‘It’s time we admit our failings’

Mary M. Shirley. She is the President of the Ronald Coase Institute (USA), a consultant to the World Bank and one of the leading scholars on institutions and their implications on international developmental aid. 

What are institutions?

“Institutions are the rules, laws and norms that govern human activity. As we know from the work of Douglass North (1993 Nobel Laureate in Economics] institutions are human inventions that try to give some certainty to an uncertain world by making human actions more predictable. It’s really these rules and norms that in developing and developed countries determine our behaviour both in economic and political markets and in the social sphere.”

Why are these rules and norms important for development?

“If you perceive institutions as the rules of the game and organizations as the players you can see how important they are to development, because they fundamentally determine human choices. Institutions determine human choices and as such human behaviour because people’s ideas and ways of thinking or belief systems are shaped by the institutions around them.”

What are the institutions that are important for development?

“The underlying institutions that persist over time are the ones that matter most for development, such as constitutions and norms of behaviour. These institutions are critical to development because in order to change an economy you have to overcome these fundamental institutions. For development you need, what North calls, ‘open access’ institutions, political and economical. Over the long run, a dynamic market economy is only compatible with the developed open access set of institutions. The set of institutions that we see in the developing world is closed access: it’s hard to start business, it’s hard to get political power.”

How can less developed countries attain these open access institutions?

“We don’t know the answer to that question. There are not many countries that have developed in this century or the previous one. Each of them followed a very idiosyncratic or very specialized local approach. So it’s not as though we could design a model that you could follow and become a developed country. And that’s why I think that local knowledge is especially important. You have to create local scholars who understand the institutions and that can design reforms that fit with the institutional framework of that specific country.”

Are you suggesting that only local scholars can design successful reforms?

“The reason why I focus on local people and local knowledge is because it’s very hard for an outsider to truly understand the belief systems of a country and the local norm. And without that understanding it’s difficult to design reforms that actually work. In the 21 years that I worked for the World Bank I saw a lot efforts by well-informed outsiders to try to promote reforms in developing countries. Ultimately they were unsuccessful because they didn’t have enough local understanding. When they were ever successful it was, because they were working with somebody who was local and understood the local situation.”

Jeffery Sachs, the founding father of the Millennium Development Goals, argues that the international aid community has talked enough about issues like good governance, the rule of law and corruption. The problem is according to Sachs the lack of capital for investment in, for example, paved roads and anti malaria mosquito nets. What’s your comment on this, because it essentially goes against your argument?

“It does go against it and I disagree with it. If your main interest is to give humanitarian assistance to people to help alleviate the misery of their lives then what many foreign aid agencies do is useful. If you’re interested in long-term development so that countries can actually grow and prosper on their own there is absolutely no evidence that you can do that without better institutions. Sachs argues that there hasn’t been enough aid. But having seen close at hand huge amounts of aid going to many countries, I have yet to see that volume makes any difference. The fundamental problem is that the institutions aren’t there and outsiders, including aid agencies, don’t know how to create them. I think that it’s time we face up to that and we admit our failings rather than making a case for more aid.”

Why does there seem to be a business as usual mentality within the international aid community and does a paradigm shift not occur, despite the general failure of aid to reduce poverty and induce development?

“The growth and expansion in aid flies in the face of the empirical evidence. Aid agencies don’t change, because there are strong incentives not to. You can, for example, lose your job if you are working in an aid agency and you try to no longer lend to countries or give aid to countries that were not using assistance well. The message of those who are critical of aid is basically that people have to solve these problems internally and we have to be more selective in the kinds of assistance we give them. And, most importantly, not get in the way of solutions. Often people are looking for easy answers or magic bullets.”

But aren’t you also talking about a magic bullet: the magic bullet being institutions?

“Institutions are not a magic bullet, because there is no way to easily change either beliefs systems or institutions. But institutions and belief systems do define development decisively.”

What’s your advice, as a critic of aid, to people that are genuinely interested in Third World development?

“I’d encourage especially scholars to do research on institutional issues in their own countries. They should try to identify and to come to grips with real problems that can be empirically researched and can have influence and communicate their findings. To a wide community and powerful people that have an influence on policymaking. One of the things we do at the Coase Institute’s workshop is try to give scholars the tools to do better institutional analysis and communicate their findings effectively.”

