PSIA Analytical Approach

Although there is no methodological template for analyzing the poverty and social impacts of policy, it is possible to identify a number of elements that make for good-practice PSIA. This section outlines 10 key elements that those attempting to undertake or advise on PSIA will need to address:

1. Asking the right questions
2. Identifying stakeholders
3. Understanding transmission channels
4. Assessing institutions
5. Gathering data and information
6. Analyzing impacts
7. Contemplating enhancement and compensation measures
8. Assessing risks
9. Monitoring and evaluating impacts
10. Fostering policy debate and feeding back into policy choice.

While there is a logical sequence to these elements, this does not imply that they need to be undertaken in strict order or that all the steps will be feasible in every country.

This section provides a broad overview of specific methods and tools that can be used to address each of these elements.

The first stage of PSIA is to identify (1) the reform or set of reforms for analysis, and (2) the key questions to be addressed by the analysis.

1. The identification of the policy reform for analysis is a matter of judgment at the country level. It will likely depend on factors such as:

• The expected size and direction of the poverty and social impacts,
• The prominence of the issue in the government's policy agenda,
• The timing and urgency of the underlying policy or reform, and
• The level of national debate surrounding the reform.

2. The formulation of the key questions for analysis requires an understanding of the underlying problems that the reform is intended to address, both in the short and the long term. The formulation can be done with a problem diagnosis, which organizes the chain of cause and effect from policy objectives to constraints, to choices, to impacts. It is also important to define a counterfactual, i.e. what the social and poverty impact of not having the reform would be.

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Stakeholder analysis identifies the people, groups and organizations that are important to consider when looking at the poverty and social impacts of reforms. It describes their characteristics and assesses their interests in relation to the reform. Identification of stakeholders is important because policy changes affect different groups differently and stakeholders can influence the adoption and implementation of various parts of a reform agenda.

The analysis of poverty and social impacts should examine the following:

• Stakeholders who may be affected by the reform, positively or negatively.
• Stakeholders who may affect the reform, by supporting or resisting it.

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After analyzing stakeholders, PSIA identifies the channels through which a particular policy change is expected to affect them. The expected impacts of a policy change on the welfare of different stakeholders will manifest themselves through various transmission channels. There are five main channels through which policies affect stakeholders:

• Employment
• Prices - production, consumption, and wages
• Access to goods and services
• Assets - physical, natural, social, human, financial
• Transfers and taxes

The transmission channels will convey different impacts on stakeholders, depending on the reform in question. Impacts may differ along two key dimensions. First, impacts can be direct (when they result directly from changes in the policy levers altered by the reform) or indirect (when they result from the reform through other channels). Second, the nature of impacts may vary over time, and so will net impacts on various stakeholders.

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The channels through which policy reforms affect stakeholders run through institutions. Institutions are the formal and informal rules of the game that affect the behavior and incentives of stakeholders. Institutions determine the framework in which policy reforms may affect households and individuals, and are the main arenas in which stakeholders interact with one another. Changes in these institutions are themselves often the object of policy reforms. Also, many policy changes require particular organizations to play central roles in their implementation. In this regard, PSIA needs to consider:

• How institutions and interests mediate the impact of policy reforms
• How the analysis of markets and organizational structures reveals the necessary conditions for the benefits of interventions to reach the poor

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Once the policy issues, stakeholders and likely transmission channels have been identified, the analyst should assess the available data to determine what type of analysis is feasible and plan future data collection. Four steps are suggested:

• Mapping out desirable data and information for PSIA (includes both quantitative and qualitative)
• Taking stock of available information and prior analyses
• Adapting PSIA to data and information limitations ex ante (includes selecting a feasible analytical approach and collecting additional data)
• Planning to prevent limitations in the future (includes developing a strategy for data collection, monitoring and ex-post analysis that builds national capacity for PSIA)

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• Social tools (social impact assessment, participatory poverty assessment, beneficiary assessment, and social capital assessment)
• Direct impact analysis tools (such as average and marginal incidence analysis, poverty mapping, and tools to assess public service delivery)
• Behavioral models (including supply and demand analysis, behavioral incidence analysis, and household models)
• Partial equilibrium analysis (such as multi-market models or reduced-form techniques)
• General equilibrium models (including social accounting matrices and computable general equilibrium models - CGEs)
• Tools linking microeconomic behavior or distribution with macroeconomic frameworks or models.

For comprehensive and effective impact analysis, the PSIA approach advocates the integrated use of both quantitative and qualitative tools and methods.

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If the ex-ante analysis reveals adverse effects on the living standards of the poor or other vulnerable groups, one could:

• Consider alternative design: the design of the reform can be improved by including enhancement or mitigation measures, or a different sequencing of public actions
• Consider direct compensatory mechanisms: when adverse effects are unavoidable, one can consider compensatory measures on poverty, equity, or political economy grounds
• Consider delay or suspension of reforms: if the benefits of the reform are lower than the costs of mitigating or compensating the poor

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Risk assesment addresses the risk that some of the assumptions underlying the analysis may not be realized. This provides further insights into policy choice and design. In addition, when combined with careful monitoring, risk analysis can help anticipate and address major unintended consequences by adjusting the reform during implementation.

There are four main types of risk in PSIA:

• Institutional risks: risks that assumptions regarding institutional arrangements and/or organizational performance were incorrect (for instance, unexpected market failure, reform complexity exceeding institutional capacity, vested interests in the agency)
• Political economy risks: risks that groups may block implementation, capture benefits, or reverse reform actions
• Exogenous risks: risks of shocks such as conflict, financial crisis, terms of trade shocks, or natural disaster
• Other country risks: risks of political instability, conflict or social tensions undermining effective reform

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Monitoring and evaluation play an important role in the analysis of poverty and social impacts of reforms. During implementation, they are critical to validate ex-ante analysis and, where necessary, to influence the reformulation of policy reforms. By following impact indicators and the assumptions underlying the analysis, monitoring helps to signal unexpected developments. Monitoring and evaluation are also central in the promotion of accountability and ownership.

In order to enhance their impact, monitoring and evaluation systems are best set up during the initial stages of reform. They should also be integrated with existing systems in order to strengthen national capacity.

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