Chapter

Chapter 6. Political Economy of Reform

Author(s):
Lamin Leigh, and Ali Mansoor
Published Date:
January 2016
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Author(s)
Ali Mansoor

Thus far, this book has discussed the macroeconomic vulnerability faced by small middle-income countries (SMICs) in sub-Saharan Africa, assessed how labor market outcomes can be improved by reforms that contain spending and crowd in private initiative, looked at structural policies and institutional frameworks that could boost productivity growth in these SMICs, and provided suggestions about financial inclusion policies that are friendly to stability and growth. This chapter suggests a process to assist reformers in making progress in these areas and on complementary reforms in the social sector.

The Development Assistance Committee of the Organisation for Economic Co-operation and Development has defined political economy analysis as being “concerned with the interaction of political and economic processes in a society: the distribution of power and wealth between different groups and individuals, and the processes that create, sustain and transform these relationships over time” (DFID 2009, 4). In this chapter, we look more narrowly at the question of how to implement reforms that are desirable from a technical point of view, but that face some political resistance.

This is of concern to many ministers of finance and other policymakers who sometimes find it hard to act on sound technical advice on the premise that the advisors “just do not get it.” Most policymakers feel that they are different—that their difficulties are unique, their population less patient, their constraints more binding, and their stakes of failure higher.

In view of this, it is hard to prescribe a list of actions required to address political concerns and reluctance in the implementation of reform. Nonetheless, reformers may keep some general issues in mind to help address these concerns, such as

  • How can advice to policymakers be tailored to facilitate acceptance at the political level?

  • How contentious or complex is the reform?

  • Who are the important players and stakeholders?

  • How can reformers build coalitions, communicate, compensate, bundle reforms, and find appropriate “second-best” solutions?

This chapter draws on these ideas to suggest how technocrats could be more sensitive to the political and administrative realities and constraints in proposing the reforms discussed in Chapters 2 to 5. The political economy opposition to reform belongs to one of two broad categories:

  • Insufficient knowledge, either because the costs and benefits are not clear or information on ways to implement the reform is lacking

  • Reluctance to implement the reform because of unwillingness to bear the costs.

This chapter draws on the political economy literature and successful experiences around the world to suggest some of the pathways available to reformers in SMICs in sub-Saharan Africa. These avenues could generate more traction for the reforms outlined in the previous chapters and that are required to graduate to advanced economy status. It then covers considerations for implementing reforms, such as channels for reforms, maintaining an appetite for reform, and peer support. Such an approach may be important because “given country-specific realities, best-practices thinking—which works backward from a desired end state—is at best moderately helpful in identifying feasible next steps” (Levy 2010, 1). Instead, progress may require reformers to look at how others have found their own second-best solutions and adapt these to the circumstances of the country.

The chapter does not directly consider how to approach reform in the face of outright unwillingness to bear costs because this attitude is very contextual and would need to be addressed on a case-by-case basis. It focuses instead on addressing knowledge gaps that will enhance the toolkit that reformers have at their disposal to tackle interest groups who block reforms because they want to avoid the costs that may be misperceived by policymakers and other stakeholders.

However, this chapter’s proposals for more peer exchange and peer learning would also offer insights into how to deal with interest groups that are blocking reform because they are unwilling to pay the costs. Peer exchange may offer ideas on how to identify blocking interest groups and how to compensate them or overcome their opposition by mobilizing a countervailing coalition.

Setting the Stage for Addressing Political Economy Issues

How to Approach Political Economy

The political economy approach to the implementation of economic reforms involves understanding the interaction between the political sphere and the economic system. Much of political economy analysis rests on country specificity at a given point of its history. No guide to political economy can ever determine a set list of issues that need to be considered because the issues are dynamic. Instead, the analysis must have at its disposal a toolkit that can be used by reformers to enhance the likelihood of success. Such a kit includes observational and analytical skills to define the key issues in the country on the topic at hand. Over time some of these issues will wane in importance, but others will emerge. Thus, understanding a country’s political economy and carrying out the required reforms is as much an art as it is a science. Accordingly, there may be merit in reformers exchanging experiences and ideas on a regular basis to help them master the art.

Carrying out economic reforms requires political will. However, political will is endogenous to the system, and commitment to reform does not necessarily have to come from the very top. Political will generated by the actions of reformers within the system may also be a good source of momentum for policy change. Senior government officials could demonstrate dedication and devotion to sustaining reforms through outreach efforts that cause the public to contemplate reform programs favorably. Public support, once generated, can boost enthusiasm in political circles. An effective outreach program may help depoliticize the process and illustrate the practical benefits to the population at large. Support from the public for reforms makes it easier for politicians to move forward (that is, to muster political will).

The experience of successful countries (see Chapter 1), suggests that planning can help focus the various stakeholders and address the political economy of reform. Many of these countries also practiced some form of industrial planning, which is a somewhat independent issue from that of the political economy of reform. Chapter 4 considers the economic case for government intervention to address bottlenecks or leverage externalities and the potential costs and benefits of industrial policy for SMICs.

Review of Factors Important for Success

Experience suggests how successful reform momentum can be generated and sustained. African ministers have noted that successful reform is facilitated by “committed leadership, coherent strategies, and long-term planning frameworks, as well as robust institutions and accountable governance structures. They supported the deepening of South-South cooperation, the building of political coalitions, and enhanced public-private dialogue to ensure policy consistency and coherence in the interest of industrialization.”1

Along the same lines, at its December 2013 meeting, China’s Central Economic Work Conference called on all local governments and government departments to set up an organization to specialize in pushing for reform in identified areas (IMF 2014).

Minns (2001) suggests that the Republic of Korea’s economic “miracle” was based on the state’s ability to implement a strongly developmental policy, that is, reforms that yielded sustainable and equitable growth over a long period of economic and social transformation to become an advanced economy. Cho (2001) complements this supposition by explaining that Korean economic development is owed mainly to the Korean government’s and people’s efforts to make the best use of the internal and external changes in the economic environment. Huff (1995, 1) similarly argues that the Singapore model of economic development relied on “extensive government intervention and planning, though not a rigid central plan.”

In Taiwan Province of China, according to Lau (2002), government planning and intervention were crucial for success. Key elements included reliance on private enterprise focused on export-oriented industrialization together with land reform that raised agricultural productivity and freed resources for industry. Rodrik (1995, 2) suggests “that in the early 1960s and thereafter the Korean and Taiwanese governments managed to engineer a significant increase in the private return to capital. They did so not only by removing a number of impediments to investment and establishing a sound investment climate, but more importantly by alleviating a coordination failure which had blocked economic take-off. The latter required a range of strategic interventions—including investment subsidies, administrative guidance and the use of public enterprise—which went considerably beyond those discussed in the standard account. That government intervention could play such a productive role was conditioned in turn by a set of advantageous initial conditions: namely, a favorable human capital endowment and relatively equal distribution of income and wealth.”

Adelman (1999, 57) also points to the heterodox approach of Korea with “an activist government—mobilising private entrepreneurs, the bureaucracy and the general public—that pushed its plan for economic growth and gave continual detailed attention to economic matters.” Adelman (1999, 58) highlights that at the outset of the reforms President Park “sacked 10 percent of the top bureaucracy and sent the rest to two-week retraining courses that stressed both management techniques and commitment.” To achieve export-led industrialization, “the Ministry of Commerce established ever rising export targets and monitored the performance of individual firms” (Adelman 1999, 62) The president also kept close track of export performance, and at monthly meetings he honored those who did best. The planning process involved coordination and accountability for outcomes. The deputy prime minister chaired meetings with all ministers to ensure that the targets developed were owned by those with the mandate. Accountability came from monthly meetings to verify progress and deal with bottlenecks and issues, and a press conference informed the public of progress.

