Why those promoting growth need to take politics seriously, and vice versa

Nicholas Waddell, a DFID Governance Adviser working on ‘Governance for Economic Development’ (G4ED) Nicholas Waddellexplores the links between governance and economic growth. 

Should I play it safe and join a governance team or risk being a lone voice in a sea of economists and private sector staff? This was my dilemma as a DFID Governance Adviser returning to the UK after a stint in East Africa. I gambled and joined the growth specialists in DFID’s newly created Economic Development arm.  A year in, I now think differently about the relationship between growth and governance.

Eradicating poverty will not be possible without high and sustained growth that generates productive jobs and brings benefits across society. Historically, this has included boosting productivity within existing sectors as well as rebalancing economies towards more productive sectors (e.g. from agriculture to manufacturing). Such structural change or economic transformation has lifted millions from poverty.

corruption-or-patronageEconomic transformation can have a strong disruptive effect on political governance – giving rise, for example, to interest groups that push for accountable leaders and effective institutions. As countries get richer, more effective institutions also become more affordable. Over time, economic transformation can therefore advance core governance objectives.

But this is easier said than done. Economic development is an inherently political process that challenges vested interests. Often the surest ways for elites to hold onto power and profit aren’t in step with measures to spur investment, create jobs and foster growth. Shrewd power politics can be bad economics.

With this in mind, in my new role I’ve been part of a major exercise with DFID country offices to identify the best opportunities for inclusive economic growth. Unlike standard ‘growth diagnostics’, we have explicitly incorporated politics into our approach. The resulting country studies powerfully illustrate the close relationship between growth and governance challenges – in everything from extractives, to infrastructure or energy. Consider the following excerpts (with the countries anonymised):

  • The fundamental obstacles to promoting inclusive economic growth are primarily political in nature and not due to a lack of technical expertise or knowledge about what needs to be done.
  • Dependence on primary commodities provides scope for elites to enrich themselves without needing to implement reforms that improve the long-term productive capacity of the economy.
  • Patronage politics distorts the economy and diverts public investment away from more productive sectors. Inertia is politically safer than reform. There’s an acute lack of trust between government and the private sector.
  • Politically-connected economic elites have increasingly established monopolies e.g. in the fuel, transport, foodcorruption (1) and construction sectors forcing out or intimidating smaller players.

Implications for donors

Bringing power and politics into growth diagnostics didn’t just expose the extent of the challenges. It also identified tangible opportunities and helped avoid technically attractive measures that aren’t viable. This involved going into the nitty gritty of particular sectors and constraints to find openings that build on things as they are, rather than how donors might like them to be.

Not only can the integration of politics improve donors’ growth work; a better understanding of growth and economic transformation can improve governance work. Donors sometimes imply that growth will automatically follow if poor countries develop a set package of institutions (such as secure property rights, rule of law, anti-corruption measures, free media, democratic elections etc.). These are important concerns but it isn’t so simple. There’s a risk of focusing on ideal governance destinations rather than learning from recent history of how countries have developed (and considering how future paths may differ).  As Dani Rodrik argues:

Few, if any countries have grown rapidly because of across-the-board institutional reforms… Rapid growth is feasible in institutional environments that look quite distorted, and policy remedies can look quite unorthodox by the standards of the conventional rulebook… The bottom line is that successful growth promoting reforms are pragmatic and opportunistic.

Donors need to reflect this in how we work. In Nigeria, for example, I saw how DFID’s work on the oil and gas sector shunned technical reform blueprints in favour of locally-led initiatives. The programme brings together diverse players as and when they share incentives and appetite for reform – whether among government, the private sector or civil society. For example, the programme took a calculated approach to who it could work with in the Nigerian Government, avoiding the notorious state oil corporation and finding pockets of reformers elsewhere. This work has influenced major legislation; tackled illegal gas flaring; and helped recoup public funds worth many multiples of the programme’s total cost.

Time to get them better aligned?
Time to get them better aligned?

In Nepal, DFID has focused on the huge untapped hydropower potential. Combining a flexible and politically-savvy approach with rigorous technical input has helped to attract initial deals for over $2 billion of new foreign direct investment. Arm’s length DFID support helped the Investment Board of Nepal to pave the way for investment by influencing the politics surrounding the deals – not least to address wariness about forging closer energy ties with India. More work is needed to secure the poverty reduction benefits. But getting this far is progress and could help attract further investment.

