive ways, nor
ture and empirical evidence with far-reaching impli- do the more violent groups exercise violence at all
cations for development: Instead of focusing on times. In many of these cases, insurgent groups have
fixing failed states, development practitioners and taken on some (if not all) of the functions of the state
academics are asking new questions about whether in terms of providing local security and formal and
more appropriate forms of order can be constructed informal dispute resolution mechanisms, building
by . . . focusing on function rather than form in a infrastructure, setting up systems of administration,
context in which suboptimal hybrid arrangements are mediating access to and in some cases providing
better than the total collapse of services (Meagher, public goods, imposing revenue-extracting systems,
De Herdt, and Titeca 2014, 1). Wartime governance regulating marketsin brief, governing.2
is a specific application of these governance arrange- To govern, armed actors establish wartime insti-
ments to territories where the states monopoly over tutions, defined as the rules of the game that result
the use of violence has collapsed or is being contested, from the interaction between civilians and armed
and where armed groups, traditional authorities, factions. Wartime institutions have three important
and other informal local actors have taken over and dimensions: (1) they constrain absolute power by
become the de facto authority, sometimes undertak- armed factions; (2) they establish boundaries to civil-
ing functions normally performed by the state. ian behavior; and (3) they are negotiated, depending
Although these territories are typically portrayed on shifts in power between warring factions in given
as anarchic, disordered, and ungoverned, observa- localities (Stojetz and Justino 2015). These wartime
tions from the field show that this is not the case. institutions determine how different armed factions
Different actors adopt a myriad of strategies in the govern territories and populations in the absence of a
areas they control, some resulting in fairly stable unitary national government.
It is the ability and willingness to govern that
WDR 2017 team, based on Justino (2016). distinguish state-like armed groups from bandits

130 | World Development Report 2017


or other extractive organizations. For example, in the a way that overlooks the micro-foundations necessary
Democratic Republic of Congo, the Rally for Congo- for sustainable peace. The resulting inattention to
lese Democracy-Movement for Liberation (RCD-ML) local conflicts leads to unsustainable peacebuilding
developed into an amalgam of militiamen and local in the short term and potential war resumption in the
businessmen who provide minimal services, levy long term (Autesserre 2010, 3940).
taxes, and seek to access global markets, while still Of course, not all local political dynamics are
relying on coercion. The Union of Patriotic Congo- always purely local events; they often depend on how
lese (UPC), on the other hand, remains a coercive bargains, relations, and negotiations among factions
military junta (Raeymaekers 2013). Such divergence unfold in the wider political arena (Balcells and Jus-
in wartime governance across time and space is in tino 2014). Yet, a local perspective on wartime insti-
turn shaped by several factors. Among them are the tutions and wartime governance is still important.
strength and nature of preexisting systems; how civil- State-building processes in conflict-affected coun-
ians accept and comply with different local forms of tries are influenced by multiple actors operating at
authority; the levels of competition among political different levels of governance. This influence can be
actors, including the state, for a certain territory; the exerted through formal and informal structures and
time horizons of different factions and how long an networks, and it is not always driven solely by the
armed group expects to stay in a certain area; and the interests of national-level elites. Local actors are also
sources of external financing available to the group.3 influenced by geopolitical and external factors, rang-
Wartime governance arrangements may result in ing from foreign donor interventions to international
relative security outcomes nested within violent con- and regional military forces, peacekeeping missions,
flict contexts when this security benefits the strategic private commercial and security organizations, pri-
objectives of particular political groups. These groups vate sector and foreign investment in resources and
need at the very least to extract revenue to fund land, international and local media, and international
fighting and territorial expansion. Because revenue drug and arms control systems, among others.
extraction is likely to be higher in situations in which Understanding in more detail the role of these
one group exercises the monopoly of violence, some groups in processes of state building is important
armed actors may choose to levy taxes in exchange because the activities and behavior of these groups
for the provision of public goods and security. This notably, how they govern and interact with civil-
choice may in turn result in the emergence of secu- iansshape how institutions are formed, reinforced,
rity as postulated by Olson (1993) and Tilly (1992). The and change in the postconflict period. In particular,
wartime systems of governance just described may the exclusion of elements of these groups from state-
also result in the emergence of security in conflict building processes in the aftermath of violent conflicts
contexts when a given political actor is accepted (or may result in further armed conflict, or may disturb
tolerated) and recognized by local populations. Nota- political order for a long time, leading to the situations
bly, wartime forms of governance may offer a sense of no peace, no war experienced by many countries
of legitimacy and certainty, which may reflect civilian with a history of conflict (Richards 2005).
perceptions about the authorities who govern them
and the nature of their authority (Bates 2008).
Recent research on violent conflict has found com- Notes
pelling evidence that local (and not just state-level) 1. Migdal and Schlichte (2005); Lund (2006); Olivier de
institutional structures influence political processes Sardan (2008); Raeymaekers, Menkhaus, and Vlassen-
during and after conflicts (Kalyvas 2006; Blattman root (2008); Hagmann and Pclard (2010); Meagher,
and Miguel 2010). A related body of literature has long De Herdt, and Titeca (2014).
questioned the centrality of the state in local systems 2. Weinstein (2007); Mampilly (2011); Arjona, Kasfir, and
of governance in areas of uneven or absent state pres- Mampilly (2015).
encethe so-called ungoverned spaces (Scott 1999; 3. Snyder and Bhavnani (2005); Kalyvas (2006); Wein
Batley 2011). This local perspective is an important stein (2007); Arjona (2014); Sanchez de la Sierra (2014).
supplement to national-level perspectives on state
building because, as argued in a landmark study on the
Democratic Republic of Congo, The dominant inter-
References
national peacebuilding culture shapes the interveners Arjona, Ana M. 2014. Wartime Institutions: A Research
understanding of peace, violence, and intervention in Agenda. Journal of Conflict Resolution 58 (8): 136089.

