Making Reform Incentives Work for Developing Countries
Overview:
Wealthy countries and international organizations (IOs) have adopted a wide range of strategies to spur, strengthen, and solidify reform efforts in developing countries. They have employed positive conditionality - e.g. through the Heavily Indebted Poor Countries Initiative, the Millennium Challenge Account, and the WTO accession process - to alter the incentives of developing country leaders and shore up the bargaining power of domestic reformers. They have utilized moral suasion tools, such as the World Bank's Doing Business Report , to increase the reputational costs of resisting reform. They have also imposed financial sanctions to deter backsliding and reform reversals.
Scholars and policymakers generally agree that these types of policy instruments can hasten the adoption and implementation of growth-accelerating reforms. However, there is little evidence about the conditions under which such tools are most and least effective. We intend to fill this gap in the literature by creating and analyzing a first-of-its-kind cross-national dataset on the effectiveness of specific financial incentives (e.g. trade and investment agreements, performance-based aid and debt relief contracts, membership in international organizations) and moral suasion tools (e.g. benchmarking exercises, watch lists, and exclusive clubs). After completing the empirical research phase of the project, we will conduct targeted outreach to the policy community in collaboration with the Center for Global Development.
Research Question:
The institutional architecture of global development assistance is undergoing a period of radical transformation. New actors and governance mechanisms have emerged, increasing competition within the aid market and up-ending conventional norms of development practice. China, Venezuela, Russia, Iran, and Brazil have emerged as major sources of development finance. Private donors, such as the Bill and Melinda Gates Foundation and the Mo Ibrahim Foundation, have pioneered new approaches and assumed increasingly prominent roles in the health, education, agriculture, and governance sectors. At the same time, traditional donors and international organizations (IOs) have embraced new ways of doing business. The UK's Department for International Development (DFID) has introduced sweeping changes in how it implements conditionality contracts, shifting from a policy-based to an outcome-based approach. The European Commission has created a battery of new mechanisms to incentivize governance reforms, including the Special Incentive Arrangement for Sustainable Development and Good Governance (GSP+), the European Neighborhood Policy (ENP), and MDG contracts. In the United States, experimentation with new aid delivery mechanisms has taken the form of a transition from "pushing reforms" to "pull mechanisms" that reward countries for meeting certain eligibility conditions.
Donors and IOs have also begun to make more extensive use of moral suasion tools to advance their development objectives. The World Bank has created a flagship Doing Business (DB) report, which provides guidance on which countries are most successfully implementing business regulatory reforms and shines a spotlight on the fastest-reforming governments ever year through its "Reformers' Club." The US State Department publishes an annual Trafficking in Persons (TIP) report that benchmarks the degree to which governments around the world comply with the minimum anti-human trafficking standards. Active participation in the Extractive Industries Transparency Initiative (EITI) has similarly become a global litmus test for governments that substantially rely on revenue from the oil, gas and mining payments; resource-rich governments that choose not to engage in EITI risk becoming a pariah state.
The existence of such a complex global patchwork quilt of incentives, sanctions, and socialization tools raises several interesting research questions: Which external influences possess the highest levels of perceived salience among decision-makers in developing countries? Which of these financial incentives and socialization tools exert the greatest policy influence? How can we account for the variation in levels of influence that these different reform promotion tools enjoy in different country contexts?
Theory and Hypotheses:
Existing theories of policy and institutional reform have generated a range of testable hypotheses regarding the conditions under which developing countries will respond to external pressures from wealthy countries and IOs. One group of scholars argues that the likelihood of reform hinges on the ability of external actors to find and work with developing country officials who share a common set of causal and principled beliefs about development policy. Another camp emphasizes that the prospects for reform are strongest when international actors successfully align external incentives with domestic interests. A final group draws attention to the use of coercive power, predicting that the probability of reform will correlate positively with a developing country's level of economic and political dependence on wealthy countries.
