Institutional development

Literature has not yet settled on a standard definition of 'institution', and the term is often used to satisfy a range of different meanings. This page defines institutions as 'formal rules, informal constraints - norms of behaviour, conventions, and self imposed codes of conduct - and their enforcement characteristics.' (North, 1991)

A considerable amount of development activity is concerned with helping organisations to improve their performance, but organisations are subject to laws, policies, cultures and norms. To distinguish these formal and informal 'institutions' from organisations, institutions can be viewed the 'rules of the game' and organisations the 'players.'

Institutions that are created and maintained by rich and powerful elites can discriminate against the poor, excluding them from the benefits of economic growth and social development. Improving institutions is therefore viewed as an important step in supporting structural poverty reduction and promoting sustainable development.

Page contents 

Where is a good place to start?

Department for International Development, 2003, ‘Promoting Institutional & Organisational Development: A Source Book of Tools and Techniques’, DFID, London
What models, tools and techniques are available to analyse and review institutional development? Compiled for the Department of International Development, this paper outlines some of the key tools used in DFID's own institutional work, including a framework to encourage discussions between the various stakeholders involved in the institutional reform process.
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The institutional framework

Traditional economic growth theory has focused on factors like labour, physical and human capital accumulation and technological change. Because these theories do not fully explain why some societies manage to grow more rapidly than others, research is increasingly turning to institutional explanations.

Lane, J.E., 2000, 'Chapter 10: The New Institutionalism,' in The Public Sector: Concepts, Models and Approaches (Third edition), SAGE Publications Ltd, London
The institutionalist paradigm has grown as a reaction to the reductionist attempt to explain how political organisations work by looking at non-political factors. This chapter critiques the new institutionalism and asks whether its theories can help us to understand and model the public sector. It criticises the holism of the new institutionalim, arguing that both interests and institutions affect social outcomes. Furthermore it argues that both political and economic interests need to be understood. 
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Although the predominant view is that institutions matter for growth, views on the degree of impact and the causality structure differ.

Aron, J., 2000, 'Growth and Institutions: A Review of the Evidence', The World Bank Research Observer, Vol. 15, No. 1, Pp. 99-135
What is the evidence for a link between institutions and economic growth across countries and over time? This paper, prepared for the 1997 World Development Report, reviews the economic literature that tries to link quantitative measures of institutions with growth of gross domestic product. It concludes that the evidence does suggest a link between the quality of institutions and investment and growth, but that the evidence is by no means robust.
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International Monetary Fund, 2003, 'Chapter 3: Growth and Institutions', in World Economic Outlook: Growth and Institutions, IMF, Washington D.C.
There has recently been a resurgence of interest in the importance of institutions for economic development and growth, motivated in part by renewed attention to enormous cross-country differences in incomes. What is the relative significance of institutional quality compared with other influences on development? How can policymakers contribute to overall institutional development? Compiled for the International Monetary Fund, this paper examines recent work on the impact of institutions on economic performance.
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While most research acknowledges linkages between the quality of institutions and economic growth, the casual use of the term 'institution', combined with the lack of a clear analytical framework, has historically produced vague policy recommendations.

Jutting, J., 2003, 'Institutions and Development: A Critical Review', OECD Development Centre, Technical Papers No. 210, Organisation for Economic Cooperation and Development, Paris
The role of institutions in development has come under increasing scrutiny in recent years. Many studies have found that high-quality, well-performing institutions go hand in hand with positive development, but evidence regarding the causes of this remains thin. In response, this paper from the OECD Development Centre proposes an analytical framework that maps out key channels of influence between institutions and development outcomes.
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Institutional diagnosis

Institutional diagnosis is the clear analysis of the various components and stakeholders in an institutional setting. Good institutional diagnosis is key to effective institutional development, as unnecessary or inappropriate institutions can incur great costs without achieving desired outputs and outcomes. Countries with similar income levels can have very different institutional settings, and the process of imposing uniform institutional blueprints on developing countries has often produced disappointing results. This implies that there is no fixed model for institutional design that will work across different local contexts, and that institutional diagnosis should incorporate an understanding of local context, including constraints and opportunities.