Wartime governance | 131


Arjona, Ana M., Nelson Kasfir, and Zachariah Mampilly. Crises of State Domination, edited by Klaus Schlichte,
2015. Rebel Governance in Civil War. New York: Cam- 140. Burlington, VT: Ashgate.
bridge University Press. Olivier de Sardan, Jean-Pierre. 2008. Researching the
Autesserre, Sverine. 2010. The Trouble with the Congo: Practical Norms of Real Governance in Africa.
Local Violence and the Failure of International Peacebuild- Discussion Paper 5, Africa, Power, and Politics Pro-
ing. Cambridge Studies in International Relations gramme, Overseas Development Institute, London.
Series. New York: Cambridge University Press. Olson, Mancur. 1993. Dictatorship, Democracy and
Balcells, Laia, and Patricia Justino. 2014. Bridging Micro Development. American Political Science Review 87 (3):
and Macro Approaches on Civil Wars and Political 56776.
Violence: Issues, Challenges and the Way Forward. Raeymaekers, Timothy. 2013. Robin Hood, the God-
Journal of Conflict Resolution 58(8):134359. father, and Judge Dredd: Explaining De Facto Sov-
Bates, Robert H. 2008. When Things Fell Apart: State Failure ereignty in Sub-Sahara Africa. Paper presented at
in Late-Century Africa. Cambridge, U.K.: Cambridge the Unravelling Public Authority: Paths of Hybrid
University Press. Governance in Africa workshop, London School of
Batley, Richard. 2011. Structures and Strategies in Economics, December 67.
Relationships between Non-government Service Raeymaekers, Timothy, Ken Menkhaus, and Koen
Providers and Government. Public Administration and Vlassenroot. 2008. State and Non-state Regulation
Development 31 (4): 30619. in African Protracted Crises: Governance without
Blattman, Christopher, and Edward Miguel. 2010. Civil Government? Afrika Focus 21 (2): 721.
War. Journal of Economic Literature 48 (1): 357. Richards, Paul, ed. 2005. No Peace, No War: An Anthropology
Hagmann, Tobias, and Didier Pclard. 2010. Negotiating of Contemporary Armed Conflicts. Oxford, U.K.: James
Statehood: Dynamics of Power and Domination in Currey.
Post-colonial Africa. Development and Change 41 (4): Sanchez de la Sierra, Raul. 2014. Defining the State:
53962. Armed Groups Monopolies of Violence and Emer-
Justino, Patricia. 2016. Implications of Wartime Institu- gence of State-Like Behavior in Eastern Congo.
tions for State-Building in Post-conflict Countries. Unpublished working paper, Harvard University,
Background paper, WDR 2017, World Bank, Washing- Cambridge, MA.
ton, DC. Scott, James C. 1999. Seeing Like a State. New Haven, CT:
Kalyvas, Stathis N. 2006. The Logic of Violence in Civil Yale University Press.
Wars. New York: Cambridge University Press. Snyder, Richard, and Ravi Bhavnani. 2005. Diamonds,
Lund, Christian. 2006. Twilight Institutions: Public Blood, and Taxes: A Revenue-Centered Framework
Authority and Local Politics in Africa. Development for Explaining Political Order. Journal of Conflict
and Change 37 (4): 685705. Resolution 49 (4): 56397.
Mampilly, Zachariah. 2011. Rebel Rulers: Insurgent Gover- Stojetz, Wolfgang, and Patricia Justino. 2015. Long-Run
nance and Civilian Life during War. Ithaca, NY: Cornell Effects of Wartime Institutions in Post-war Angola.
University Press. Unpublished working paper, University of California,
Meagher, Kate, Tom De Herdt, and Kristof Titeca. 2014. Berkeley.
Unravelling Public Authority: Paths of Hybrid Gov- Tilly, Charles. 1992. Coercion, Capital, and European States:
ernance in Africa. Research Brief 10 (March), IS Acad- AD 9901992. Studies in Social Discontinuity Series.
emy on Human Security in Fragile States, Wagen Oxford, U.K.: Blackwell.
ingen University, Wageningen, the Netherlands. Weinstein, Jeremy M. 2007. Inside Rebellion: The Politics of
Migdal, Joel S., and Klaus Schlichte. 2005. Re-thinking Insurgent Violence. Cambridge Studies in Comparative
the State. In The Dynamics of States: The Formation and Politics Series. New York: Cambridge University Press.

