Institutional development

Institutional development process, framework and diagnosis

Page contents

Where is a good place to start?
The institutional framework
Institutional diagnosis
Institutional development process

Where is a good place to start?

Unsworth, S. (ed.), 2010, 'An Upside Down View of Governance', Centre for the Future State, Institute of Development Studies, Brighton
How can effective, accountable public authority be increased? This paper synthesises research findings from the Centre for the Future State. It explores how public authority is created through processes of bargaining between state and society actors, and the interaction of formal and informal institutions. Findings highlight the need for a fundamental reassessment of existing assumptions about governance and development. Informal institutions and personalised relationships are pervasive and powerful, but they can contribute to progressive as well as to regressive outcomes. Rather than focusing on rules-based reform, policymakers should consider using indirect strategies to influence local actors.
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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? 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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Booth D., 2011, 'Aid, Institutions and Governance', in Development Policy Review, vol. 29 (s1), pp. s5-s26
This article reviews research on institutions, governance and aid. Three constructive themes emerge: how and with what qualifications 'institutions rule'; the limitations of the instruments easily accessible to development assistance organisations; and the idea of context-sensitive facilitation of institutional change. Research indicates that both institutions and policy choices influence development outcomes. The nature of the 'right' institutions is context- and time period-specific, and institutional change is not self-generating. Aid needs to become more context-sensitive, more politically-informed, and less supply-driven. Donors should abandon formulaic 'best practice' interventions and think about how to build on institutions that already exist. Researchers should deliver more finely-tuned ideas about the building blocks, and the potential room for manoeuvre, in facilitating appropriate and feasible institutional innovations.
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The institutional framework

Traditional economic growth theory has focused on factors such as 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 institutionalism, 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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The Political Approach to Institutional Formation, Maintenance and Change: A Literature Review Essay
What are the political circumstances, power dynamics, and institutional conditions that promote pro-poor growth? This review argues that politics rather than economics is the primary factor in shaping state institutions. Using political analysis will better indicate whether institutions enable or inhibit pro-poor growth than economic or incentive-focused analyses. However, there has been relatively little research to date on the application of institutional theory to the politics of growth and development in developing countries. Institutional analysis can be used as a lens through which to view both political and economic analysis of pro-poor growth.
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Chakravarti, A., 2008, ‘A Theory of Discontinuous Change’, Queen Elizabeth House, Oxford
How does institutional development occur in the South and how can it be supported? This paper argues that institutions are more central to successful development than resources, whether physical or human capital. The emergence of institutions favourable to good governance requires interventions which break through patterns of elite predation. Such deep and rapid institutional interventions, undertaken by external actors with local partners, can constitute a successful model for development policy and practice.
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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 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? This paper examines recent work on the impact of institutions on economic performance.
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Easterly, W., Ritzan, J. and Woolcock, M., 2006, ‘Social Cohesion, Institutions and Growth’, Center for Global Development, Washington, D.C.
What are the links between social cohesion, the quality of political institutions and economic growth? This paper conducts an empirical investigation to identify any causal sequence between the three, finding that there is a strong correlation between them. It suggests that insufficient social cohesion constrains politicians’ capacity to build institutions and implement pro-development policies. It advocates further research into the determinants that contribute to social cohesion and recommends that governments should deploy education and public services in a way that promotes unity.
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Huang, Y., 2010, ‘Political Institutions and Financial Development: An Empirical Study’, World Development, vol. 38, no. 12, pp. 1667-1677
What is the interaction between financial development and democratisation in developing countries? This research examines whether institutional improvement (i.e. democratisation) stimulates financial development. Improved institutional quality is associated with increases in financial development – at least in the short run – especially for lower-income countries, ethnically divided countries and French legal origin countries. Democratic transitions are typically preceded by low financial development, but followed by a short-run boost in financial development and greater volatility of financial development.
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While most research acknowledges linkages between the quality of institutions and economic growth, a 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 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 paper 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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Voors, M. J. and Bulte, E. H., 2008, ‘Unbundling Institutions at the Local Level: Conflict, Institutions and Income in Burundi’, Households in Conflict Network, IDS, Brighton
What kinds of institutions most effectively boost personal income and reduce inequality? This paper identifies institutions that guarantee property rights security as the most vital drivers of long-term prosperity. Insights from a new data set from Burundi reflect the comparatively less important roles of local political leadership and social capital. Conflict plays a positive role in income growth, largely because conflicts may contribute to institutional maturation.
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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 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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Hyden, G., 2008, ‘Institutions, Power and Policy Outcomes in Africa’, Overseas Development Institute, London
In Africa, as elsewhere, the paths to development are dependent on historical institutional context, and cannot be imposed from outside. This paper argues that in African states informal institutions dominate power relations but are not understood, and so development policies lack any real traction. A model of how formal and informal institutions interact is proposed and linked to an analysis of power itself - its basis, reach, exercise, nature and consequences. This shows that conventional models of development planning cannot work in Africa, where the production and distribution of 'public goods' are highly politicised and personalised.
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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 and service delivery. 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 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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Further, the links between donor behaviour and institutional development are highlighted in terms of debt relief, which is often used by donors as a means of both rewarding and facilitating institutional changes towards ‘good governance’.

Presbitero, Andrea F., 2009, ‘Debt Relief Effectiveness and Institution-Building’, Development Policy Review, Volume 27, Issue 5, pp. 529-559.
This article provides new evidence on the effects of recent debt-relief programmes on different macroeconomic indicators in developing countries, focusing on the Heavily Indebted Poor Countries (HIPCs). The relationship between debt relief and institutional change is also investigated to assess whether donors are moving towards ex-post governance conditionality. Results show that debt relief is only weakly associated with subsequent improvements in economic performance but is correlated with increasing domestic debt which undermines the positive achievements in reducing external debt service. There is also evidence that donors are moving towards a more sensible allocation of debt forgiveness, rewarding countries which have better policies and institutions.
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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 which 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 time 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 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. It is important that capacity development strategies adopt a systemic perspective and incorporate flexibility and learning. Outsiders should not overstate their role in driving capacity 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 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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Brinkerhoff, D. W., with P. J. Morgan, 2010, 'Capacity and Capacity Development: Coping with Complexity', Public Administration and Development, vol. 30, no. 1, pp.2-10
What has been learned about capacity and capacity development (CD), and their relationship to achieving sustainable results? What are the implications for analysis and practice? This article highlights: the benefits of viewing capacity and CD through systems lenses; the salience of politics; and the need for new approaches to the practice of CD. Outsiders may be able to assist in developing capacity, but sustained capacity results when endogenous actor-led processes stimulate the creation and strengthening of five core capabilities.
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