USAID Policy Paper

## Institutional Development

**Bureau for Program and Policy Coordination**

**U.S. Agency for International Development**

**Washington, D.C. 20523**

### March 1983

# TABLE OF CONTENTS

#### EXECUTIVE SUMMARY

I. Introduction: The Concept of Institutional Develop­ment

II\. Institutional Development Priorities for the 1980s

A. Analysis and Reform of the Policy Environment

B. Consideration and Introduction of Organizational Alternatives

C. Development of Institutional Learning Capacity

D. Transfer of Knowledge and Technology

E. Analyses and Improvement of Institutional Linkages/Coordination

F. Improvement of Management Systems

G. Provision of Skills and Training

H. Capitalizing upon Local Capacities and Participation

I. The Role of Institutions in the Development of Supporting
Infrastructure

III\. Conclusions

A. Institutional Analysis

B. Time Horizons and Financing

C. Private and Non-Governmental Institutions

**Executive Summary**

It is USAID policy to help countries establish and strengthen public and
private institutions in support of mutually agreed, priority devel­opment
objectives. This is because effective institutions:

\-- enhance a country\'s ability to marshall its own human and financial
resources for development;

> \-- expand people\'s opportunities to undertake successful development
> by providing in­creased incentives for investment;
>
> \-- provide individuals with opportunities to acquire the skills,
> resources, and services needed to increase their productivity, income,
> and well-being; and
>
> \-- increase the likelihood that USAID and host country resources will
> foster development that can be sustained after external assistance is
> withdrawn. That is, USAID\'s investment should stimulate a process of
> investment and reinvestment by beneficiaries themselves that continues
> after the termination of donor involvement.

In undertaking institutional development ef­forts, USAID will adhere to
the following principles:

1\. Institutional development should be ad­dressed as an issue in all
projects, and should not be seen as a special activity of its own. This
does not preclude support to particular institutions (e.g., regional
management train­ing entities) where the prime focus is in fact
institutional development. Although analysis of institutional issues is
required in all pro­jects, no special institutional development ef­fort is
required where concerned institutions are demonstrably strong.

2\. Institutional development must address weaknesses in complementary
institutions,\' since institutional deficiencies elsewhere in a sector
(e.g., extension) may well inhibit the ef­fectiveness of particular
institutional interven­tions (e.g., in research).

3\. Institutional development must encourage institutions that are
flexible and which can adapt to changing local and national needs. This
entails building effective Information- \' handling systems, strong
analytic capacities, and close linkages to client or user groups.
Well-functioning markets will support this goal as well.

4\. Institutional development must provide for the active participation
of clientele in the assessment of their needs, and in the design,
implementation, and evaluation of field pro-grams. This helps to ensure
that USAID- ­supported institutions will meet their own im presentation
goals, be relevant to local needs, and become self-sustaining. Where
possible, these methods and objectives should be real­ized through
development of private sector institutions.

5\. Institutional development must be aimed at providing people
increased ability to acquire essential resources, and greater
opportunity to apply these resources in rewarding ways. This can often
be achieved by reducing the role of government and expanding the role of
the private sector in development.

6\. **We conclude that private sector options for institutional
development must be considered carefully**. Experience has indicated
that with the exception of such areas as basic public ad­ministration,
major transportation infrastruc­ture, and certain aspects of agricultural
research, public preventive health measures, and basic schooling,
private sector options are both less costly and more responsive to
clientele, and at the same time more innovative, dynamic, and efficient,
than public enterprise. **Thus, where there is a choice, USAID should
encourage and support institutional development options in the private
sector and should avoid activities that explicitly or implicitly preempt
private sector options**.

**I. Introduction: The Concept of In­stitutional Development**

This paper outlines USAID policy on institutional development. It begins
with a short discussion of the concept of institutional development, and
proceeds to a review of institutional development priorities in the
1980s. Here a number of important policy goals are set forth, and
suggestions are made regarding various interventions likely to achieve
these goals. The paper closes with recommendations for how the Agency
can prepare itself to deal with institutional development needs in the
coming years.