Lee (2013) summarizes that in countries that were successful in catching up, policymakers “were in fact always asking themselves, ‘what’s next?’” This suggests that, as dramatically demonstrated by President Park’s actions in firing and retraining his top civil servants, high value added could come from building the capacity of key public officials to reflect on this question.

A particular version of the “what’s next” approach is to be prepared for shocks that may offer an opportunity to start comprehensive reforms. By definition, shocks happen quickly and are unannounced. Hence, one of the key requirements for reformers during a period of relative calm is to find out where the main challenges lie, that is, where to implement reforms once the opportunity presents itself. A growth diagnostic, as explained in detail by Hausmann, Rodrik, and Velasco (2005), suggests that growth may be unleashed by relaxing a limited number of country-specific constraints that have an impact on some or all of the channels through which growth can be unlocked. Knowing which of these constraints should be relaxed and how to do it will be required to unleash growth.

However, the success of these countries also rested on good integration between planning and budgeting along with strong monitoring and accountability mechanisms. In this regard, it is noteworthy that Singapore had no formal planning process outside the budget framework. The ministry of finance integrated long-term planning goals into its allocation of resources. Over time, accountability arose from the use of program budgeting. Korea had a more formal planning process separate from the budget, but eventually the planning and budget functions were integrated into one ministry, and after being separated for some time, again reintegrated.

The planning function must have authority to prevent short-term needs from crowding out the financial and human resources or policy space required to achieve long-term objectives. This prerequisite means that the planning function needs to have the authority of the president, prime minister, or minister of finance. There is a trade-off, however, between the authority that the president or prime minister would provide and the time they have to resolve technical differences of opinion or trade-offs over the use of scarce political capital. This difficulty is why arrangements in which the minister of finance has the authority to arbitrate may work better. This arrangement is even more important because the minister has the direct means, through the budget, to allocate resources to support long-term objectives. Accountability can be secured by the president or prime minister chairing quarterly meetings to review objectives and implementation progress.

However, the process must be underpinned by strong commitment and a good understanding of technical issues and trade-offs by a core of committed public officials. A process to encourage and energize middle to upper management in the public sector may be the area that most needs nurturing in countries that wish to move from middle-income to advanced economy status.

Implementing Reform

As discussed in the previous chapters, a number of areas remain in which SMICs now need to reform. Some of these reforms could potentially be implemented fairly quickly. For example, Cabo Verde and Namibia need to bolster their reserves, as detailed in Chapter 2. Reforms to the financial sector may also be relatively straightforward to implement. As detailed in Chapter 5 these reforms are technical, politically less contentious, and, like reserves accumulation, are within the remit of the central bank—all traits that make it easier to navigate the political economy landscape. Other reforms may be more challenging from the political economy perspective and require more time and preparation. Labor market reform and its role in increasing total factor productivity are discussed in Chapter 4. The required reforms are likely to be contentious. A skills mismatch is one of the reasons for a drop in total factor productivity in SMICs, but the lag time is long between reform in areas such as education and retraining and the benefits in the form of higher wages and more employment. In the short term a more open labor market with more foreign labor may be politically difficult to achieve in the face of unemployment, underemployment, and low wages that reflect inadequate skills.

First and foremost, the key to successful reform implementation is reaching a clear consensus among stakeholders on what reforms are needed, why they are needed, and what the reforms are expected to achieve once implemented (Box 6.1). In Mauritius in 2006, the government attempted to implement a property tax in rural areas without full consensus of the population. The government had underestimated the importance that had been placed on the tax by those who were not even liable to pay the tax, and in the ensuing backlash the government decided to annul the tax.

Box 6.1Considerations for Overcoming the Political Economy Constraint

When is the time ripe? Take advantage of windows of opportunity for structural reform

In any country, the urgency of structural reforms, and the weaknesses and unsustainability of the status quo, only become fully apparent during periods of poor economic performance. Arguments by conservatives in the elite for maintaining the status quo are neutralized by circumstances, and governments are presented with a unique opportunity to implement difficult reforms—virtually risk free—since the likelihood of the new outcome being an improvement over current circumstances is high.

Where to start: The importance of quick wins

Reforms that are easy to implement and that will facilitate further change are key in a period of extended reform. By demonstrating the benefits of reform, quick wins can activate new constituencies in favor of change and generate reform momentum.

Where to continue: The importance of comprehensive reform

Quick wins are not a substitute for more comprehensive reform. Clear communication about the ultimate goals of the reform package is, therefore, important to overcome political economy constraints. These reforms, which usually start appearing a year or two after the initial shock, can benefit from the guidance of peer countries that have been through similar reforms. Those countries will have first-hand experience of the political challenges and strategies for offsetting them.

How to build consensus: A social bargain for structural reform in SMICs

A social bargain can be a mechanism for generating consensus around a package of mutually reinforcing reforms. In particular, when there is mistrust, a social bargain similar to the 2012 “Pact for Mexico” may make it easier for all parties to make concessions and agree on monitorable steps each has to take, and thus help overcome resistance to reform. Although reform may bring short-term costs for all parties involved, the promise of higher future pay-offs can pave the way for implementation (Johnson 2013).

Additionally, acknowledging that reforms are highly likely to make a group of people worse off in the short term—creating a group of “losers”—is important. Reform will only be possible if this group can be placated or compensated, or a powerful coalition built capable of overriding their objections.

Considering the fact that SMICs are well developed compared with many of their sub-Saharan African neighbors—they are, after all, looking at small tweaks to allow them to break through the glass ceiling to advanced economy status—it is not entirely surprising that solutions without losers are hard to find. After all, one would expect each of these countries to be relatively close to a Pareto-efficient equilibrium. However, a Pareto-efficient equilibrium may be far from the efficiency frontier if many players have “inherited rights” that are incompatible with a more open and globally competitive economy. If the losers will be permanent losers and face large losses, compensation may not be operationally feasible or politically acceptable. Fortunately, in many cases, losers eventually reap the rewards of reform. For example, workers who have to accept working longer before retirement end up contributing more toward their pensions, and hence eventually receive a higher pension. This type of outcome is why it may be possible and necessary to find mechanisms to compensate those who would be worse off, at least in the short term, from reform. For example, during the early stages of Botswana’s development the cattle owners were a politically strong group that had to be placated before the introduction of new policies.

The compensation should be aimed at negating the outcome that the losers are most likely to complain about to prevent the losers from mounting a campaign against the reform that could generate a public relations backlash. Public support reduces the costs of reforming, thereby raising the probability that political leaders will back the reform.

The nature of the compensation depends on the timescale of the reforms and the clout of the losers. The longer the time frame before the losers will obtain benefits, the greater will be the compensation required. Likewise, the greater the political clout, the greater the compensation required (for example, cutting the public sector workforce by 10 percent will require greater compensation mechanisms than introducing exchange bureaus to compete with banks in the foreign exchange market).

