Development Management and

Institution (MAPMC-602)
Misgina A. (Ph.D.), Asst. Prof. of Agricultural Economics and Management at ECSU
l Migration and Development
misgie2008@yahoo.com
 Course Description
 Institutions are arguably accepted as the ultimate sources of
development and income disparities among countries.

 The course mainly focuses on issues pertaining to dev’t

economics and their importance for developing countries.

 This course will enable to analyze and understand the major

problems faced by developing countries and assess the usefulness
of alternative economic policies to overcome these problems.
 Objective of the course
 Successfully completing this course will enable you:

 To join the debate on the role of institutions to development.

 To investigate the position of informal institutions in

development.

 To investigate the position of formal institutions in

development

 To identify the link between property right and institutional

development
Chapter One: Introduction

 Chapter One: Social Foundations of Institution

 Chapter Two: Introduction on Institutions and Development

 Chapter Three: The role of formal institutions on development

 Chapter Four: Informal Institutions and Development

 Chapter Five: Property rights institutions in development

Evaluation Mode (Tentative)

Contents % share
Article review………………………….... 25
Group presentation…………..................... 25
Class participation (reflection).................... 10
Final exam........................................................ 40
 Chapter 1: Social Foundations of Institution

Brainstorm!
1. What do you know about development management
and institutions?

2. Why are institutions and institutional development are

important for development?
 Overview of Development Management
and Institutions
 The nature of development tasks means that managing such
tasks differs from the simple idea of getting the work done
by the best means available on several counts.

 First, while conventional management is mostly a question

of trying to achieve internal, organizational goals by
co ordinating internal organizational resources,

….development management also aims further, at social goals

(involve with some social work) external to any particular
organization.
Overview of Development Management…
 Conventional management may be about directing
resources towards meeting goals, development management
is more about using resources for influencing social
processes (social interaction) or intervening in such processes
in favour of certain goals.

 One can extend the point about no single agency having control
over the relevant resources to noting that no single agency has
anything but very partial control over these social processes.
Overview of Development Management...
 Development management is a growing and important
area in development studies and used as an instrument for
achieving smooth and faster development.

 According to Paton, “Development management is

contemplated with a realization of the importance of the
expressive aspect of management in which values and
ideas are promoted as part of, not just as one way, of getting
things done”.
Overview of Development Management...
 …Development management is a process that includes
the social definition of needs and it is embedded in public
action.

 ….Development management is more than policy

implementation in a rigid sense. Rather, it involves activities
that steer and facilitate intervention towards the identification
and meeting of human need.
Overview of Development Management…
 Development management aims to improve the management
of development projects or programmes in a systematic
manner, in order to improve the quality of life of people
at the grassroots level.

 The aim of development can be outlined as:

 i) It is aimed at promoting development through the best alternative
ways and in a cost-effective manner.

 ii) It is aimed at improving the efficiency and effectiveness.

 iii) It aims at just and equitable way of development and so many...

The aims of development management can be presented as:

Management of
development
human asset

Management of Management of
development Development resources
values/principle management meant for
s/ethics development

Management of
development
projects and
programmes
Development Management Cycle
Overview of Development Management…
 The characteristic features of development
management include,
 change orientation,

 goal orientation,

 innovative administration,

 client orientation administration,

 beneficiary participation.
Overview of Institutions
 In the words of North (1990) “Institutions are the rules of
the game in a society, …the humanly devised constraints that
shape human interaction.

 … They structure incentives in human exchange, whether

political, social or economic”.

 Institutions comprise for example contracts and contract

enforcement, protection of property rights, the rule of law,
government bureaucracies, financial markets.
Overview of Institutions…
 They also, however, include habits and beliefs, norms, social
cleavages and traditions in education (so-called informal
institutions).

 Formal institutions typically tend to be the crystallization of

informal institutions (North, 1990), as social norms in the
realms of gender, class and caste, for example, determine rules
of political participation and representation, methods of
economic exchange, and inclusion of different groups in
society (Pateman, 1988).
 Why are institutions important for
development?
 We can identify two reasons why institutions and
institutional development are important for development.

 Institutions are the sets of rules that structure development

just as they structure any aspect of social interaction.

