2008-E-14
CAPACITY DEVELOPMENT AND INSTITUTIONALCHANGE IN INTERNATIONAL DEVELOPMENT
COOPERATION
Shunji MATSUOKA, Ph. D. and Professor
Graduate School of Asia-Pacific Studies, Waseda University
1-21-1 Nishi-Waseda, Shinjuku-ku, Tokyo, 169-0051, Japan
Email: smatsu@waseda.jp

June, 2008

Summary: The capacity development approach was proposed by UNDP and European
donors as a new approach based upon the African aid failure in the1980s and the end of
the Cold War instead of conventional aid approach. In this paper, capacity development
approach comes into collision with institutional studies in social sciences on purpose toaccelerate knowledge evolution. This paper presents a new perspective on thedevelopment process and on aid policy. It is named an approach of “capacity
development and institutional change”. By using this new approach of “capacity
development and institutional change”, capacity development is able to cover not only
technical cooperation but also lending matters. Moreover, the program approach isrealized into development strategy and aid policy. The program approach indicates
criteria of selectivity and priority of allocation of development resources including aid
resources. Program approach concentrates more on the policy making process or on the
top down (upstream) approach. Furthermore, this paper shows the importance of field
experiences, meaning the advantages of Japanese aid compared to European aid,
especially with regards to making the program approach more effective. The micro(field experience) and macro (top down) loop is a critical factor for aid effectiveness.

1. Introduction
During the 1990s, it became apparent that the replacement approach, i.e., theone-sided transfer of knowledge and technology from advanced countries to developing
countries was insufficient to deal with the issues of international development assistance.
Moreover, a recent study conducted using the capacity development approach (FukudaParr et al. 2002) revealed that the self-efforts of the developing countries are necessary
to improve their social capacity and enable them to achieve sustainable development
performance. Although there has been some progress in the stakeholder and theinstitutional analyses (see Morgan and Taschereau, 1996; Lopes and Theisohn, 2003),
there still exists a need to further intensify the research and development on capacity
assessment and institutional change.
The historical background of capacity development is the failure of African
development assistance in the 1980s and the end of the Cold War in the late 1980s andearly 1990s. Moreover, the academic background of capacity development is the
emerging studies of new or modern institutional approach in social sciences in the
1980s and 1990s. Capacity development discussions and institutional studies aredifferent at a glance, but these two have the same orientation when they focus on thesocial context and institutions which are formulated historically in developing countries.
This paper aims to accelerate the knowledge exchange between capacity
development and institutional change, to make a new approach of “capacity
development and institutional change” for a new development paradigm.
This paper is divided into seven sections. Section 2 introduces the starting pointand historical background of capacity development discussions. Section 3 assesses theconcept of capacity of UNDP and describes how to conceptualize the social capacity
development process. Section 4 discusses what institutions mean. Section 5 provides adetailed description of the following analytical methods of social capacity assessment:(1) actor-factor Analysis; (2) indicator development; (3) institutional analysis; (4) pathanalysis; and (5) development stage analysis. Section 6 discusses the program design forsocial capacity development and institutional change based on the analytical approaches
described in section 5. Finally, section 7 presents the summaries and conclusions of thisanalysis.
In this paper, the author comes to the conclusion that we should evolve a new
approach of “capacity development and institutional change” from the “capacity
development approach” and this new approach logically needs to be based on a programapproach which stands on a wider scope of operations, bigger budget, more humanresources, and longer time period. Moreover, a clear selection criteria of aid allocation
promoting aid effectiveness is needed for a new approach of “capacity development andinstitutional change” as stated in the Paris Declaration in 2005.
2. The Starting Point of Capacity Development
The discussion of capacity development has, roughly speaking, been focused on
two historical events; one is the failure of African development and the other is the endof the Cold War.
Most Western donors have been mainly implementing their aid activities inAfrican countries. However, many African countries recorded minus economic growthratios in terms of GDP per capita in the 1980s and the minus growth also meant thefailure of African aid by European donors. At the same time, the development society
paid more attention to evaluate aid activities from a more comprehensive point of view.
Due to these situations, conventional aid approach was criticized for low effectivenessand low efficiency. Donors had to change their conventional approach. This has been
discussed extensively in Robert Cassen’s well known book; “Does Aid Work?” (1986).
Moreover, the end of the Cold War meant that the political motivation to assist
developing countries in Western countries decreased, and as a result an era of “aidfatigue” came about in European countries.
African aid failure and the end of the Cold War caused many critiques on
European donors, especially on technical cooperation.
Fukuda-Parr Sakiko wrote about the following in her edited book in 2002.
"Technical cooperation is still frequently criticized for:
*Undermining local capacity: Rather than helping to build sustainableinstitutions and other capabilities, technical cooperation tends to displace or inhibit local
alternatives.
*Distorting priorities: The funding for technical cooperation generally bypasses
budgetary processes, escaping the priority-setting disciplines of formal reviews.
*Choosing high-profile activities: Donors frequently cherry-pick the more
visible activities that appeal to their home constituencies, leaving recipient governments
to finance the other routine but necessary functions as best they can.
*Fragmenting management: Each donor sends its own package of funds andother resources for individual programmes, and demands that recipients follow
distinctive procedures, formats and standards for reporting, all of which absorb scaretime and resources.
*Using expensive methods: Donors often require that projects purchase goods
and hire experts from the donor country, although it would be far cheaper to sourcethem elsewhere.
*Ignoring local wishes: the donors pay too little attention either to thecommunities who are supposed to benefit from development activities, to the local
authorities, or to NGOs, all of whom should comprise the foundation on which todevelop stronger local capacity.
*Fixating on targets: Donors prefer activities that display clear profiles andtangible outputs. Successful capacity development, on the other hand is only
intrinsically included.” (Fukuda-Parr et al. 2002, pp.5-8.)
According to these kinds of criticism, UNDP and the European donors
developed the discussion of capacity development (Fukuda-Parr 1996, Fukuda-Parr,
Lopes, and Malik 2002).
In Japan, JICA has strongly advocated the capacity development approach fromthe 2000s and has published many materials and documents such as the “Handbook of
Capacity Development” in 2004.
There are several discussion points on the development communities’ discussionof capacity development.
Firstly, the capacity development approach must not focus on technicalcooperation. The capacity development approach should cover not only technicalcooperation but also concessional loans to build infrastructure. The building of
economic and social infrastructure is not only a fiscal matter but it heavily depends on
the local capacity and institutions in developing countries.

