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Incentive compatible reforms : the political economy of public investments in Mongolia

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  • Hasnain, Zahid
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    Abstract

    Why do politicians distort public investments? And given that public investments are poor because presumably that is what is politically rational, what types of reforms are likely to be both efficiency improving and compatible with the interests of politicians? This paper explores these two questions in the context of Mongolia. It argues that Mongolian members of parliament have an incentive to over-spend on smaller projects that bring benefits to specific geographical localities and to under-spend on large infrastructure that would bring economic benefits to Mongolia on the whole. The incentive for the former is that members of parliament internalize the political benefits from the provision of particular, targeted benefits to specific communities. The disincentive for the latter is that large infrastructure carries a political risk because the political faction in control of that particular ministry would have access to huge rents and become politically too powerful. The identity of these"winners"is uncertain ex ante, given the relatively egalitarian and ethnically homogenous nature of Mongolia's society and polity. Anticipating this risk, members of parliament are reluctant to fund these projects. Since these large infrastructure projects are crucial for national growth, neglecting them hurts all members of parliament. Members of parliament will therefore support reforms that collectively tie their hands by safeguarding large, strategic investment projects from political interference thereby ensuring that no political faction becomes too powerful. This protection of mega-projects would need to be part of a bargain that also allows geographical targeting of some percentage of the capital budget.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5667.

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    Date of creation: 01 May 2011
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    Handle: RePEc:wbk:wbrwps:5667

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    Keywords: Debt Markets; Public Sector Expenditure Policy; Political Economy; Access to Finance; Parliamentary Government;

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    1. Ricardo Hausmann & Alberto Alesina & Rudolf Hommes & Ernesto H. Stein, 1998. "Budget Institutions and Fiscal Performance in Latin America," Research Department Publications, Inter-American Development Bank, Research Department 4160, Inter-American Development Bank, Research Department.
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    Cited by:
    1. Richard Allen & Francesco Grigoli, 2012. "Enhancing the Capability of Central Finance Agencies," World Bank Other Operational Studies 10061, The World Bank.
    2. Jurgen Blum & Nick Manning & Vivek Srivastava, 2012. "Public Sector Management Reform : Toward a Problem-Solving Approach," World Bank Other Operational Studies 17057, The World Bank.

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