Institutional Alternatives for DevelopmentRandolph CardonaEliza Wethey

Market vs. StateWho should do what in development initiatives?

Also voluntary sector, no photo available with 3 boxers

Markets: Strengths and Weaknesses1StrengthsCustomers buy based on satisfactionAllows for competitionProvides for private entrepreneurship

WeaknessesResponds exclusively to customer powerDoes not ensure universal access or equitable distributionOnly satisfies those that have purchasing power

1 Based on Esman. Alternative Channels for Service Provision

These are in terms of having a purely market based economy with no state input, thus they are to the extreme and to be thought of as a model only.

Role of the StateEstablish and maintain physical and social infrastructure

Highways, bridgesPublic educationEstablish rules and procedures

Protection of personal and property rightsEnvironmental lawsBetter than the market for promoting social security and equitable access to resources

Interaction of the State and MarketSocietal Pluralism

Should share responsibilities Privatization States roles

Promote and stimulate economic initiativesEstablish physical and institutional infrastructure Markets roles

Provide competition and private entrepreneurship

Esman and the world bank articles suggest that there should be a combination of the 2, you can have one or the other but there should be a balance. The state needs to establish certain physical and institutional infrastructure (roads, education)

General considerations for the mix of public service provisionTraditionally, there had been a public sector orientationInstitutional economics departs from a different perspective: why shouldnt the market do it?Currently, higher involvement of the market and voluntary sector in public service provisionThe use of the market depends on a goods degree of excludability and substractability (which occurs only for private goods)Other kinds of goods (toll-goods, common-pool goods, civil goods, government goods, and public goods require other combinations)These other goods allow for combinations of markets, hierarchies, and participatory schemes.

Common pool goodsNot excludable, but substractable (e.g. common pastures) Individual incentives can create social disutility, and public monitoring is difficultBest alternative is cooperative arrangements with participation of the beneficiaries (e.g. the case of Nepalese irrigation). High voice, low exit. Low market, low hierarchy, high participation.

Toll goodsExcludable, non-substractable.Market can provide this good, but hierarchy must play a major role in providing fairness, predictability, and clear conflict resolution schemes.High exit (another provider could take the role), but low voice.

Civil goodsProducts of charitable, voluntary, advocacy organizations (can also be provided private sector). Might generate social disutility when they pursue the benefit of a reduced group.Can have a role in restraining excesses of both market and state.High exit, high voice; high market, low hierarchy, high participation.

Public goodsNon-excludable, non-substractable.Although initial state participation is the rule, effective citizen participation of beneficiaries is key for success, especially when maintenance is needed. When some beneficiaries have excessive power and might benefit excessively from the good, hierarchy must also play a major role. Low exit, high voice; low market, high hierarchy, high participation.

Government goodsNon-excludable, non-substractable. Policies seen as goods that are provided under the assumption of government monopoly of coercion. Generate the environment for the provision of all other goods (e.g. the generation and implementation of a countrys commercial law).Risk that bureaucratic constraints and rent-seeking lead to bad provision - > Civil society counterparts to provide for checks that these goods are provided accordingly. Low voice, low exit; market low, hierarchy high.

Governance Achieving the appropriate balance between the products of various institutional goods so as to achieve a positive interplay between state, market and voluntary sector. To achieve this, initial conditions must be taken into account. Each sector has to be strong and if not so, needs to be strengthened.Critique: However, all depends on the source of this strengthening (e.g. NGOs heavily financed by World Bank).

Nature of Project Goods

SubstractabilityLowHighExcludabilityLowHigh

Public goodsCommon-pool goodsToll goodsPrivate goods

Exit and voice mechanisms

VoiceLowHighExitLowHigh

Government goodsPublic and common-pool goodsPrivate and toll goodsCivil goods

The Role of Hierarchy

HierarchyLowHighMarketLowHigh

Common pool goodsPublic and government goodsPrivate and civil goodsToll goods

Centralization vs. PolycentricityWhen can local arrangements improve development project effectiveness

What is polycentricity?Arrangement whereby independent authorities have certain responsibilities of service provision in a circumscribed area Individuals can have citizenship in several governmentsThere are no hierarchical relations among the different governmentsRefers not only to formal government, but also to other informal arrangements (e.g. community-based irrigation, resistance movements)

