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Reform leaders who want to pursue technically sound policies are confronted with the problem of getting myriad government agencies, staffed by thousands of bureaucrats and state personnel, to deliver. This paper provides a framework for thinking about the problem as a series of interdependent principal-agent relationships in complex organizations, where one type of actor, the agent, takes actions on behalf of another, the principal. Using this framework to review and forge connections across a large literature, the paper shows how the crux of state capacity is the culture of bureaucracies -- the incentives, beliefs and expectations, or norms, shared among state personnel about how others are behaving. Although this characterization might apply generally to any complex organization, what distinguishes agencies of the state is the fundamental role of politics -- the processes by which the leaders who exercise power over bureaucracies, starting from the lowest village levels, are selected and sanctioned. Politics shapes not only the incentives of state personnel, but perhaps more importantly, it coordinates their beliefs and expectations, and thereby the performance of government agencies. Recognizing these roles of politics, the paper offers insights for what reform leaders can do to strengthen state capacity for public goods.

This paper brings the economic tools of demand and supply curves to better understand how political markets shape the selection of government policies. It does so to tackle a problem at the intersection of political science and economics: government failure to pursue policies on the basis of sound technical evidence. Too often, the leaders who wield policy-making power within governments deliberately and knowingly ignore sound technical advice, or are unable to pursue it despite the best of intentions, because of political constraints. The paper shows how the prevailing dominant explanation for suboptimal policies and weak institutions, of special interest and elite capture, can be understood as the selection of a point on the political demand curve by oligopolistic political competition. Further, it shows how elite capture is only one of many possible outcomes, and is endogenous to preferences and beliefs in society. Preferences in society for public goods (or the lack thereof), and beliefs about how others are behaving in the public sector, are the primitive or fundamental elements driving the shapes of political demand and supply curves and thence the selection of public policies and institutions. This framework highlights the need for future research to understand where political preferences and beliefs come from, which is essential to the design of institutions that address problems of public goods.

This paper reviews the literature relevant to understanding political constraints to economic reforms. Reform refers to changes in government policies or institutional rules because status quo policies and institutions are not working well to achieve the goals of economic well-being and development. Further, reforms refer to the alternative policies and institutions that are available that would most likely perform better than the status quo. The main question examined in the political economy of reform literature has been why reforms are not undertaken when they are needed for the good of society. The succinct answer from the first generation of research is that conflict of interest between organized socio-political groups is responsible for some groups being able to stall reforms so that they can extract greater private rents from status quo policies. The next generation of research is tackling a more fundamental question: why does conflict of interest persist; or, why do some interest groups exert influence against reforms if there are indeed large gains to be had for society? These are questions about norms and preferences in society for public goods. The next step is to examine where norms and preferences for public goods come from, and which institutional arrangements are more conducive to solve the public goods problem of pursuing reforms. After reviewing the available and future directions for research, the paper concludes with what all of this means for policy makers who are interested in understanding the factors behind successful reforms.

Résumé La multiplicité des appartenances identitaires conduit à des situations de clientélisme ( patronage democracy ) dans la distribution des biens publics. Les politiques décentralisées peuvent dès lors avoir des effets pervers : les populations défavorisées peuvent être incitées à demander à bénéficier de politiques ciblées, plutôt qu'à se mobiliser pour que les niveaux d'éducation ou de santé publique soient améliorés. Un arbitrage délicat entre politiques ciblées et politiques universelles de lutte contre la pauvreté reste à trouver.