Reforms Are Ultimately Concerned with

more efficient and/or equitable use of

resources, goods, and services. Both

policy and institutional reforms have

developmental, welfare-enhancement

characteristics, which may involve the

dismantling and reforming of existing

underperforming institutions while, at

the same time, developing, through

investment-type activity, new

institutional arrangements for future

development.

The World Development Report 2002 provides a useful and basic framework for analysis that becomes the basis for evaluation of effective institutions of government. Three aspects are highlighted by the report

Channels of information that exist to inform current and potential new participants about market conditions and goods

The extent to which property rights and contracts are defined and enforced as the basis for determining access to resources and income

The extent to which institutions increase or decrease competition in markets

a. Channels of information

Good information flows help formal and informal businesses identify production and trading partners, as well as compare and identify possible returns in terms of size, risk, trustworthiness, and creditworthiness of potential partners such as suppliers, producers, buyers, borrowers, and lenders. Each of these partners, as part of the institutional setup, can play a role in the collection, production, analysis, verification, and dissemination of information and knowledge. Public or private institutions, such as banks, can perform this role for specific purposes. The extent to which the various participants have access to sufficient information determines the likelihood of participation. Development-needs assessment is based on an analysis of:the extent to which formal and informal institutions collect, provide, and disseminate information as a matter of policy; the costs of collecting information; and related capacity limitations.

b. Property rights and contracts

Understanding and clearly defining rights to assets and income and being able to protect agreed rights is essential for market development. The rights of the private sector in relation to the state, and foreign participants in relation to domestic participants, as well as the ability of institutions to handle disputes and enforce contracts, have a crucial bearing on market and participant confidence. Not only must corporate and SME investors and innovators be assured of their rights, but also the poor, risk-averse investors who stand to lose what little they have. The focus of assessment is likely to be: constitutional provisions; the judicial system; other social networks and mechanisms for rights determination, adjudication, registration, and settlement; and the costs of enforcement.

c. Competition in markets

The value of competition through equal opportunity is the incentive for participants to do better and channel resources to their best use, compared with systems that depend on social and political connections. On the one hand, this requires institutions that facilitate competition, by providing key market entry information and rules of operation and by minimizing transaction costs. On the other hand, institutions play a key role in regulation that ensures fair practice from the point of view of all participants. Problems arise in over and under-regulation of markets, resulting in exclusion to the benefit of a few participants in the former, and exploitation and other negative externalities in the latter. Assessments on the appropriate level of market regulation will help determine the

Collectively, the above aspects determine critical policy-related matters including the distribution of assets, incomes, opportunities, and incentives for market participants, as well as the efficiency of market transactions. The performance of these institution dependent economic variables determines the pace of improvement of productivity, economic growth, and poverty reduction.

3. Managerial and

Administrative

Capacity of Institutions

Assuming that the political commitment exists to pursue a reform path, the next areas to be assessed are the nature, role, and abilities of the institutions responsible for implementing policy changes. When policy reforms address enterprise under performance problems, such as poorly managed public enterprises, in favor of emerging market-based opportunities, reforms can move the management of activity to more appropriate public, or private, institutions. When reforms address the delivery of public goods and services, assessment of the capacity of institutions to deliver in the context of programs will be as important as project institutional assessments, if not more so, because of their often sector-wide effects. Box 4 outlines key elements of managerial and administrative absorptive capacity that require an understanding for the purposes of policy operations.

4. Technical Capacity of

Institutions

Closely related to managerial and administrative capacity is the issue of technical capacity to implement reforms.

Again, where reforms are proposing realignment of responsibilities between institutions, whether public or private, appropriate technical procedures and a minimum level of technical capacity must exist or be developed for institutions and reforms to be credible.

For example, a realignment of public services may require substantial investment in technical training or reorientation from direct service provision to a support and regulatory function.

Decentralization often requires not only massive fiscal decentralization, but also extensive and costly investments both in local skills training for administration of funds and the technical aspects of planning, and service delivery that were previously handled by central government staff.

Such capacity building needs to be integrated with the adjustment effort.

Box 5 summarizes technical capacity

BOX 4: Factors to Consider in Assessing Managerial

and Administrative Absorptive Capacity

• Which are the core public institutions involved in the implementation of policies, specific steps (e.g., decisions/activities), and related policy conditionalities?

• What are the key capacity-related assumptions about implementation capacity for reforms, steps, and related conditionalities?

• How do decisions/activities relate to each other including required linkages, coordination, and cooperation among institutions?

• Do senior and mid-level management understand and support the reform?

• Is there an acceptable level of administrative integrity and accountability (has due diligence been conducted)?

• What is the extent of user confidence in target institutions?

• What capacity gaps exist and how can they be reduced, such as change of conditions, or strengthened capacity?

– Is the organizational structure appropriate and what, if any, are the requirements for change?

– Is there clarity in management and administrative roles and responsibilities?

– Is management of public service personnel, including motivation, incentive, and reward

systems, conducive to reforms and what is the likely responsiveness?

– What are the prospects for institutional adaptability?

– Have human resource development needs been assessed and determined?

• What are the implications for public expenditure, including distribution of fiscal

responsibilities; interdepartment realignment/reallocations; short-term adjustment costs;

medium-term savings; budget execution; changes/introduction of cost-recovery systems; and

reporting, accounting, and auditing systems?

Source:Based on G. Abonyi. 2002. Toward a Political Economy Approach to Policy-Based Lending. ERD Working

Paper Series No. 14. ADB, Manila.

BOX 5: Factors to Consider in Assessing Technical Absorptive Capacity

• Existence of appropriate technical systems, procedures, and standards.

• Technical capacity of institutions and staff to carry out realigned tasks.

• Sufficiency of budgets to carry out realigned tasks.

• Adequacy of technical support for institutions and staff assuming new responsibilities.

• Adequacy of human resource development provisions for technical aspects.

• User confidence and satisfaction in technical aspects of service delivery.

Source: EREA staff, Asian Development Bank.