Capacity Development and Institutional Change

1. Capacity Development and Institutional Change Jaap Voeten and Saeed Parto Seminar ‘Scrutinizing Success and Failure in Development’ Wageningen International, 3 Dec. 2007

2. Objective To promote understanding of institutions and institutional change in capacity development … By introducing several concepts from new economic theory.

3. Contents • Problem exploration ‘capacity development and institutional change’ (JV) • Review institutional theories economics (JV, SP) • Analytical framework institutional assessment (SP) • Case illustrations (SP, JV)

4. Seminar problem statement ‘A significant cause of failure of many well intended capacity development interventions is a limited understanding of institutions and false assumptions about processes of social change’. More often then not, CD interventions do not meet expectations. There is something missing in the existing CD approaches, methods, plans Why would understanding institutions be critical in CD?

5. Capacity Development What is it? Many definitions… Two essential elements: • various approaches, strategies and methodologies • seek to improve performance at different levels Still quite vague, what is meant by the term ‘capacity’?

6. Capacity • Abilities, skills, understandings (explicitly addressed in CD) • Attitudes, values, relationships, behaviors, motivations (implicitly, indirectly addressed) • (Resources and conditions)

7. What is missing/implicit? Issues of attitudes, mentalities, values, motivations, culture, norms all concern: • Human interaction There is something missing in our understanding of human interaction in CD

8. Emerging questions • How could we better understand the human interaction in capacity development? • What theories on human interaction exist and could be of help? • What about institutional theories?

9. Theoretical concepts New economic theories address human interaction in their analysis: • Transaction Cost Theory • New Institutional Economics • Evolutionary Economic Theory

10. Transaction costs theory What makes some markets more imperfect than others? Transforming Transacting Costs of measuring, enforcement, (dis)trust

11. Transaction costs Costs implied in economic transacting due to human interaction issues. Transaction costs need to be taken into account in the analysis. Assuming that measurement, enforcement and trust are costly and context related, explains why some economies/markets develop better than others.

12. New Institutional Economics What determines the transaction costs? In economic transaction, rules of the game are framed (contract, enforcement, trust). If the framework is clear -> low transaction costs Rules of the game = ‘Institutions’ Institutions are the rules of the game in a society, they are the humanly devised constraints that shape human interaction.

13. Examples of institutions Formal rules: constitution, law, policy, regulations, tax, contracts on paper Informal rules: conventions, norms of behavior, values, attitude, (self imposed) codes of conduct, routines, personal standards of honesty Institutions (rules) <-> Organizations (players)

14. Functions of institutions • provide stability and predictability • facilitate behavior in recurrent interaction • codify accumulated knowledge in routines and traditions • communicate values by containing social prescriptions for behavior • Institutions are regulated power relations

15. Evolutionary Economic Theory • Sees the economy as always in the process of change • The economic context is not completely understood by the actors; they can not make optimal choices. • Institutions help cope with incomplete information and uncertainty providing guidance and stability • An always changing economy implies changing institutions.

16. Implications Institutional change • The more complex a society, more formal rules • Institutions serve the ones in power, not necessary (socially) efficient • Formal rules can change overnight, informal rules usually do not • Path dependency perpetuates the existing institutions • Institutional changes imply internalization • Institutions will never reach a steady state

17. SP: Reconstruction of Afghanistan • Started in earnest in late 2001 • A number of international conferences held on how to reconstruct • Numerous infrastructure and service provision programmes were introduced including: • Microfinance (2003) • Community Development Councils (2004) • Water User Associations (2005)

18. Policy Process Dynamics Physical / Material Conditions Institutional Context Patterns of Interactions Attributes of Community Outcomes Policy Decisions

19. Policy Process Dynamics Physical / Material Conditions Institutional Context Patterns of Interactions Attributes of Community Outcomes Policy Decisions Problem(s)

20. Policy Process Dynamics Physical / Material Conditions Institutional Context Patterns of Interactions Attributes of Community Outcomes Policy Decisions Problem(s) Decision making analysis (March and Olsen)

21. Policy Process Dynamics Physical / Material Conditions Institutional Context Patterns of Interactions Attributes of Community Outcomes Policy Decisions Problem(s) Network Analysis Coleman; Burt Decision making analysis (March and Olsen)

22. Policy Process Dynamics Physical / Material Conditions Institutional Context Patterns of Interactions Attributes of Community Outcomes Policy Decisions Problem(s) Network Analysis Coleman; Burt Implementation Analysis Mazmanian and Sabatier Decision making analysis (March and Olsen)

23. Policy Process Dynamics Physical / Material Conditions Institutional Context Patterns of Interactions Attributes of Community Outcomes ? ? Policy Decisions Problem(s) Network Analysis Coleman; Burt Implementation Analysis Mazmanian and Sabatier Decision making analysis (March and Olsen)

24. What are “Institutions”? • A way of thought or action of some prevalence or permanence, embedded in the habits of a group or the customsof a people (Hamilton 1932) • Conventions, rules of action, embedded in social structure, locally specific (Krätke 1999) • Settled habitsof thought commonto the generality of men (Veblen 1919) • Collective action exercised by different types of organization (family, corporation, trade union, state in control of individual action (Commons 1924) • Convenient term for the more important among the widely prevalent, highly standardized social habits (Mitchell 1950) • Sets of rules of the game or codes of conduct defining social practices (Young 1994) • Formal organizations, patterns of behaviour, negative norms and constraints (Coriat and Dosi 1998) • Mental constructs (Neale 1987) • Rules of the game (North 1990) / How the game is played (Nelson and Sampat 2001) • A set of socially prescribed patterns of correlated behaviour (Bush 1986) • Prescribed or proscribed patterns of correlated behaviour(Tool 1993) • Constitutional rule systems for society, collective choice rules governing different kinds of organization, operational rules of organizations • Norms that regulaterelations among individuals (Parsons 1990)