Effective public and private institutions are essential for providing a
country the self-sustaining capacity to solve critical development
problems. Furthermore, they: enhance a country\'s ability to marshall
its own human and financial resources for development;

> \-- expand people\'s opportunities to undertake successful development
> by providing in­creased incentives for investment;

\-- provide individuals with increased opportunities to acquire the
skills, resources and services needed to increase their productivity,
income, and well-being; and

> \-- increase the likelihood that USAID and host country resources will
> foster development that can be sustained after external assistance is
> withdrawn, through a process of indigenous investment and
> reinvestment.

It is therefore USAID policy to help recipient countries establish and
strengthen public and private institutions in support of mutually
agreed, priority development objectives, by drawing upon support from
Title XII universities, the US cooperative movement, US and LDC
institutes of management, PVOs, and other organizations with appropriate
capacities.

By \"institutions\" we mean specific organizations (a commercial bank, a
ministry of health), but we also mean institutions in the broader and
more fundamental sense, such as financial and commodity markets, systems
of land tenure, and legal institutions.[^1] A nation\'s economic,
political, legal, and social institu­tions determine the basic framework
of incentives and opportunities within which development efforts take
place. Even the best of organizations can accomplish little when this
broader institutional framework is antithetical to development goals.
However, because institutions become tangible only through the policies
and actions of particular organization, much of USAID\'s institutional
development effort will be focused on improving the policies and
procedures of key organizations.

USAID has viewed institutional development as an important element of
its development assistance program for many years, but, although the
experience has been long, few universally valid approaches seem to have
emerged. Rather, the clearest lesson is that nearly any type of
initiative will be well suited to some situations and will fail in
others; similarly, nearly all projects with significant institutional
development components experience substantial implementation
difficulties.[^2] USAID\'s experience in this regard is mirrored by that
of the World Bank; a staff paper on the topic has concluded that \"the
lack of clearly superior approaches in this field calls for considerable
experimentation,\" while a Bank audit review of recent projects and
their institution building components shows that most methods (e.g.,
training, expatriate consultants, forming a new agency or unit, etc.)
achieve only partial success under most circumstances.[^3] This suggests
that we have much to learn about how donors can assist in building
effective LDC institutions. Thus, this paper makes few prescriptive
statements about the relative utility of various institutional
development models, of short or long term technical assistance, the role
of various types of training, and so forth. At the same time, it is
possible to point to some of the issues and lessons, which seem
consistently to emerge in discussions of institutional development and
to highlight the implications for programming and development

strategies. This is done in Section H below.

**II. Institutional Development Priorities in the 1980s.**

The most critical areas of concern in institu­tional development today
relate to:

\-- the host country policy environment;

\-- the potential of various alternative forms of organization;

\-- the importance of institutional learning capacity;

\-- the problem of transferring knowledge and technology;

\-- improvement of coordination and linkages among institutions;

\-- improvement of management systems;

\-- provision of training;

\-- the role of local initiative and participation; and

\-- the role of institutions in undertaking the development of physical
infrastructure.

Each of these areas of concern is discussed in detail below.

**A. Analysis and Reform f the Policy Environment**. There is a strong
interaction between a country\'s policies and the effectiveness of its
institutions. Unfavorable policies can seriously inhibit institutional

development. For example, many donor supported community development
efforts in the 1950s failed because they ignored the need for
complementary policies to encourage investment in the agricultural
sector. Domestic private enterprise can be impeded or supported by the
nature of enabling legislation, regulatory codes, and licensing
procedures, as well as economic policies.

On the other hand, successful institutional development can also
mitigate the impact of unfavorable policies. In India, for instance,
cotton marketing associations permitted farmers to capture some of the
value added from processing cotton even though prices for cotton were
maintained at low levels. Because policies are always imperfect, full of
conflicts, biased against some, and characterized by lags, organizations
will frequently seek to compensate for policy deficiencies. Often,
however, organizational solutions to policy problems will simply shift
the cost of poor policy to some other group in society. USAID may
support organizational solutions of this sort on a short-term basis,
when the clear intent is to gain leverage for policy dialogue, but
USAID\'s long-term emphasis must remain on reform of poor policy.