Advantages of polycentricityStronger incentives to keep constituents happyLocal governments can allocate resources in a way that best conforms to local preferencesCompetition among local governments leads to efficiencyFunctions tend to be more focused, reducing the possibility of neglect of functionsBUT: coordination costs (related to coordinated action with central government) and diseconomies of scale are its major weakness

How can formal polycentrism work better?Mechanisms to maintain coherence of lawEffective enforcement of general rule (rights to remove authorities, court intervention, access to resolution mechanisms)Capacity building based on local knowledge (??)Mechanisms to guarantee equity among local governments (e.g. arranging borders to encompass heterogenous populations)Optimal assignment of responsibilities (taking into account the externalities of strictly local action and networking effects) Optimal allocation of tax revenues

How can informal polycentrism work better?Incentives and sanctions to promote long term collaborationValid and reliable measure of estimating benefitsAppropriate measure to determine obligationsMethods of resource generation

Optimal allocation of resources

NATIONAL LEVELLOCAL LEVELStabilization taxesUser taxes and feesTaxes that are distributed unequallyTaxes on immobile resourcesTaxes on very mobile bases

Basic Conditions for Allocating Responsibilities in Development Initiatives

Conditions for successful development projects (according to R. Picciotto)

Taking into account the initial conditionsReorienting governmentFinancial sector developmentPublic sector reformAccountabilityStrong legal frameworkTransparency and participationLong term commitment

What is accountability?an obligation or willingness to accept responsibility1World Bank2relationship among actors

DelegationFinancePerformanceInformationEnforceability1 Merriam Webster 20062 World Development Report 2004

Before we can talk about how to guarantee accountability for the poor we need to define it.Anther way of defining it could beTaking responsibility for ones actions (something that many govs. are not willing to do)World Bank breaks it down into 5 components. Ex. Buying shoes. Delegationask for your size, Financepay for them, performanceyoure given one left and one right shoe, theyre in perfect new condition and havent been used before, informationafter you wear them for a while you gain more information about performance. eg. If you bought the cutest shoes but the highest heels they might not have the best performance for your feet, especially if youre walking to and from work/class. Enforceabilitydepending on the information you may or may not want to buy another pair from the same store or same brand

How can we ensure that accountability is happening?(World Bank 2004)

Accountability requires relationships among a number of actors. One of the most important is voice, which we talked about last week. Voice is often the most powerful for the poor. They often have no exit so voice is their only alternative. Politicians should pay more attention to this aspect of accountability b/c if the citizens do not feel that theyre doing a good job they can easily be voted out of office next time. One example of this can be seen in Latin America in the recent elections, specifically in Bolivia as weve talked before. Also in Peru during the elections one of the candidates was highly supported by the lower class, Ollanta Humala b/c he represented nationalism and a movement away from the status quo. The lower class had nothing to lose so they mostly voted for him while those in power and with stable jobs were afraid that they would lose ground if voting for him so they instead voted for Alan Garcia.In terms of compactClient power is very similar to voice but it bypasses the state and goes straight to the providers. This only functions when people are in the capacity to access these resources.Also managementits not on the chart but it plays an important role in making sure that workers are provided with responsibility, including training, motivation and selection.

Why is accountability important?Way of diagnosing poor performance

InefficiencyCorruptionEnsures that services are being provided Provides poor with

VoiceClient power

Funny picture from an Armenian website--seems like the politician is dressed as a purse, give me more money and Ill give it to the others

Case Study: Privatization of Telephone Company in Peru1990shigh inflation and rising deficit in Peru1994privatization of both CPT and ENTEL

Bought by Telefnica Initially positive reactionService quality and access improved BUT 5 years later satisfaction dropped 40%

What is privatizationtransfer of assets, service functions and/or decision making from the domain of the pulbic sector to the privateOnly works when govs. closely monitor the activitiesshould generally only be used to take advantage of private sector companies that can provide a better service than the gov.In 1999 public approval dropped from 60 to 20% with the poor being the most dissatisfiedIncrease related to high monthly tarrifs and lack of competition

Falling Approval Rate

Why did this occur:Gov. was not monitoring telefonicas processAlso, no competition, was the only service for local phone callsmonopoloy Now claro is entering the market, a cell phone company so telefonica may have to provide lower service but until the gov. breaks their monopoly on home telephone service likely will not change. People have no exit, they can only use voice, but b/c its a private firm they dont care much if they complain.