Compensation can be in the form of “golden handshakes” for reductions in the public sector workforce, partial state guarantees for increasing the credit extended to SMEs, or subsidizing retraining and initial job placement for overall labor market reforms. Seychelles used the principle of the golden handshake to help it reduce its payroll by more than 10 percent during the 2008 reforms.

The movement for reform can operate under three sets of circumstances. When opportunities for reform arise either in response to shocks or in anticipation of an emergency, public officials who have been preparing reforms will be ready to act as was the case in India in 1991 (Dutt 2003; Mukherji 2010) and Mauritius in 2006 (Box 6.2). When reforms need to be undertaken in periods of stability, mobilizing public officials and arming them with ideas and information on the internal calculus of the costs and benefits of reform could tip the calculus in favor of change (Drazen 2000).

Box 6.2Major Reforms in Mauritius in 1982 and 2006

Mauritius underwent two major reform episodes. In 1982, the fixed exchange rate regime and the collapse of sugar prices resulted in a balance of payments crisis. An IMF program with a World Bank structural adjustment loan ushered in reforms that set Mauritius on the path of sustained export-oriented industrialization and full employment (Gulhati and Nallari 1990).

The second episode was launched with the 2006 budget when the Minister of Finance explained that an era of dependence on sugar and textile preferences had come to an end. A comprehensive reform program was announced to make the economy globally competitive and more diversified.

In the 1982 reforms, senior officials had no clear proposal for what would be required to address the challenges, and the World Bank and IMF teams played a significant role in defining the agenda. In contrast, in 2006, the reforms were home grown and ready because there had been extensive discussions around Vision 2020 on the challenges facing the country and the reforms required. This technocrats’ preparedness for what needed to be done facilitated the formulation and implementation of a wide-ranging set of reforms. Moreover, public acceptance of the reforms was aided by the public outreach around Vision 2020.

Providing officials with information is most likely to work when there is genuine lack of knowledge of costs and benefits. Better analytical capacity and knowledge of experiences in other countries could shift the dynamic in favor of reform. However, complementary action may be required when it is not a lack of knowledge of costs and benefits that holds up reform but an unwillingness of interest groups to pay the up-front price for reform. This usually leads to a “war of attrition,” where those best able to absorb the cost of inaction eventually push the cost of reform to others. Even in those situations, however, peer learning may generate ideas and lessons that allow the reformers to adapt solutions to the circumstances and achieve reform earlier and with a fairer distribution of costs.

Three main issues must be kept in mind when implementing reforms in the SMICs:

  • The appetite for reform tends to be low because these countries are not doing too badly (annual growth of 2–3 percent).

  • If unable to implement reforms, the second-best option is to be ready with a road map of what reforms are needed for when the opportunity does arise.

  • Opting for the status quo is unlikely to be sustainable in the long term as the costs of inaction mount. As the price for staying put goes up, the opportunities for reform will open up at some point even if it is in the medium term. This can be seen in the experience of many African countries that resisted a more flexible exchange rate system in the 1970s and 1980s but were eventually pushed by the rising costs to move to more flexible approaches.

Reforms Following a Shock

Given that these countries are faring relatively well, the opportunities to push through reforms are harder to find. The situation is akin to what has happened in Europe recently. For the past decade or two the reforms required in Europe were clear to most observers, and some reforms were even implemented, such as labor market reform in Germany. However, political economy constraints made it difficult to implement most required reforms in most countries. The crisis following the Great Recession finally led to action on a broad front across Europe. Reforms were facilitated once the opportunity arose because it was relatively clear what technical solutions were required.

Therefore, as discussed earlier in the chapter, reformers should be prepared to push reforms forward when a difficult situation arises following an extended period in which the status quo has prevailed. In general, the SMICs have responded to external shocks or crises induced by poor policies. As discussed in Chapter 3, Botswana reviewed the performance and institutional arrangements in the public sector to deal with fallout from the Great Recession. Mauritius reacted to the loss of the sugar preferences with the European Union and the loss of textile preferences under the Multi-Fibre Agreement with a comprehensive reform program aimed at making the country globally competitive. In Swaziland, the various legislative and institutional reforms undertaken after shocks similar to those experienced by its Southern African Customs Union neighbors since 2010 have not shown a significant impact on growth so far. Seychelles responded to an external debt and balance of payments crisis in 2008 with reforms that reoriented the role of the state in the economy.

Reforms Ahead of an Emergency

Cabo Verde, Mauritius, and Seychelles faced challenging times following independence, with many observers arguing that these countries would not be viable. Cabo Verde was “declared ‘unviable’ after independence in 1975 by the then U.S. Secretary of State, and thereafter by some international financial institutions” (ADB 2012, 1), and the 1977 Nobel laureate in economics James Meade saw no future for Mauritius, a sentiment echoed by V. S. Naipaul (1976) in The Overcrowded Barracoon.

In all three countries, the political leaders were attuned to institutional and policy frameworks that would exploit and develop comparative advantage. It is remarkable that despite an interventionist approach in a one-party setting, over the period following independence in 1975 until democracy was instituted in 1990, Cabo Verde adopted a pragmatic approach that built the foundation for success. With the advent of democracy, development widened from a focus on building human capital and infrastructure to freeing up individual initiative to develop and diversify the economy.2Pitcher (2012) attributes the reforms in Cabo Verde to negotiations between the political parties and compromises with their bases of support.

Similarly, there are only a few cases in which the political leadership would continue to reject reform despite an untenable macro-fiscal framework. Such a scenario, where the force of circumstances forces reform, can be considered a special case of “reforms following a shock.” The main difference is that the timing of a shock is unpredictable whereas the tipping point for system breakdown is usually within sight. Accordingly, the same prescriptions as for a true shock apply but with more urgency. Technocrats need to accelerate the development of politically acceptable reforms that the political leadership will eventually be forced to undertake.

In this approach, a quick way of developing a critical mass of reforms would be to work with peers and development partners to better understand the technical challenges, the solutions adopted in other countries, and the political economy of reforms that worked and failed elsewhere.

Reforms in Times of Stability

The MICs that successfully graduated to advanced economy status demonstrate that, although hard, it is possible to implement reform in times of stability. Despite the difficulties in maintaining momentum for continuous reform, room for optimism remains. Initiatives such as the World Bank’s Ease of Doing Business Report, which ranks countries, has catalyzed the improvement of the business climate in a number of countries as each attempts to attract foreign direct investment through better rankings.

Despite each country’s unique characteristics, the sharing of experiences among SMICs will show that challenges are common. Each of the SMICs will have at least one area in which they have managed to push through reform better than their colleagues—whether it be improving labor market policies, boosting financial inclusion, or building up reserves using appropriate fiscal policy.

Knowing which constraints are binding in blocking growth and how to relax those constraints is a constituent part of effective policymaking. Reforms will need to ensure low-cost delivery of public goods, good governance, and sound public infrastructure. Key elements include a good legal system and competent and honest public officials, which will result in low-cost contracting, predictable transaction costs, and fairness and certainty in application of laws and enforcement of taxation.

Putting in place reforms that attack these constraints is more likely when public officials are accountable and institutions operate transparently within a rules-based framework. At the same time, putting the required institutions in place may often disturb rents that are available from a less open system that relies more on discretion. The political economy of reform becomes important in this area.

Numerous empirical studies have highlighted the link between political variables and economic outcomes. Although these studies offer strong evidence of correlation, they do not explain causality, and provide little insight into the mechanisms by which political processes influence growth. The main contention is that growth is strongly influenced by the nature of interactions between holders of state power (political and military elites) and potential investors.

