CONCEPTS AND FRAMEWORKS

Institutions, as defined by Douglass North, are “the rules of the game in a society, or, more formally... the humanly devised constraints that shape human interaction” (North, 1991).  These govern economic relationships, political processes and social interactions. There is growing evidence that taken together, such institutions play a fundamental role in economic growth.  This is because, while growth requires physical, human and social capital, these are accumulated only when the institutional environment encourages investment. Growth requires appropriate institutions. Our focus is on understanding how institutions may constrain or encourage economic activity and growth.

As North's definition of institutions is general and possibly opaque and elastic, fruitful research needs to unpack carefully the institutional dimensions to economic activity in better defined research. Our understanding of institutions is built around three broad sets of questions.  Maintaining North's language, these questions pursue four different types of ‘rules-of-the-game', namely, rules governing social, political, organizational and legal behaviour.  We discuss these in turn.

The first question we address is how underlying social norms, values and informal rules-of-the-game shape the development process. In particular, are values, norms and attitudes constraining economic activity and therefore growth?  This is an area where development economists have only recently begun to draw on insights from psychology, anthropology and political science to build a richer model of economic lives of the poor and social milieu in which they operate. Three examples help to illustrate what we mean.

The clearest case is perhaps the project on aspirations in Ethiopia. In terms of growth issues, it fits well into the third dimension considered above (stimulating growth in the context the poor live in). In terms of institutional dimensions, it focuses of norms hindering an escape from poverty. Ray (2002, 2006) put forward an already influential model that, to summarize crudely, depicts a poverty trap of psychological defeatism.  The model has stark implications for development practice, suggesting social and psychological obstacles to the success of development interventions that seem to provide the poor with attractive incentives.  The ACEHS experiment with Ethiopian farmers is an attempt to directly test this model of ‘aspiration failure.'

A second example, examining a similar set of issues, is the iiG project on the BRAC ultra-poor programme in Bangladesh.  On the surface this is an experimental impact evaluation focused on questions of aid effectiveness at the micro level (linked to the third dimension of our work on growth, focusing on the context the poor live in).  From a conceptual point of view though, the design of the BRAC ultra-poor programme was motivated by a very radical hypothesis about the social and psychological constraints – rather than ‘mere' financial ones – that were preventing the poorest household from access BRAC's microfinance services.  The project is more policy oriented than the Ethiopian experiments, but offers an important complement to it, by testing a particular NGO intervention to overcome the trap of aspiration failure.

Finally, a very different set of social norms and attitudes is investigated in ongoing research within the project on “Elections, Ethnic Polarization and Managing Post-Electoral Conflict in Kenya” that looks at how the experience of violence affected respondents' trust for institutions, fellow citizens and   views about democracy, the use of violence and the rule of law.  The tragic natural experiment provided by the post-election violence in Kenya gives researchers a chance to disentangle the (possibly reciprocal) causal chains connecting political attitudes and violence. Complementary research on the impact of the election violence on economic activity (via a study of the flower export industry) offers a direct link from attitudes, violence to lower growth.

The second set of questions is located more squarely within the traditional domain of political economy: how do material interests (specifically, in very poor societies) shape political competition and conflict (including in young and fragile democracies), and how does political competition affect material interests and overall growth?   Two brief examples illustrate the kind of work that iiG is engaged in on this front. In terms of growth themes, both directly address questions related to institutional constraints on a system of governance favouring growth and stability:

  Among the various papers looking at the link between ethnicity and voting behaviour in the 2007 Kenyan elections, one stream of the work is looking specifically at economic determinants of ethnic identification. Researchers are testing, and tentatively corroborating, the hypothesis that – rather than an ideological trap for the poor and powerless – ethnic identification plays a stronger role in the political attitudes of wealthier individuals, who may gain important economic advantages from fomenting ethnic allegiance. Within this theme, researchers are also investigating how ethnic allegiances have affected the way MPs have managed funds aimed at reducing poverty at community level.
The experimental study on “Votes and Violence” in Nigeria examines the functional role of electoral violence in a corrupt political system.  An information campaign was launched (using a randomized design) on the serious consequences of political violence and vote buying, and was found to reduce the tendency of voters to vote for those using violence or vote buying to put their views across. The study showed that norms related to the acceptability of violence can be changed, but also that violence and vote buying is unfortunately effective in making people vote for particular parties.

The third set of questions focuses on the rules of the game determining the effective organization of public service delivery and of private sector production processes. This line of inquiry is guided by the tools of contract theory, focusing on issues of incentives, accountability and ownership.  We focus on two questions. First, what institutional arrangements contribute to formulation and implementation of effective service-delivery policies? Second, what institutional arrangements in terms of firm organization and firm size offer productivity and earnings growth? 

In terms of growth dimensions, work on the first question focuses currently on service delivery in the sphere of human capital investments in health and education, relevant for growth directly and especially for the distributional dimensions of growth. Work on the second question focuses on the mechanisms driving informal and formal sector firm and productivity growth, and how they deliver earnings growth in the economy.

