Incentives & Institutions in Development Aid:Towards Mutual AccountabilitySujai Shivakumar PhDNational Academy of SciencesWashington DC

Overseas Development InstituteNovember 7, 2006London

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Today’s PresentationThe Meaning of Development

The Challenge of Collective ActionThe Role of Institutions

The Aid Effectiveness PuzzleUnsolved Collective Action ProblemsThe Donor’s Role in Institutional Perspective

Incentives in the Aid SystemMyth of the Linear ModelThe ‘Octangle’ Model

Towards Mutual AccountabilityLaying the Institutional FoundationsStarting from Here—A Case Study

Conclusions

The Meaning of Development

Development concerns the realization of our adaptive wellbeing through Collective Action

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Collective Action Situations are at the Heart of Development

Collective Action Situations exist where contributions from multiple actors are required to produce joint outcomesCollective Action Problems occur when unresolved

Motivation Problems and Information Problems

…create sub-optimal outcomes

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Motivation problemsSocial Dilemmas: Potential conflict between individual gain and collective benefits

Public Goods and Free RidingRules as Public Goods (Policy Context)Common Pool Resources and Tragedy of the CommonsRent Seeking (Policy Context)

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Information problemsMissing information

Time and Place KnowledgeKnowledge of local realities, rules, and relationships

Asymmetric informationMoral HazardPrinciple-agent problemsSignaling ProblemsFiscal Illusion (Policy Context)

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Institutions can Solve Collective Action Problems

Institutions are rules, socially consideredRepresent a shared understanding of rules needed to successfully address problems of collective actionSuch rules must be

• Reliable—triggering consistently in similar circumstances• Recognizable—subject to broad awareness• Non-arbitrary—seemingly dependant on general principles

By structuring human interaction, institutions • Help each anticipate the actions of others• Reduce uncertainty, promote coordination and

cooperation

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Institutions Matter for DevelopmentIn more developed countries, well adapted networks of institutions generally lead to productive outcomesIn poor countries, individuals often face negative incentives, making it difficult to

invest in economic activitiesProvide public goodsImprove communally held resources

The “State” often fails in its core institutional roleThe state often does not address underlying problems of collective action facing its citizensOrganization of state often fosters perverse incentives of its ownAid often fails to craft the institutions needed for sustainabledevelopment Problems of Aid Effectiveness

The Aid Effectiveness Puzzle

The widespread perception of aid ineffectiveness continues to challenge donor & recipient governments, aid agencies, and scholars

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The effectiveness of traditional aid is increasingly questioned

What’s Wrong with Development Aid?. Micro aid often not sustainableHas macro aid made a difference?

In responseDonor governments & aid agencies are demanding new, more productive delivery systems for aidParis Declaration is a recent instance of international commitment to improve the quality of aidNew donor modalities—e.g. Budget support—represent experiments with mixed success

Challenge: How to “translate the rhetoric of Paris into concrete behavioral change from donors and recipients at the country level”?

Concept Paper—2006 ODI Conference

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Missing, Weak, or Bad Institutions

In most countries receiving large amounts of development aid, institutions needed to cope adaptively with problems of collective action are either missing, weak, or bad

Aid initiatives that do not tackle these institutional factors are not likely to succeed.

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Donor Involvement in Institutional Perspective

A donor entering a recipient countryEncounters a diversity of collective action situationsCreates new Collective Action challenges

The donor’s presence always alters, for better or worse, existing incentives

For example, the presence of aid can introduce new moral hazardsAid can strengthen some local stakeholders over other

How well do we understand the Donor’s Institutional Impact?