Reformers in each country will need to understand the incentives and constraints facing different actors, as well as their capacity to respond to incentives. Key questions that require answers are (1) why do the holders of political power engage in predation, rent seeking, and patronage instead of nurturing growth; and (2) what might encourage more productive co-operation between politicians and investors that would unlock productivity along all the dimensions listed above?

To implement prodevelopment policies, it is necessary to analyze the decision-making processes of governing elites, influential interest-controlling groups and agents in civil society, the private sector, and government bureaucracy. These decision processes may result from the pursuit of economic interests and the restraint of formal institutions. They are also dependent on the informal social rules that govern behavior, define the social hierarchy, perpetuate embedded power structures, and generate reciprocal social obligations, often shaped and perpetuated by historical, cultural, and ethnic influences.

Given that governance reform is driven to a great extent by local political forces, civil society groups have an extremely important role to play. These organizations can canvass public opinion and exert pressure to overcome entrenched interests. In addition, they can also act as overseers by ensuring that policy reforms are properly executed.3 A strong civil society is vital to monitor implementation, campaign for transparency and accountability, and expose malpractice. Modernization of the judicial system is critical because effective rule of law and ensuing sanctions against malpractice are necessary to uphold reforms, particularly given developments in technology, capital flows, tax planning, and others. An independent media as watchdogs can only be catalytic to reform processes.

To bind these processes together and provide momentum for policymakers to formulate and implement appropriate responses, the crucial ingredient is a core of professional, credible, and knowledgeable public officials. These public officials would ideally be the middle to upper management whom politicians consult and rely on for advice and action. This interaction was one of the positive externalities from the work of the Joint Vienna Institute with officials from Eastern Europe and the former Soviet Union.

Maintaining an Appetite for Reform

From the perspective of game theory, the ability to share experiences among SMIC peers serves to provide greater information on both expected payoffs and perceived probabilities of success. It may also provide ideas on tactics and strategies that can unlock reforms by either appropriately compensating losers or mobilizing a sufficiently powerful coalition to overcome those against change. Although a step-by-step solution for each country cannot be provided, reformers can address the political economy issues outlined here to ensure that their countries graduate to advanced economy status.

Outsiders like the IMF and other development partners may be able to support reformers’ efforts by helping build the confidence, knowledge, and credibility of committed public officials (Annexes 6.1, 6.2, 6.3, and 6.4). As previously alluded to, SMICs in sub-Saharan Africa have similar difficulties and similar issues, but some have made more progress in particular areas of reform than others. Peer-to-peer learning can, therefore, serve as a catalyst for the knowledge that can help unlock reforms. This function is particularly important since authorities are better able to relate to other practitioners than to staff from international financial institutions or to consultants—especially as their economies grow more complex as they pursue economic diversification. As an example, Ahmad and Brosio (2015) note that the 2007 tax and transfer reforms in Mexico were an excellent example of South-South learning from experiences. The 2007 Mexican reforms were predicated on a hold-harmless condition, building on the Chinese example, that ensured that no state would lose revenues, and additional revenues were shared on an incremental basis. Additionally, the transfer system was revamped. This was a case of learning from the international community of practice—or horizontal scaling, as small-scale experimentation was not possible.

In fact, part of the effort may be to provide reformers with the tools to undertake a political economy analysis of the reforms they wish to promote. Rodrik (2008) argues that appropriate institutions for developing countries are often “second-best” institutions—those that take into account context-specific market and government failures that cannot be removed in short order. Devising second-best policies will often involve adapting solutions that have worked in other contexts to the specifics of the country for there to be a reasonable chance of implementation. This may be why successful reformers, including in SMICs in sub-Saharan Africa, have generally adopted heterodox solutions that secure buy-in from key stakeholders.4 Reformers need to thoroughly understand the political and institutional power networks, vested interests, formal and informal operating rules, and how to approach compensation of losers. Effective supporting communication is essential for success. For example, the 2006 reforms in Mauritius would probably have been reversed without a communications campaign driven by the former ministers from Ireland, Mexico, and New Zealand who had spearheaded similar reforms in their countries.

The reform process could, therefore, be facilitated by stronger and more systematic peer learning, drawing on the experience of Eastern Europe. Two key components from Eastern Europe were commitments to a policy agenda (the acquis communautaire, which was defined by the European Union) and capacity development of a cohort of policymakers through the Joint Vienna Institute.

The challenge will be for the SMICs in sub-Saharan Africa to develop a similar approach without the benefit of an externally provided “acquis.” This tactic could involve governments committing to a small number of critical reforms at a given time that would be delivered by a dedicated team. This team would be accountable for outcomes within an agreed-upon deadline (as in the “acquis”) and would benefit from strong peer-learning support through an appropriate regional anchor to replicate the Joint Vienna Institute’s role. One possibility is the Regional Multidisciplinary Centre of Excellence that has been set up by the government of Mauritius to promote peer learning.

“If it ain’t broke, don’t fix it.” This principle or argument can be (and has been) used to neutralize any appetite for reform. But another relevant cliché is “a picture paints a thousand words.” Solid data that demonstrate trends can build confidence and spur sentiment for further improvement. Therein lies the basis of the next point in the political economy of reforms—the need for key performance indicators.

Reforms meant to lift countries from middle-income to advanced economy status need to be wide ranging and require strong coordination across government ministries and departments. Each agency would need to define the outcomes that need to be achieved for areas under their mandate over a 10-year period. These outcomes can be updated annually as part of the budget exercise. Trends can be used to maintain the appetite for reform, and the key performance indicators can be used as part of the social contract between government and the electorate. In return for continuous improvement in conditions captured by tangible indicators, the authorities would be given trust and leeway for implementation of reforms. Coupled with a tolerance for the “teething” period for new reforms, a government can make great strides. A good illustration is Seychelles, where, despite a month-on-month inflation spike of more than 25 percent upon implementation of monetary reforms in 2008, the population exhibited patience, and shortly thereafter prices stabilized. Since 2009, the exchange rate has been stable and inflation has remained in the low single digits (about 3 percent annually between 2010 and 2013).

Operational three-year rolling plans could be integrated into a program-based budget. A minimum standards approach to targeting can be a useful device for focusing energies and organizing coordination.

In this regard, some of the measures that could act as pointers for reflecting on the appropriate interventions and policy reforms are listed in Annex 6.3.

Peer Learning and Peer Support

We have addressed political economy, why it is important, its role in reform, and how to overcome the bulk of the hurdles it presents. We are now looking at ways to use political economy to spur reform. Let us address ways to conjure up support.

As mentioned earlier in the book, SMICs face many similar challenges in their quest for graduation to advanced economy status. Nonetheless, the reforms are aimed at improving an already pleasant situation in comparison with their neighbors, which suggests significant downside risk for the authorities. A forum in which the reformers from various SMICs could discuss their particular areas of reform may help.

It is highly likely that one country’s current bottleneck was another’s bottleneck in the past—presenting the opportunity to discuss possible solutions and common areas often overlooked. Consequently, it is highly likely that a group of SMICs holds the collective wisdom and experience to solve one another’s problems. Moreover, even if the group has no experience with a particular reform, the collective experience can be the basis for generating solutions that no country reformer on his or her own would have devised (Box 6.3). This may be particularly important if we consider the approach of Fukuyama (2013, 16), who argues that the “quality of governance is ultimately a function of the interaction of capacity and autonomy.” Peer learning can directly contribute to building capacity and may eventually generate the social consensus to improve autonomy.