 They will govern, for example, who gets what, and how, from
development. It is important to get the rules – i.e. the
institutions – right.

 And it is also important to recognise that what is ‘right’ will be

contested.
Why are institutions…
 Both forms of institutional development are of
significance for development:
 institutional development as intervention, as a process of
consciously and deliberately seeking to establish rules that
promote development; and

 institutional development as history, as a matter of the context

in which interventions are designed, both making possible and
constraining the scope of such interventions.
Social foundations of Institution and
Development
Human beings living in community
 Modern people for millennia – since at least the appearance of
„homo sapiens” – have lived in communities of different
levels, ranging from families, tribes through nation states to
present…global communities”.

 They were not living isolated on an island but are exposed to

continuous social interaction with their fellow people.

 Humans are “biosocial” beings, not atomized – although

gradually individualized in modern societies, (still) needing
social interaction.
Human beings living in community
 However, human interaction - by definition - breeds conflicts,
unresolved problems, which „fortunately” provide food for
the social sciences in general,

…and as we briefly overview, for economics, sociology and

political sciences in particular.
 Living in chaos or order (cooperation or
defection, war or peace)?
 Many questions arise, some philosophical: What was first? Chaos
or order?

 What is social order, and how can it be created? What kind of

mechanisms, solutions can induce people to cooperate and live
in social order?

 What are the basics, main characteristics of human societies, and

of human- social beings, what do determine their human activity?

 Are we rational or sometimes irrational and rather emotional?

Which conquer which? And what will be the overall, macro-level
aggregate result of the individuals’ social interaction?
 Living in chaos or order (cooperation or
defection, war or peace)?

 Many ancient philosophers and modern social scientists tried to

answer these questions, like Platon thousands years ago, who
said:…to defeat (master) ourselves is the greatest victory, but to
be weak and fall, is the ugliest of all…it means that we are in
constant conflict and war with ourselves…
Values, norms and how are they developed?
 Values constitute a very important part of the immaterial cultural
elements, which – for a long time - were treated as the only
representatives of culture.
 Values are such basic cultural principles of the whole society that
shows what is essential to be followed or not to be followed, good
or bad for the members of the community.
 We, Ethiopians, tend to exhibit traditional values—we are
conservative and modest. It is important to be polite and
respectful. Generally Ethiopians pride themselves as a culture of
hospitality (i.e., the traditional coffee ceremony).
Values, norms and how are they developed?
 While norms are incorporated values, developed into rules of
behavior, guiding and governing the life of a community, helping
cooperative behavior and peaceful living together.
 They are the most essential rules of the game in the society, which
provide the basis of social order, ranging from simple, informal
conventions through traditions, religious and moral rules to the
highest level, formalized rules, the legal laws. E.g. Ethiopians will not
take a seat before their guests…, crossing of lanes before elders…
 The evident question arises again: how social norms were born?
Another perspective: public goods…
 Private good and services can be fairly and easily bought and
sold easily because it is a separate and identifiable item.
 However, public goods are not separate and identifiable in this
way. Instead, public goods have two defining characteristics:
 Non-excludability means that it is costly or impossible for
one user to exclude others from using a good. It is not
desirable and not feasible to exclude people from their
benefits once the goods or services are provided.

 Non-rivalry, meaning that when one person uses a good, it

does not prevent others from using it.
Another perspective: public goods and…
 Collective action problems occur not only when consuming but
also when providing public goods to a group of people.

 Collective action also occurs when a number of people work

together to achieve some common objective.

 Nonetheless both properties of pure public goods constitute a

parable of collective action, which can be best depicted by the
well known game theoretic Prisoners’ Dilemma (PD) model.

 This paradoxical situation has been widely used for the

explanation of collective action problems in many branches of
social sciences.
 …Collective action problems

 The concept of public goods: a symbolic formulation of the so-

called collective action problems (the social traps), which are
closely connected to the co-operation of the latent groups in
large numbers and the problem of free-riding.

 The former idea means that the individual is lost in large-sized

groups, any of his/her activity or possible contribution to the
things of the community is "marginal", that is unnoticeable.
 …Collective action problems

 But if others provide the public good, nobody can be excluded

from its consumption, as we have learned before and there is a
big temptation to free-ride.

 Free-rider problem when people can consume a good without

paying towards its.

