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

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  • Hasnain, Zahid

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.

Suggested Citation

  • Hasnain, Zahid, 2011. "Incentive compatible reforms : the political economy of public investments in Mongolia," Policy Research Working Paper Series 5667, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5667
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    References listed on IDEAS

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    1. Alesina, Alberto & Hausmann, Ricardo & Hommes, Rudolf & Stein, Ernesto, 1999. "Budget institutions and fiscal performance in Latin America," Journal of Development Economics, Elsevier, vol. 59(2), pages 253-273, August.
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    Cited by:

    1. Allen, Richard & Grigoli, Francesco, 2012. "Enhancing the Capability of Central Finance Agencies," World Bank - Economic Premise, The World Bank, issue 73, pages 1-7, January.
    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.
    3. Naazneen H. Barma, 2014. "The Rentier State at Work: Comparative Experiences of the Resource Curse in East Asia and the Pacific," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 1(2), pages 257-272, May.

    More about this item

    Keywords

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

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