Make Way for the Hybrids

Development experts are often quick to focus on the role of institutions. They are, simply put, the "rules of the game" derived over time that drive politics, economics, and other social interactions. Social scientists like Douglass North, Daron Acemoglu, and Jim Robinson have shown that these rules strongly influence how countries grow and develop. Over decades, theorists and development practitioners have compiled what one might consider a script of the "right" rules and institutions needed to foster economic growth and open societies with good governments that advance the needs of their citizens. But despite all the good intentions, this western-created game plan hasn't quite worked out as expected.

Organizations like the World Bank have supported institutional reforms in developing countries for more than two decades now, often making it the backbone of their development agendas. Such work accounts for billions of dollars of development spending each year, devoted to creating democratic electoral processes, robust public financial management systems, effective anticorruption regimes, and other new rules of the game in countries ranging from Afghanistan to Uganda.

At first glance, many of these reforms seem to have yielded success. In Afghanistan, for example, new laws adopted after 2003 have modernized the government's budgeting and financial management system. The system's quality was ranked "higher than a middle-income country" in a 2008 assessment using the multi-donor Public Expenditure and Financial Accountability (PEFA) framework, which compares countries' governance systems with what is considered "international good practice." Similarly, Uganda's anticorruption reforms have produced new laws that donors tout as world-class. The think-tank Global Integrity rated these laws as best in the world in 2008, giving them a perfect 100 score. Canada scored 90; Italy got 82.

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When one examines these reforms more closely, however, the picture is less impressive. While Afghanistan's public financial management system may look like one in a middle-income country, donors still express reservations about whether funds are actually spent where the budget says they are. Allegations of corruption are rife, and financial controls that work in the central ministry of finance buildings in Kabul are still not operational in many sectoral ministries (especially those located outside the capital) where most spending remains outside of the national budget. The gap between appearance and reality becomes evident upon examination of the PEFA data used to assess the system, which shows that laws and budgets on the books bear little relationship to their implementation. Similarly, while Uganda's anticorruption laws may look perfect, that's hardly how they function in practice. Corruption is commonplace, and a string of high-profile corruption cases have caused donors to withdraw funding from the country as recently as November 2012. This is reflected in the data from Global Integrity, which scores the country's anti-corruption laws at a perfect 100 but rates implementation of laws at only 51, leaving a "huge" implementation gap of 49.

Such gaps between what institutions look like and how they're put into practice are commonplace in developing countries. They reveal the limits of institutional reforms in development and suggest the need to correct the way these reforms are currently done.

My research shows, for instance, that over 80 percent of developing countries experience major implementation constraints after years of public financial management reform. Countries make budgets better after reforms but commonly fail to execute the budgets as they are written. They draw up best-in-class procurement regulations that are seldom implemented, and adopt internationally accepted accounting standards required by donors -- but with little hope of actually doing their accounting in accordance. What's more, studies suggest that there is little reason to believe this gap between form and function closes over time. In fact, the limited existing evidence shows that the gap widens with the years, as reforms help countries craft ever-better laws and formal procedures instead of focusing on better implementing the laws and procedures that already exist.

When looking at Global Integrity data, for instance, it appears that the average gap between the quality of anti-corruption laws and their actual implementation widened for developing countries between 2008 and 2011, from 32 to 35, regardless of institutional reforms. (I'd argue, in fact, that the reforms may have exacerbated the problem.) This gap is more than twice that in richer countries, where corruption is less of a problem.

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