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Aiding Social Protection: the political economy of externally financing social policy in developing countries

Periodic Reporting for period 3 - aidsocpro (Aiding Social Protection: the political economy of externally financing social policy in developing countries)

Reporting period: 2018-05-01 to 2019-10-31

The problem being addressed by this project is two-fold. On one hand, it explores tensions involved with the macroeconomic management of aid and other official flows between financial need versus efforts by donors and international financial institutions (IFIs) to influence national policy agendas of the recipient countries, through conditionalities or other forms of pressure. These tensions are particularly relevant given donor commitments to principles of national ‘ownership’ since the Paris Agenda in the mid-2000s, despite ample evidence that they still attempt to influence policy agendas through a variety of channels, either financial or non-financial, some explicit and crude, others less so. Macroeconomic management also concerns issues of aid absorption, which occurs through trade deficits and, in this macroeconomic sense, is in tension with the pressure for countries run trade surpluses or limit trade deficits and accumulate reserves, and disciplined in this respect by a context of relatively open financial systems. Absorption addresses the question of whether aid flows are actually redistributive, in the sense of augmenting the consumption of goods and services of the recipient country rather than simply compensating income or financial outflows or even facilitating them, as might occur when aid is tied to conditions of financial liberalisation and deregulation. Hence, it is possible that some conditionalities undermine the redistributive impact of aid, even whilst the aid is justified in terms of addressing this financial need for redistribution.

On the other hand, the project investigates how such influences play into the political economy surrounding the evolution of social policy in recipient countries, as a key realm of redistribution and distributive struggles within these countries. In particular, certain models of social protection have been vigorously promoted by donors since the early 2000s, often against the resistance of recipient country governments, in tension with alternative policy objectives envisaged by such governments in contexts where public resources are, in general, severely constrained. The concern of the research also stems from the fact that these models are characterised by narrow forms of targeting that in many cases encourage fragmentation, stratification and segregation in social protection and provisioning systems, rather than more comprehensive, integrated, cross-class, and even universalistic approaches, as often preferred by many recipient country governments (although sometimes not in the case of the more conservative ones).

The specific policy case of social protection – in particular cash transfers – brings together these two strands of research given that donors have at least notionally directed significant portions of aid towards the promotion of cash transfers. This is despite the fact that these are domestic social expenditures, denominated in domestic currency, which can in principle be financed domestically and do not require the foreign exchange that aid represents. In the initial proposal of this project, the latter point was presented as a financial quandary or a ‘monetary transformation dilemma’ facing the transfer of aid from foreign to domestic resources. The PI contended that this dilemma implicates a range of complex and politicised processes in macroeconomic policy. The increasing emphasis of domestic expenditures by donors would therefore tend to exacerbate the politicised controversies and power struggles already involved within donor-recipient relations, as well as within the recipient countries themselves, from macroeconomic conditionalities to negotiations regarding domestic spending commitments. The implications, he argued, require a serious rethink of many of the accepted premises in the political economy of aid and related literatures, in particular highlighting the often-contradictory tensions that recipient governments must deal with in orde
Under the auspices of the project, the PI has so far published four publications (two journal articles, one in an A-rated journal, and two working papers, all single authored). The two working papers serve as the analytical foundation of the project. The PI has an additional a single authored book that is in the final stages of production and that should be released by summer 2018. The post-doc on the project (hired with the overheads – see below) has also submitted two papers to leading A-journals in the field. With the rest of the team, we are currently in the course of producing around 10 article submissions, as well as policy briefs, discussion and working papers. Due to the late start of the PhD students for reasons beyond our control, we decided to postpone the production of the first series of working papers until after the fieldwork stage of the project.

So far, all publications have been published open access (gold standard) without cost to the project. The first journal article was part of a forum that was already funded for open access, and the second fell under the purview of an agreement between Dutch universities and Wiley for all publications from academics based at Dutch universities to be published open access.

As an additional achievement, the PI won the 2015 International Studies in Poverty Prize in February 2016, awarded by Comparative Research Programme on Poverty (CROP), with its secretariat based in Bergen, Norway. This was based on his proposal and preliminary work on his first single authored book for the project, which is now in a stage of near-completion (Poverty as Ideology: Rescuing Social Justice from Global Development Agendas). The book will be published open access by Zed Books, as part of an arrangement with CROP.

