Develop a differentiated approach to identify the social effects of regulatory reforms on all groups expected to be affected by them beyond the business community. The approach should identify which groups are expected to be affected by the regulatory reform(s) within and beyond the business community, to ensure that reforms "do no harm" to people and the environment. The assessment should be differentiated depending on the expected impact of the regulatory reform(s) and
may include qualitative or quantitative methods. The approach should be employed both ex ante (during the design of the project) as well as ex post (to assess the achieved impact of the reform). Such an approach should help better estimate the political economy risk associated with the reform, to identify potential groups that would sustain or oppose reforms, and the extent of such support or opposition. The World Bank Group may also consider developing client capacity to conduct social value assessment in order to enable sustainability of investment climate reforms.
Business regulations govern markets to enhance or protect certain social values, such as public health, safety, and the environment. IEG's review shows that social value is not explicitly defined or accounted for in regulatory reforms supported by the World Bank Group in client countries. Without that it is difficult to establish whether particular reforms have generated any particular benefits (or losses), or to identify distributional effects.
The Bank Group impact indicators include measures of aggregate compliance cost savings for businesses or increases in private sector investment. Separate measures are needed to
capture a wider range of benefits and costs (social, economic, and environmental) if existing regulations are changed. Some groups may benefit from regulatory reform, but other (potentially vulnerable) groups may lose out, with regard to incomes employment access to goods, services, and infrastructure or other indicators. A social value framework suggests that projects should identify relevant stakeholders an exclusive focus on businesses is too narrow. Nonbusiness stakeholders need to be incorporated within any evaluation of regulatory reform.
Furthermore, a better assessment of political commitment is key in determining the success of investment climate projects. In many cases, IEG found that unsuccessful efforts in regulatory reforms focused on improving the technical quality of legislation but ignored the importance of the political process. Although the World Bank and IFC cannot and should not be engaged in these processes, successful regulatory reform requires understanding this part of the policy-making process and informing relevant stakeholders. This is especially important in FCS, where the political process is even more unstable.
WB: Agree. Management agrees on the importance of considering both the economic and social impact of regulatory reforms. It concurs with the recommendation for a differentiated approach that takes into account the expected scale of impact.
In investment climate reform interventions, management takes into consideration social effects in a variety of ways. Scaling up a social welfare/value assessment requires specific expertise and significant resources. A nuanced approach is needed and management plans to develop a selective approach that distinguishes between reforms that attempt to do away with laws and regulations that convey very little in way of social benefits, and reforms inducing trade-offs between business interests and social interests. Management plans to develop a set of criteria to help prioritize interventions for which social value assessments would be done and in what form.
Action 2.A: Management will develop a checklist for T&C to distinguish between T&C projects that induce significant trade-offs between business interests and social interests and those that donât. This will be applied to identify T&C projects that will require a social value assessment in order to ensure that these âdo no harmâ.
Indicator: Checklist or similar instrument developed.
Baseline: Lack of a differentiated approach to identify social effects of regulatory reforms.
Timeline: End of FY16.
Action 2.B: T&C in cooperation with other GPs and CCSAs will collaborate to develop a more systematic approach for examining and addressing political economy dynamics in institutions, transparency and inclusion, in relation to technical assistance project design, implementation, and results. It will begin to apply the new approach in T&C.
Indicator: Approach developed to assessing and addressing political economy dynamics. Number of T&C projects to which this is applied.
Baseline: TBD
Target: A number of institutions that are strengthened through the new approach.
Timeline: Approach developed by end of FY16 and applied consistently across the T&C Global Practice in FY17.
Both actions taken are in line with the recommendation. However, while action 2B is well into its piloting, action 2A is still in its draft formulation.
2.A: T&C is preparing a draft approach based on the following four steps:
- Identifying potential products where social interests are more at risk and laying out some of the potential negative impacts
- Develop a simple stakeholder analysis tool to identify positively and negatively affected stakeholders
- Establishing a PPD approach to play a role in managing the negative impact
Provide guidance as to how to incorporate potential negative impact on society into the risk matrices of projects
2.B: 1. Development of framework to address political economy:
1. T&C has worked at three levels in order to develop a systematic approach for examining and addressing political economy dynamics in institutions, transparency and inclusion. This multi-pronged approach is necessitated by the complex, multi-dimensional nature of issues related to political economy, transparency and inclusion. The work includes the following:
a) Political economy dynamics in institutions: An over-arching framework to address issues related to political economy and government dynamics in projects. This framework (attached) has the following features:
- It covers both political economy and government dynamics because both sets of factors impinge on the quality of reform design, implementation and sustainability and need to be taken into account during project design.
