Facilitating Socio-Economic Development – Institutions

Related ecosystems (ECO)

“Jobs liked to tell the story- and he did so to his team that day- about how everything that he had done correctly had required a moment when he hit the rewind button. In each case he had to rework something that he discovered was not perfect. He talked about doing it on Toy Story, when the character of Woody had evolved into being a jerk, and on a couple of occasions with the original Macintosh. “If something isn’t right, you can’t just ignore it and say you’ll fix it later,” he said. “That’s what other companies do.”
Walter Isaacson, Steve Jobs


Developing St. Petersburg, the previous post, outlined the history of the Southside St. Petersburg CRA and posed the question about the effectiveness of the underlying economic development policies and practices employed, as well as the goals, theories and assumptions on which they are based.

One of the most important considerations is an appreciation of the roles of institutions in the development and maintenance of economic progress.   The Workshop Toolkit, including the Institutional Analysis and Development (IAD) Framework, developed by the Ostroms and others, enables development aid providers to elucidate how the less-than-satisfactory local social and economic outcomes arise from the perverse incentives that are the result of the way the social and economic institutions,  including the aid system itself, ‘The System,’ are organized.

In addition, employing the IAD framework suggests possible methods to further guide the design and implementation of urban redevelopment policies and projects by applying the knowledge gained from empiric research of the design and management of common-pool resources and community-based resource management.

The Institutional Analysis and Development (IAD) Framework lays the theoretical groundwork that can be used to design a successful redevelopment initiative. This post explains key terms of the IAD Framework and relates them to overall goals of sustainability and ownership, setting the stage to make recommendations on priorities, principles and tools for shaping policy and program implementation.

Five Key Terms of The IAD Framework


Institutions are the rules used by individuals in a wide diversity of repeated situations that they confront in life; they help or hinder the efforts of individuals to be optimally productive in the activities they undertake with others. Institutions key aspect is their shared rules regarding what actions individuals must take, must not take, or are permitted to take in particular situations. By constraining behavior, institutions increase order and predictability.

E.g.: baseball; the interstate highway system; commercial airplane operation; Starbucks and innovation.

It is now widely accepted that the main development problem is “missing institutions” or “perverse institutions” instead of “missing money.” No matter how well-intentioned those providing assistance are, or how many resources are transferred, development will occur only if political and economic institutions generate incentives that facilitate individuals’ achievement of development goals.


In the IAF, the term incentive means the rewards and punishments that individuals believe to be related to their actions and those of others. Perceived rewards and punishments can motivate individuals to take actions that are productive for all involved. Perverse incentives, on the other hand, lead individuals to avoid engaging in mutually productive outcomes or to take actions that are generally harmful for others.

Citizens often face incentives that make it difficult to invest in economic activities, to provide public goods, to manage common pool resources and generally to arrive at mutually beneficial day-to-day arrangements. Thus, a core problem of development assistance is to understand the structure of the incentives generated within these situations.

Where people themselves cannot change incentives, government policies potentially can. However, incentives at the policy level may obstruct institutional reforms needed to improve economic, social, and political conditions.


Meaningful progress or development implies not only the progressive meeting of basic material requirements of all, but also the conditions and institutions consistent with respect for basic human rights.

According to Sida, development can be defined as those actions taken by donors and recipients intended to further two distinct outcomes:

  • Poverty reduction, and
  • Freedom.

There are six political priorities:

  1. Democracy;
  2. Human rights;
  3. Gender equality and
  4. Women’s role in development;
  5. Environmental sustainability;
  6. Climate change. (Sida Development Assistance – A Presentation)


The process of development is one in which individuals increase their well-being by solving more collective-action problems more effectively through the design and use of institutions
at many scales.

A key message of the Commission on the Measurement of Economic Performance and Social Progress is that we should shift our emphasis from measuring economic production to measuring people’s well-being. Well-being is multi-dimensional. The key dimensions that should be taken into account simultaneously are:

  1. Material living standards (income, consumption and wealth);
  2. Health;
  3. Education;
  4. Personal activities including work;
  5. Political voice and governance;
  6. Social connections and relationships;
  7. Environment (present and future conditions);
  8. Security, of an economic as well as physical nature.

Information relevant to valuing quality of life includes measures of people’s “functionings” and freedoms. In effect, what really matters are the capabilities of people, that is, the extent of their opportunity set and of their freedom to choose among this set, the life they value. There is a consensus that quality of life depends on people’s health and education, their everyday activities (that include the right to a decent job and housing), their participation in the political process, the social and natural environment in which they live, and the factors shaping their personal and economic security.

Collective-action situations

Collective-action situations lie at the center of development. A collective-action situation a desired joint outcome requires the input of several individuals. Almost all productive relationships involve some form of collective action. For example, while one person can produce agricultural products from a single, small agricultural plot, the amount of agricultural product per amount of input is greatly enhanced by creating diverse forms of teamwork through family, community, or corporate arrangements to increase the size of the enterprise. Similar benefits of increasing the number of participants who bring different skills and resources occur in almost all manufacturing or service activities. Collective-action situations become collective-action problems whenever a lack of motivation and/or missing or asymmetric information generates incentives that prevents individuals from resolving a collective action situation. In other words, in order to achieve a benefit that helps the members of the group, some portion of these people must accept a risk of paying extra for a benefit shared by all. Simply creating a public bureaucracy to provide public goods or protect natural resources doesn’t automatically solve the collective-action problem.

Rather than think about linkages among action situations involved in development assistance as a “chain of aid delivery,” we believe it is more advantageous to think about a set of nested situations that may take on any of a variety of productive or unproductive relationships. The chain-like fashion of aid delivery does not fully reveal the varied institutional contexts within which the actors in their situations are connected.