As a governance adviser, I’m familiar with thinking about the state or civil society. I’m less accustomed to probing why firms hold back from making the kind of investment that could build local productive capabilities. How often do governance staff in-country talk to local firms, entrepreneurs or investors that have walked away?  This is as much about understanding the politics of informal ‘deals’ as about promoting formal rules. We also need a better understanding of how to spur economic development in severely fragile states – not least to avoid worsening conflict dynamics.

Governance work remains important in its own right. And many staple governance programmes (on public financial management, taxation etc.) contribute to economic development. But the governance agenda could focus more on economic transformation; on how it links to political change; and on the practical implications for governance work. This has little to do with ‘good governance’ prescriptions and everything to do with the context-specific political economy. Often this will be as much about using governance and political skills as spending money on governance-specific programmes.  It needs to be a two-way street though. As Lant Pritchett told DFID governance advisers, ‘economists are coming your way’. Let’s make sure that we meet in the middle.

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5 Responses to “Why those promoting growth need to take politics seriously, and vice versa”
  1. Maggie

    Hi Nicholas

    Thanks for a great post – I was wondering how this work was coming along at DFID.

    Your useful examples are mainly about the relationships between governance and economic transformation/ and moving towards more inclusive growth. But I was wondering if you had looked more specifically at conflict contexts. And whether/how the ‘politics’ shapes strategic decisions about the economy that will have lasting implications both for the chances of moving out of conflict (e.g. through impacting on nature of the political settlement), and potential development pathways beyond that, given DFID’s focus on conflict and fragile states?

    Best, Maggie

    • Nicholas

      Thanks Maggie. Great question. Yes, lots to say about the conflict and fragility dimensions to this. Drop me a line and I can elaborate. In terms of evidence (major challenge), there are a few recent DFID-funded things – e.g. on political settlements on the Development Leadership Programme site; on economic development and fragile states on the GSDRC site as well as on politics and growth more broadly at the Effectives States and Inclusive Development research centre. Best, Nicholas

  2. Maybe I am naive, maybe I just don’t possess the fancy jargon, but surely the link between economic development and governance can be simply summarised as (a) getting money to come into the country as investment, and (b) getting it to stay in the country and circulate around the economic system rather than being transferred straight back out again as untaxed profits or private swiss bank accounts.

    Investment decisions are based on projected return on investment against perceived risk. Risk can be reduced by the property rights, anti-corruption measures and strong judicial systems that Nicholas referred to, as well as having a stable democratic state with a strong civil society that is less prone to coups and revolutions. Incentives to enhance return on investment are inherently political and will be driven by what type of economic growth is wanted. I worry sometimes when i read what DfID’s vision for development is these days, but that is another post…

    Keeping the money in the system may be harder, but it also requires a government that is responsive to the needs of its people and is willing to take a long-term perspective. the more technocratic we become, the further we seem to move way from reality. But as I said before, maybe i am just naive.

  3. Rob Nash

    I like the observation that this work, in relation to economic transformation, has little to do with ‘good governance’ prescriptions and everything to do with context-specific political economy.
    As someone who was once a banker, then a private sector development advisor and recently a governance advisor, I must say find it strange that the world of Development still has to battle to see this otherwise than as a question of whether its ‘Economics’ (private sector) or ‘Governance’ (public sector and civil society). If we look at investment dynamics, the decision of a private equity firm looking at a frontier market is not going to be narrowly driven narrowly by economics any more than the decisions of a local politician or bureaucrat trying to improve services are going to be driven by governance theories.
    As with the question of why private investors are not building local productive capabilities, the answer is presumably because they have no, or insufficient, incentive to do so (carrot or stick). Which is indeed a context-specific question about the motives and resources and approaches of the investor, and the structure and dynamics of the context on which they are investing. I think the 2 examples given do help to show it is both theoretically sound and practically useful to overcome the overly prescriptive, linear approaches and inter-disciplinary barriers that have been built up.
    But given that the blog begins by proposing a traditional political economy analysis of economic growth leading to poverty reduction and social development, I would like to see a bit more caution or nuance alongside the call for governance advisors to engage more with businesses and investors. Even if we stick directly to Adam Smith, there must be significant risk in expanding this interaction if we fail to distinguish the fundamental task understanding how the context affects the decisions of the private sector, from the interesting but rather more fraught path of asking businesses individually or collectively what they want governments to do for them in general or to facilitate a particular deal.