Thus, being able to show how similar constraints in neighboring SMICs were overcome, along with a commitment to take advice during the initial implementation period, will allay some of the concerns of the authorities and increase the likelihood that reforms will be implemented. Another set of stakeholders that can play a key role in providing an independent opinion and that can demonstrate the feasibility and credibility of the reforms are specialized multilateral organizations. Box 6.3 elaborates on how such a process might be put in place.

Action by the IMF and other development partners might help change the risk perceptions of key interest groups, thus leading them to take a chance on reform. Moreover, in areas in which public officials feel they lack certain skills or knowledge, institutions such as the IMF and other partners could provide assistance (areas of IMF assistance and the level of success are shown in Annex 6.2, which discusses the case of Mauritius).

Such mechanisms currently exist for areas such as balance of payments accounting, through the use of the African Regional Technical Assistance Centers and the Africa Training Institute. However, the void being alluded to here is more subtle. It is one in which peers can share policy concerns and develop plans to use the forces of political economy to spur required reforms.

Box 6.3Pointers on Peer Support

A starting point could be to ask interested policymakers to identify a small number of reforms that they consider important and that they will ensure get implemented within a short period, say, three years. This would be the equivalent of the acquis.

A dedicated team for each reform would be appointed by the country authorities; the team leader would anchor the process. The team leader need not be a specialist in the technical area but would be a good task manager who would be accountable for delivery in an agreed-upon time frame.

Once a reform is implemented, the team leader would be assigned to move on to another reform. Although at any given time a country may be ensuring full success of only, say, three reforms, this process sets the stage for cumulative progress. Over 10 years, the country would have enacted 10 to 30 key reforms required to sustain movement toward high-income status.

Moreover, success would create momentum for change by building credibility for the reformers and generating more political capital. Over time the number of teams working on reforms could be gradually increased, further contributing to momentum.

The IMF, in collaboration with other development partners, could provide support to the teams to ensure they meet their delivery targets. This support would come through a combination of traditional capacity development and a new systematic peer learning program that could be operated by the Africa Training Institute. Such support would be facilitated if the SMIC reformers collectively put forward requests via the steering committee of the Africa Training Institute, on which they all have a seat.

The peer learning platform would be open to all countries interested in changing the reform dynamic in their country. They would have to commit to deliver a small number of specific reforms within a given time frame and appoint an accountable team for doing so.

Further thoughts on this process are outlined in Annex 6.1.

This peer-learning program could be coordinated by the participating countries (probably on a rotating basis) with a suitable regional institution acting as the secretariat in partnership with the Africa Training Institute, the African Regional Technical Assistance Centers, the Regional Multidisciplinary Centre of Excellence, and other development partner institutions.

A formal congregation of a small group of SMICs would provide the right environment for generating knowledge together. Thinking through issues together will make use of the collective wisdom of the reformers and reduce the time to work toward a solution that is technically correct, administratively feasible, and politically supportable.

A similar initiative was developed in Eastern Europe, where external partners helped develop the acquis for a group of like-minded countries that were willing to go for bold reform.

A tentative plan on the possible mechanics of such an initiative is described in Annex 6.1.

Role of the IMF

According to surveys carried out for the 2011 Triennial Surveillance Review, about 75 percent of country officials thought that IMF policy advice enabled them to generate policy debate at least to some extent in their country, and 65 percent acknowledged that IMF advice led to a policy change. A majority of country officials emphasized the need for more tailored policy advice.

The IMF carries out its mandate to foster macroeconomic stability and thereby facilitate prosperity by promoting the adoption of sound policies and international cooperation. Key to achieving such traction is the relationship between IMF staff and member country authorities, together with the quality of the advice and members’ confidence in it. The concept of peer support would further facilitate the absorption of technical assistance and improve efficiency of reform implementation.

In cases in which advice is demand driven, the authorities’ decision to seek the IMF’s advice might also signal their trust in the IMF and could provide the opportunity for the institution to influence policy formulation at an earlier stage. This concept is covered in greater detail in Annex 6.2.

Conclusion

Sustained reforms required to advance from middle-income to advanced economy status will occur when enough key decision makers become convinced that change is required and will help achieve their objectives.

Three main aspects must be kept in mind when implementing reforms in the SMICs in sub-Saharan Africa:

  • The appetite for reform tends to be low because the countries are growing, albeit slowly (3 percent per year on average from 2009 to 2012).

  • If unable to implement reforms, the second-best option is to be ready with a road map of what reforms are needed for the time when the opportunity does arise.

  • Opting to make no reforms is not sustainable in the long term.

Hence, in an effort to implement the reforms needed to graduate, a mechanism to convince the political authorities of the credibility of the proposed reforms as well as their necessity is required. Peer learning and support can go a long way toward achieving this goal. Once the political economy is swayed in the direction of support, successful implementation of reforms is highly likely, provided the proposed solutions are technically correct and administratively feasible. If reformers in the SMICs organize themselves for this, they should be able to count on the support of development partners, including the IMF.

Generating belief among SMICs that continued reform is not only desirable but possible can be achieved with the IMF’s assistance. This publication can plant the first seeds for such a process.

Annex 6.1. Mechanics of Peer-to-Peer Learning

The following elements could help relax the political economy constraints by helping SMICs in sub-Saharan Africa put in place a cohort of reformers who would reinforce and encourage each other’s efforts:

Setting the stage for peer learning by putting a dedicated team in place

  • A dedicated team is needed in each country with the credibility and capacity to formulate, sell, and implement required reforms. Some stability in the technical team is required.

  • It is the limited availability of persons of the right caliber to form such a team in each SMIC in sub-Saharan Africa that would restrict the number of major reforms tackled at any time. The real challenge would be to form this team and in particular to find a person who believes in the reforms to drive this team and face the associated institutional and other opposition. In this context, it will be more important to identify someone with drive and commitment rather than simply assigning the task to the staff with formal institutional responsibility for strategic planning or policy development.

  • The core team would ensure cross-sectoral coordination but implementation will rest with the relevant ministries and departments that have the mandate for implementing measures required to deliver the agreed-upon reform. The core team may, therefore, need to be reinforced by one representative from each relevant agency. This sort of team composition would assist the relevant organizations with monitoring progress and addressing bottlenecks.

Peer learning to support the team

  • At the outset of the exercise, the capacity of the selected team will need to be built, not only on the process of formulating reform but also on how to go about marketing it. For this purpose, cross-country experience has much to offer for peer learning and peer support. Each SMIC in sub-Saharan Africa could identify areas for which its team will take the lead in the peer activities, with appropriate backstopping and support from the IMF and other development partners.

  • A good understanding of the reforms required could involve the following:

  • Opportunities to build the capacity of the country anchors through interactions with peers and development partners as well as formal capacity-building support. Anchor capacity building would be followed by an evaluation of the specific capacity development needs that can then be targeted for the anchor team as well as those who would be implementing the reforms in relevant ministries and departments.

  • An appreciation of the political economy of reform that guides the sequencing and the nature of reforms proposed

  • A process for peer learning and support that allows country anchors to interact with others who face the same issues or have addressed them in the past. Peer support would enable country anchors to develop ideas and sustain belief in the possibility of reform while enhancing their credibility in their own country.