Secondly, institutions are critically important for the capacity development
processes. However, the discussion of capacity development in the past did not fully
pay attention to the relationship between the capacity development and the institutionalchange. The capacity depends on institutions, while institutions depend on the capacity
in the society. The development process of the capacity in the society will cause
institutional change that means the change of collective actions in the society.
Institutional change will develop social capacity in developing countries.
Thirdly, the historical background of capacity development discussion in Japanis quite different from Europe’s. As I mentioned already, the European discussion isbased upon European donors’ experience of giving aid to Africa and the African aid
failure in the 1980s. However, the main focus of Japanese aid has been on East Asia andmost of East Asian countries developed dramatically in the 1980s and 1990s. The
Japanese discussion on the capacity development reflects recent successes of economic
development in East Asia. Therefore, it is difficult to make the limitation of
conventional Japanese aid approach clear. Since JICA has been successful in theirdevelopment aid approach as can be seen in their projects in East Asia, they have notfelt it important to change their development approach.
For example, JICA aims to transform their operational framework from project
management to program management in the “Management Handbook of JICA
Operation” in the end of 2007. However, the program management in this document
means that a program is based upon a set of several projects in a similar field. Projectbased program management is a more suitable word for JICA’s program management
approach.
3. What is meant by Capacity?
In this section, we discuss what capacity is in order to pick up environmental
management capacity cases in developing countries.
According to UNDP and JICA, “Capacity is defined as the ability to performfunctions, solve problems, and set and achieve objectives” (Fukuda-Parr et al. 2002,p.8) and the capacity consists of three levels; individuals, organizations/institutions, andsociety. However, UNDP’s definition on the capacity is not effective to solve
micro/macro paradox due to its approach from individual to society. As this paper
discusses on institutions in the section 4, UNDP’s definition is based upon themethodological individualism. We have to understand dual characteristics of thecapacity. Therefore, this paper defines the capacity from a macro view point.
Determining the target capacity level and obtaining information about thesystem factors of capacity development, i.e., socio-economic factors, environmental
quality, and external factors, are the initial problems faced during the assessment ofsocial capacity. Since the SCA has to be applied by the developing countries, it should
be inexpensive, simple, and based on scientific research. Moreover, the development of
the self-assessment ability of a developing country must also be considered, in order toenable the country to assess its own social capacity.
The Social Capacity for Environmental Management (SCEM) is defined as thecapacity to manage environmental problems in a social system composed of three social
actors, i.e., government, firms, and citizens and their interrelationships (see Figure 1).
The Social Environmental Management System (SEMS) is defined as the system ofinteraction between the SCEM and institutions (see Figure 2).

Figure 2 also shows the interrelationships between the SEMS, the socioeconomic conditions, the environmental qualities, and the external factors in the total
system. The SEMS of a country is constrained by the existing socio-economic
conditions and the condition of the environmental quality. Furthermore, here weobserve the inter-prescribing relations between environmental quality and socioeconomic conditions (See, e.g., Matsuoka and Kuchiki 2003, Matsuoka et al. 2004 andMatsuoka ed. 2007).
As evident in figure 3, the SCA is designed to analyze the interactions between
the SEMS, the socio-economic condition, and the environmental quality of the total
system. Apart from this, it is also designed to analyze the social capacity of each actor
and the interactions between all the social actors. Thus, the SCA reveals the current
social capacity and the development path of a particular region and/or a country. The
SCA includes the following five steps: 1. Actor-Factor Analysis, 2. Indicator
Development, 3. Institutional Analysis, 4. Path Analysis, and 5. Developing Stage
Analysis. The section 5 provides a brief introduction to these steps.

Figure 1 Social capacity forenvironmental management
Source: Matsuoka and Kuchiki (2003)

Figure 2 Social environmental management
in total system
Source: Matsuoka (2005)

Figure 3

SCEM and Social Capacity Assessment

Source: Matsuoka (2005)