Finally, effective organizations may serve to bring steady influence to
bear on governments for needed policy changes. Popular organizations,
national business associations, and planning units within ministries
have proven effective in encouraging policy change. Thus, missions
should undertake an ongoing assessment of host country policies,
legislation, and regulatory procedures which facilitate or impede
private and public institutional growth and effectiveness, and should
develop within their overall programs a dialogue with host country
government and assistance activities aimed at improving the content of
host country policies.

**B. Consideration and Introduction of Organizational Alternatives**.
Very often USAID\'s approach to development issues is to focus on
increasing resources or opportunities to acquire resources, typically by
introducing or strengthening an implementing organization. Thus, for
instance, lack of credit is often identified as a problem in the
agricultural sector, and the response is to build credit dispensing
institutions. But the reasons why resources are lacking often have
nothing to do with the capacities of particular organizations; rather,
the problems may stem from poor policies (in the case of credit,
artificially depressed interest rates) or weak national level
institutions (e.g., poorly articulated financial markets). Hence
missions that are considering organization type interventions to
increase the availability of development resources should direct close
attention to the broader institutional and policy environment, and the
associated framework of incentives and opportunities. If these are
fundamentally flawed, it is unlikely that an organizational intervention
will be more than minimally effective.

If an organizational intervention is justified, then a number of other
considerations come into play. For organizations to be effective, both
their structure and their procedures must be suited to their
socioeconomic environment, the nation\'s administrative and political
traditions, and the technology around which they are organized.

Organizational theory has long recognized that the nature of an
organization\'s environment profoundly affects its structure. An,
agriculture department designed for a small homogeneous group of farmers
with the security afforded by a well-established irrigation system, for
example, would be quite different from one serving large numbers of
small farmers, diverse in their conditions, and subject to the vagaries
of natural rainfall. In the development of human resources, the
organization required for training in technical skills related to
employment is quite different from that required to manage a uniform
system of primary schools. Similarly, although administrative traditions
in much of the Third World are characterized by highly centralized,
control-oriented management systems, environmental diversity and the
technology of production militate in favor of decentralized, flexible
structures. Hence, missions should explicit consider the implications
that an institution\'s proposed function may have for the form it should
take; and missions should ensure that the institutional structure is
appropriate to the function. USAID should therefore see the task of
institutional development not simply as institutional transfer, but
rather as institutional invention and/or adaptation. Because of the
uncertainty involved, it may sometimes be appropriate to encourage
institutional diversity and Perhaps even organizational competition,
although unproductive organizational conflict must be minimized.[^4]

In examining organizational alternatives particular attention should be
given to the complementary roles of the public and private sectors.
Where high returns redound to the economy but not to the individual
investor, public sector institutions are likely to be required. This
situation tends to prevail where fixed costs are extremely high but
returns are very risky or low in the short-run, or because it is not
feasible to charge a price to each consumer that will cover total costs
(e.g., in the case of transportation infrastructure and some types of
agricultural research). Nevertheless, investments in national public
institutions must be balanced both by the establishment of decentralized
institutions at regional and local levels, and by encouragement to the
private sector. Balanced assistance of this sort is essential if
excessive centralized control is not to inhibit individual and local
initiative. Private institutional development can be promoted by
assisting local business organizations (firms or associations) in
management, technology assessment, accounting systems, and so forth; by
providing funding for financial intermediaries; or by undertaking other
activities as discussed in USAID\'s Policy Paper on Private Enterprise
Development.

**C. Development of Institutional Learning Capacity**. Institutions must
have the ability to learn from and adapt to the environment in which
they work. Such learning capacity enables organizations to adjust
development programs to their environment. For example, technology
developed by agricultural researchers must be reconciled with the local
knowledge, capacities, and goals of the farmers for whom such technology
is intended, if the technology is to be generally useful and widely
adopted. -This concept has gained currency in the management field,
where learning and adapt ability are non-defined as requirements of
successful organizations. This requirement is particularly critical for
development institutions, because many urban-based managers and
professionals are unfamiliar with the diversity of conditions found in
rural areas, and with the speed and extent of the changes taking place.