132 | World Development Report 2017


SPOTLIGHT 5

Crime

How much reduction in crime is possible? A look it appears that trends in the levels of interpersonal
at past trends indicates the degree to which crime violence and organized crime stem only partly from
can be reduced globally over the next 15 years. The factors that governments can directly influence. For
broad crime drop in the United States between 1991 example, analyses of time series going back to the
and 2014 amounted to an annual decline of about 2.9 1970s suggest that factors such as changing demo-
percent a year, which included a range of manifes- graphics, unemployment, technological change, drug
tations of interpersonal violence such as homicide, epidemics, and changes in norms and attitudes toward
child maltreatment, assault, and violence in schools. violence have affected trends in crime levels generally
Meanwhile, Singapore has achieved its very low and homicides specifically (Baumer and Wolff 2014).
crime ratesincluding the lowest homicide, robbery, On the other hand, changes in income inequality over
and domestic violence rates known in the world the last 100 years seem to be entirely unrelated to
through a sustained decline of about 5 percent a year changes in homicide rates, despite income inequality
over the last 25 years. Italy has experienced an annual being a robust and consistent cross-sectional correlate
decline in homicides of about 6 percent since the early of homicide (Brush 2007).
1990s. In South Africa, homicides have fallen about 4 However, there is increasing evidence of a pos-
percent a year since the mid-1990s, or just about the itive correlation between homicide and organized
same yearly rate of decline as in Colombia since the crime levels, on the one hand, and corruption levels,
early 1990s. Indeed, many countries have seen annual on the other (Lappi-Seppl and Lehti 2014; Pinotti
reductions in serious crime and violence of 25 per- 2015). This correlation can be interpreted as empirical
cent over two decades or more. An average annual evidence of a role for governance in the reduction of
decline of 3 percent may therefore be possible at the interpersonal violence, and specifically for the theory
global level, leading to a reduction of about 40 percent that the failure of governments to sanction and deter
by the end of 2030 (Eisner and Nivette 2012). organized criminal groups is one important factor
contributing to high levels of homicides.