4. What is meant by Institutions?
A debate on traditional capacity development has developed from the following:
conceptualization of capacity development, the relationship between capacity
development and development policy, and the methodology to embody the capacity
development (Machida & Hayashi 2006). Even though there are various debates on
capacity development, its theorization and embodiment has not necessarily developed
because developing countries did not regard institutional change as an essential factor.
The previous studies by North and Aoki show the importance of institutional approach.
Institutional approach has been studied by not only economics but also political scienceand sociology. Putnam, a political scientist and Coleman, a sociologist both develop thetheory of social capital, while Rosenau studies institutions related to governance fromthe discipline of international relations (Hodgson 1998, Williamson 2000, and Isoya
2004).
North (1990) defines institutions as the following. Institutions are the rules of
the game in a society or, more formally, the humanly devised constraints that shapehuman interaction. As a consequence, they structure incentives in human exchange,
whether political, social, or economic (North 1990, p.3). Whether it is formal
institutions such as law or informal institutions such as social norm, institutions form
the way people behave in the society.
Aoki (2001) points out the importance of comparative institutional analysis
based on the game-theoretic approach. He defines institutions as self-managed systems
shared with groups and analyzes how people play an important role in the game. The
economic entity is deeply related to how people make their strategic choices. Therefore,
institutions are formed by strategic interaction by economic entities, but their strategic
choices are always made under ever-changing environment (Aoki 2001, p.33).
Ostrom (2005), who studies the “commons” phenomenon, broadly defines
institutions as the following: Institutions are the prescriptions that humans use toorganize all forms of repetitive and structured interactions including those withinfamilies, neighborhoods, markets, firms, sports leagues, churches, private associations,and governments at all scales. Moreover, she expresses institutions as rule-structured
situations (Ostrom 2005, p.3).
Strictly speaking, there are some differences in the meanings and definitions ofinstitutions that North, Aoki, and Ostrom defined, but their definitions are similar insome respects. Institutions mean that a variety of actors who construct society have theirown recurrent activities in their interrelationships. If individual action is regulated bytraditional rules or social norms, it will be classified as informal institution, while if it isrelated to legal laws that people must obey, it will be classified as formal institution.
North regards institutions as patterned objects conducted by social actions ofpeople, while Aoki and Ostrom regard institutions as objects based on methodologicalindividualism, so they insists that these institutions are sometimes re-established,developed, and disappear, in order for people to facilitate their social actions.
Institutional change is caused by efficiency such as social transaction cost reduction andits change which is connected to some sort of sustainability. Needless to say, institutions
formed throughout history have constructed “a bundle of institutions” which has acharacteristic of durability. Therefore it is not easy for institutions to change. In manycases, institutional change is the gradual process characterized by “path dependency”.
On the other hand, Scott (1994) has different opinions regarding institutions.
According to his definition, institutions consist of cognitive, normative, and regulative
structures which provide a meaning and stability for social actions. Institutions
themselves give a meaning and stability to people’s social actions. Where institutions
already exist, they are seen as methodological holism. Therefore, the mechanism ofinstitutional change is expressed as the weeding-out or the evolutional process
conducted by collective actions in the society. Scott’s institutions that take the side ofmethodological holism focus more on the process of social development than North’s
institutions do.
Institutions have two characteristics, one as institutions that regulate people’s
behavior and two, as institutions that expand the possibility of people’s behavior (Isoya
2004). With regards to the relationships between social capacity and institutions,institutions are prescribed by social capacity, and they can also cause institutionalchange by the development of social capacity. For that reason, social capacity andinstitutions have interdependent relationships. Given that institutions have the two
characteristics stated above, the “micro/macro loop” will be formed by adopting social
capacity at the micro level and institutions at the macro level when human action andsocial capacity are transmitted by these institutions (Alexander 1987, Imai & Kaneko
1998, and Shiozawa 1999). To make the micro/macro loop, institutions are criticallyimportant factors to transport information between the micro and the macro, and to set
up the place of knowledge creation.
In order to bring capacity development into place, it is necessary to change
people’s behavior by new institutions. The author concludes that institutional changes
should be clearly specified in the definitions of capacity development. Therefore theauthor suggests that the capacity development approach needs to evolve into a new
approach, the “capacity development and institutional change approach”.
5. Social Capacity Assessment (SCA)

In this section, social capacity assessment method is discussed in detail for
realize a new approach “capacity development and institutional change” into
international development cooperation.
5.1. Actor-Factor Analysis
The actor-factor analysis reveals the level of social capacity by combining theresults of both the actors and factors approaches. This provides us with a concrete
estimation of the social capacity. The results obtained by the actor-factor analysis
enable us to design suitable programs for international development assistance.
In order to appropriately conduct the actor-factor analysis, we propose an actorfactor matrix (see Table 1) of 3 actors and 3 factors, i.e., a 3×3 matrix. The data used toconstruct this matrix is obtained from statistical tables and through the interview andsurvey of each social actor. The cells of this matrix indicate the level of social capacity
attained by each social actor. Table 1 displays the information regarding the programs
and projects designed to compensate for the capacity gap, i.e., the difference between
the actual social capacity and the critical minimum of social capacity established foreach social actor’s contribution to the designated factors.

Table 1 Actor-Factor Analysis: The Actor-Factor Matrix

Source: Matsuoka et al. (2008)

The critical minimum that is obtained for each factor and is assumed to yield
good results in terms of the environmental performance is distributed among the actors

proportional to the roles they perform in their respective societies. However, this
distribution is not always fixed, and changes in the initial situation might inducechanges in the distribution of the critical minimum. These changes depend on
institutions such as a political system and the relationship between the actors, historicalpath dependency, and the characteristics of the environmental problem. Moreover, thetime required for the transition to the next development stage might also induce changes
in the distribution of critical minimum among the social actors. (For details, see section
3.5).
For the purpose of our analysis, we assume the government (G), firms (F) andcitizens (C) as the social actors. However, it is also possible to consider a collection ofscientists and media as the fourth social actor (Zhang et al. 2004). Furthermore, we
define the SCEM as the environmental management capacity stipulated by the capacity
levels of the social actors and the correlation between them. Table 2 shows theclassification of actors that are targeted for assessment. Among previous researches thathave contributed to our understanding of the factors of environmental management
capacity, the joint work by the UNEP and WHO, which focused on the air quality
management capacities in cities, is worth a mention (UNEP/WHO 1996). The abovementioned study assumes that the capacity for air quality management comprises four
elements (see Figure 4). However, the targets in this study were limited to the capacityof the government and the local administration for managing the air quality. Thus, we
focus on extending this parameter of analysis by including the capacities of firms andcitizens. Table 3 shows an example of the results of an assessment using the actor-factor
analysis for air quality management in China. Considering the capacity of thegovernment in China, we find that the critical minimum for the capacity for air quality
management had been achieved during the mid 1990s.