Other major achievements include establishing the research team. This included inducting the three PhD researchers, and getting them through their first year (which they all passed successfully) and started on their fieldwork by the beginning of the third year of the project as planned. All of this was achieved very successfully (as described below) and was the dominant focus of the first two years of the research project. The recruitment of the PhD candidates took place through an open and competitive international call for applications in spring 2015, which generated over 60 applications for the three positions. As noted below, the three candidates selected were each from one of the case countries, although they also happened to be the strongest candidates. They started their PhDs in February 2016.

The PI also negotiated with the HI to use part of the overhead of the project to finance a three-year post-doc to replace his teaching and also to support the project. The recruitment for this position also occurred through an open competitive international call in spring 2015, which generated over 60 applications. The postdoc who was selected – a graduate from London School of Economics in the UK – started her position in October 2015.

When the team was finally assembled in February 2016, we then ran a weekly series of PhD research seminars throughout 2016, focused on theoretical, empirical and methodological themes related to the research project. The aim was to build up a strong shared understanding in the team about the project and its position in the broader academic literature, to strengthen our team collaboration, and to also give a strong training for the students to pass the first year of their PhDs, referred to at the HI as the Dissertation Design Seminar (DDS) and effectively the equivalent to an upgrade seminar in the UK system. All three PhD students passed this stage very successfully by late January / early February 2017, within a year of starting their degree.

Soon after, the PhDs left for their fieldwork at the end of February or March 2017. The PI then joined them to work together in the field (this phase is still ongoing), first in Ecuador and Paraguay
The iterative inductive approach used in the project to analyse trends in the structure of balance of payments as a means to identify their potentially constraining and compelling influences on the political economy of public policy is novel within the literatures on aid, on the political economy of social protection, on institutional change, and on policy diffusion, which are our main comparison literatures. In these literatures, quantitative work is mostly restricted to deductive econometric approaches, usually cross-country, which the PI has argued are not able to identify the important dynamics and processes that we are researching, and lacks potential for interdisciplinary research (as opposed to multi-disciplinary work, which is how it is usually combined). Qualitative work, however, mostly exhibits a weak engagement with complex quantitative evidence, such as with respect to the complex interactions of external flows with fiscal systems, which are very difficult if not impossible to statistically model without losing the richness of complexity, but that nonetheless demand serious (inductive) quantitative investigation.

As detailed in the Description of Action and above, our interdisciplinary approach derives from this combination of macroeconomic and international finance research on the role of external financing, with political research on the policy processes related to the adoption, design and implementation of social protection policies in the case countries, under the strong advocacy by donors and international financial institutions through both financial and non-financial channels. The integration of these two aspects of the project is ongoing. The quantitative macroeconomic work has been mostly conducted by the PI. The insights from this have been used to inform the more political research, which has been led by the PhD students in the field, although the PI spent time in each of the case countries with the PhD students while they were in the field, as a means to ensure this integration and also to allow the PI to conduct qualitative research on several specialised tangents, mainly with central bank and finance ministry officials. As the PhD students are returning from their fieldwork now, the integration will continue as we process the results from their fieldwork and work towards the production of a series of publications that will embody this interdisciplinary approach.

Our approach has already proven its effectiveness, by revealing potent avenues of inquiry that we have used in our qualitative interviews with government officials, in particular those from finance ministries and central banks. A notable example of this was during our research in Zambia. The PI was able to identify an anomaly that started to appear in the Zambian financial account following debt-relief in the 2000s, and in particular since the Global Financial Crisis in 2007-08. In our subsequent interviews with Central Bank officials in Zambia, we discovered that they were also trying to figure out this anomaly. It appears that the anomaly represents illicit or unreported profit remittances or financial outflows. Indeed, the anomaly was the intentional creation of the central bank based on their observation of discrepancies between their own national reporting versus the reporting of assets held by Zambian residents by international banks to the Bank of International Settlements, which led them to believe that the discrepancies belonged in this category rather than in the more usual category of errors and omissions (which would have of course raised alarm bells, given the magnitude of these flows). While these choices might be justified, they effectively hide the discrepancies in an otherwise orderly balance of payments. Drawing from these iterative insights, the PI estimated that profit remittances or their equivalent are more to the tune of 15-20% of GDP, rather than the 5% reported in the current account, and are most likely dominated