What are institutions?

“Institutions are the rules, laws and norms that govern human activity. As we know from the work of Douglass North (1993 Nobel Laureate in Economics] institutions are human inventions that try to give some certainty to an uncertain world by making human actions more predictable. It’s really these rules and norms that in developing and developed countries determine our behaviour both in economic and political markets and in the social sphere.”

Why are these rules and norms important for development?

“If you perceive institutions as the rules of the game and organizations as the players you can see how important they are to development, because they fundamentally determine human choices. Institutions determine human choices and as such human behaviour because people’s ideas and ways of thinking or belief systems are shaped by the institutions around them.”

What are the institutions that are important for development?

“The underlying institutions that persist over time are the ones that matter most for development, such as constitutions and norms of behaviour. These institutions are critical to development because in order to change an economy you have to overcome these fundamental institutions. For development you need, what North calls, ‘open access’ institutions, political and economical. Over the long run, a dynamic market economy is only compatible with the developed open access set of institutions. The set of institutions that we see in the developing world is closed access: it’s hard to start business, it’s hard to get political power.”

How can less developed countries attain these open access institutions?

“We don’t know the answer to that question. There are not many countries that have developed in this century or the previous one. Each of them followed a very idiosyncratic or very specialized local approach. So it’s not as though we could design a model that you could follow and become a developed country. And that’s why I think that local knowledge is especially important. You have to create local scholars who understand the institutions and that can design reforms that fit with the institutional framework of that specific country.”

Are you suggesting that only local scholars can design successful reforms?

“The reason why I focus on local people and local knowledge is because it’s very hard for an outsider to truly understand the belief systems of a country and the local norm. And without that understanding it’s difficult to design reforms that actually work. In the 21 years that I worked for the World Bank I saw a lot efforts by well-informed outsiders to try to promote reforms in developing countries. Ultimately they were unsuccessful because they didn’t have enough local understanding. When they were ever successful it was, because they were working with somebody who was local and understood the local situation.”

Jeffery Sachs, the founding father of the Millennium Development Goals, argues that the international aid community has talked enough about issues like good governance, the rule of law and corruption. The problem is according to Sachs the lack of capital for investment in, for example, paved roads and anti malaria mosquito nets. What’s your comment on this, because it essentially goes against your argument?

“It does go against it and I disagree with it. If your main interest is to give humanitarian assistance to people to help alleviate the misery of their lives then what many foreign aid agencies do is useful. If you’re interested in long-term development so that countries can actually grow and prosper on their own there is absolutely no evidence that you can do that without better institutions. Sachs argues that there hasn’t been enough aid. But having seen close at hand huge amounts of aid going to many countries, I have yet to see that volume makes any difference. The fundamental problem is that the institutions aren’t there and outsiders, including aid agencies, don’t know how to create them. I think that it’s time we face up to that and we admit our failings rather than making a case for more aid.”

Why does there seem to be a business as usual mentality within the international aid community and does a paradigm shift not occur, despite the general failure of aid to reduce poverty and induce development?

“The growth and expansion in aid flies in the face of the empirical evidence. Aid agencies don’t change, because there are strong incentives not to. You can, for example, lose your job if you are working in an aid agency and you try to no longer lend to countries or give aid to countries that were not using assistance well. The message of those who are critical of aid is basically that people have to solve these problems internally and we have to be more selective in the kinds of assistance we give them. And, most importantly, not get in the way of solutions. Often people are looking for easy answers or magic bullets.”

But aren’t you also talking about a magic bullet: the magic bullet being institutions?

“Institutions are not a magic bullet, because there is no way to easily change either beliefs systems or institutions. But institutions and belief systems do define development decisively.”

What’s your advice, as a critic of aid, to people that are genuinely interested in Third World development?

“I’d encourage especially scholars to do research on institutional issues in their own countries. They should try to identify and to come to grips with real problems that can be empirically researched and can have influence and communicate their findings. To a wide community and powerful people that have an influence on policymaking. One of the things we do at the Coase Institute’s workshop is try to give scholars the tools to do better institutional analysis and communicate their findings effectively.”