The extant literature draws attention to the ascriptive and behavioral characteristics of states and IOs, and this project will provide an opportunity to test some core predictions from the literature in a large-N context. However, we will also develop and empirically evaluate a new theoretical approach that focuses on the explanatory power of social networks. States, IOs, and other global development actors are embedded in social networks. Some of these relational structures are of a material nature, while others are ideational. Social networks empower and restrain governments. On a more fundamental level, they influence the way states define their identities, values, and objectives. We will therefore explore the different ways in which social networks may facilitate or undermine reform efforts in developing countries.
Data Collection:
Unfortunately, because of the dearth of reliable cross-country data on the effectiveness of reform promotion tools, the extant literature has largely failed to produce generalizable insights that can be translated into useful policy guidance. We intend to bridge this gap between what the research community supplies and what the policy community demands by creating a first-of-its-kind cross-national dataset on the effectiveness of specific financial incentives (e.g. trade and investment agreements, performance-based aid and debt relief contracts, membership in international organizations) and moral suasion tools (e.g. benchmarking exercises, watch lists, and exclusive clubs). The dataset will be based on surveys of five population groups in 130 developing countries and semi-autonomous regions:
- Senior developing country officials (i.e. ministers, deputy ministers, chiefs of staff) with reform design and implementation responsibilities;
- Senior U.S. government (USG) officials responsible for engaging the authorities in developing countries on reform issues;
- Representatives of non-USG embassies and bilateral and multilateral aid agencies who maintain a reform dialogue with the authorities in developing countries;
- Representatives of local civil society organizations and business associations who are knowledgeable about the policy-making process; and
- Independent country analysts who monitor reform processes and outcomes.
The total estimated size of the survey population is 30,000 individuals. We will use the data from these surveys to conduct an econometric analysis of the conditions under which specific policy instruments are most and least effective. The surveys will also shed light on what motivates policymakers to initiate different types of reforms and which donors and international organizations are perceived as best-equipped to assist the authorities with reform implementation.
While large-N statistical analysis lies at the heart of this research project, it will be complemented by intensive within-case analyses. The cases we select will help determine whether the hypothesized causal mechanisms are operational. Following Eckstein (1975: 118), we will attempt to select "crucial cases," or cases which "closely fit a theory if one is to have confidence in the theory's validity, or conversely, must not fit equally well any rule contrary to that proposed." By combining statistical and case study methods, we hope to make more robust claims about specific causal processes.
Methodological Contributions:
This project represents a major methodological improvement over previous studies. Unlike existing research that proxies the effectiveness of reform promotion tools with indirect measures, we will measure our dependent variable by surveying the actual individuals whose decisions are being targeted by external pressures: developing country officials who are responsible for reform design and implementation. This has never been achieved on a national scale, let alone for the entire universe of developing countries. We will also use a common questionnaire to survey five population groups with extensive knowledge of local reform processes and outcomes in 130 countries, which will enable the use of sophisticated statistical models that can generate reliable composite measures of policy instrument effectiveness (by assigning lower weights to noisy data sources and higher weights to less noisy data sources). Additionally, we will measure the comparative effectiveness of policy instruments designed to promote reform. Such measures do not currently exist and will provide valuable evidence for policy-makers seeking to sharpen and widen the reach of their reform incentives. Finally, our survey data will provide a rich source of qualitative information that can be used to study the specific causal processes through which reforms are designed, launched, and sustained.
Policy Outreach:
After completing the empirical research phase of our project and publishing our results in leading academic journals and university presses, we will conduct targeted outreach to the policy community. We will widely distribute a summary of our survey results policymakers, practitioners, and opinion leaders in developed and developing countries. We will also produce issue briefs, podcasts, and blog postings, while conducting targeted outreach through private consultations with leading policymakers in Washington DC, London, and Brussels. Finally, in collaboration with the Center for Global Development, we will host a conference with leading policy-makers from developed and developing countries to share our findings and discuss future avenues for the promotion of growth-enhancing reforms. All strategic outreach activities will focus on encouraging international organizations and aid agencies to rethink the way they design and deploy reform promotion tools.