Table 2 Classification of Actors in the Actor-Factor Analysis

Source: Matsuoka et al. (2008)

Figure 4

Air quality management capacities

Source: UNDP/WHO (1996)

Table 3

Actor-Factor Analysis: Air Quality Management in China

Source: Matsuoka et al. (2008)

5.2. Indicator Development

We develop two SCEM indicators using the following different statistical
approaches: (1) Frontier/Tobit approach and (2) Factor Analysis approach. This section
describes the methodology and the empirical applications of both these approaches.
5.2.1. Frontier/Tobit ApproachThis approach is based on the Total System conceptual framework. In thisframework, the SCEM as well as socio-economic conditions are included as a single
component influencing the environmental performance (see Figure 2). Our analyticalframework is as follows: First, the directional distance function estimates the emissionbased environmental efficiency as environmental performance (of air quality). The
Tobit model is then applied and the estimated environmental efficiency is used to
identify the SCEM variables affecting the efficiency scores. Finally, the SCEM
indicator is calculated as the weighted average of the SCEM variables.
We begin our analysis with the measurement of the environmental efficiency.
Figure 5 illustrates the relationship between production (y) and the corresponding SO2
emissions (b). Suppose that the current level of production of a firm i is y, while theobserved SO2 emission level is b. However, if this firm incorporates and operates withthe best practice technology, then the SO2 emission can be reduced to b* with the output
remaining constant. The production frontier line indicates the efficient (i.e., minimum
feasible) SO2 emission at the given output. We define environmental efficiency as the
distance between observed and efficient levels of SO2 (b, b*); the smaller the distancethe greater is the efficiency. In this study, the environmental efficiency is empiricallyestimated by using the directional distance function (Fare et al. 1994).
Once the environmental efficiency is estimated, the next step is to evaluate therole of the SCEM using the Tobit model. In this study, the Tobit model selects one
SCEM variable for each of the three actors, The identified variables are used toconstruct the indicator for the SCEM. This is defined as follows:

(

~
~
~
S it = w g Git + w f Fit + w c C it

)

(1)

~
~ ~
where S it is the level of SCEM for province i in year t. Git , Fit , C it represent theenvironmental management capacities of the government, the firms, and the citizens,
respectively. w g , w f , and w c represent their weights. These are adjusted such thatw g + w f + w c = 1 . Thus, our indicator proves to be a convenient measure because it
always ranges between 0 and 1.

Figure 5 Production frontier and environmental efficiency
Source: Tanaka and Watanabe (2005)

An empirical application of this framework is conducted by using the provincelevel data of China’s manufacturing industry from the period 1994–2002. Using the
Tobit model, we identify the total number of monitoring stations as the government’s
capacity and the ratio of SO2 reduction as the firms’ capacity. However, due to limited
data, we are unable to include the citizens’ capacity as a part of our model. Thus, the
SCEM in this application refers only to the capacities of the government and the firms.
Figure 6 depicts the SCEM and the normalized SO2 emissions in China’s
manufacturing sector for the period 1994–2002. The figure indicates a significant
increase of nearly 40% in the SCEM - from 0.25 in 1994 to 0.35 in 2002 - during theestimation period. In addition, the SO2 emission is shown to be fairly responsive to the
SCEM. Figure 7 illustrates the environmental management capacities for thegovernment and the firms during the same estimation period. The firms’ capacity (SO2
reduction rate) increased from 0.19 in 1994 to 0.42 in 2002 - an increase of more than
120%. On the other hand the government’s capacity (total number of monitoring
stations) development rate improved by a mere 8%, i.e., from 0.31 in 1994 to 0.34 in
2002. Thus, the SCEM development in this period is largely due to an improvement in
the firms’ capacity, while the contribution by the government is rather limited.
In this section, we developed the indicator for the SCEM using the
Frontier/Tobit approach. We observed a rapid increase in the SCEM in China for theperiod 1994–2002. Moreover, the results indicated a significant contribution of thefirms in the development of the SCEM, while suggesting a limited contribution of thegovernment. However, in order to provide future suggestions and recommendations, afurther interpretation of these results is required. Finally, this approach can be extended
to conduct an international comparison using international panel data. In future studies,
we will use the same approach to analyze the SCEM development in Asian countries.

Figure 6 SCEM indicator and SO2
emission in China’s manufacturing
Sector
Source: Tanaka and Watanabe (2005)

5.2.2. Factor analysis approach

Figure 7 Actor-specific environmental
management capacity
Source: Tanaka and Watanabe (2005)

Factor analysis is a statistical analysis technique that is used to uncover thelatent relationships between many observed variables. This approach allows numerous
correlated variables of air quality management policy to be summarized by fewer
Table 4 Factor Loading and Contribution of Factor Loading (1) (Kitakyushu-city)

Source: Murakami and Matsuoka (2005)

Table 5 Factor Loading and Contribution of Factor Loading (2) (Osaka-city)

Source: Murakami and Matsuoka (2005)

dimensions, i.e., factors. In the context of this research, the factors are interpreted as theelements of capacity for air quality management that contribute to the environmental
performance. Murakami and Matsuoka (2005) estimate the factors of government
capacity for air quality management in Kitakyushu and Osaka cities by using the factor
analysis. In this study, the capacity for air quality management is assumed to be equal to
the factor scores and to the contribution of factor loadings that are estimated by using
the data on air quality management policies in Kitakyushu and Osaka cities from 1970
to 2000. Tables 4 and 5 show the results of factor analysis for each city. The screen test
for factor analysis reveals four elements of capacity in each city. The four elements arefurther arranged into three factors, i.e., Policy & Measure, Human & Organization, andKnowledge & Technology (see Table 6).
By using the factor scores and the contribution of factor loadings, we estimate
the weighted average for all the four elements. This is assumed to be an indicator of thecapacity for air quality management in each city. The contribution of factor loadings isassumed to be the weights for capacity elements. The average weights of the factors of
capacity of the two cities are as follows: Knowledge & Technology is 7.5%, Human &Organization is 47.3%, and Policy & Measure is 31.8%.

