Aarhus Lecture

Institutions, Development and Donors: Importance, causality and do’s and don'ts Peter Frøslev ChristensenDevelopment Associates A/S : Institutions, Development and Donors: Importance, causality and do’s and don'ts Peter Frøslev Christensen Development Associates A/S Århus 8 February 2008


Outline of Presentation : Outline of Presentation What are institutions? Why do they matter for development? Causality which way – High quality institutions cause higher economic growth but not visa versa


Outline of Presentation (Cont.) : Outline of Presentation (Cont.) How do countries acquire quality institutions Donor attempts to promote (and unintentionally undermine) institutional quality Recent reforms in aid modalities (Paris Declaration, budget support etc.) Case Study: Vietnam’s Smallholder Project


What Are Institutions ? : What Are Institutions ? In economic theory they can be defined as: The humanly devised constraints that structure political, economic and social interaction (Douglass North, 1991) Institutions provide rules, organisations are the actors, neither are static but interact Markets are themselves institutional artefacts


How do institutions affect development outcomes? : How do institutions affect development outcomes? Disillusions from donors regarding primacy of policies paved way for institutional focus Strong explanatory power Traditional institutional economics focused on institutions for transaction cost reductions


How do institutions affect development outcomes? (Cont.) : How do institutions affect development outcomes? (Cont.) Additionally, institutions reduce uncertainty but not necessarily improve aggregate outcomes Institutions can perpetuate stagnant economies


High quality institutions generates strong growth not visa versa : High quality institutions generates strong growth not visa versa Income and high quality institutions correlated However seems to be a one-way correlation Counter-intuitively, resource poor countries tend to have better institutions Especially incomes from ‘point-source’ resources tend to worsen institutional quality


Why one-way causality? : Why one-way causality? Fiscal nexus between citizens and government broken in resource rich countries High incomes blunt the incentives for both external and internal accountability Elite capture of key institutions may perpetuate low quality institutions The result: Deteriorating institutional quality


What characterise quality institutions for development? : What characterise quality institutions for development? Institutions that promote private enterprise Institutions that provide predictability and macro economic stability Institutions that promote political participation


How do countries acquire quality institutions? : How do countries acquire quality institutions? For the layman; nobody knows For the academics: It all depends… Increasingly evident that there is no ‘best practice’


How do countries acquire quality institutions (cont.)? : How do countries acquire quality institutions (cont.)? Achieving embedded autonomy is a delicate balancing act Need to have institutions embedded in society at large to get information and feedback… ….but autonomy to guard against state capture


Donor attempts to promote institutional quality… : Donor attempts to promote institutional quality… Increased emphasis due both disillusion with both infrastructure investment and policies However defining appropriate entry points for donors have proven problematic In the absence, focus has been on providing inputs and improving outputs from organisations Also support to voice and political participation has assumed importance


…and unintentionally undermine institutions : …and unintentionally undermine institutions Many donors projects outside budget undermines planning and institutional effectiveness Volatility also undermines macro-economic stability and institutions Donors tend to poach best government staff to projects undermining existing institutions Also aid may substitute for domestic revenues and hence weaken state citizen relations


Recent reforms for improving aid effectiveness  : Recent reforms for improving aid effectiveness Sector programmes to avoid fragmentation Paris declaration to get all donors to reform Budget support Strengthening watchdog institutions External pressures (Press, NGOs/CSOs)


Case study from Vietnam : Case study from Vietnam Project attempted to improve small scale farmer in Vietnam (poultry and pigs) Based in Ministry of Agriculture but separate project structure Two objectives: To develop replicable farming models and develop institutional capacity


Case study from Vietnam (Cont.) : Case study from Vietnam (Cont.) Succeeded in the first.. …and not only failed but actually worsened institutional quality Modalities were key for this depressing outcome Topping ups, scholarships distorted incentives and promoted corruption


Case study from Vietnam (Cont.) : Case study from Vietnam (Cont.) Changes are under way However difficult dilemma between producing tangible outputs and long term institutional development Realistic ambitions, acceptance of failures and long term perspective Still not fully consistent with current donor practices


Thank you : Thank you