  • A mechanism for development partners to support the process in each country and to support the peer activities.

  • A social contract similar to the acquis communautaire that relates progress with reforms to additional and predictable support, particularly for capacity building and assistance to tap existing financial resources such as the European Development Fund and trust funds.

  • A mechanism for review of progress made and to focus the attention of national authorities on the efforts of the country anchor teams. The annual Article IV consultations are the only institutionalized instrument for such a review and could be a natural fulcrum for these efforts. Moreover, such an arrangement would increase the traction from the Article IV consultations, increase the payoff for the authorities, and facilitate the work of the IMF. These annual discussions with the IMF could be reinforced and complemented by the country strategy discussions that each development partner pursues (for example, the African Development Bank’s and European Union’s Country Strategy Paper, the United Nations Development Programme’s Country Program, and the World Bank’s Country Partnership Framework).

The objective of the peer-learning initiative would be to enhance the capacity for undertaking evidence-based policy reforms necessary for economic and social transformation (or emerging out of fragility toward growth and transformation) by purposively selected and willing SMICs in sub-Saharan Africa.

Three main questions would drive and shape the focus of this capacity-development process: First, what policy reform measures are the willing countries ready to undertake? Second, who are the people within the multilateral development agencies and in the private sectors of these countries who are expected to work and implement these reform measures? Third, what capacity-development support related to mobility, knowledge, training, and peer learning for these officials and professionals could be provided to ensure that the policy reform measures are implemented? Answers to these questions provided by the selected countries would constitute the guiding principles and constituent elements of the capacity-development programs for the various countries over a long-term horizon of about five to ten years.

More in-depth work would then be required through Article IV consultations and focused capacity-building efforts to promote reflection on the ideas and build belief in both the necessity and possibility of effecting the required changes. This is a long-term process, but as can be seen from Eastern Europe, once launched it can lead to very rapid transformation.

Annex 6.2. Macroeconomic and Structural Reforms in Mauritius: A Case of Intensity and Duration

Since independence in 1968, Mauritius has had a rich experience with macroeconomic and structural reforms, in both their intensity and their duration. Despite the lack of a planned approach to reforms, most of them were timely and well sequenced (Narrainen 2013).

Four main triggers of reform can be identified during the period 1968 onward, specifically the need to accomplish the following:

  • Change the development strategy, as in the early 1970s and in 2006.

  • Ride out crisis situations, as during the structural adjustment years (1979–86) and the Great Recession of 2009 and the ensuing euro crisis.

  • Adapt to external influences, in particular trade liberalization, globalization, Reaganomics, and Thatcherism.

  • Address social and sustainability issues.

The Need to Change Development Strategies

Mauritius has changed its development strategy twice since independence and in the process implemented a series of crucial reforms. A first wave of reforms was implemented in the 1970s. Mauritius realized quickly that the import-substitution industrialization strategy adopted soon after independence in 1968 would not deliver on the country’s development goals, which were to diversify from a mono-crop sugar economy, create jobs to face down the problem of high and rising unemployment, and raise annual per capita income, which was then about US$200, while the Gini coefficient was about 0.50.

Mauritius thus developed a new growth model that has become known as a heterodox mix of highly protective policies to support its import-substitution strategy and liberal approaches to boost exports. The export processing zone, set up in the early 1970s, and the development of a tourism industry were at the center of that new model.

The heterodox model has underpinned economic growth and development in Mauritius for more than three decades. It succeeded in making exports the driver of economic growth, which has averaged about 5 percent annually for the past four decades, propelling Mauritius into the ranks of upper-middle-income countries. However, the heterodox strategy was heavily dependent on preferential access to markets under the Multi-Fibre Arrangement that was active from 1974 to 2005. It also depended heavily on the Sugar Protocol set up in 1975 that provided countries that were members of the African, Caribbean, and Pacific Group of States with guaranteed access to the European Union market for fixed quantities of sugar at preferential prices.

Faced with the dismantling of the Multi-Fibre Arrangement in 2005 and the replacement of the Sugar Protocol with a nonreciprocal duty and quota-free preferential trade system, the preference-centric heterodox model was fast becoming obsolete. The model that was cracking at the seams under the pressures of global free trade and globalization started to crack at the center with the programmed dismantling of trade preferences. Piecemeal repairs would have been of no use. Mauritius therefore shifted to an entirely new paradigm centered on global competitiveness.

This shift was accomplished by means of an impressively large number of simultaneous bold and fundamental reforms, some 40 in all, that were announced in the 2006/2007 budget. The main aims of this big-bang approach were to accomplish the following:

  • Secure a world-class doing business environment

  • Open up the economy further to foreign capital, talent, expertise, and ideas

  • Step up the perennial endeavor to diversify the economy

  • Strengthen macroeconomic fundamentals, in particular, consolidate public finances and reengineer tax policy

  • Ensure more flexibility, fluidity, and security in the labor market

  • Empower workers, entrepreneurs, the youth, and men and women to succeed in the transition to global competitiveness.

Riding Out Crisis Situations

Mauritius has weathered a number of crises since independence, but the most challenging one, which brought the economy to its knees, happened in the 1970s and early 1980s. Mauritius had to draw down its foreign currency reserves, ending up with only two weeks of import cover. The unemployment rate rose as high as 20 percent, and the country was running high budget and balance of payments deficits. The economy was in a precarious state.

Mauritius turned to the Bretton Woods Institutions for assistance. The IMF prescribed a structural adjustment program, focused mainly on macroeconomic reforms, which were implemented over the period 1979 to 1986.

Adapting to External Influences

In between the launching of the heterodox model in the 1970s and the globally competitive model in 2006, Mauritius implemented a series of ad hoc reforms to adapt the economy to new trends and developments at the global level. Some of these developments included the influence of Thatcherism and Reaganomics, trade liberalization, and globalization.

Adapting to external influences, Mauritius gradually transformed itself from a country that relied on state planning to one that promoted open markets, free competition, and private entrepreneurship. It adopted a more open and heartfelt welcome to foreign direct investment.

Mauritius also gradually and fundamentally changed its macroeconomic policies to focus on greater price stability, freeing the financial markets and the rupee from the distortions of credit and exchange control (Lange 2003; Frankel 2012).

The western influence also drove the government to revisit its role, and it began to favor policies that would trim its size, cut down on intervention, and dispense with excessive regulation.

Addressing Social and Sustainability Issues

Along with economic reforms Mauritius has also been implementing new policies to ensure inclusiveness and sustainability. The most prominent social reforms were in the field of education, but there have also been some bold attempts to improve the social security and pension systems, moving from a universal to a targeted approach. Reforms have been more challenging in the social than in the economic sectors, resulting in cases of major toning down and even total policy reversals.

Annex Table 6.2.1 gives a chronology of some of the most prominent reforms implemented from 1970 to 2014.