Table 6 Correlation of the Three Actors and Critical Minimum

Note: The State of Correlation of the Three Actors has an effect on the Critical Minimum Level.
Source: Matsuoka et al. (2008)

Figure 8 Trend of government capacity
for air quality management(Kitakyushu- city in Japan)
Source: Murakami and Matsuoka (2005)

Figure 9 Trend of government capacity
for air quality management (Osakacity in Japan)
Source: Murakami and Matsuoka (2005)

Figure 8 and 9 show the change in the government’s capacity for air quality
management from 1970 to 2000. It can be observed that the rapid improvement ingovernment capacity in the early 1970s resulted in a dramatic reduction in the SO2
concentration. Additionally, the effects of each indicator of capacity on the SO2
concentration are estimated by a simple regression analysis.
5.3. Institutional Analysis
The institutional analysis of the SCA investigates a group of institutions (see,e.g., Aoki and Okuno, 1996) that constrain social actors’ activities and capacities. It also
regulates the current capacity level and affects the future formulations of social capacity.
Therefore, this study will focus on the role of the individual institutions and the groupof institutions as well as the processes of transitions among them. For this purpose, wewill classify the institutions into two categories: principal institutions and secondaryinstitutions, and then, we will classify each category into two subcategories, i.e., formal
and informal institutions.
The method of classifying an institution as a principal or a secondary institution
is based on analyzing them according to the level of their incentive or disincentive, i.e.,
the upper levels are principal institutions, and the lower levels are secondary institutions.
Further, in order to classify the institutions into the subcategories, i.e., formal andinformal institutions, this study follows North’s study (1990) and defines formal
institutions as public formalized rules, such as state laws, and informal institutions as
unspoken rules, such as social norms and customs that influence the behavior of social
actors.
While investigating informal institutions, we pay close attention to the changes
in the relationships between the social actors. Figure 10 indicates the basic concepts foranalyzing the informal institutions. Based on these concepts, we identify three types ofrelationships between the social actors: one-side (or direct) relationships, mutual
relationships, and multilateral relationships (partnership). As shown in table 6, eachrelationship has an effect on the critical minimum capacity of each actor. Thus, the next
step is to analyze the impact of each relationship between the actors on their criticalminimum capacities.
In order to conduct this analysis, we introduce a case study wherein we haveanalyzed the institutional changes in Ube City. Ube City, often referred to as the “Ube
Model” or the “Ube System” (Nose, 1996), is a model Japanese city that has succeededin effectively managing the problem of air pollution. The most important characteristicof the Ube model is that the decision-making process is not solely dependent on
government regulations; rather, it is a joint exercise carried out by a committee
comprising representatives from industry, government, educational system, and general
population. It is therefore believed that the spirit of the Ube model can be replicated byformally institutionalizing the informal institutions, however, keeping in mind, thespecific culture and customs of a city (see Table 7).

Figure 10 The Benchmarks for the social actor’s relationship
Source: Matsuoka et al. (2008)

Table 7 The Benchmarks for The Social Actor’s Relationships

Source: Matsuoka et al. (2008)

Table 8 Environmental Policy and the Characteristics in Ube City

Source. Matsuoka et al. (2004)

Table 8 indicates the environmental policies and their characteristics in Ube City.
Figure 11 shows the relationship between institutional changes (formal and informal)
and the SCEM of Ube City, while figure 12 shows the systemic change and theformulation of SCEM in Ube City. Thus, we observe that as compared with the policy
for dust pollution, the measures for controlling SO2 in Ube City were delayed until theenactment of the pollution control agreement in 1970. According to this investigation,
we conclude that (1) the knowledge and technology were not sufficient to control SO2
pollution in Ube City, and (2) the characteristics of the Ube Model. Thus, these
conclusions highlight the following:(1) The institutions needed for controlling pollution differ on a case by casebasis and depend on the type of pollution;(2) The efficiency of the performance of the institutions is closely related to the
SCEM in the region.
Therefore, in order to achieve a higher capacity level for a country, it isimportant to analyze the nature of the existing institutions, i.e., whether they are
principal/secondary and formal/informal. Moreover, it is also important to ascertain
whether the actors’ capacities of environmental management satisfy the efficientperformance requirement of the institution.

5.4. Path Analysis
The path analysis clarifies the information and the conditions that are
prerequisites for setting a rational capacity level target. Moreover, an analysis of thepath (strategy or program) adopted for the current social capacity level helps in
identifying the ideal path toward achieving the set target.
As discussed in the previous section, social capacity is developed through theinteractions between the actors and the institutions. In a broader sense, we can consider
the capacity level as defined by the interrelationship among the capacity level, thesocio-economic levels and the performance levels (environmental quality). First, thepath analysis deals with the development process of the total system, which consists ofthree components.