Private sector institutions depend directly on market forces and thus
generally face strong incentives for learning from their environment and
for adapting to changes in the needs of their clientele. In the public
sector, however, the incentive structure tends to be weaker, and so
special efforts to create such incentives must be made, for instance by
instituting performance- or impact-based employee reward structures, or
by providing formal links between institutions and user or clientele
groups. This may also help to ensure that public institutions phase down
or alter their program content when the need they were originally
formulated to address has been met.

**D. Transfer of Knowledge and Technology**. Key institutions in the
development process are those that generate, adapt, and disseminate
knowledge and technology at international, national, and local levels.
Technology transfer is accomplished most effectively by those countries,
which have a scientific establishment capable of evaluating and adapting
knowledge and technologies to local conditions. The establishment of
local institutions that have the capacity to tap and contribute to the
world knowledge supply must therefore be a high USAID priority.

USAID\'s considerable experience in building such key institutions in
the past, however, indicates that it is not possible simply to
\"transfer\" institutional models to developing countries. They must be
adapted to their environment. Of course, they must have qualified staff
and adequate facilities to produce quality products; the best management
systems and most responsive institutional structures fail when they have
nothing to deliver to their clientele. But we have also learned that
national knowledge and technology-producing organizations must be linked
institutionally to the people who are expected to apply the knowledge
and technology. Without such institutionalized interaction with user
groups, the national institutions will remain isolated and ineffective.
Where this requirement has been ignored, it has been common to hear that
LDC researchers are more responsive to the research agendas of the
developed world and the disciplinary interests of international
associations than to the problems of their own farmers. We must learn
from the successes of the past to structure institutions and incentives
so as to combine technical excellence with accountability to the user.
One way this may be done is to forge ties between new or developing
organizations and established organizations with demonstrated records of
success in the relevant field.

**E. Analyses and Improvement of Institutional Linkages/Coordination**.
Many developmental efforts involve more than one organization in the
planning and implementation process, and so an oft-encountered problem
concerns the development of mechanisms, which link these organizations
into a unified, effective whole. Donor agencies and host country
governments have experimented with a wide array of organizational
structures and processes in seeking to achieve more coordinated
develop­ment efforts. Improvements in information systems which permit
and encourage feedback .are a first step. In addition, basic changes in
budgetary and planning procedures are re­quired to achieve horizontal
links among development departments or ministries, and to place
expenditure authority in the hands of those directly responsible for
implementation, rather than retaining these powers in central offices.

Integrated rural development projects provide an example of the linkage
problem. Donor funded projects within defined geographical areas may be
well integrated so that activities take place in a systematic and
mutually supportive manner. However, these projects are often developed
in isolation from normal organizations and administrative procedures, an
isolation, which is usually reinforced by direct donor involvement in
project management. Typically, therefore, the model proves to be
non-replicable, and has no enduring impact. Hence, USAID should rely
less on special project units of this type and strive instead to improve
coordination among existing organizations.

Institutional coordination in the private sector can be improved by such
measures as expanding and improving transportation and communications
infrastructure, by fostering the development of local and national
business associations, and by improving the efficiency of formal and
informal financial and commodity markets, especially in rural areas
where access to markets may be particularly limited, or where markets
may be fragmented.

**F. Improvement of Management Systems**. To assure organizational
effectiveness, key

organizational systems, (e.g., decision-making and resource allocation
information processing, budgeting, personnel, and logistics) must be
strong. These basic components of organizational action allow policies
and programs to be translated into concrete accomplishments. But an
institutional development perspective must also focus on the informal
aspects of organizations, i.e., how employee behavior is influenced by
the structuring of authority, incentives, and information within
organizations. Ultimately, it is these patterns of employee behavior,
which are molded by the internal organizational en­vironment, which
determine whether an organization will be responsive to the external
environment. A variety of techniques to create such systems are
available and have been demonstrated to be effective in LDC settings,
Thus, management improvement activities should include not only
traditional emphases on financial management, training, and planning,
but a new emphasis on assessing and restructuring patterns of behavior
within institutions so that overall effectiveness can be improved.