The concept of “development” as a goal has become “sustainable development.” Sustainable development focuses on the two concepts of sustainability AND ownership.

Sustainability refers to the longevity of development aid’s effects, rather than the existence of particular projects or activities.

Ownership requires greater participation and responsibility on the part of aid recipients and a decrease in a donor’s authority over their own aid packages.

To be effective and sustainable, an intervention should incorporate the local knowledge about the needs, preferences, and problems of target beneficiaries that only they themselves possess. Access to this localized knowledge requires active beneficiary ownership – meaning a role in all four aspects of ownership – rather than just the consumption of whatever is produced. By making investment in these processes, beneficiaries are not simply consumers of someone else’s largesse. They have had to articulate their own preferences and allocate their own resources.

Four dimensions of ownership have been identified:

  1. Enunciating demand: Participation in provision by articulating what asset, project, or program is needed and deciding how resources should be mobilized.
  2. Making a tangible contribution: Participation in production by making tangible contributions. Time, effort, and other resources contributed to production are a costly signal that beneficiaries expect to derive benefits from a project.
  3. Obtaining benefits: Participation in consumption of the benefits if the project is successful and in a share of responsibility if the project fails.
  4. Sharing responsibility for long-term continuation or non-continuation of a project: Participation in decisions related to the alienation of the rights to a project (the decision to continue or not continue a project once it has been initiated).


Institutional Analysis

Many institutions foster incentives that undermine their goal of sustainable development. Some options that may help development agencies ameliorate some of the perverse incentives are:

  1. Awareness of the role of incentives in underpinning aid effectiveness and sustainability.
    1. Most individuals with experience in development cooperation realize that incentives underpin aid effectiveness and sustainability.
    2. A more explicit and systematic understanding of institutions and the incentives that emerge within particular organizational structures, as well as mechanisms for transmitting that knowledge, are crucial to improve an aid agency’s effectiveness.
    3. The only way that an understanding of incentives will lead to better development assistance is through the determination of an agency’s own staff to create rules that promote “good” incentives.
  2. The Nature of the Good
    1. A development agency should understand the wider incentives involved in the underlying core good as well as the more narrowly focused incentives related to its activities.
    2. Such an understanding, coupled with a desire for sustainable results, would most likely exclude most projects that primarily involve infrastructure provision and move the agency toward institution building.
  3. Ownership and Sustainability
    1. Many agencies now voice a strong concern for the sustainability of development cooperation. A long-term positive change is a better investment of resources than more temporary results.
    2. Such agencies seek to improve the outcomes related to its efforts in development cooperation by giving ownership of aid to recipients. Including recipients and beneficiaries in true ownership can help solve some of the severe information and motivational problems in development.
    3. But this is not a sufficient condition to ensure sustainability. Motivational and information problems in aid are very deeply embedded and no type of development cooperation is free from powerful perverse incentives.
    4. Given aid’s complexity regarding relationships and incentives, it is important that an essential first step is that all participants involved in an aid project to understand what the terms ownership and sustainability mean in practice. Aid agencies need to allow sufficient opportunities for the owner(s) to contribute to the design, implementation and mid-course corrections of the project/program.
    5. A final step is to allow the owner full participation in the final evaluation of a project/program. Beneficiary owners need to (1) enunciate a demand for an aid, (2) allocate at least some of their own and other actor’s assets to the project or program so that they have a real stake in the way their own and other actor’s assets are used, (3) obtain real net benefits, and (4) have clear-cut responsibilities and be able to participate in decisions regarding continuance or ending of a project.
    6. We recommend that aid agencies focus on the concepts of responsibility and accountability as they relate to ownership. An agency should make clear what is intended to be sustainable, how development assistance helps produce sustainability, what time frame is being used, and how sustainability will be measured. Project planning documents should clearly identify the intended owners and include an analysis of the anticipated impact that this designation of ownership will have on sustainability.
  4. Encouraging Learning at the Individual and Organizational Levels
    1. Most development agency employees generally accountable for producing sustainable results.
    2. Evaluators should be instructed to examine the level of ownership in a project or program and the impact of ownership on sustainability should be seriously discussed.
  5. Putting Beneficiaries First
    1. Effective and sustainable development assistance must center on beneficiaries and the problems they face.
    2. Beneficiaries should take ownership of the developmental projects in all four senses of that term.
    3. To be sustainable, aid should address how beneficiaries relate to each other in dealing with diverse collective action situations.
    4. Without this deeper analysis and programs focused on institutional change to facilitate the long-term improvement in the lives of beneficiaries, aid is likely to provide only short-term benefits.

We are now in a position to begin making recommendations on priorities, principles and tools for shaping development policy and program implementation, the subject of the following post.


  1. Ostrom, E., 1990; Governing the Commons – The evolution of Institutions for Collective Action; Cambridge University Press.
  2. Ostrom, E. 2005; Understanding Institutional Diversity; Princeton University Press.
  3. Gibson, C., Andersson, K., et. al., 2005; The Samaritan’s Dilemma: The Political Economy of Development Aid; Oxford University Press.
  4. CSSP.org; Institutional Analysis:
    Organizing Systems to Support Improved Outcomes for Children and Families – Lessons Learned from the Institutional Analysis
  5. Child Welfare Practice – Creating a Successful Climate for Change; Findings and conclusions from an institutional analysis.

About Freedom to...

Consultant helping people and employers in health care, education and government to see and understand how their organization works and how to change them to improve performance.
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