Why do interpersonal
violence and crime decline? Three sets of factors explain
Why interpersonal violence and organized crime
homicide drops in the past
are declining is still not possible to explain with any In addition to theories linking the decline in crime
real accuracy. However, it is currently possible to rates to demographics and access to economic oppor-
disentangle the mix of factors that influence both the tunities (see, for example, Donohue and Levitt 2001
cross-sectional variation in crime rates among coun- and de Mello and Schneider 2010), comparisons of
tries and the trends of crime levels over time. First, major sustained declines in homicides by country
and historical period across the globe suggest that
WDR 2017 team, based on inputs from Manuel Eisner. declines in murder rates occurred when three factors

Crime | 133
came together (Eisner 2013, 2014). The first factor is Figure S5.1Homicide rates across
changes in relative power: homicide rates declined Europe have declined dramatically over
where states gained control over private organized the last 800 years
providers of protection and enhanced their legiti-
macy through effective institutions that produced 80

Homicides per 100,000 residents


benefits for broader segments of society (see chapter
4 and Rotberg 2004).
60
The second factor is changes in technological
and human capacity: declines in homicides appear
to be regularly linked to the spread of new social 40

control technologies such as the monitoring and


management of daily behaviors; increased control 20
over disorderly conduct and substance use, especially
alcohol; and systems aimed at early identification
0
and treatment of offenders and victims (Eisner 2014). 1200 1400 1600 1800 2000
For example, the international fall in crime over the Year
last 20 years is best seen as a result of investments Belgium Netherlands
in security technologies that have affected almost Finland and Sweden Spain
every aspect of daily routines (Farrell and others 2011). France Switzerland
These technologies include electronic immobilizers Germany United Kingdom
Italy
to prevent car theft, burglar alarms, CCTV cameras
in hot spots of disruptive behavior, a less cash-based Sources: WDR 2017 team, based on Eisner 2003 with data from Eisner 2014.

economy, more private security personnel, and mobile


telephones to call help and record crimes more easily. expansion in state capacity, brought about changes in
Many of these security and surveillance technologies societal attitudes toward homicide that over time led
are designed to reduce property crime, but they may to a drastic reduction in homicide levels (figure S5.1)
have had an effect on violent crime as well. see Eisner (2003).
The third factor is changes in norms of behavior: Before the expansion of the capacity of courts and
historical declines in homicides appear to have been bureaucracies that accompanied the rise of the states
catalyzed by a diminishing acceptability of violence monopoly over violence in 17th-century Europe, gov-
and intentional harm to others. Historically, such ernment attitudes toward homicides were lenient if
change in social norms manifests itself in a growing the motives were passion or the defense of honor, and
repugnance for public executions and torture, disgust society perceived private retaliation as an acceptable
with blood revenge and duels, or increasing sensiti- way of restoring order. Between the 16th and 17th
zation to child maltreatment and neglect. Political or centuries, dispute settlement moved out of the private
religious leaders, philanthropists, intellectuals, and sphere and became the prerogative of judges and gov-
teachers are among those ushering in such changes ernment officials, and perpetrators of homicide came
in societal preferences (Pinker 2011). to be seen as criminals. Campaigns of social aware-
ness; societal acceptance of increased bureaucratic
control of everyday life; improved trust in and the
The states monopoly over legitimacy of the state as an overarching institution;
the means of violence is the the evolution of the notion of honor, which lost its cul-
overarching factor tural significance; and the liberation of the individual
from his or her obligations to the groupin short, a
This report argues that the changes in capacity and in change in normseventually led to this historical
norms of behavior that affect development outcomes, decline in homicide rates (Tilly 1992; Rousseaux 1999).
including reductions in levels of violence and crime
levels, are ultimately derived from changes in the
relative power among actors. The sharp declines in References
homicide rates that occurred in more than 10 Western Baumer, Eric P., and Kevin T. Wolff. 2014. The Breadth
European countries after 1650 illustrate how shifts and Causes of Contemporary Cross-National Homi
in the balance of power toward the state and away cide Trends. Crime and Justice: A Review of Research 43
from private providers of security, and the resulting (1): 23187.