Annex Table 6.2.1A Chronology of Reforms in Mauritius
YearReforms
1970s and 1980sReforms to support the heterodox model
• Liberalizing the export sector
• Setting up the export processing zone
Reforms under the IMF structural adjustment program
• Slashing maximum income tax rate from 75 percent to 35 percent
• Introducing a sales tax
• Liberalizing the exchange rate
• Significantly devaluing the exchange rate
• Raising the interest rate
• Reducing food subsidies
• Removing price controls on a number of products
• Lowering barriers to imports
1990sReforms to consolidate social development
• Extending free education from primary to secondary and tertiary levels
• Liberalizing the financial markets
• Liberalizing the exchange rate
• Liberalizing interest rates
• Removing credit controls on banks
• Reforming tax policy and tax administration
• Replacing the sales tax with the value-added tax
• Introducing the Pay As You Earn system
• Introducing the Current Payment System
• Reforming the role of government
• Privatization
• Government role gradually shifting from dirigiste and interventionist to that of a facilitator
• Reforming trade
• Starting a phased reduction in import tariffs bringing the maximum tariff rate from 617 percent to 80 percent
• Cutting the number of tariff rates from 69 to 9
2000sReforming tax policy and administration
• Setting up the Mauritius Revenue Authority
• Significantly simplifying the tax return to make it one of the simplest in the world
• Implementing policies to make Mauritius a duty-free island
• Zero import duty on all inputs
• Slashing the maximum income tax rate from 35 percent to a 15 percent flat rate
• Removing almost all tax expenditures from the tax system
• Setting up the Monetary Policy Committee
• Enhancing central bank independence
Reforming the pension system
• Extending the retirement age from 60 to 65 years
• Moving from defined contribution to defined benefits
Reforming the doing business environment
• Applying the silent agreement principle
• Replacing bureaucracy with self-adherence to guidelines
• Cutting delays to start new activities to 3 working days from at least 46 days by reforming approval processes for licenses and permits
• Making it easier for foreigners to obtain occupation permits
• Making it easier for a foreign investor or self-employed worker to secure residence permits for spouse and children
• Issuing occupation permits in three working days in line with the silent agreement principle
• Creating a level playing field for all businesses
• Rationalizing all investment schemes by abolishing some 20 incentive schemes
• Significantly reducing tax expenditures for both businesses and individuals
Labor market reforms
• Setting up a National Wage Council to replace the tripartite mechanism to ensure that the level of wages and compensation are linked to productivity and to capacity to pay
• Shifting the policy approach from protecting jobs to protecting workers
Social reforms
• Introducing statutory corporate social responsibility
• Introducing free transport for students and the elderly
• Extending schooling beyond nine years
• Introducing the Social Register of Mauritius database

Outcomes of the Reforms

The reforms that were implemented in the early 1970s to support the heterodox mix model, carry out the Structural Adjustment Program, and adapt to external influences paved the way to what is hailed by some analysts as the Mauritian Miracle. The main achievements of Mauritius between 1970 and 2006, which were the result of comprehensive and sometimes bold reforms, can be summarized as follows:

  • An average annual GDP growth rate of 5.5 percent for the period 1970 to 2005

  • A resilient economy with no recessions since 1980 despite being buffeted by a number of severe external shocks

  • Successful diversification from a sugar mono-crop to a multisector economy

  • Unemployment slashed from a high of 20 percent to a low of 2.5 percent before rising again

  • Government finances taken from a precarious to a sustainable state

  • Extreme poverty reduced to a negligible level (overall, there is virtually no poverty based on the $1.25 a day and $2.00 a day thresholds)

  • Per capita income rose more than 25-fold to US$5,300 by 2005

  • A significant improvement in the Gini coefficient, which fell to 0.38 in 2006 from 0.50 in the early 1970s.

The reforms implemented since 2006 have firmly established Mauritius as an upper-middle-income country, preparing it to face intensifying global competition. Following the 2006 reforms, Mauritius climbed from 31st place to join the top 20 in the World Bank Ease of Doing Business Survey. It received more foreign direct investment in the five years following the 2006 reforms than during the preceding four decades put together. Economic growth was invigorated in high value-added sectors (for example, information and communication technology and finance). The economy showed remarkable resilience to the global financial crisis that erupted in 2008 and the ensuing global recession and euro area crisis. The reforms had created the fiscal space and financial robustness necessary to cushion the impact of these global events.

The resilience of the economy is borne out by Moody’s one-notch upgrading of the country’s rating to Baa1 in 2012. Mauritius now ranks eighth among the most liberalized economies in the world, according to the Fraser Institute.

The reforms have also delivered noticeable improvement in social development. Mauritius has consistently moved up from a low to a high human development country. In 2013 it scored 77.1 percent on the Human Development Index of the United Nations Development Programme (UNDP), compared with about 66 percent in the 1970s. Mauritius is thus getting closer to the rank of very high human development countries, which starts with a score of 80 percent.

Inspired by the overall success of its past reforms, Mauritius is now working on another wave of fundamental policy changes with the aim of achieving advanced economy status before 2025 in a manner that ensures inclusiveness and sustainability.

The Political Economy of Reforms in Mauritius

Several features of the Mauritian economy and society must be considered when assessing the political economy of reforms. The following four dominate:

  • A multi-ethnic population

  • A deeply entrenched tradition of democracy

  • A significant overlap in the ideologies of the main political parties

  • The existence of a wide network of interest groups.

A Multi-Ethnic Population

Mauritius has a multi-ethnic population in which the different communities also belong predominantly to different social strata, making stratification synonymous with ethnicity. Therefore, some reforms can easily be perceived as favoring one ethnic group at the expense of others. When such is the case, policy reforms must be accommodative and carefully designed to strike the right balance. Sometimes the political and social risks are so big that some reforms, regardless of being deemed necessary, are not implemented.

A Deeply Entrenched Tradition of Democracy

Mauritius has a deeply entrenched tradition of democracy with rather short political cycles—elections are held every five years and very often even sooner. Freedom of speech, press, and assembly allows opinion leaders and interest groups to air their concerns and views on public policy and lay out their positions. This democratic setting tends to favor reforms that can deliver quick wins rather than those that cause short-term pain before delivering long-term gains.

Overlap in Ideology of Political Parties

Most political parties in Mauritius operate at the center left, resulting in a conspicuous overlap of ideologies. This overlap should make political consensus on major reforms easier to achieve. However, formidable political opposition to crucial policy changes can be engendered by the political game of which party is benefiting most from the reforms, or whether a party can capitalize on unpopular reforms to undermine its rival. These rivalries have happened in the past on the issues of food subsidies, targeting of government transfers, and tax on interest income.

A Wide Network of Interest Groups: Voice and Partnerships

Both the private sector and civil society encompass wide networks of interest groups. This situation can be both an advantage and a disadvantage for implementing reforms. A great many of these groups try to influence public policy. Actually, because of a strong and effective social partnership among government, civil society, and the private sector that is based on constant dialogue, interest groups are encouraged to express their views and opinions on public policy. This arrangement also allows the government to communicate its expectations of its social partners. In recent years, that platform for dialogue has increasingly involved development partners as well, such as the European Union, the United Nations Development Programme, and UNICEF among others, especially in areas in which they are directly supporting public policies and reforms.

Many of the interest groups have a political bent and can therefore wield strong influence on election outcomes. Reforms can be a challenge if such interest groups find reasons to oppose them, even though the changes may be for the greater good.

The Mauritian Experience: 11 Lessons

The four features of Mauritian society described above explain why political reform in Mauritius can be complicated. Nonetheless, Mauritius has rich experience with reforms in a rather unique political economy context. Following are 11 main lessons to be learned from the Mauritian experience.

First, reforms are more readily accepted if they are the only way out of a crisis situation. The experience from the reforms of the structural adjustment years bears this out.

