GOVERNANCE E Q U I TA B L E G R O W T H , F I N A N C E & I N S T I T U T I O N S N OT E S State Capture Analysis A How to Guide for Practitioners Gael Raballand and Bob Rijkers © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: Maria Lopez / lopez.ten@gmail.com State Capture Analysis A How to Guide for Practitioners 1 Gael Raballand and Bob Rijkers 1. The authors would like to thank Abel Bove, Anne Brockmeyer, Hans Hoogeveen, Anne-Lucie Lefebvre, Simon O’Meally, Natasha Sharma and Oleksii Balabushko for their inputs, Jim Anderson, Verena Fritz for comments, Debbie Isser for guidance and Nicola Smithers for comments and guidance. >>> Introduction This note describes how political economy analysis can be Although policy advice for countries experiencing slow eco- used to promote development, focusing specifically on state nomic development often focuses on remedying its symp- capture.2 It is intended to help practitioners within the World toms (such as weak job creation and innovation), evidence Bank execute and disseminate political economy analysis from across the globe, including post-communist countries of state capture. It is not intended to be comprehensive but (e.g., Balabushko et al. 2018), Southeast Asia (e.g., John- serves as a “how-to guide” for those not intimately familiar with son and Mitton 2001) and Middle East and North Africa (e.g., the topic. Benhassine et al. 2009, Freund et al. 2017) points to state capture as one of the root causes of economic stagnation: the The note complements a number of other notes and sector benefits of competition and contestability are systematically specific tools for political economy analysis that have been de- sacrificed to favor a select few politically connected families veloped in recent years.3 It also complements a recent Discus- and/or elite networks. sion Paper (Fiebelkorn 2019) that reviews existing literature on measuring state capture, and exposits various methods Hence, identifying policy distortions associated with capture used to quantify its costs. and analyzing their costs is an important dimension of the World Bank’s overall engagement and for several areas of Addressing political economy challenges such as state cap- work in particular (governance, procurement, trade and com- ture is critical to ensure that development assistance ends petitiveness, energy, etc.). up producing its intended outcomes. It is imperative that the World Bank and other donors invest in studies to diagnose This note discusses options and methods to acquire and ana- and redress capture or, at minimum, prevent their assistance lyze data and then presents some relevant examples. We end from inadvertently exacerbating the problem. by discussing lessons learned. 2. According to Fiebelkorn (2019) state capture is the exercise of power by private actors — through control over resources, threat of violence, or other forms of influence — to shape state policies and/or their implementation to favor their interests. State capture is perpetrated by interconnected corrupt economic and political actors targeting state assets and (ab)using weak institutions for their private benefit. A related concept is ‘Elite capture’ which describes a similar phenomenon: resources are usurped by a few, usually politically and/or economically powerful groups, at the expense of the less economically and/or politically influential groups. 3. Much of this material can be accessed through the intranet site of the Political Economy Community of Practice. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 4 >>> Diagnosing the Problem Diagnosing state capture requires demonstrating that policy formulation and/or implementation are manipulated to the advantage of a select few (typically politically connected) private agents. > > > B O X 1 - The Main Required Identification at the Beginning of the Process It typically requires the three following identifications: 1. A set of economic outcomes considered problematic 2. Key stakeholders and their political connections 3. Information on the mechanism by which advantages are conferred on those with ties to those in power A quick stock taking exercise of which policy areas are most likely to be prone to potential rent-seeking can facilitate this process. While capture can manifest itself in myriad of ways, it tends especially when they are correlated with tariffs. Similarly, to to be most prevalent in contexts where government actions detect monopoly power in the telecommunications market, it are an important determinant of firms’ success. This is the can be useful to compare the costs of a phone call to the costs case in markets with high natural (or policy-induced) barriers in neighboring countries and/or countries at a similar stage to entry, and when rents are large and concentrated. Classic of development. manifestations of capture include, but are not limited to: (i) the provision of privileged access to inputs – including credit, im- While it is often easy to identify firms that benefit from certain port licenses and land (ii) perverted public procurement where policies, it may not be easy to identify whether there are ties, contracts are awarded on the basis of connections rather than and if so which ones, between those benefitting from policy- the quality of the bids (iii) selective tax enforcement (iv) reg- induced privilege