- It makes a distinction between three sets of actors: a) businesses b) high-level policy-makers in government and c) front-line implementing agencies, and shows the relationships between them. In doing so, it illustrates why both political economy (such as the efforts of stake-holders to influence policy) and government dynamics (such as principal-agent relationships within government) are relevant for projects.
- Based on the framework, and drawing upon various strands of work in the T&C family, a list of operational approaches to address political economy and government dynamics is developed. This is accompanied by a diagnostic tool that project teams can apply at project design (and revisit mid-way through implementation) to assess the institutional readiness of projects. This is a modified version of the Reform Sustainability checklist developed earlier and includes, among other things, elements from sveral on-going or recently completed exercises in T&C that address political economy and government dynamics such as the Good Regulatory Practices (GRP) program and an analytic report on privilege-resistant policy making in the MENA region.
b) . Transparency: In FY16 ,the T&C GP initiated the Good Regulatory Practices (GRP) program, in collaboration with DEC and the Governance GP. It involves the development of innovative approaches to enhance transparency in the conduct of the regulatory functions of government, including stakeholder participation in the process of regulatory design, use of evidence in the drafting of regulations, and the gathering of information on the quality of regulatory service delivery and implementation quality of regulatory reforms, including through stakeholder feedback exercises. These innovative approaches are being applied through operational pilots embedded in WBG projects. These pilots have the dual purpose of improving the effectiveness of the WBG projects in which they are embedded and to help refine the innovative approaches through operational application. These pilots are currently being implemented through 16 projects advisory and lending projects, of which 12 are led by T&C. Another 3 pilots have recently been approved and more will be initiated in FY18.
c) Inclusion: A path-breaking study by MENA T&C on Privilege-resistant Economic Policy addresses the critical issue of policy capture by powerful businesses. The report was completed in June 2017. Policy capture by powerful business leads to a policy regime that often leads to the exclusion of non-elite businesses from economic opportunities, thus adversely affecting broad-based growth. An inclusion agenda requires addressing the issue of policy capture. Given its sensitive nature, approaches to address policy capture will need be operationally feasible while also addressing the causes of policy capture. The study develops a methodology to assess the vulnerability to capture in several policy areas on a country, which it applies to benchmark 8 MENA countries. It suggests an approach to operationalize the privilege-resistant policy-making agenda. Application in additional countries, within and beyond the MENA region are planned for FY18.
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The management actions call both for a checklist to assess social effects of projects by T&C, and a more systematic approach for examining and addressing political economy dynamics. With regard to the first action, Management has not made progress except for a number of internal discussions. Management puts a lot of emphasis into the political economy aspect of reforms rather than on an understanding of the impact of reforms to different stakeholders in society (including those that might not have any political leverage). Even with respect to this - notably action 2b, T&C has not developed a systematic approach to assess and address the political economy dynamics in projects.
A number of discussions have taken place around the social effects of regulatory reforms in T&C. The GP will put together a working group in FY17 to tackle this item in a more targeted approach with the aim to still develop a checklist or other instrument to assess the social effects.
A matrix has been prepared summarizing the approach and tools used in investment climate work to address political economy dynamics. The matrix identifies a number of channels by which political economy dynamics affects both formulation and implementation of policies and reforms. For each channel of influence, it lists available solutions. These solutions fall in three categories: a) Diagnostic tools to inform WBG work b) Information for clients and c) Operational interventions. The matrix is attached.
In addition, two important projects/programs were initiated in FY15-16 that will help address political economy issues in investment climate related work:
a) The Good Regulatory Practices Program (designed in FY15 and launched in FY16), a collaboration between DEC, the Governance GP and the Trade and Competitiveness GP, aims at helping governments enhance the quality of regulatory regimes and their outcomes and put in place effective, transparent, accountable and consultative reform processes that assist in reform prioritization, design, and implementation. The various components of the program address an important source of political economy induced distortions, i.e., information asymmetry (between government and stakeholders, among stakeholders, and within government). The program supports exercises that open up proposed regulations to stakeholder consultation and economic analysis, as well as mechanisms that generate information on reform implementation, service delivery and investor grievances. Operational pilots in these areas have been initiated in FY16 through 17 WBG projects.
b) The Trade and Competitiveness unit in the MENA region initiated a study in late FY15 on policy capture in private sector related policy areas. The study, which will be completed in FY17Q1, develops a methodology for assessing the vulnerability of different policy areas to capture or privilege seeking, benchmarks eight MENA countries following this methodology and develops operational approaches to address policy capture/privilege seeking. The findings and conclusions of the study will inform future projects in Trade and Competitiveness and help address this important aspect of political economy.