Systematic corruption, inefficiency, over-centralisation and poor incentives in governmental and non-market institutions. With this list of problems, it is of little surprise that markets continue to offer little security for poor people. What can be done to make these institutions in developing countries more effective?
This discussion paper from the World Bank examines the key obstacles to development that exist in developing countries from an economic point of view. Specifically, the paper applies institutional economics to development practice. It aims to show that a qualitative assessment can offer insights into long- standing economic problems. The paper gives a broad assessment of development problems in areas such as market and non-market institutions and examines how aid agencies can be more effective in their approach to indigenous institutions. Additionally, it details a case study made in The Gambia that assesses how to overcome incentive problems.
The market place is a risky place for poor people to operate within in developing countries. Weak legal systems do not enforce or define commercial rules, property rights are unclear, and information is limited.
- Alternative market institutions or ‘indigenous institutions’ have been developed as a less risky alternative arrangement. An example of this is sharecropping, where a tenant farmer gives part of their crop as rent.
- Public sector agencies suffer as a result of low pay. In The Gambia, in 1992-3 salaries were below their 1984 levels. It is proving impossible to attract and retain qualified staff.
- Pay is not linked to performance, therefore there is no incentive to work harder to benefit the agency or to improve one’s own financial situation.
- An additional pressure comes from donors who wish to reduce costs in a bid to improve efficiency.
- A considerable amount of aid money is spent on studies and assessments, their planning, and the pay of the foreign technical assistants. Often their success is limited for example, by their ‘grand reform’ approach.
The paper advocates a procedural approach as a method of overcoming the constraints on incentive reforms seen above. Participatory experiments are cheaper than technical assessments.
- This more qualitative approach may be harder to assess financially in some areas, but in others, cost savings can still be documented.
- Institutional adjustment is essential to address chronic economic problems. This includes improving incentives, promoting competition and fighting corruption.
- A framework needs to be developed to enable indigenous institutions to adjust to governmental and non-market institutions.
- There are still many unanswered questions. For example, in Africa, do problems between modern and traditional institutions stem from them being too connected or disconnected? Should they merge to create something new?