Figure11 Institutional change and social capacity environmental management
Source: Matsuoka et al. (2004)

Figure 12 Social capacity for environmental management in Ube City
Source: Matsuoka et al. (2004)

Figure 13 Transition of SCEM, socio-economic conditions, and environmental
performance: The case of SO2 in Japan
Source: Ministry of Environment, Japan (2005)

Figure 14 Path analysis
Source: Matsuoka et al. (2008)

Figure 13 informs us about the indicators pertain to SO2 in Japan. We adopted
the SO2 general monitoring stations as the capacity level, per capita GDP as the socio-economic level, and the performance level as the average monitoring data at thestations; although, due to limited information, this data was compiled after the peak of
the observed SO2 value. According to the figure, we observe that until the mid 1980s all
the three components improved (capacity and socio-economic level increased, while theperformance level decreased). However, post the 1980s the socio-economic level
continued to improve, while the capacity level remained almost constant and theperformance level stabilized at a low level. Based on this information, it can be said that
until the mid 1980s the system operated efficiently resulting in an improvement in theenvironmental performance. However, since then the system continues to operate at anecessary minimum capacity, irrespective of any improvement in the socio-economic
level.
By conducting a thorough analysis of the cases of different countries and theirenvironmental issues, we can identify the characteristics responsible for the
improvement of the environmental performance in each case. For example, figure 14
clearly demonstrates the differences between the cases wherein the adopted pathchanges from SCEM-led to socio-economic conditions-led and vice versa. Moreover,such a path analysis enables us to identify the course that we must adopt for improving
environmental performance in the future.
Thus far, we have focused on the change in the level of the three components ofthe total system. However, in order to understand the development process of thesystem, it is necessary to bear in mind that these changes do not occur independently;
rather, they undergo a transition in the context of the interrelationship between the threecomponents. Honda et al. (2004) analyzed the relationship between these threecomponents for 47 prefectures in Japan. From among these analyses related to several
environmental issues, let us present the case of SO2. The analysis is carried out using
the Granger Causality Test and is based on the data for the period ranging from 1982 to
2000. Figure 15 confirms the existence of interrelationships between the threecomponents for 23 out of 47 prefectures. In order to complete the path analysis, we needto verify the hypothesis that the change would occur from a state of weak or partial
interrelationship at an early stage to that of a strong interrelationship with an interactive
impact on all the three components (we do not exclude the possibility of plural paths toachieve the target). Thus, we shall now investigate the methodology and pursue theseanalyses.
In addition, the development processes of the capacities of social actors and theirrelationships also form a part of the path analysis’ targets. In this case, we assume acertain level of substitutability among the actors; for instance, part of the government’s
role can be borne by a firm or a citizen. Future efficient capacity development paths aredifferent for cases with different paths, such as government-led and citizen-led; however,they have the same level of social capacity as a whole. Regarding aid policy, this
proposition implies that there should be cases wherein firms or citizens would not relyon the government to government approach and would be the direct beneficiaries of theaid.

Figure 15 Interrelationship between SCEM, socio-economic conditions, andenvironmental performance
Source: Honda et al. (2004)

5.5. Development Stage Analysis
The development stage analysis that is conducted on the basis of the actor/factor
analysis, the indicator development, the institutional analysis, and the path analysis,
aims at specifying the development stage based on the benchmarks and then presenting
the development process and the direction for further development. The analyticalresults highlight certain preconditions that clarify appropriate quantity, quality, andtiming of input in order to enable development and aid policies to be implemented asprograms.
Matsuoka and Kuchiki (2003), bearing in mind industrial pollution, assumed thefollowing three development stages for the SEMS: system-making stage, systemworking stage, and self-management stage. Table 9 indicates the stages and thebenchmarks of SEMS.
Table 9 The Stages and Benchmarks of Social Environmental Management System

Source: Matsuoka and Kuchiki (2003)

The system-making stage focuses on the development of the fundamental
functions of the SEMS. Since this stage particularly focuses on the capacity
development in the government sector, the benchmarks in this stage should be thedevelopment of the environmental law (basic law and acts for specific pollution control
mechanisms), environmental administration, and environmental information. With
regard to the environmental information benchmark, it is important to arrange the databy networking, understanding the environmental status, and then presenting the policy
measures. Thus, we use not only the number of monitoring stations but also the firstpublication of the State of the Environment and the like as specific evaluation indicators.
In the system-working stage, the system actually starts functioning to improvethe environmental quality. This occurs in response to the improvement of the basic
environmental administrative institutions. As the pollution trend changes—fromincreasing to decreasing—a turning point of the so-called environmental Kuznets curve
is observed. With reference to this, we focus upon the results of the implementation of
government regulation (reduction of pollution by firms) and the consequent change to adecrease in pollution levels. In order to evaluate the achievement of pollution reduction

measures, the standard achievement ratio of SOx—a typical industrial pollutant—will
be observed as the indicator. If the achievement ratio for all the monitoring stations in
the country is higher than 90%, then it is considered to be an indication of the end ofSOx pollution. In developed countries, the Command and Control (CAC) has played asignificant role in pollution reduction at the system-working stage. The CAC requires
the government to utilize its administrative capacity in order to understand the state ofpollution, set regulation standards, and ensure that those responsible for pollution arecomplying with the regulations. It is observed that as compared to the governments ofdeveloped countries, the governments of developing countries lack this administrative
capacity and are therefore ineffective in implementing the CAC. However, pollution
reduction can be realized efficiently by effectively introducing the market based
instruments (MBIs) for environmental regulation and utilizing the market mechanism(Matsuoka, 2000).
The self-management stage is the stage wherein the system develops in asustainable manner through the strong interrelations between the government, firms,
and citizens, and a comprehensive environmental policy is enforced. At this stage, firms
and citizens voluntarily adopt and participate in initiatives for environmental
management. For instance, firms voluntarily upgrade their facilities in order to obtain
the ISO 14000 certification as an in-house environmental management program, and inorder to increase the efficiency of environmental management, they adopt
environmental accounting. Moreover, they highlight their environmental management
achievements in order to court consumer appreciation and thus gain a competitive
advantage in the market. With regard to international cooperation, at this stage, adeveloping country becomes less dependent on donor's assistance and utilizes its own
financial and human resources.
As a country experiences the development of SEMS, the roles and relationshipsof the three actors also evolve. The government sector plays an important role inmanaging and coordinating issues at the system-making and system-working stages;
however, at the self-management stage, its responsibility evolves to supporting the firms
and the citizens by designing a framework for comprehensive environmental
management.

