The Principled Agent

Thoughts on development economics and impact measurement

The Trouble with the Institution Agenda

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Douglas North and company benefitted our understanding of how economies grow with a series of papers and books on the role of institutions. Institutional development can take many forms, but often involves providing large sums of money and technical assistance to governments. The donor can tout that the improved institutions will be self-sustaining (rather than creating a dependency on the developed world!) and provide greater local ownership of development. Unsurprisingly, institution building is hot.

The problem with institutional development is that we aren’t quite clear what constitutes a good institution (i.e., plenty bear the trappings, but not the horse), and we don’t know how to make them. The former question complicates the latter and the latter undermines development work. What’s more, while we don’t know how to make good institutions, the evidence we do have suggests that the strengthening of state institutions only undermines the cause. Sue Unsworth provides the broad strokes in An Upside Down View of Governance (HT: Chris Blattman):

…the research findings reveal that underlying the new activism [of “western policymakers … becoming much more actively involved in looking for ways of addressing these challenges posed by weak or ‘fragile’ states'”] are two very unhelpful assumptions: that state building involves putting in place formal, rules-based institutions designed to protect civil, political, social and economic rights; and (despite their protestations about this being a local political process) that Western governments need to take a leading role in finding and funding solutions.

This “Upside Down View of Governance” is specifically addressing top-down institutional building in fragile states, but the lessons apply across the political development continuum.

The key is to understand the incentives that drive elite interests, the way sources of revenue shape relations between governments and taxpayers, the relationship between people who hold political power and people who hold economic power, and the way informal ‘traditional’ institutions operate at a very local level.While the orthodox approach of creating formal, rules based political and market institutions may be a valid long-term goal, it is ill suited to helping poor countries with weak governance to improve stability and security or to increase productive investment in the short to medium term. Viewing the world through an OECD lens, and assuming that ‘west is best’, can get in the way of discovering more unorthodox, incremental ways of making progress.

As stated in Autonomous Recovery and International Intervention in Comparative Perspective, top-down institution building belies the European (world?)  experience:

The establishment of representative institutions depended in important ways on the degree to which rulers were economically dependent on taxpayers for revenues to fight their wars. North and Weingast, in their study of the origins of constitutional arrangements in England after the Glorious Revolution, also link the economic dependence of rulers to the establishment of representative institutions. The Crown gave taxpayers a voice in Parliament – and a credible commitment to uphold property rights – in exchange for the continued right to tax at a reasonable level. While war-making was not central to their story of democratic expansion, the revenue imperative of the Crown made reshaping institutions and constraining the power of the monarchy a rational strategy to improve the bottom line.

Many will limit this argument to the Somalia’s of the world. There is, however, a larger discussion to be had on how donors, both nation-states and NGOs, engage with countries where the people lack the political and economic means to hold government accountable. Western policymakers (or at least thought leaders) are understandably apprehensive about imposing Western values on a country against its will. At the same time, these same thought leaders avoid the rather tough problem of reconciling this noble aim with the reality that many national governments, whom they seek to empower through “local ownership” of development dollars, do not govern by consent of the people and do not have an incentive to serve their citizens.

King Arthur: The Lady of the Lake, her arm clad in the purest shimmering samite held aloft Excalibur from the bosom of the water, signifying by divine providence that I, Arthur, was to carry Excalibur. THAT is why I am your king.
Dennis: Listen, strange women lyin’ in ponds distributin’ swords is no basis for a system of government. Supreme executive power derives from a mandate from the masses, not from some farcical aquatic ceremony.

Not only is the farce oft ignored, but many argue that NGOs should conduct their work through the government, to both a) avoid waste in the duplication of services by different non-state actors, and b) to respect and assist the local people in deciding their fate (through their often unresponsive proxy – the government). Yet it was the wasteful replication of independent power bases in Europe, be it the German principalities, or the English commercial class that provided the foundation for liberal institutions.  The distribution and autonomy of economic power in a society may be our best (untested, to my knowledge) predictor of institutional quality, and this balance may be best served by subnational NGO interventions that target a) marginalized populations and b) commercial classes that would have an incentive to keep peace and hold the government accountable.

At the same time, though it may be difficult to draw a line in the sand of where legitimate government begins and ends, does that mean we should not more carefully reconsider whether respecting the wishes of an illegitimate national government is wisdom or a bad habit left over from the 20th century celebration of national government power? To go a step further, why not err on the side of caution and not judge any government as good or bad, and instead distribute all aid directly to the people? Would this not better respect the values of the poor and the dictum “do no harm” than channeling aid to the same powers who restrict political and economic access in the name of “local ownership” and “capacity building”?

In sum, institutions matter. But you don’t build institutions with money and words on paper, you build them on economic balances of power that can support a liberal social compact. You don’t catalyze the economic and political empowerment of the sub-elite by strengthening the very institutions that marginalize them, you don’t build quality institutions by giving the house more chips.

Written by Chris Prottas

September 28, 2010 at 4:30 am

Posted in Development

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