Evans, P., 2004, 'Development as Institutional Change: The Pitfalls of Monocropping and the Potentials of Deliberation,' Studies in Comparative International Development, Vol. 38, No. 4, Pp. 30-52
 Why has the new focus on institutions had minimal positive impact on developmental outcomes in the global South? Could deliberative institutions funded on ordinary citizens’ participation improve development performance? This article uses examples from Porto Alegre and Kerala to suggest that deliberative strategies improve governance, increase the supply of basic collective goods, and strengthen the citizens’ democratic capabilities, while remaining growth neutral. Donors should work to reduce the current bias against deliberative solutions and actively support local actors interested in pursuing deliberative development.
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Djankov, S. et al 2002, 'Appropriate Institutions', paper presented at the World Bank conference on Appropriate Institutions for Growth, Washington, September 13, 2002
This conference paper by a group of scholars from the World Bank, Harvard University and Yale University discusses the historical evolution and the current conditions shaping institutions. The first section of the paper deals with the three major economic changes of the final decades of the 20th century. The second section deals with the institutions that secure property rights against private expropriation, or what the authors refer to as "law and order". The third section focuses on the institutions that secure property rights against expropriation by the state, also known as "rule of law". The final section considers policy reform.
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Political actors often respond to a mix of formal and informal incentives, and in some cases, informal incentives carry more weight than the formal ones. Because of the impact informal institutions can have on the effectiveness of formal institutions, good institutional analysis requires attention to both formal and informal institutions.

Helmke, G. and Levitsky, S., 2004, 'Informal Institutions and Comparative Politics: A Research Agenda', Perspectives on Politics, Vol. 2, No. 4, Pp. 725-740
How do informal institutions influence political behaviour and institutional outcomes? How and why do informal institutions arise, and how can we identify them? This article from the journal 'Perspectives on Politics' outlines a typology of informal institutions and some areas for future research. It argues that institutional analysis has neglected informal institutions, thereby missing out many of the incentives and constraints underlying political behaviour.
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Institutional development process

Institutional development is concerned with the process and content of changing existing institutions to improve their effectiveness in promoting growth. It relies on support and participation from those at a high political level and also from key actors and stakeholders.

World Bank, 2002, 'Chapter 1: Building Institutions: Complement, Innovate, Connect, and Compete', in 'World Development Report 2002: Building Institutions for Markets', Washington, D.C., Oxford University Press.
How do you build effective institutions that support growth and poverty reduction? This chapter from the 2002 World Development Report sets out a diagnostic framework for building effective institutions. It argues that improvements in living standards and in the lives of poor people depend on institutions that support markets and poor people's access to them.
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While donors recognise the importance of good institutions, one debate concerns whether institutional development should become the central element of donor cooperation strategies and - if so - how it can be mainstreamed.

Bossuyt, J., 2001, 'Mainstreaming Institutional Development: Why is it Important and How Can it be Done?', European Centre for Development Policy Management (ECDPM).
Institutional development is a vital tool in the struggle for sustainable development and structural poverty reduction. Though there is consensus on this from donor agencies, and this has been reflected in new policy, in terms of practical implementation, there is still a long way to go. Often the traditional supply-driven techniques of quick-fix technical solutions are still used, with the consequence of de-capacitating local institutions. Is there a danger that donor agencies will become irrelevant if they do not focus on institutional issues and work in partnership with the countries they are there to help?
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Because of the different starting points and institutional requirements of developing countries, a 'global standard' for institutional development is not realistic. The process should take into account what institutions are 'necessary' for developing countries. Some institutions that developed countries take for granted are the products of lengthy processes of institutional development involving political struggles, ideological battles and legal reforms. The costs and times involved in institutional development may vary depending on a country's unique history.

Chang, H., 2001, 'Institutional Development in Developing Countries in a Historical Perspective: Lessons from Developed Countries in Earlier Times', University of Cambridge
In recent years, many donors have come to believe that well-functioning institutions are a prerequisite for economic development. But is their view supported by history? This paper, presented at a meeting of the European Association of Evolutionary Political Economy, examines the evidence and argues that donors may be making unrealistic demands for improved governance in developing countries.
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Increasing emphasis is being placed on capacity building, as development is unlikely to succeed without sufficient local capacity. Capacity refers to the ability of people, organisations and societies to manage their affairs. Strong local capacity can strengthen formal institutions and increase the effectiveness of institutional development.

Organisation for Economic Cooperation and Development, Development Assistance Committee, 2006, ‘The Challenge of Capacity Development: Working Towards Good Practice ’, OECD DAC, DAC Network on Governance (GOVNET)
Despite being on the agenda for decades, evaluations show that sustainable capacity development remains one of the most challenging areas of international development practice. What lessons have been learned? How can good practice become common practice? This paper from the Development Assistance Committee synthesises the importance of capacity and the mixed record in achieving results. Supporting capacity development requires context-specific and in-depth understanding of existing capacities at the individual, institutional and societal levels.
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Institutional change

While formal rules may change overnight as the result of political or judicial decisions, informal constraints that are embodied in customs, traditions and codes of conduct can be much slower to change. Organisational reform and change in the public sector often fail because behaviour and other institutional factors do not change. Exploring rational choice, historical and sociological theories may help to explain how and why institutions evolve and change.