Figure 16

Development stages of SCEM: The case of China

Source: Japan Society for International Development (2004)

Figure 17

Social capacity development in trade: Malaysian case

Source: Hiroshima University - Mitsubishi Research Institute Inc. Joint Venture (2005)

Figure 16 shows the development of SCEM with the stages and benchmarks
mentioned above (China's case). Considering economic indicators or passage of time as
the horizontal principal and SCEM index (a group of indicators) as the vertical principal,
it can be presumed that, by and large, China adopted the capacity development processthat is shown in the figure. After the enactment of the Environmental Protection Law as
the starting point of system-making, China entered a full-scale system-working stage
during the 9th Five Year Plan (1996–2000). The 10th Five Year Plan (2001–2005)
further accelerated this process. It is expected that China will be able to lay thefoundation for initiating the self-management stage between the period of the Beijing
Olympic Games in 2008 and the Shanghai Expo in 2010.
In terms of relationship between the three actors, the SEMS in China haschanged drastically. As shown in figure 16, the government had exclusively performed
all the functions and roles at the system-making stage. However, during the systemworking stage, although the government continued to institute vigorous steps, the firms
did render some important tangible contributions to curtail pollution. In addition, therelationships between the actors, particularly between the government and the firms
grew stronger. Based on this, we can expect that during the self-management stage, amore balanced relationship, entailing the promotion of environmental industry and selfsustained growth of an environment-oriented market will be developed.
Moreover, we have also begun to apply the development stage analysis beyond
the field of environmental management. Figure 17 describes the development stage
analysis of social capacity development for trade (particularly export promotion) in
Malaysia. The research is conducted for the JICA evaluation project (Thematic
Evaluation: Economic Partnership). We observe that it is possible to conduct theanalysis based on a similar format of benchmarks and stage setting; nevertheless, thetrade capacity has its peculiar characteristics, such as the limited role of citizens and thevulnerability of performance level to external conditions.
This section introduced and discussed the basic designs of specific analyticalmethods that form the components of the SCA. The methodology enabled developingcountries themselves to understand the current state of pollution and the problem ofsocial capacity. Adopting the analytical method mentioned here as a precondition, thefinal section deals with the following question: How to transform development and aid
policies into effective programs for attaining the capacity level that developing
countries regard as their target.
6. Designing the Program for Social Capacity Development and Institutional
ChangeThis section describes the program design for social capacity development andinstitutional change. Based on the SCA framework, the author develops the programapproach to identify the target level of capacity, and to provide specific strategies toachieve the target. The program presents an overall package consisting of: (1) the
relationship between social actors, (2) the input resources—their quantity and timing,and (3) the institutional changes.
The program approach differs from the conventional stand-alone projects inmany respects. This approach considers the following: (a) wide and systematic
approach; (b) recognition of mutual dependence of society, economy, and culture; (c)long-term project implementation; (d) the harmonization of system development and its
process; (e) focus on the capacity of the recipient countries; and (f) cost reduction by
avoiding redundant aid projects (Bolger 2000). Table 10 shows a detailed comparison
between stand-alone projects and the program for social capacity development.
Sector-wide approaches (SWAPs) for social capacity development can beclassified as one of the approaches of the program. The SWAPs are primarily carriedout in basic education and healthcare sectors in the African countries. Jones and Lawson(2000) characterize the SWAPs as follows: (i) the harmonization of policies between thedonor and recipient countries (policy alignment), (ii) efficiency improvement in internaland external resource allocations, (iii) developing partnerships with local stakeholders,and (iv) emphasis on ownership. This characterization, however, is insufficient.
According to the new definition discussed in this paper, the program is defined as aprogram involving three actors (government, firms, and citizens) and three factors(policy and measure, human and organizations, and knowledge and technology). Thus,
the new social capacity development approach always takes the form of the program.
Table 10 Programs and Stand-alone Projects

Source: Lavergne and Alba (2003)

Figure 18 SCA and Program Design
Source: Matsuoka et al. (2008)

