For structural transformation, consider political economy

Why do some of the best ideas on structural transformation — shifting economies from low- to high-productivity sectors — often fail or fall short of their goals?

Because many researchers tend to ignore political economy considerations in their policy recommendations, according to Ngozi Okonjo-Iweala, Nigeria’s minister of finance and coordinating minister for economy.

To address this shortcoming, analysts should think through the process of implementing policy recommendations and evaluating winners or losers to determine whether or not they are plausible, and what can be done to mitigate challenges, the Nigerian minister and former World Bank managing director told an audience composed mainly of researchers at the Global Development Network’s annual conference in Accra, Ghana.

During her keynote speech on Friday, Okonjo-Iweala gave three Nigerian examples of how the political economy of a situation can impact, undermine or enhance structural reform policies and programs.

The first is the privatization of the power holding company. Poor governance and corruption had left power in a bad state in Nigeria, with half of the population lacking access to electricity and 90 percent of the industrial sector generating its own power, the latter thus contributing a very low 2 percent to the country’s GDP annually.

In 2005, Nigeria passed the Power Sector Reform Act, unbundling the state power company into multiple successor companies: 11 power distributors, fiver power generators and one transmission company. All but the transmission company would be privatized, although political challenges delayed completion until 2013.

“The vested interests in the labor movement made privatization difficult, almost impossible to carry out for years,” Okonjo-Iweala said. After a protracted negotiation period, the changes were implemented, but they may have been achieved more quickly or efficiently if the various stakeholders had been considered and addressed in advance, she pointed out.

The second case study was the removal of oil subsidies. In 2012, the Nigerian government decided to eliminate a longstanding subsidy on petroleum and kerosene, which had ballooned and amounted to 43 percent of the total federal budget. The plan was to eliminate the subsidy and use the savings to create social safety net programs for the poor.

A consultation process was started, but during the process President Goodluck Jonathan decided to go through with reducing the subsidy, and in January of 2012 gas prices jumped 117 percent to the full market price. Two labor unions launched a national strike and protests erupted, and finally the government partly reversed its decision and in the end cut the subsidy by about 50 percent.

In this case, a longer or better consultation process may have helped, as well as more education about the programs and benefits for the poor, noted Okonjo-Iweala. Again, if stakeholder organizations and coalitions had been identified early on, there could have been fewer challenges and more buy-in from the beginning.

The third example was a shift in industrial policy, specifically a change in the waiver system to focus on key sectors rather than for individual companies to one that identified key sectors. Okonjo-Iweala explained how better education about whether the incentives could actually produce the projected benefits and lead to additional investment and production would have been beneficial.

The three case studies, the Nigerian minister argued, represent sound economic policies and presented opportunities for progress, but showed that even the best recommendations can fail to be implemented if political realities are not taken into account by analysts.

“Research in isolation of the real facts of what policymakers face may be good, but at the end of the day doesn’t deliver what is needed,” Okonjo-Iweala said.

Keeping this in mind, she called on researchers to work with governments and policymakers to understand potential roadblocks and provide the evidence needed to make the political case for policy changes.

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