Work under this sub-theme in iiG is illustrated by the projects on improving the quality of primary education in Kenya and Uganda. The projects examine the complex trade-off between (centralized) public financing for service delivery and the need to generate local (decentralized) accountability to ensure quality of service.  Institutions in this context refer to the structures of managerial control and ownership in the school system – i.e., who ‘owns' the school and what does ownership entail? Who has hiring and firing authority over teachers? – which are clearly distinguishable from policies that are under the discretion of Ministry officials or head teachers on issues such as curriculum content, class sizes, or even teacher salary levels. The project in Uganda, for example, focuses on the interaction between formal institutions of accountability, such as the powers of School Management Committees, and the informal institutions – embodied in norms – that govern teacher behaviour.  Innovative measures of informal institutions, through laboratory-type experiments conducted in the field, are used to examine the view that formal and informal institutions are substitutes for one another, and, in its extreme form, that strengthening formal institutions can ‘crowd out' the informal. 

A number of projects in India focus on related themes in the health sector: how to organise the delivery of health services, again through the lens of contract theory and incentives. One project focuses on how and which health worker incentives matter for health services provided as part of the Integrated Child Development Services (ICDS) in Chandigarh. A second project focuses on a new national programme of subsidised health insurance for the poor, Rashtriya Swasthya Bima Yojna (RSBY). The research project asks whether and how health worker incentives matter for health services delivery. Insurance products targeted to the poor, even generous ones such as the RSBY, suffer from problems of low uptake and utilisation, and this study focuses on the role of information and incentivised agents in improving the situation.

In some cases, the private sector may offer the most efficient mechanism for public service delivery.  But while governments are increasingly considering private sector provision, little is understood about the supporting institutions required for them to effectively deliver service results.  A project in Ghana looks specifically at the private provision of access to clean drinking water in traditionally underserved rural areas.  Working with UNICEF and the Carter Center's Guinea Worm Eradication Program, the first phase of the project studies the determinants of product demand, usage decisions, and market mechanisms for reaching target populations.

A second category of work under this heading looks at the relationship between institutional reforms and manufacturing firm performance.  Research on India's experience of “dismantling the license raj” – i.e., the progressive elimination of the system of industrial regulations on entry and production – shows an unequal effect of liberalization depending on the institutional context: in states with pro-employer labour market institutions, industrial output and employment grew significantly faster.  Research in Ghana has also focused on the relationship between liberalization and firm performance, tracing the evolution of the firm size distribution during the twenty-year period following Ghana's massive structural adjustment program of the mid 1980s.  Once again, the effects of liberalization are found to be somewhat nuanced: entrepreneurship and industrial employment grew quickly, but average firm size – and the prevalence of large, high wage, export-oriented manufacturing firms – declined dramatically.

A final set of questions focus on how economically relevant activities that are typically done within an informal set of rules and norms are affected by the emergence of more ‘formal' mechanisms. Are these formal mechanisms crowding out informal mechanisms, reducing their impact on growth and development? Are they more attractive to the poor, or do they hurt the poor? Two projects, while rather different, both address institutions through this lens.

A first project is based in Liberia, and studies the impact of improving access to the formal justice system for land, debt, and other disputes in rural areas.   As in much of sub-Saharan Africa, most economic activity in rural Liberia is governed by customary law.  In the post-conflict period, ambitious legal reforms and a wave of progressive legislation have attempted to extend the domain of the formal law, and grant new legal rights to women, returning refugees, and other marginalized groups.  However, the formal courts have been widely criticized for inefficiency, corruption, high costs of access, and incompatibility with local norms.  The project studies the impact of offering information and support on (formal) legal rights through visits to isolated rural areas by community legal advisors, or paralegals. The question addressed in the iiG work is whether a model of subsidizing de facto access to justice, and often combining customary and formal legal remedies, can produce better outcomes than an exclusive focus on de jure reforms. 

A second project under this theme takes place in Ethiopia, and focuses on the introduction of a formal insurance product, offering drought insurance, on informal insurance structures and mechanisms in rural areas. A priory, offering more drought insurance must seem an unequivocally positive development: as drought is a high risk, offering a market-based form of social protection must help farmers to protect their assets during drought periods and stimulate rural growth. However, the issue may be more subtle, given the informal mechanisms currently in place. More specifically, the drought insurance product is offered to funeral societies (iddirs) and the aim is to study that such new targeted microinsurance products strengthen informal mechanisms, or possibly weakens them, with important consequences for the overall growth and development outcomes.

So what will this research offer in terms of policy relevance? Its prime facie objective is to expand the knowledge base on institutions and growth, to contribute to policy making based on solid evidence. It will not offer any striking new evidence on whether institutions matter for growth, and is not intended to do so. Intellectually, this is not the relevant agenda anymore– the question is not whether but how institutions matter for growth. A predominantly in-depth micro-level approach is then absolutely essential, as the only mechanism to unpack the specific and relative relevance of different institutional constraints to growth. As many of the studies are embedded in an intervention-based research design, evaluating particular policy measures and interventions, we can offer robust, contextualised evidence on specific institutional constraints. Furthermore, the studies are all implemented to offer evidence on questions of relevance beyond the context involved. Links between the themes and research questions will contribute to the development of comparative evidence, across contexts and issues, in line with this overview. Finally, the work will continue to feed into the development of overarching policy narratives, successfully applied by Paul Collier in his recent books, targeting both high level policy makers and the broader development community.