**G. Provision of Skills and Training**. Successful institutional
development depends upon persons trained in appropriate technical and
managerial skills. In both skill areas a broad range of people need to
be considered for training, e.g., private artisans and business people
as well as government technicians, paraprofessionals as well as
professionals, and local level administrators as well as central
ministry personnel. To carry out this training a range of possible
mechanisms is available, including traditional long-term degree
programs, short-term seminars, action training workshops, non-formal
education, and individual consultation/instruction. A general
presumption exists in favor of in-country training. Various
considerations, including the topical specialization required, costs and
budget, and the best setting for training, will influence the decision
on venue: on-site, elsewhere in-country, in another LDC, or in the U.S.
Training programs intended to benefit private sector employees,
managers, or entrepreneurs should involve private sector representatives
in design, implementation, and financing to the greatest possible
extent. However necessary these training programs may be, we should not
lose sight of the fact that the need for project-related skill training
is directly related to inadequacies within existing education and
training systems. It is the latter which must ultimately be made
adequate and self-sustaining, or else there will be a perpetual need for
project-related training.

**H. Capitalizing upon Local Capacities and Participation**. The first
step in a broadly based development strategy which fully mobilizes
available human resources is to assure that people have the opportunity
to acquire resources (e.g., land, water, technology, and knowledge), as
well as the incentives and opportunities to utilize the resources
productively. Where political, economic, social, or geographical factors
deny individuals a secure opportunity to obtain essential resources, or
where there are strong disincentives for individual initiative and
investment, the removal of these constraints must have priority in
USAID\'s country strategies.

The development experience of the past two decades also indicates
clearly that the impact and sustainability of public sector investments
can be significantly improved if local citizens assume a role in needs
assessment, project design, and implementation. Local participation (in
both urban and rural areas) is essential in adapting development
priorities, designs, and implementation strategies to particular
contexts, and in communicating to planners local needs, constraints, and
priorities. Participation of this sort ensures that public policies and
programs are consonant with and supportive of existing private patterns
of production and investment. For example, farmers or farmer
organizations can provide agricultural planners valuable information
about local production patterns, market conditions, and investment
constraints, without which such planning tends to become irrelevant.

Local involvement in the development process also enables communities to
provide a range of private resources (labor, materials, money,
leadership) that can facilitate and guide both government financed and
private sector projects. Equally important, community-level involvement
may contribute to the management and maintenance of new programs, which
can help defray recurrent costs. Finally, beneficiaries themselves must
invest their own time and resources in development efforts to begin the
process of indigenous investment and re-investment which marks the
beginning of a successful development initiative and makes possible the
termination of donor sup­port. Operational guidance on encouraging
popular participation is contained in Hand-book Three as an appendix to
Chapter Two on PID preparation.

**I. The Role of Institutions in the Development of Supporting
Infrastructure**. Many organizations require physical infrastructure in
the form of buildings and equipment. USAID will consider provision of
capital assistance to meet these needs where resource availabilities
permit, and where such assistance is integrated with sound planning to
strengthen the organizational, managerial, and technical aspects of
institutional capacity. Conversely, it is often essential to *add* an
institutional and human resource development component to projects
(roads, water supply) which have in the past been approached strict, in
terms of physical infrastructure needs.

These areas of emphasis are for most part complementary, and should all
to addressed in a comprehensive program of institutional development.
However, depending upon program size, the current activities of USAID
and other donors, the political environment, and absorptive capacity,
mission institutional development efforts may address a strategic subset
of the areas outlined above. At one extreme, USAID\'s institutional
development pro­gram may be limited to portions of a specific project or
projects; at the other extreme, it may be a separate project to improve
performance across several sectors-e.g., by analyzing and improving
interest rate policy, or by increasing the effectiveness of local and
national revenue generation efforts.