and those in power. Some relationships are ulatory protection for incumbents (either because of de jure salient however. Politicians have been shown to bestow privi- rules or because of selective enforcement of regulation) and leges upon their family members and friends.4 Some of them (v) excessively generous subsidies, grants and/or tax exemp- also implement policies favoring those from their own ethnic- tions. Assessing whether any of these might be at play by talk- ity, birth regions, and those who finance their campaigns. To ing to knowledgeable colleagues can be a useful first step in identify potentially problematic connections, it can be useful figuring out what (not) to focus on. to examine asset disclosure registries (where they exist) and patterns of political financing. Yet, in many cases ownership Identifying problematic economic outcomes can be facili- links are difficult to document due to the use of a network of tated by benchmarking outcomes against relevant compara- shell companies. tors; to detect tariff evasion, for example, it can be useful to compare the imports of a particular product recorded in the Even when ties between the ruling elite and those benefiting importing country with exports recorded by source countries. from certain policies can be established, it is important to iden- Major discrepancies are potentially indicative of tariff evasion, tify the mechanism by which policies are manipulated. Often- 4. For example, Mobarak, and Purbasari (2006) show that former Indonesian President Suharto (1968-1998) granted privileged access to import licenses to companies where family members were on the firm’s board. Freund, Nucifora, and Rijkers (2014) provide evidence that, in Tunisia, former President Ben Ali (1987–2011) and his family established regulatory barriers that favored firms under their control. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 5 times policies do not discriminate de jure, but de facto policy ing people without evidence can be harmful. Another compli- implementation can be manipulated to favor a select connect- cation arises from then fact that state capture is often perfectly ed few. To diagnose state capture it is important to identify legal.In fact, many of the policies that are frequently captured evidence of such discriminatory implementation of policies. (such as entry regulation) often have a sound underlying nominal rationale. A number of common complications arise when diagnosing capture, however. To start with, oftentimes the political econ- A useful starting point for diagnosing capture is conducting omy problems at the root of a particular economic ailment qualitative interviews with those who have knowledge about may not be immediately visible to the uninformed observer. the local context. Anecdotal evidence on abuse of power Conversely, some outcomes that look like they could be the can often be a useful guide on what type of data to consid- product of capture can have more innocent explanations. er collecting. Of course, it is important to ensure that such Identification of political connections and the mechanisms evidence is sufficiently representative of systematic abuse by which rents are derived is usually challenging, given that before investing a lot of time and resources into collecting those involved have incentives to hide their activities. Accus- systematic data. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 6 >>> Getting the Right Data Approaches to acquire and/or access data must be adjusted Data requirements also depend on the nature of the study. to the local context, taking into consideration both the capac- Typically, the broader the question, the harder it is to obtain ity of local (research) institutions, and prevailing local laws the requisite data. It is often easier to deliver a compelling an- and norms regarding data sharing. Countries differ consider- swer to a very narrowly defined development problem (price of ably in their willingness to share data. For example, in some electricity or transport, tax evasion, and so on…), than to an- countries, databases on procurement contracts are readily swer a broad brush question (e.g. what explains poor gover- available. In others, such data are nearly impossible to ob- nance?). This may help explain why the most actionable (and tain. Local academics or think tanks can frequently provide hence most impactful) studies have been the sectoral rather access to important and sensitive data but sometimes such than broad ones. local partners are hard to find, and they may not always feel comfortable sharing data. Investing in data provided by experts can often help expose the costs of capture and related governance distortions. For Local presence (collaborating with a staff member based in a example, sectoral regional or global industry benchmarks may country or a local consultant) is often critical for studies related be critical to demonstrate price anomalies. The value added of to assessing the prevalence and costs of state capture. Suc- such benchmarks is especially high when obtaining data ac- cessful studies require establishing a trust relationship with cess is prohibitively difficult (this may be the case for capture key decision-makers, institutions and/or well-informed individ- in infrastructure markets or through State-Owned Enterpris- uals. Such