134 | World Development Report 2017


Brush, Jesse. 2007. Does Income Inequality Lead to In The Future of Criminology, edited by Rolf Loeber
More Crime? A Comparison of Cross-Sectional and and Brandon C. Welsh, 21928. New York: Oxford
Time-Series Analyses of United States Counties. Eco- University Press.
nomics Letters 96 (2): 26468. Farrell, Graham, Nick Tilley, Andromachi Tseloni, and
de Mello, J. M. P., and A. Schneider. 2010. Assessing So Jen Mailley. 2011. The Crime Drop and the Security
Paulos Large Drop in Homicides: The Role of Demog- Hypothesis. Journal of Research in Crime and Delin-
raphy and Policy Interventions. In The Economics quency 48 (2): 14775.
of Crime: Lessons for and from Latin America, edited Lappi-Seppl, Tapio, and Martti Lehti. 2014. Cross-
by Rafael Di Tella, Sebastian Edwards, and Ernesto Comparative Perspectives on Global Homicide
Schargrodsky, 20735. Chicago: University of Chi- Trends. Crime and Justice: A Review of Research 43 (1):
cago Press. 135230.
Donohue, J. J., and S. D. Levitt. 2001. The Impact of Legal- Pinker, Steven. 2011. The Better Angels of Our Nature: Why
ized Abortion on Crime. Quarterly Journal of Economics Violence Has Declined. New York: Penguin.
66 (2): 379420. Pinotti, Paolo. 2015. The Causes and Consequences of
Eisner, Manuel. 2003. Long-Term Historical Trends in Organized Crime: Preliminary Evidence across Coun-
Violent Crime. Crime and Justice: A Review of Research tries. Economic Journal 125 (586): F158F174.
30: 83142. Rotberg, Robert I., ed. 2004. When States Fail: Causes
. 2013. What Causes Large-Scale Variation in and Consequences. Princeton, NJ: Princeton University
Homicide Rates? In Aggression in Humans and Other Press.
Primates: Biology, Psychology, Sociology, edited by Rousseaux, Xavier. 1999. From Case to Crime: Homicide
Hans-Henning Kortm and Jrgen Heinze, 13762. Regulation in Medieval and Modern Europe. In Die
Berlin: Walter de Gruyter. Entstehung des ffentlichen Strafrechts: Bestandsaufnahme
. 2014. From Swords to Words: Does Macro-Level eines europischen Forschungsproblems, edited by Diet-
Change in Self-Control Predict Long-Term Variation mar Willoweit, 14375. Cologne: Bhlau Verlag.
in Levels of Homicide? Crime and Justice: A Review of Tilly, Charles. 1992. Coercion, Capital, and European States:
Research 43 (1): 65134. AD 9901992. Studies in Social Discontinuity Series.
Eisner, Manuel, and Amy Nivette. 2012. How to Reduce Oxford, U.K.: Blackwell.
the Global Homicide Rate to 2 per 100,000 by 2060.

Crime | 135
CHAPTER 5

Governance
for growth

If a firm in Brazil or Mexico is asked how long it has policy commitments, harming investors. In some
to wait to receive approval for new construction, the cases, existing norms such as tolerance of corruption
answer could range from as little as 1 day to more than in public agencies can reinforce such policy failures.
100 days (figure 5.1). Such remarkable variation in the That said, the influence of interest groups, while
wait time experienced by firms within the same coun- ubiquitous, does not always render growth policies
try is true of almost any basic regulatory procedure ineffective; sometimes, it can even improve them.
in most low- and middle-income countries. Examples How this process plays out depends on the character-
of such procedures are receiving a license to set up a istics of the government agencies that enact the poli-
new firm or a permit to import an item.1 cies in question, as well as the incentives of influential
One reason for the variance in regulatory imple- groups, such as industry associations, that interact
mentation could be that some firms have more influ- with those agencies. Understanding what drives this
ence over the policy arena than others. For example, difference can help identify ways to improve policy
recent firm-level studies suggest that, to the detriment effectiveness.
of long-term economic growth, firms with powerful One lesson that emerges from such understanding
political connections are unduly favored in the way is that designing second-best policies that can achieve
certain policies are designed or implemented.2 These at least the partial goals of security, growth, or equity
firms receive preferential access to state credit, land, may be more effective than designing ideal policies
and import licenses. The sectors in which they oper- that are at high risk of capture (such second-best pol-
ate are protected from competition from other firms icies are considered implementable). A second lesson A lesson is the
through high regulatory barriers to entry. This form is the value of avoiding policies that look good in the value of avoiding
of policy subversion has significant negative effects short term but could end up reinforcing the power of policies that look
on the economy. dominant groups that could block further reforms, good in the short
thereby hindering the effectiveness of policies in term but could end
the future. A third lesson is that undue influence up reinforcing the
How policy capture slows from dominant groups can be counterbalanced by power of dominant
groups that could
economic growth the appropriate design of incentives within public
block further
agencies, checks and balances between agencies, and
This chapter explains how and when powerful groups mechanisms that extend accountability to a broad reforms.
with narrow interests can have an undue influ- group of firms and individuals. Such reforms can
ence on policy (capture) and slow down economic expand the set of implementable policies.
growth, even in the context of high state capacity.3 This approach assumes that the interests of high-
Such dominant groups can include politically con- level policy makers are aligned in the direction of
nected firms and lobbies for industry, farmers, or reform. Whether that is the case depends on the evo-
consumers. This chapter also analyzes cases in which lution of the broader governance environment, a topic
shortsighted, opportunistic state actors renege on examined in part III of this Report.