 According to game theory free-riding is a dominant strategy: since

the individual player is better off in any case regardless of the fact
what others do. In this way, however, they will not provide
themselves the public good.
 Two-player, one-shot PD game
 The prisoner's dilemma is a paradox in decision analysis in
which two individuals acting in their own self-interests do not
produce the optimal outcome.

 The typical prisoner's dilemma is set up in such a way that

both parties choose to protect themselves at the expense of the
other participant.

 In a one-shot PD rational individuals even if they would mutually

benefit from cooperation will fail to do so because there is a big
temptation to defect if we look at the payoff matrix.
 Thus there is strong incentive for both of them to defect, and indeed,
defection is a “dominant strategy” for each player, because each
obtains a higher payoff no matter what strategy the other player
chooses.

 However, while choosing the strategy of defection promises an

individually higher payoff it finally leads to a mutually less preferred,
Pareto-suboptimal (or inferior) outcome (Defect-Defect).
 Mancur Olson’s collective action problem

 According to Mancur Olson, many theoreticians had implicitly

and explicitly accepted the view that groups of individuals with
common interests usually attempt to further those common
interests, stemmed from a logical deduction of the premise of
rational, self- interested individuals’ behavior.
 Mancur Olson’s collective action problem
 However, Olson rejects this argument, saying:
 it is not in fact true that the idea that groups will act in their
self-interest follows logically from the premise of rational and
self-interested behavior.

 Unless the number of individuals in a group is quite small, or

unless there is coercion or some other special device to
make individuals act in their common interest, rational, self-
interested individuals will not act to achieve their
common or group interests.
 Mancur Olson’s collective action problem
 Even if all of the individuals in a large group are rational and self-
interested, and would gain if, as a group, they acted to achieve
their common inters or objective, they will still not voluntarily
act to achieve that common or group interest.

 Large groups will not form organizations in order to achieve

their common goals in the absence of coercion of separate
incentives. What makes this situation worse is the fact that even
in the case of unanimous agreement in a group about the
common good and the methods to achieve this, collective action
will not take place to further the common goal.
 The social trap is closed ….how to get
out?
 A social trap is a situation in which a group of people act to
obtain short-term individual gains, which in the long run leads to
a loss for the group as a whole.

 Thus we reached such a social trap or a collective action problem,

where the interests of the individual and the community are in
contrast to each other, because in a case where everybody takes
into account only their own, short- term self-interests, and in
addition, the contribution of the individual is negligible, the
production of the public good is pretty doubtful.
 The social trap is closed ….how to get
out?
 Such a social trap in its broader sense is the general election,
for instance, where the vote of each individual is lost in the
multitude and "does not have any influence", so it is
unnecessary to go to the polls, but if everybody thinks in this
way, then after all, nobody (or just few people) go to the polls
in a local or governmental elections, and a tiny part of the
community decide the fate of the whole finally.

 So the question is given: how can we get out of this social trap?
 Solutions to the problem
 The message of the Prisoner’s Dilemma and consequently of the
collective action game has been as “depressing” as challenging,
therefore many social scientists have tried to solve the problem.
 The basic question is what kind of mechanism can induce
the rational, self-interested players to opt for the
cooperative solution of the game?

 Remaining within the game-theoretic framework there have

been many attempts to solve the paradoxical situation of the
Prisoner’s Dilemma.
 Solutions to the problem
 The earlier mentioned self-defeating outcome is due to the fact
that the original PD game is one-shot, therefore one of the
solutions is making it “iterated”. If the number of plays is
“infinite”, or at least it is uncertain when it will end, there is a
great chance for cooperation.
 „Tit-for-tat” strategy (an equivalent given
in return)
 Robert Axelrod has demonstrated in a computer tournament
that the so-called “tit-for- tat” strategy (cooperating in the first
round then doing whatever the other player did on the previous
move) in repeated games was the best strategy that lead to a
Pareto-optimal solution.

 It was the winner because it was the simplest and the "nicest",
meaning never being the first to defect. See his argument:

 the pre-condition for the evolution of cooperation is that the

players have a sufficiently large chance for future interaction.
 „Tit-for-tat” strategy (an equivalent given
in return)
 See his argument:

 If this is met then cooperation can evolve. According to

Axelrod, under certain conditions the actors of the “game”
can learn to cooperate.