relationships not only serve as a conduit for obtain- es).In this regard, when sectoral benchmarking is undertaken, ing crucial (and often confidentially provided) knowledge but it is critical for the Bank team to benefit from the best technical also enable data access, which is often contingent on trust. expertise available. With this end in view, several teams have Cultivating personal relationships with the right actors requires used firm competitive bidding to be able to recruit experts ben- ‘people skills’ from the Bank team. efiting from large cross-country databases5. Obtaining data is typically easier when the Bank team uses Whichever methodology is best suited for analyzing capture them to (first) help policy-makers/implementers meet their im- depends on the nature of the data. Simple descriptive statis- mediate objectives, such as increased revenue collection for a tics can go a long way towards identifying potentially problem- tax administration, generating more electricity for an electricity atic patterns, but compellingly demonstrating capture typically company or Ministry, or better value for money for procure- involves ruling out competing explanations. This, in turn, can ment. Data requests are very rarely successful when framed require more sophisticated methods. as studies solely concerned with understanding political econ- omy dynamics or ‘state or elite capture’ specifically. 5. The World Bank has a competition policy team (https://www.worldbank.org/en/topic/competition-policy) that can help you find the relevant expertise and data. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 7 >>> Maximizing Policy Impact: How to Present Findings In order to maximize policy impact of political economy analy- time and gradually contribute to creating a more open and sis, it is crucial to consider the main audience’s interest and competitive environment. needs, which in turn requires reflecting on their remit of influ- ence and responsibility. Conclusions and recommendations Compelling data analytics that shed light on the impact of rent- that are succinct, substantiated, and actionable are most likely seeking and capture on the efficiency of public administration to be effective. are often a fruitful starting point. Studies that quantify exces- sive private gains/cost of corruption or excessively high mark- Studies focusing on rent-seeking and capture can help to ups tend to be most impactful, especially if they quantify the better inform powerful but losing actors (e.g., citizens, firms, returns to taking remedial action. or public officials) and hence may increase pressure for change. They may also contribute to the formation of coali- Providing quantitative analysis helps demonstrate the scale tions of losers motivated to implement reforms that reduce of the problem and its development impact and can provide rent-seeking opportunities. more neutral and objective information (see Ogien, 2010). Quantitative studies can be an important trigger for reform ef- There is usually a lag between the production of such political forts. At the same time, for the purposes of World Bank opera- economy studies and their impact on the ground. Patience is tions and underlying analysis, practitioners will need to keep in usually required to record change of approach or a new design mind the trade-offs outlined in section 3: narrow questions can of Bank operations. It may take months or even years before be more readily evidenced through data than broader ones, policies are altered and/or operational designs are modified. and the availability and accessibility of relevant data can vary For example, based on the experience in MENA, Mahmood across issues and countries. and Slimane (2018) highlight that addressing capture requires a long-term programmatic approach which uses a mix of vari- Data visualization can also play an important role to convince ous World Bank tools deployed in sequence. Some critical policy-makers. Short notes, blogs, and powerpoint presenta- policy actions may be supported through DPOs while oth- tions are often more widely read than long papers. A good ers may be better supported by advisory activities, and re- strategy is therefore to summarize the main takeaways of your sults-based or investment operations. A well-sequenced set analysis as succinctly and simply as possible. Graphs are of- of reforms –and the exploitation of synergies across various ten a great way to convince readers and make sure that mes- parts of the World Bank– may have a cumulative effect over sages stick. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 8 >>> Selected Recent Examples of Impactful State Capture Analysis Political economy analysis that contributes to reducing state Bank project in Madagascar coincided with an increase in tax capture can improve the development benefits of World Bank revenue collection at the border in excess of 100 million USD financed support. In Haiti, for instance, political economy anal- (the equivalent of a 1% increase in the tax/GDP ratio). ysis conducted in the context of the Haiti Energy Integration and Trade Study (P153043) provided the impetus for a shift In Ukraine, state capture analysis (Balabushko et al. 2018) in the World Bank’s engagement after two decades of stale conducted in light of the new Country Partnership Framework progress. The study documented that energy prices in Haiti (CPF) 2017-2021 showed that politically connected firms are are very high relative to comparator countries and produc- dominant in Ukraine’s economy using various channels6 to ac- tion methods excessively pollutive as a result of monopolistic cess economic rents, while being less productive and grow- energy provision. The lack of competition and investment in ing slower. The findings indicate potentially large payoffs from the energy sector was shown to be due to a combination of policies that promote a more competitive playing field. The clientelism and corruption that benefitted a select few power- study helped inform analytical and advisory support on some ful families, and a parallel black market benefitting a variety of the key mitigation measures, including establishing an an- of politically connected brokers and gangs. The World Bank’s ticorruption framework, and independent anticorruption court new engagement fosters increased competition by stimulating on the one hand, and the use of the electronic procurement the decentralized provision of renewable energy and discon- system, Prozorro, on the other.7 The study also shifted the fo- tinuing funding projects with designs that historically failed to cus of strategic engagement in Ukraine. The CPF 2017-2021 achieve their desired outcomes. identified corruption and state capture as fundamental con- straints to addressing the country’s development challenges. Similarly, in Madagascar, analysis undertaken in the context Interventions to curtail capture in resource management and of a public sector reform project documented widespread col- an additional focus on governance aspects of land reform, and lusion in customs. Customs brokers paid officials in the IT de- the ongoing anti-corruption agenda were introduced. partment to be paired with their preferred inspector who, in exchange for a bribe, would turn a blind eye on fraud. This sys- Another example is the World Bank’s engagement with the tem was costly; tax yield on declarations whose assignment Senegalese tax authorities. A research project unveiled how was manipulated would have been 27% higher in the absence selective tax enforcement prevented certain politically con- of systemic collusion. This analysis led to the sanctioning of nected firms from being audited. The World Bank research several inspectors and the divestment of the assignment of team is now piloting the use of algorithm-based initiation of declarations to customs inspectors to a third party. The World audits to promote tax equity. 6. Such as public procurement, subsidized loans, transfers from the budget, trade regulations that restrict imports, privileged access to state assets through privatizations, and beneficial tax regimes. 7. One of the avenues was leveraging an innovate corruption impact study and bank management commitment to engage directly on corruption issues to generate interest and impact in local media outlets, including print media, online publications and TV shows. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 9 >>> Lessons from Practitioners What are the “must dos” in order to be able to generate im- The Must Do’s pactful studies? It is important to acknowledge that data quality is usually an important challenge and data access is often partial. That is Impactful studies have common characteristics that seem why task teams have to be innovative, use proxies (like indus- conducive to success (i) strong intrinsic motivation from op- try benchmarks), transfer knowledge and strengthen, as much portunistic task teams with technical expertise, (ii) support as possible, data analytics capabilities. from the CMU, (iii) data sharing which is facilitated by cultivat- ing trust and personal relationships between Bank teams and policy-makers and/or researchers, and finally (iv) results are Learning from Common Mistakes succinctly presented in language that is easy to understand, and framed as being directly relevant for the development ob- jectives of the counterpart with economic impacts assessed. A number of common mistakes offer important lessons on how to conduct state capture analysis: Find the right people: Building a team of people who have the relevant expertise is one of the key challenges for task Overly burdensome data requests and ambition: In nu- team interested in conducting quantitative political economy merous cases, data requests may be overly burdensome for analysis. Practice managers, and (senior) colleagues, who counterparts. Requests that are too complex and compre- have worked on comparable topics can often point a task team hensive in countries where data are usually scarce and scat- to people with relevant skills. Help from DECRG researchers tered and data analytics not necessarily developed may prove can also be obtained (see the DECRG website for a list of all counterproductive. Such large ‘ideal’ requests may undermine researchers by area of expertise) by posting a request for sup- goodwill to undertake such studies. The best chance of being port on the research matchmaker. DECRG researchers that successful is to proceed in small steps; start with relatively may have relevant expertise (or who work on related topics) simple data requests that yield initial results, and successively should also be contacted directly. ask for expanded