The ability to nurture and manage a wide variety of large-scale organizations is essential to any country’s ability to promote economic development. In fact, in some ways economic development is simply a product of a society’s growing capacity to create strong organizations that serve an ever-enlarging number of purposes.
Only with a sizable number of medium- and large-sized companies can economies generate broad-based, employment-generating growth. Only with well-managed government institutions—which often contain tens of thousands if not more people—can states provide a wide range of public services to millions of people and across large territories. And only big (or, at least, extremely well managed) NGOs are likely to have the breadth of coverage to make a difference in the lives of a significant proportion of a population.
Yet while energizing economies, increasing employment, improving governance, and enhancing civil society are all prioritized by development actors, little thought is put into what would enable societies to better grow and manage organizations despite their obvious importance to all of these objectives.
The World Bank’s Doing Business reports focus on how easy it is for companies to start up and operate, but say little (at least directly) about how politics affects business. And by looking only at aggregate data, they tell us little about the advantages or disadvantages different types of companies (with, say, different sizes and types of owners) have. They also ignore managerial issues.
Many indicators covering government look at performance, but say little about political development. As a result, they can return the same results from countries with sharply different governance outcomes. Indonesia, and other Southeast Asian countries do badly even though they have had rapid growth for decades.
Samuel Huntington wrote half a century ago about “the institutionalization of political organizations and procedures,” which depended on “the extent to which the political organizations and procedures encompass activity in the society” and are able by their “adaptability, complexity, autonomy, and coherence” to resiliently respond to the ever growing needs of rapidly evolving societies. But he looked at these issues from a very broad perspective, and did not address in depth the processes that nurture the strength, size, and robustness of such organizations.
The best work on the role of organizations in development is Douglas North, John Wallis, Steven Webb, and Barry Weingast’s Limited Access Order (LAO) framework, which puts the limits on organizations at the core of its analysis. As they explain,
The dominant coalition creates cooperation and order by limiting access to valuable resources – land, labor, and capital – or access and control of valuable activities – such as contract enforcement, property right enforcement, trade, worship, and education – to elite groups. Restricting support for organizations to elite groups magnifies the rents that elite groups receive. Sophisticated social organizations require the ability to make agreements within and between organizations that rely on external, third party enforcement. Limiting access to organizational forms and contract enforcement is the key to the limited access order: it creates rents through exclusive privileges and directly enhances the value of the privileges by making elites more productive through their organizations.
In LAOs, power (and violence) is deployed to constrain all but a narrow set of people from exploiting the myriad advantages of organizations. The state—the biggest set of organizations—is in turn constrained from treating organizations equitably, which encourages government malfeasance and ineffectiveness (and undermines attempts to enhance capacity). In the least developed LAOs, the organizations that make up the state are actually controlled by different elites for their own advantage.
A second equally important issue is the enormous scarcity of capable managers—especially middle managers—and other specialists (such as accountants) that greatly limit any large institution from working effectively. The biggest institutional shortfall in the developing world as a whole exists at the middle-management level, where millions of people lack any formal training. As a result, organizations rapidly decrease in effectiveness as the number of employees, departments, locations, and complex tasks increase. There has been little emphasis—both within governments and donors—on any type of management training outside of the standard workshops provided through aid agencies. According to the Africa Management Initiative, “fewer than 10 African institutions [business schools] measure up to international standards.” Just two of these exist in sub-Saharan Africa outside of South Africa. The Middle East, Central Asia, and, to a lesser extent, South Asia are similarly deficient.
When states are unable to enhance the independence, scale, durability, and robustness of political, economic, and social organizations, they limit their own potential for development in all of these spheres.
Changing these dynamics require changing the “ecosystem”—made up of various institutions—that shape the framework and conditions under which organizations must operate.
Increasing the durability and scalability of companies (and NGOs) such that they can operate without active elite-family involvement or support is essential to opening up power dynamics more broadly. For too many businesses (especially small- to medium-sized businesses), access to licenses, bank funding, and government contracts depends on elite connections. As a result, the great majority of organizations operate illicitly (or informally) across the developing world, without the protections better-connected entities have. Strengthening institutions such as the courts and other contract-arbitrating and enforcing mechanisms; banks, especially those aimed at small-to-medium-sized businesses; and regulatory agencies that oversee private entities would offer non-elites an opportunity to form and grow organizations capable of augmenting their economic and political power.
If they are to become prosperous and inclusive states, developing countries must make it a high priority to establish and upgrade not only business schools but also universities, accounting schools, public administration academies, law colleges, and a host of other institutions that can accelerate the upgrading of organizations.
Foreign aid would be better spent on institutions that develop managers, lawyers, accountants, and public administrators than on short-term projects that seek to shore up ineffective government departments. Newly trained lawyers and accountants may seem less valuable, and certainly less inspiring and photogenic, than a campaign against corruption, but their long-term impact on the lives of the poor is likely to be greater.
It is also necessary to build up independent monitoring organizations that shed a light on government performance, entities that work to enhance policymaking and pressure officials to perform better, and associations that enhance the ability to solve common problems. Think tanks, rule of law watchdogs, the media, and citizen pressure groups can make a significant difference to government effectiveness. Strengthening horizontal cooperation across society—and across groups that do not normally work together—through associations of every kind—build trust and make it easier to forge the bonds necessary to promote better governance.
Another promising avenue to explore is the generation of more information and more accurate data on local conditions would also help spur political development. More information (on things like politician performance and school test results), more qualitative studies (on budgets and service delivery outcomes), more benchmarking (of schools and various electricity and water suppliers), and more understanding of local sociopolitical dynamics would empower an ever greater number of emerging leaders to act more assertively and more wisely. Right now things are so bad in so many places that the World Bank has talked of “Africa’s statistical tragedy.”
None of this is a panacea. Reworking elite incentives, increasing the institutionalization of the state, and making societies more inclusive remain far more important to encouraging increases in the variety, size, and robustness of organizations throughout a country. But, better information on how states work, more good managers, and a more equitable playing field for non-state organizations can all help provide a better environment for organizations to grow and play the crucial roles that need to in the development of any country—and they are all doable on a project by project basis.
Hi Seth
extrapolating out the idea of LOAs in developing countries to a global scale –
Do you think LOAs on an international stage are mature enough? Can we say that the multi lateral orgnaisations exhibit OAO. is the LOA exisiting in multi lateral organisations fuelling the inability of maturing LOAs in developing countries?
Do we not also need to work on the capapcity of our own governments and multi lateral orgnaisations to be able to manage change effectively without resorting to violence?
Just a couple of questions that spring to mind
It is a very interesting point! I don't think anyone has used the LAO framework to analyze the international community before, but they certainly could and should. I think the framework would apply at the global level. If the ability of a few states to maintain political order breaks down, then chaos and violence will erupt unless a much stronger rules based order is in place. But the LAO is skeptical that the latter can be created in most circumstances (outside of a few developed countries).