 When people recognize that they have objectively common

interests and there is a high probability of future association
cooperation will more likely occur, as in the First World War
trenches, the so-called “live and let live” type of cooperation.
 „Tit-for-tat” strategy (an equivalent given
in return)
 In another computer simulation model scientists found that in a
population with a local interaction structure, where individuals
interact with their neighbors and learning is by way of imitating a
successful neighbor, cooperation is proved to be a stable strategy
that cannot be easily eliminated from the population.
External (or institutionalized) solutions
 External (or institutionalized) solutions are those, where the
“rules of the game” are changed, meaning peoples’ possibilities,
attitudes and beliefs are changed (but not necessarily from
outside of the group).

 External solution can either be centralized or decentralized

depending on to what extent the initiative for the changes is
dispersed amongst the members of the group.

 A centralized solution…concentrated in the hands of only a few

members of the group, as in the case of “the state”.
External (or institutionalized) solutions
 In Thomas Hobbes’s Leviathan can be found the first full
expression of the justification for the existence of the state
Leviathan, as a metaphor, constituting laws and order,
necessarily do play a primary role in resolving social dilemmas.

 However, this is not the only way!

Governing the Commons in communities

 Communities on the other hand, are characterized by

decentralized solutions.

 Community is a group of people

 Who have common beliefs and values
 Whose relations are direct and many-sided, and
 Who practice generalized as well as merely balanced
reciprocity.
Governing the Commons in communities

 Elinor Ostrom, in her "Governing the Commons" (1990) book,

provided alternative solutions to the strongly recommend state
and market ones in common-pool resource (CPR) problems by
examining how communities try to “govern their commons” by
voluntary organizations.

 "Success in starting small-scale initial institutions enables

a group of individuals to build on the social capital thus
created to solve larger problems with larger and more
complex institutional arrangements.„
 Political entrepreneurs
 External solutions are not necessarily “coercive”, restricted to the
use of threats and offers, positive or negative sanctions, because
altering the expectations of people (through, for example,
persuasion) can also be treated as an external solution, therefore
political entrepreneurs belong to this group.

 Anyone can be a political entrepreneur who offers his/her

services to solve or remove the collective action problem in
exchange for a profit (material or monetary reward, but also an
immaterial political support from a constituency).
 Political entrepreneurs
 Such an entrepreneur can establish a collection organization,
gather contributions, or provide the public good itself. In these
cases the crucial function of the entrepreneur is to provide
different mechanisms for pooling resources.

 Political entrepreneurs can serve as coordinating mechanisms, not only

by collecting and distributing information but also by manipulating the
expectations of the individual members of the group regarding the
behavior of the other members
Internal or spontaneous solutions

 Internal or spontaneous solutions are those, which “neither

involve nor presuppose changes in the game”, i.e. all those
factors that induce members a group to voluntarily act for the
collective good, meaning that cooperation can evolve without any
external force.

 Internal solutions help individuals living in communities to

develop such rules and mechanisms that later become
institutionalized (external) solutions, as “ready tools” for future
conflict resolution.
Internal or spontaneous solutions

 Relying on the achievements of experimental social psychology,

sociology and economics the following motivations are
included: self interest or egoism, altruism, collectivism and
principlism.

 Besides these motives, we consider trust, as another essential

and necessary factor of cooperative behavior.
 What is trust?
 Some theoretical questions, which cut to the core of an
unsettled debate among social scientists: What are the sources
of trust and trustworthiness? If social norms are part of the
reason for the presence of trust, how can it be manufactured?
How can trust be introduced into an antagonistic situation?

 Can cooperation come about independently of trust?

 Can trust be a result rather than a pre-condition of cooperation?

 How can trustworthiness be acquired?

 What is trust?
 Some say that “apart from teaching children the capacity to trust
others (largely being trustworthy to them), there is little point in
cultivating trust ”, because “law and political institutions are used
on behalf of trust, they should be used to cultivate
trustworthiness and to block the kinds of actions that would
most severely abuse trust”

 However others claim that normal social relations require a

background or atmosphere of normative commitments to be
honest and to keep promises namely an atmosphere of
trustworthiness.
 Trust and cooperation, a chicken-egg
problem?
 Game theory suggests the so-called “tit-for-tat” strategy in
repeated games under certain conditions can lead to a Pareto-
optimal, cooperative solution of the PD. What is essential is to
avoid the use of “defect all” strategy by announcing to play a "nice
tit-for-tat” in the very first round, that is to cooperate.