Governance for growth | 137


Figure 5.1Length of time needed for firms to obtain a action are associated with persistent differences
construction permit varies widely in levels of economic development. For example, in
some regions of Peru an extensive system of forced
Russian
Federation mining labor (mita) was in effect from 1573 to
Peru 1812. Today, the average household consumption
Chile levels in those regions are about 25 percent lower
than in adjoining regions. One explanation is that
Brazil
in areas without mita, the landowning class that
Vietnam
emerged had an incentive to set up stable property
Romania rights institutions. Today, areas that did not have the
Paraguay mita system continue to have more secure property
Mexico rights and do a better job of providing public goods
(Dell 2010).
Guatemala
When change is viewed over the shorter time span
Argentina of decades rather than centuries, the relationship
India between broad, aggregate measures of governance
Turkey and economic growth is weaker (figure 5.3). Over the
last century, growth accelerations and slowdowns
Nigeria
that lasted as long as a decade do not seem to have
0 100 200 300 400 500 been correlated with major changes in governance,
Days to obtain a construction permit nor have sustained periods of high growth lasting as
long as three decades.6 It is possible for economies
25th75th percentile
to grow without big changes in the nature of gover-
Median
Outliers nance, but it is not clear how long such growth can
Minimum and maximum values excluding outliers be sustained.
What are the mechanisms behind the aggre-
Sources: WDR 2017 team, based on data from World Bank, Enterprise Surveys, circa 2006 to 2014.
gate relationship between governance and growth?
Because different dimensions of governance are
correlated across countries, it is not easy to delin-
How governance matters to eate their impacts on growth using a cross-country
growth: A microeconomic analysis alone. A more microeconomic analysis of
the mechanisms through which governance affects
perspective growth is therefore a vital complement to the macro-
There is a clear positive correlation between aggre- economic analysis of governance and growth (Pande
gate measures of governance and per capita income and Udry 2006).
across countries (figure 5.2). Because countries had
similar levels of per capita income in the distant past, Two sources of growth: Investment
current differences in their per capita income largely and efficiency
reflect differences in their long-term growth rates.4 On the surface, growth in per capita income has two
Thus governance and long-term growth are positively sources: investment and efficiency. On the one hand,
associated. investment is the process by which economies accu-
This correlation should be viewed with some mulate physical capital, skills, and knowledge. Effi-
caveats, however. It could reflect reverse causation ciency, on the other hand, determines how well this
from growth to governance, or some third factor (such labor and capital are put to use. In general, at least half
as accumulated knowledge and skills) that affects of the per capita income differences across countries
both governance and income growth. Bearing in mind is attributable to differences in countries efficiency
these caveats, many cross-country studies suggest levels (total factor productivity, or TFP). The rest is
that the nature of governanceas reflected in broad due to differences in investment (accumulation)see
institutional measures such as protection of prop- Caselli (2005, 2016). Both investment and efficiency
erty rights, rule of law, and absence of corruption thus matter to growth.
matters to long-term growth.5 Countries vary in the emphasis they place on
Even within countries, historical differences in various forms of investment and efficiency in their
institutions that affect property rights and collective growth models. Some growth models emphasize

138 | World Development Report 2017


Figure 5.2Per capita income and governance are correlated
a. Bur