25. Typology of Institutions • Constitutive • Regulative • Associative • Cognitive • Behavioural

26. Introducing Microcredit Organizations in Afghanistan Rationale for Microcredit: • High “unmet demand” for credit in rural areas • Lack of access to credit in rural areas • Microcredit as a means to improve economic and social wellbeing in rural areas

27. Introducing Microcredit Organizations in Afghanistan Research Objectives: • Investigate role of Microcredit in rural communities • Assess impact of Microcredit on rural livelihoods • Take stock of changes in rural socio-economic conditions due to introduction of Microcredit

28. Introducing Microcredit Organizations in Afghanistan Methodology: • 32 households in 4 provinces • “chit chats” • Focus Group Meetings • Key Informant interviews (shopkeepers, farmers, teachers, mullahs, eldermen, widows, MFI staff) • A lot of time and sweat

29. Introducing Microcredit Organizations in Afghanistan Findings (1): • Significant amount used for consumption smoothing, but also some for increased economic activity • Used for weddings, funerals, medical expenses, repaying loans from traditional sources and vice versa • Borrowed for others (wives for their husbands, kin, friends) • Overly strict repayment schedules • Amounts too small, lent over too short a period, to make a difference in livelihood of borrowers

30. Introducing Microcredit Organizations in Afghanistan Findings (2): • Selling assets (land, livestock) to make payments • Contravention of Islamic notion of credit • MC is a new “product” on the highly structured and evolved rural credit market • Statistics on high uptake of MC in rural areas is misleading because the novelty factor is not taken into account • Statistics on the high percentage (68%) of women taking MC loans is misleading because they mostly borrow for their husbands – there are some exceptions

31. How can institutional analysis help in finding solutions?

32. Source: Parto and Regmi (2007)

33. Behavioural Institutions Source: Parto and Regmi (2007)

34. Cognitive Institutions Behavioural Institutions Source: Parto and Regmi (2007)

35. Associative Institutions Cognitive Institutions Behavioural Institutions Source: Parto and Regmi (2007)

36. Regulative Institutions Associative Institutions Cognitive Institutions Behavioural Institutions Source: Parto and Regmi (2007)

37. Constitutive Institutions Regulative Institutions Associative Institutions Cognitive Institutions Behavioural Institutions Source: Parto and Regmi (2007)

38. Source: Parto and Regmi (2007)

40. To Summarize…. • Some institutions are slow to catch up with and adjust to new knowledge (learning) • The question is seldom whether to intervene, but how to do so effectively and with the least negative impact • Work through, or with, current institutions • Catalyze complementary institutionalization processes

41. “Good” Development Policymaking? The core responsibility of those who deal in public policy – elected officials, administrators, policy analysts, [and academics] – is not simply to discover as objectively as possible what people want for themselves and then to determine and implement the best means of satisfying these wants. It is also to provide the public with alternative visions of what is desirable and possible, to stimulate deliberation about them, provoke a reexamination of premises and values, and thus to broaden the range of potential responses and deepen society's understanding of itself. Robert Reich, The Power of Public Ideas (1988)

42. Policy Process Dynamics Physical / Material Conditions Institutions: Behavioural Cognitive Associative Regulative Constitutive Patterns of Interactions Attributes of Community Outcomes Policy Decisions Problem(s)

43. Practical application (JV) Institutional mapping of 3 Nuffic NPT CD Cases (Vietnam, Yemen, Uganda) to identify constructive and ‘undesirable’ institutions Institutions: • within the Southern organization • between Dutch and Southern organization

44. Behavioral institutions Human interaction is structured by standardized (recognizable), habits social norms, routines, ways of doing things. Examples in NPT projects: • Routines and norms in education and research • Attitude towards authority • Ways of doing things in management • Initiative taking, proactive/reactive • Habit to work from a structured approach written down in plans, logframes, schedules, reports

45. Cognitive institutions Mental models and scripts how the world around perceived understood and interpreted by constructs, definitions and also wishful thinking. Examples in NPT projects: • A CD project is a bag of money • Everything from abroad is ‘best’ or ‘no-good’ • Everything new and innovative is ‘best’ or ‘no-good’ • Emerging problems are to be solved by directors • Interpretation and ambition of education and research position • Values: education = good and invest a lot in education

46. Associative institutions Group identification rules: culture, attitude, mentality within organizations networks, classes, associations). Examples in NPT projects: • Culture and attitudes within education research teams, project team • Resistance-to-change mentality by groups opposed to change • New formal/informal teams emerge setting new organizational culture • Formally or informally organized external networks

47. Regulative institutions Formal policies, regulations of government and organizations). Examples in NPT projects: • National policies and regulations • Nuffic rules and regulations • NPT project also help to develop new national policies

48. Constitutive institutions Constitutions, contracts, agreements and property rights structures. Examples in NPT projects: • The project contract and its negotiation • Internal contracts and arrangements • Agreements with third parties (auditor, co-funding, consultancy).

49. Concluding remarks • So what’s new? ….. sounds like old wine in new bottles • It is about the new bottles; Institutions should be addressed explicitly, better explain process • Mapping institutional context helps to plan and anticipate change • No tool boxes or cooking book; only analytical framework. Institutions matter!