Second, reforms are generally better received if past experience shows that the pains are actually only short term and the gains indeed long term. Following an impressively positive experience from the reforms of the structural adjustment program, it was easier for the government to implement a series of reforms, albeit on an ad hoc basis with little direct impact on day-to-day life, over the period 1986 to 2005. These reforms successfully consolidated the transition to a more liberalized economy giving a greater role to the markets in the allocation of resources.

Third, an appropriate communications strategy about the importance of reform is crucial to success. Some of the reforms announced in 2006 met with strong opposition from the population merely because they were not well understood: the costs of the reforms were obvious but the benefits were not. A couple of the reforms had to be reversed, and a couple more had to be moderated to win acceptance.

Fourth, reforms must be applied in the right dosage. Too many reforms simultaneously can raise an overwhelming and widespread feeling of discontent in the population that is difficult to contain unless some of the most unpopular ones are abandoned or revisited.

Fifth, communicating the costs of forgoing reforms can be as important as airing the benefits of reforms.

Sixth, all reforms must be well thought out and supported by rigorous research and analysis. Changes that are miscalculated and not well focused on the issues being addressed can seriously damage the credibility of policies, as well as create a permanent attitude of mistrust that would make future reforms more difficult.

Seventh, success has many fathers; failure is an orphan. Government should be united around the reforms to avoid encouraging resistance to change and undermining the popular acceptance that is crucial to success. Political conditions as well as the policy regime must be ripe for reform.

Eighth, the most challenging reforms to implement are those that take away a privilege that is perceived to be a right. For example, not paying property tax is perceived to be a right by the rural population. The imposition of a tax on property in the rural areas in 2006 turned out to be one of the most difficult to implement. The issue was very sensitive politically and was eventually reversed.

Ninth, the experience with the imposition of a property tax in the rural areas also taught us that even if a reform has an insignificant impact on personal budgets or well-being, it will be resisted if the population sees it as a harbinger of deeper and more burdensome policy changes.

Tenth, although some reforms must be adequately and properly communicated, some of them, especially if there is wide consensus among the political parties, can be implemented silently. Silent reforms can avoid the short-term pains that prevent reforms from having enormous long-term benefits for the population and the country.

Eleventh, the IMF and other development partners played a crucial role in building the capacity and resolve of the technocrats to formulate and implement reforms. This included analytical work as a prelude to reform, capacity building and technical assistance, as well as financial support to facilitate implementation.

Annex 6.3. Key Performance Indicators

For illustrative purposes the following indicators could be a starting point for the challenges to be met and the monitorable targets to track cumulative annual progress in reaching the goals.

  • Housing

    • Proportion of young couples who should own their home

    • Proportion of poor families who live in housing of minimum specified square footage

    • Proportion of poor families who have access to running water in their homes

    • Proportion of poor families who have access to a sewerage system

    • Minimum standards to be adhered to in building construction

  • Public transport

    • Proportion of population that has access to public transport within a specified distance

    • Frequency of vehicles (waiting time kept below specified amount)

    • Ratio of travel time by public transport relative to private cars

    • Cost of public transport as a specified share of minimum wage

  • Water

    • Percentage of population with access to safe running water

    • Number of hours of daily supply

  • Electricity

    • Costs of supply within a specified percentage of average cost for comparator countries

    • Blackouts limited to specified number of hours weekly

    • Percentage of population with access to the grid

  • Education

    • Percentage of cohort that attends tertiary education, secondary school, primary school, and preschool

    • Achievement standards relative to the Program for International Student Assessment or national standards

  • Health

    • Specified level of immunization coverage

    • Waiting times for emergency and for routine operations

    • Waiting times for visits

    • Ratios of nurses and doctors to population and variations in regional distribution kept within minimums

    • Share of spending on preventive, basic primary care versus hospitals

    • Improvement in under-five mortality and life expectancy

  • Pensions

    • Proportion of population with a pension that provides replacement income at a specified ratio

    • Contributory system that is sustainable

  • Unemployment insurance and disability

    • Proportion of workers covered

  • Unemployment

    • Percentage of long-term unemployment, youth unemployment, and female unemployment

Annex 6.4. Political Economy of Reform: The Case of Lesotho

Lesotho has recently undertaken a number of reforms to improve its position in the World Bank’s Ease of Doing Business Report. When the reforms were launched in 2013, the authorities felt that going for “quick wins” would build momentum, which has proven to be correct as the reforms continue into 2015. The reforms have been drawn from the National Strategic Plan and the Financial Sector Development Strategy, which form the backbone of the country’s plans.

The government set up an Investment Climate Reform Forum comprising staff of the relevant ministries as well as the private sector and civil society. The forum has been subdivided into smaller task teams using the nomenclature of the Ease of Doing Business Indicators. For example, there are three task teams: the Getting Credit and Insolvency Reform task team; the Starting a Business, Protecting Investors, and Resident and Work Permits Reform task team; and the Trade and Investment Policy Reform task team. This partnership between users and administrators facilitates implementation of the reforms since the private sector is aware of the incoming improvements beforehand, and their involvement during the design phase ensures that solutions will address their concerns. The authorities ensure that the reforms are implemented swiftly. Progress is monitored regularly by a special Cabinet Cluster constituted of relevant ministers. The Cabinet Cluster is chaired by the deputy prime minister. This arrangement has facilitated rapid progress in various areas of reform. Political will has not been lacking for improvement of the Ease of Doing Business rankings since the gains from the reforms have been extensively appreciated by the population. In addition to the Investment Climate Reform Forum, one other factor believed to have been responsible for political acceptance is outreach, which is believed to have helped “depoliticize” the reform process. Planned outreach strategies for future reforms are anticipated to facilitate the implementation of improvements in other areas (some of which have been outlined in this book).

Nonetheless, Lesotho feels that other steps might help build confidence and catalyze the introduction of reforms. These steps include the formalization of a peer support group for small middle-income countries in Africa. Formalization of such a structure would ensure sustainable collaboration between the countries based on one another’s experiences in implementation of reforms. A further step could be the establishment of exchange visits or short-term attachments to allow technicians to incorporate the contexts of member states when using these countries as inspiration or role models in a certain sector (that is, understanding context may shed light on administrative methods and sequencing, among other issues).

Having peers on hand to offer support and guidance might nudge politicians to take the leap and implement reforms, and the technicians will be reassured by the availability of assistance from peers who have implemented similar reforms. Additionally, a forum to share reform experiences might create some competition between the countries and help maintain an appetite for reform and new ideas.

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With thanks to Bertrand Belle and Andrew Jonelis for their extensive contributions and to Ana Semedo, Andrea Richter-Hume, Carla Cruz, Elizabeth Charles, Emma Haiyambo, Erwin Niamhwaka, Jittendra Bissesur, Marshall Mills, Matthew Wright, Prakash Hurry, Rachna Ramsurn, Sen Narrainen, Sephooko Motelle, Tau Puseletso, and Thupayagale Pako for their insights and country perspectives.

Gene Leon, Senior IMF Resident Representative, Abuja, Nigeria, Memorandum for Files April 12, 2014, reporting on an AU-UNECA conference in Nigeria.

For details see ADB (2012).

In the history of advanced economies, very often change came from pressure from key segments of the population that tipped the balance in favor of liberals in the political elite who were arguing for reform against conservatives who wanted to preserve the status quo.

Subramanian and Roy (2001) demonstrate this in the case of Mauritius.

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