Result of Falling ApprovalFewer people have landlines in homes

Turning to non-contract cellular phonesTelefnica remains as the only provider of local service

Claro vs. Movistar (cellular phone providers)

The case of higher education: public or private good?

World Bank studies show that primary education has a higher return to investment than secondary and higher education (Psacharopoulos, 1986) (if seen strictly in terms of returns to the student)The conclusion has been that it is recommendable to shift public spending resources towards primary education and charge fees to university students

However, education can have social benefits that can make it partially a public good Nancy Birdsall (1996) argues that higher education brings about social benefits not captured by individuals such as:

Basic researchVarious services for public and private sectorsNation building activities In addition, higher education in a developing countries can help attract FDI, which generates jobs also for secondary school graduates *

*Not included in Nancy Birdsalls paper

Conclusions

Market vs. State vs. Voluntary Sector

Efficiency makes the market the default option for service provision The State and Voluntary Sector have pivotal roles in providing different kinds of public goodsCentralized vs. Polycentric

Services provided by polycentric governments can be more responsive to the needs of the beneficiaries However, economies of scale require many services to be provided within larger jurisdictionsRegardless of what alternative for service provision are chosen, there needs to exist a basic institutional framework that includes: consideration of initial conditions, accountability, strong legal frameworks, and transparency and participation.

Also voluntary sector, no photo available with 3 boxersThese are in terms of having a purely market based economy with no state input, thus they are to the extreme and to be thought of as a model only.

Esman and the world bank articles suggest that there should be a combination of the 2, you can have one or the other but there should be a balance. The state needs to establish certain physical and institutional infrastructure (roads, education)

Before we can talk about how to guarantee accountability for the poor we need to define it.Anther way of defining it could beTaking responsibility for ones actions (something that many govs. are not willing to do)World Bank breaks it down into 5 components. Ex. Buying shoes. Delegationask for your size, Financepay for them, performanceyoure given one left and one right shoe, theyre in perfect new condition and havent been used before, informationafter you wear them for a while you gain more information about performance. eg. If you bought the cutest shoes but the highest heels they might not have the best performance for your feet, especially if youre walking to and from work/class. Enforceabilitydepending on the information you may or may not want to buy another pair from the same store or same brandAccountability requires relationships among a number of actors. One of the most important is voice, which we talked about last week. Voice is often the most powerful for the poor. They often have no exit so voice is their only alternative. Politicians should pay more attention to this aspect of accountability b/c if the citizens do not feel that theyre doing a good job they can easily be voted out of office next time. One example of this can be seen in Latin America in the recent elections, specifically in Bolivia as weve talked before. Also in Peru during the elections one of the candidates was highly supported by the lower class, Ollanta Humala b/c he represented nationalism and a movement away from the status quo. The lower class had nothing to lose so they mostly voted for him while those in power and with stable jobs were afraid that they would lose ground if voting for him so they instead voted for Alan Garcia.In terms of compactClient power is very similar to voice but it bypasses the state and goes straight to the providers. This only functions when people are in the capacity to access these resources.Also managementits not on the chart but it plays an important role in making sure that workers are provided with responsibility, including training, motivation and selection.Funny picture from an Armenian website--seems like the politician is dressed as a purse, give me more money and Ill give it to the othersWhat is privatizationtransfer of assets, service functions and/or decision making from the domain of the pulbic sector to the privateOnly works when govs. closely monitor the activitiesshould generally only be used to take advantage of private sector companies that can provide a better service than the gov.In 1999 public approval dropped from 60 to 20% with the poor being the most dissatisfiedIncrease related to high monthly tarrifs and lack of competition Why did this occur:Gov. was not monitoring telefonicas processAlso, no competition, was the only service for local phone callsmonopoloy Now claro is entering the market, a cell phone company so telefonica may have to provide lower service but until the gov. breaks their monopoly on home telephone service likely will not change. People have no exit, they can only use voice, but b/c its a private firm they dont care much if they complain.