 Nevertheless just announcing is not enough, something more is

needed to take it seriously. There should be an initial, mutual trust
between the playing partners and a credible commitment from
the side of the starter to keep his word.
 Trust and cooperation, a „chicken-egg”
problem?
 Diego Gambetta doubts that the “Axelrodian” spontaneous
evolution of cooperative behavior can evolve without trust. He
argues that the tit-for-tat strategy is “inconceivable in relation to
humans without at least a predisposition to trust: when the game
has no history a cooperative first move is essential to set it on
the right track, and unconditional distrust could never be
conceived as conducive to this.”
 Trust and cooperation, a „chicken-egg”
problem?
 What is more, some have reservations that cooperation could be
associated with trust at all, because in this game theoretic case,
cooperation results rather from continuous calculation of self-
interest than a mutually recognized suspension of such calculation.
One could rather speak about a modus vivendi than trust.
Studied trust
 Yet another approach suggests that in close communities, with
strong norms, and/or common history and cultural heritage one
can find the basis of trust. The City of London or the community
of diamond merchants provide good examples of this.
Nonetheless the same problem arises as before: how was the
initial trust created? Trust is a by- product of events which, to the
extent they are planned at all, did not have the creation of trust
as their goal”.
Studied trust
 Then how to solve this fundamental problem of creating trust?
Charles Sabel tries to provide us with an explanation based on
the notion of the “reflexive self”. In contrast to the neo-classical
and neo-liberal accounts of the self from which stems the
pessimism about the possibility of trust, Sabel contends that
there is nothing mysterious – at least in principle – about the
creation of trust.
Studied trust
 “The reflexive self, which on this account is the one we actually
have, can entertain and act on the idea of creating or extending
common values regarding loyalty and forbearance in the face of
vulnerability precisely because it knows that other selves can
entertain and act on the same idea. Whether and under what
conditions such a change is likely to occur is an empirical
question… Mutual dependence is the
 precondition of both individuality and sociability, is in some sense
known to be such” .
 Trust is a “thick and thin” human relation
 These reflexive selves form a community, which by definition is
prudent and other regarding, where a “trusting world” is
imaginable for all.

 Moreover, this belief is constantly tested and encouraged by the

help of different devices that are the part of a continuous process
of collective self-definition in a mutually dependent world.

 Trust is a “thick and thin” human relation, because people

deliberately make themselves vulnerable to others and are also
capable of doing so, but due to their deliberation, they can place
trust anywhere they want.
 Trust is a “thick and thin” human relation
 Therefore “blind trust” and “undying loyalty” are rather
deformation of this kind of human relation where making and
breaking trust are inevitable phenomena. Present cooperative
relations do not presuppose future obligations because there is
always the possibility of placing trust elsewhere.

 Continuous self-definition and reinterpretation allow room both

for debates and their resolution, thus seemingly – and sometimes
really – throat cutting feuds (or just misunderstandings) can be
settled.
 Trust is a “thick and thin” human relation
 This kind of “genesis amnesia” can provide an answer to the
presence of the strong social cohesion of some communities (like
in “close communities” mentioned before).

 This process can either be called a “negotiated loyalty”, “studied

consensus” or “studied trust”. By the help of this “process of
studied trust ”the pitfalls of both the game theoretic and the
historical/cultural explanations can be avoided.
 Learning by monitoring
 Nevertheless cooperation means entering into a vulnerable
position, thus such a risky move requires creating such
governance structures that allow for constant monitoring and
consultation.

 According to Sabel the more deliberately the parties apply the

general principles of cooperation to their particular activities,
the more effective those activities will be. As he observes,
monitoring can serve as routinizing contact between different
parties.
Learning by monitoring
 Similarly Ostrom stresses, analyzing the development of self-
governing institutions, that "learning is an incremental, self-
transforming process

 The supply of trust increases rather than decreases with use, and
trust can become depleted if not used!