data access. Be opportunistic and pragmatic: The approaches taken to Similarly, many studies are overly ambitious in scope; doing diagnose capture, to access data and present results are criti- good research typically requires significant resources and a cal. In a first instance, teams willing to undertake such stud- substantial time commitment. Impactful studies tend to have ies have to be opportunistic. Openings may happen in some long gestation periods, so it is important not to set unrealis- sectors/institutions whereas they may be impossible in some tically short deadlines and to resist the temptation to try to other areas for various reasons. Such work is also usually tackle too many issues simultaneously. more impactful when done below the radar and jointly with Bank technical teams. Avoid abstract political studies: Frequently studies focus too much on high-level political analysis and do not sufficiently Obtain buy-in from CMU and sectoral colleagues: Support connect this to addressing concrete development problems from CMU of a motivated task team is essential. Due to po- (such as low revenue collection for a tax administration or tential political sensitivity, CMU support is a prerequisite. This corruption in procurement for a procurement agency and so requires budget resources in order to finance, at minima, tech- forth…). As a consequence, even when studies are rigorous nical expertise and strong presence on the ground. and well-executed, their impact on the ground usually remains limited as operationalization of what can be done in specific Cultivate political will: ‘Political will’ of decision-makers is policy areas and administrative functions is not addressed. It usually not exogenous and can be cultivated over time. In is important to provide pragmatic prescriptions. some cases, a virtuous circle can be initiated: data sharing enables initial impact reforms that lead to tangible results, Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 10 which convince decision-makers to share more information to impactful studies are the ones documenting and estimating undertake bolder reforms that, if successful, will lead to even the economic impact of state/elite capture in terms of access bolder reforms and data sharing. to finance, unfair competition, revenue losses, additional rents for selected connected companies and so on. Without num- Estimate economic impacts: Such studies have to assess, bers and figures, political economy analysis remains easier to as much as possible, the economic impact of state or elite trivialize and discredit which can limit its impacts. capture in order to be (potentially) impactful. Indeed, the most >>> Concluding Remarks This note described the practical approaches to measure and present state capture, as an illustration of how political economy analysis can help promote development. Even though the topic is often politically sensitive and difficult to tackle, this note shows that with the right approach, data access and adequate presentation of the findings, the potential impact of quantitative political economy analytics is substantial, and can also prevent the Bank from undertaking flawed projects that prove counterproductive. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 11 >>> Bibliography Balabushko, O., O. Betliy, V. Movchan, R. Piontkivsky, and M. Ryzhenkov. 2018. “Crony Capitalism In Ukraine: Relationship Between Political Connectedness and Firms’ Performance.” Policy Research Working Paper 8471, World Bank, Washington, DC. Benhassine, Najy, Saadani Hassani, Youssef, Keefer, Philip E., Stone, Andrew H. W., Wahba, Sameh Naguib. 2009. From privilege to competition: unlocking private-led growth in the Middle East and North Africa. MENA development report. Washington, DC: World Bank Brockmeyer, Anne. 2019. “Working with Administrative Tax Data: A How-to-Get-Started Guide”, MTI Practice Note 7, Washington: World Bank. Fiebelkorn, Andreas. 2019. “State Capture Analysis: How to Quantitatively Analyze the Regulatory Abuse by Business-State Relationships”. Governance Discussion Paper No. 2. Washington, D.C.: World Bank Group. Freund, C., Nucifora, A., and B. Rijkers. 2014. “All in the Family: State Capture in Tunisia”, Journal of Development Economics, volume 124, pp.41-59. Johnson, S., and T. Mitton. 2001. “Cronyism and Capital Controls: Evidence from Malaysia.” NBER Working Paper 8521, National Bureau of Economic Research, Cambridge, MA. Mahmood, S.A., and M.A.A. Slimane. 2018. Privilege-Resistant Policies in the Middle East and North Africa: Measurement and Operational Implications. MENA Development Report. Washington, DC: World Bank. Mobarak, A., and D. Purbasari. 2006. “Corrupt Protection for Sale to Firms: Evidence from Indonesia. Available at: https://pdfs.semanticscholar.org/4452/ c1ec35ce71167460e582cf3b191f57724568.pdf Ogien, A. 2010. “La Valeur Sociale du Chiffre”, Revue Française de Socio-Économie 1, 5, pp.19-40. Rijkers, B., Baghdadi, L. and Raballand G. (2017), “Political Connections and Tariff Evasion Evidence from Tunisia”, World Bank Economic Review 31, issue 2, pp.459-482. World Bank. 2018. World Development Report 2017: governance and the law. World Development Report. Washington, D.C.: World Bank Group. Equitable Growth, Finance & Institutions Notes | State Capture Analysis A How to Guide for Practitioners <<< 12