The program design begins with social capacity assessment based on the actorfactor matrix presented in figure 18. When analyzing the pollution problem, the matrix
is used to evaluate: (1) the current capacity for pollution abatement, (2) the criticalminimum capacity during the system-working stage, and (3) the gap between current
and critical minimum capacities.
It should be noted that in this paper, it is assumed that capacities aresubstitutable between the actors, but not between the factors, i.e., the capacities arecomplements between the factors. For instance, suppose that the critical minimums forpolicy and measure, human and organizations, and knowledge and technology are 30,
50, and 10, respectively. Then, the critical minimum of policy and measure (30) caneither be accepted solely by the government or it can also be accepted by thegovernment and the firms jointly. Any combination of actors is possible in order toachieve the critical minimum; however, this is not true in the case of factors. Thus, the“Substitutability of actors” and “complementarities of factors” are equally important in
our framework. The capacity gaps identified through the actor-factor matrix are
expected to be filled by the projects. These projects are the ones based on the program(referred to as program-based projects) and are different from the conventional standalone projects.
Entry and exit points of the program and the projects themselves can be
determined through the development stage analysis of social capacity. Figure 19
illustrates the brown issue example. The figure shows the following institutional
milestones during the system-making stage: (1) enacting environmental law, (2) theestablishment of environmental administration, and (3) environmental information
disclosure. Technical aids, such as the environmental center, are commonly provided by
the JICA and can be effective in the latter half of the system-making stage (i.e.,developing the system of environmental information disclosure).
In the system-working stage, it is important to focus on environmental businessplanning, resource allocation and organizational development, and research anddevelopment pertaining to pollution reduction. In addition to these, the pollution control
management certification system, compliance with regulations, and financial assistancefor developing environmental technologies are also important. Aid programs/projects
can generally reach their exit point when the level of pollution decreases as per thetarget. In this stage, the environmental cooperation is horizontal, such as technology
exchange, research exchange, and civil exchange. At the same time, the environmental
policy measures take the form of economic instruments and self-regulation. Once this isachieved, the recipient countries will gradually move toward the self-management stage.
Based on the basic design of the SCA studies, Figure 19 shows an entry and exit
point of aid in the case of social capacity and institutional change of environmental
management in developing countries.

Figure 19 Entry, Exit Point, and the Development Stages
Source: Matsuoka et al. (2007)

7. Conclusions
Considering the previous sections, what does a new approach to “capacity
development and institutional change” mean as a development aid policy? Consideringthat the new JICA will embody the aid approach, what does it mean? From Oct. 1st,
2008, yen loans by JBIC and grant aids by the Ministry of Foreign Affairs will be
integrated into the new JICA. Therefore, this paper will focus on this point inconclusion.
According to a new approach of “capacity development and institutionalchange”, and considering what the new JICA should do and how integration (synergy)
effect is generated, the need and inevitability to convert to the “program approach” as a
new paradigm of development aid is evident.
The embodiment of a new approach of “capacity development and institutionalchange” logically requires a target which development aid should keep in mind andfurther, the enlargement of a scope which includes relationships with social actors,
relevance among capacities, and a time frame as shown in Fig. 18 should also be kept inmind. This logic clearly shows how the “project approach” can be converted to the“program approach”. The author defines the program approach as a target and scope offramework as introduced in Fig. 18. Based on the program approach in Fig. 18,
individual projects, even though they are the developing countries’ own projects or
donor-supported projects, will be allocated in Fig. 18. These projects based on the
program generally have large dimensions and long-term performances.
The new JICA (Japan) should be a leading donor, which aggressively moves
ahead to effective aid in accordance with the Paris Declaration in 2005, promoting not
only public private partnerships (PPP) with comprehensive operation of grant, technicalcooperation and yen loans but also public sectors like CSOs/NGOs or private firms, andit should furthermore cooperate with developing countries and/or donors.
However, these suggestions should be simultaneously considered while a new
approach of “capacity development and institutional change” is converted to theprogram approach. In order to expand the input scale within the range of constraints offinancial or human aid resources from the donor’s side, it is important to selectprograms (including the selection of aid allocation to recipient countries) based on
certain priority. It is imperative that the criteria and methods for these evaluations beestablished.
According to the Paris Declaration (MOFA 2005), it is obvious that a conversion
to the “program approach” by donors (new JICA) demands a program based approach(PBA) as a development plan (including budgetary plan) in developing countries.
However, the problem is that there are some shortcomings in the planning capacity ofdeveloping countries. The planning capacity is divided into four factors: plan-making
capacity, plan implementing capacity, plan evaluating capacity, knowledge of plans, andplanning techniques. Those are important points that developing countries should
engage in, in order to improve their planning capacity. In this regard, the “programapproach” has characteristics to expand input scale, time frame and emphasize upstream(on the top side).
In order to effectively work the program approach based on a new approach of“capacity development and institutional change” as a top-oriented and a upper oriented
approach, it is indispensable for not only the top-down approach (macro level) as

planning oriented, but also for the bottom-up approach (micro level) to make a full useof the plan based on information from the field.
Institutions for the “macro/micro loop” connected to the macro and micro play
an important role and fulfill important functions. Utilizing an advantage of theJapanese-style of aid, a new approach of “capacity development and institutionalchange” can be considered as an approach which makes the new JICA produce
integrative effects. The new JICA includes grant aid, technical cooperation, and yenloans.
Conversion to the “program approach” as an embodiment of a new approach of“capacity development and institutional change” has a characteristic which focuses on
total managed plan by a top-down approach, while information in the field is also
important to carry out the program and increase the effectiveness with which
institutions work.
The “Feedback systems of macro and micro”, the so-called institutions of the“macro/micro loop”, is considered as a decisively important factor for effective program
implementation and effective aid as stated in the Paris Declaration. Information fromthe field, which has been considered as one of JICA’s strongest points, should be
utilized in the process of the program in the future.
Acknowledgements
This paper was presented at the Seminar on Capacity Development and Institutional
Change as a keynote speech on July 17 & 18, 2008 at JICA-IFIC in Tokyo. This paper is mainly
based upon Matsuoka ed. 2007 and Matsuoka et al. 2008. Some of discussion points in this paper
also are based on Research Group on International Development Cooperation at Waseda University.
This Research Group is organized by not only academic community but also aid community like
JICA and JBIC. Mr. Hidekazu Iwamoto and Ms. Ragnheidur Reynisdottir at Waseda University
assisted me to make this English paper.

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