Srivastava, M., 2004, 'Moving Beyond 'Institutions Matter': Some Reflections on How the 'Rules of the Game' Evolve and Change', Crisis States Discussion Paper Series no. 4, Development Research Centre, London School of Economics
The role of institutions in influencing development is widely recognised. Yet there are no clear answers regarding which institutions best support development and how to acquire them. This paper for the Crisis States Development Research Centre assesses the effectiveness of various theories in unravelling these complex issues.
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It is worth noting, however, that institutional change can also produce unintended procedural and policy consequences. The broader institutional context in which an altered institution is embedded influences the likelihood and extent of such unintended outcomes.

Cortell, A.P. and Peterson, S., 2001, 'Limiting the Unintended Consequences of Institutional Change', Comparative Political Studies, Vol. 34, No. 7, Pp. 768-799.
In the past two decades, scholars in sociology, economics and political science have simultaneously rediscovered the importance of institutions as guides and constraints on human behaviour. But under what conditions do institutional reforms produce unintended policy consequences? Compiled for Comparative Political Studies, this paper uses two empirical case studies to demonstrate that it is the broader institutional context in which the institution is embedded that influences the likelihood and effect of unintended outcomes.
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Impact evaluation

Impact evaluation of projects and programmes enables identification of the effects of an institutional intervention. This can have different purposes during different stages of an intervention, including measuring progress towards desired outcomes, learning lessons about the process, or assessing institutional readiness to move on to a new phase. Impact evaluation needs to be built in to the intervention from the outset, by deciding what to monitor and why, how the monitoring will be done, and how information will be collected.

The European Foundation for Quality Management (EFQM) Excellence Model

DFID promotes the use of the European Foundation for Quality Management (EFQM) Excellence Model, which provides a framework for assessing the aspects of performance that make and organisation successful, and can be a useful tool in institutional interventions.

The model was designed to be a generic model and is as applicable to 'non-business' oriented organisations such as government departments and agencies, non-profit organisations etc, as private sector organisations. It recognises there are many approaches to achieving sustainable excellence in organisations, and provides considerable freedom for interpretation to reflect strategies which are appropriate for an individual public sector entity given where it has come from, the cultural climate, country diversity, modernisation progress, and political climate. It can be used to help organisations recognise institutional issues that must be addressed as well as provide measures for evaluating the impact of change on performance. 

Tools

The following toolkits provide tools and techniques to support the various stages of institutional intervention outlined above.

Wilson, D., and L. Beaton, 2003, 'Promoting Institutional & Organisational Development: A Source Book of Tools and Techniques', Source book prepared for UK Department for International Development, London
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Mathauer, I., 2004, 'Institutional Analysis Toolkit for Safety Net Interventions', World Bank, Social Protection Discussion Paper No. 0418
In the wake of the economic crisis in the late 1990s, safety nets that mitigate the effects of poverty and other risks on vulnerable households have experienced renewed interest. What are the institutional challenges relating to safety net interventions? How can institutional analysis propose solutions to enable better outcomes? This paper from the World Bank provides a toolkit on the institutional capacity of the major components of formal safety net interventions and provides guidelines on key performance issues.
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European Institute of Public Administration, 2002, 'The Common Assessment Framework: Improving an organisation through self-assessment', EIPA document prepared for 2nd Quality Conference for Public Administration in the EU. 
The Common Assessment Framework (CAF) is a tool to help public sector organisations use quality management techniques to improve performance. What can implementing the CAF achieve? This paper, compiled for the 2nd Quality Conference for Public Administrations in the EU, outlines the main considerations in conducting organisational analysis and recommending post-assessment improvements.
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What other resources are available on the GSDRC?

The GSDRC's topic guides on Indicators may also be of interest.

Additional information resources

http://www.capacity.org/ is a platform for exchange and access to information on capacity development.

http://www.worldbank.org/oed/ie is a World Bank Operations Evaluation Department resource on impact evaluation.

This topic guide was prepared by Anna Orrnert. The GSDRC appreciates the contribution of George Larbi (IDD, University of Birmingham). Comments, questions or documents for considerations should be sent to Anna Orrnert
  

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