Need to understand incentives in the system of aid delivery

Incentives in the System of Development AssistanceInternational development occurs in a network of linked collective action situations

The outcome of development aid depends on how these collective action challenges are addressed

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A Linear Model of Aid Delivery

A widely held understanding of the aid delivery process

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The Myth of the Linear ModelModel fails to reveal the varied institutional contexts within which each of these multiple actors in development cooperation link, in practice, with each other

Highlights principal agent relationshipsIgnores variety of other collective action challenges

Model strengthens the false view that incentive structures in the donor’s internal governance and disbursement systems are distant and unrelated to the problems of aid sustainability on the recipient side

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The Aid Octangle

Still a stylized representation, but highlights a complex network of interdependent relationships

Ostrom, et al.(2001) provide a tool for institutional analysis of aid effectiveness

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Applying the Octangle to a Sida Project in Forestry

Institutional Analysis of a Sida forestry project in Orissa, India shows:

•Consultants often manage information flows

•Orissa Forest Department faces incentives to promise and stall reforms

•Few incentive for effective beneficiary ownership

•Sustainability (in terms of the long-term effects of the project) is not likely

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Improving Incentives at Donor AgenciesIn reality, incentives facing donor agency actors do have impacts

For example, does the agency resist pressure to “Move the Money”?

Ongoing learning is needed to understand and support institutions that could solve collective action problems in recipient countries

Does the agency adequately capture staff experience?Does the agency rely on too many temporary contracts?Is there effective inter-generational knowledge transfer?Are evaluations pro forma or are they genuine learning opportunities?

To improve performance, development agencies have to provide incentives for learning

Does the agency reward staff efforts that lead to sustainable outcomes?Do policies on promotion and transfer support learning?

Towards Mutual Accountability

General questions all development initiatives should ask

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Questions all Aid Initiatives Should AskWhat is the underlying collective action problem?

Is it a public goods problem, free rider problem, etcWhat incentive problems do beneficiaries face: missing information, asymmetric informationWhat incentives precluded beneficiaries from diagnosing and sorting out their own collective action failures?What are the developmental implications of this collective action failure?

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Questions all Aid Initiatives Should AskIn what ways have previous aid interventions altered similar collective action problems?

Did past aid programs abet or exacerbate power or information asymmetries or adverse selection?

What are the implications for sustainability?Does the proposed aid intervention address the underlying collective action problem?How will the proposed aid affect the capacity of the beneficiary group to address collective action problems?Who ‘owns’ the aid intervention?

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Questions all Aid Initiatives Should AskWhat rules and institutions currently exist?

What is the structure of incentives created by extant institutions?Are existing institutions missing, weak, or bad?Are there rules or norms that have been used in the beneficiaries’ cultural traditions that bear on the current collective action context?Can these institutions be revived and updated to address contemporary needs?

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Starting from “Here”How can existing indigenous institutions be modified/modernized to cope with current challenges?How can information flows be designed to reduce missing information and asymmetric information?Would modifying these institutions threaten the power elite? If so, how can “top-down”reconcile with “bottom-up’?

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Action Aid in Somaliland—A Positive ExampleAn Aid mission in a challenging environment

Civil conflict following the collapse of the Somali StateClan-on-clan violence exacerbated by destruction of common pool resources

AA-S recognized the underlying collective action problemTragedy of the Commons Conflict over Resources

AA-S leveraged existing institutional capital: “Xeer”Traditional ad hoc arrangements to share grazing land and water sources among nomadic pastoralists in northern SomaliaAA-S drew on tradition to craft new institutional arrangements before delivering aid

Today, Xeer is underpinning new governance structures in SomalilandConcept of covenanting now used to craft and maintain collective action institutions at various levels

A major Challenge of Development is to draw on such indigenous practices in crafting capabilities for self-governance

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In SummaryCollective Action lies at the heart of developmentInstitutions help solve problems of Collective ActionAid takes place within a complex network of interactions—The Octangle—each with their own collective action challengesAid agencies affect solutions to collective action by their presenceDonor agency incentives do impact on development outcomesTo be effective, aid must account for and, if necessary, help develop, the needed institutions—both within the donor’s organizations and in the recipient’s context

Thank you

Sujai Shivakumar, PhDNational Academy of Sciences500 Fifth Street NWWashington DC 20001Tel: 202 334 1337Email: sshivaku@nas.edu

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For more, see…The Samaritan’s Dilemma

The Political Economy of Development Aid • Clark Gibson, Elinor Ostrom, Sujai Shivakumar,

and Krister Andersson• Oxford University Press, 2005

The Constitution of DevelopmentCrafting Capabilities for Self Governance• Sujai Shivakumar• Palgrave-Macmillan, 2005