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Institutional development: a new way of doing business

What is an institution?

Ever since this planet has been populated by humans, they have made arrangements for governing their lives. These arrangements are often referred to as ‘institutions’. They may be formal arrangements, such as legal systems and property rights, or informal arrangements, like moral standards. In some cases, they take the form of implicit world views or mental maps, i.e. cognitive frameworks for looking at the world around you. These arrangements or institutions operate at different levels, ranging from an international level (such as trade arrangements) to community and individual levels (for instance, the values that determine the way in which people interact with each other). According to North’s famous definition, institutions are ‘humanly devised constraints that shape human interaction’. They are the ‘rules of the game’ in a society, the rules that facilitate human interaction and societal life. “Institution” in its most general sense refers to different types of organizations, markets, contracts, cultural norms and informal or formal rules that define rights of access to goods and services, as well as access to the management of a given space or to its natural resources. Thus, Institutions facilitate decision-making and coordination between individuals. Consequently, institutional development may be seen as the processes by which institutions evolve and perish, i.e. ongoing endogenous and autonomous processes in society.

The important questions that donors need to ask themselves is whether it is possible to support or even accelerate these processes (in a pro-poor direction), without undermining their endogenous character, local ownership and the responsibility of the stakeholders involved? And, can donors and agencies facilitate such processes.

Why does institutional development matter?

The emphasis on institutional development within development cooperation is far from new. Institutional issues have always figured prominently on the development agenda and considerable resources have been invested in them. In theory, development cooperation has always been about institutional development. What is new is that institutions are now widely considered to be central to sustainable development and poverty reduction. During the 1990s, institutional arrangements were generally believed to constrain the impact, effectiveness and efficiency of development aid. Good governance, political dialogue, fair trade and ownership all depend on the presence of adequate and locally owned institutional frameworks, both formal and informal. Moreover, the recent debate on institutional development could also reflect a fundamental dissatisfaction with the approaches that dominated development assistance during the period from the 1950s to the mid-1990s, now we know that real ownership is crucial to sustainability. One could say that the debate on the institutional development signals recognition that the process of development cooperation needs to be turned upside down.

Virtually all external agencies now recognize the limits of donor-driven forms of cooperation and are reformulating their cooperation policies accordingly. Greater emphasis is being placed on principles such as ‘ownership’, ‘participation’, ‘decentralisation’, ‘process approaches’ and ‘budgetary support’. However, still there is a gap between the language of the new development agenda and the control-oriented style of operation displayed by many donor agencies.

Institutional development is a complex, messy, risky and experimental area, with tangible results emerging only over a long period of time. It therefore calls for an approach with a long-term perspective, paying full attention to the endogenous dynamics, energies and stakeholders involved in change processes. Development agencies will have to rectify some of their ‘old habits’. If they do not, they may quickly lose their capacity to generate genuine value, based on adaptability and responsiveness.

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