**III. Conclusions**

Implementing this policy implies some changes in the way USAID has
approached institutional development in the past. These implications are
summarized below.

**A. Institutional Analysis.**

Implicit in this paper is the assumption that missions will incorporate
into their country development strategies, sector assessments, and
project analyses a more complete analysis of host country institutional
performance. Clearly, most missions will have, at least initially,
neither the data nor the technical skills required. Over time, USAID
should increase its in-house capacity to address development issues that
are institutional in nature, and should simultaneously build LDC
capacity to do so. This should take the form of supporting or creating
national or regional private sector centers of business management
and/or public administration, because it is only through the sustained
involvement of such local institutions that long-lasting and self
supporting institutional development can be expected to occur.

**B. Time Horizons and Financing**.

Institutional development takes time-time to build capacity, time to
develop effective working relationships with local populations, time to
adapt *a priori* models of institutional development to on-the-ground
circumstances. Thus, USAID must be in a position to make longer term
commitments to institutions (both public and private), and must be
prepared to support a wide range of institutional development
requirements. There are two implications: First, projects clearly
dependent upon sustained institutional development will normally be
designed and approved for a period of five to ten years, including
provision for timely evaluation and redesign. Some projects may require
two or more phases, lasting, in total, more than ten years. Second,
USAID will approve recurrent cost and capital cost funding, but only
when the national policy and manpower frameworks ensure effective
utilization and when the government is doing as much as possible to
mobilize domestic resources. Further details are presented in USAID\'s
Policy Paper on Recurrent Costs.

Long term commitments and comprehensive recurrent and capital cost
support are among the most powerful tools available to missions to
accomplish needed policy and institutional changes. At the same time,
financing too large a share, of an institution\'s growth can lead to
dependency and a diminution of indigenous capacity. Thus missions should
link such support to a definite schedule according to what local
resources will be increasingly used to meet the needs of the
institutions concerned, particularly with regard to recurrent
expenditure.

**C. Private and Non-Governmental Institutions**.

Public sector resources for development, in terms of money, manpower,
and capacity for innovative and efficient action, are usually meager in
comparison to the private sector. Hence, USAID should devote greater
attention to the identification of alternative private and
non-governmental organizations to perform important development
functions, and should explore how our development assistance can support
these institutions. One approach is to ensure that USAID support to the
public sector is (a) aimed at developing public services to private
entities, such as technical institutes, credit facilities, trade and
marketing associations, and vocational education programs; and (b) meant
to improve the effectiveness of market institutions, for instance
through increasing the opportunity to acquire technical information and
to enter markets, through encouragement of private entrepreneurship, and
through improved management in private sector enterprises. Another
valuable approach is to support private organizations that can
strengthen the capacity of government institutions to plan and implement
programs. Private and voluntary organizations, Title XII universities,
the US cooperative movement, and other organizations can be helpful in
this regard.

[^1]:     ^?^See Ken McDermott, \"Institutions in Agriculture and Rural
    Development,\" TPCA Occasional Paper No. 2, 15 January 1981.

[^2]:     ^?^\"Effective Institution building,\" USAID Program
    Evaluation Discussion Paper No. 11, March 1982.

[^3]:     ^?^\"The World Bank and Institutional Development: Experience
    and Directions for Future Work\", report prepared by Projects
    Advisory Staff, 12 May 1980, and \"Eighth Annual Review of Project
    Performance Audit Results,\" Operations Evaluation Department,
    September 9, 1982.

[^4]:     ^?^Institutional diversity can be either helpful or wasteful
    depending on the context. Offering farmers the opportunity to sell
    their grain to institutions other than a monopsonistic national
    marketing board is likely to be beneficial both to farmers and to
    the economy as a whole, but encouraging a nation to support a number
    of different agricultural research institutions may hinder
    scientific advanced and the utilization of findings.