Institutional Theories About Governance Policies On Natural Resources

By Artur Victoria

To explain institutional change institutions need to be conceptualized as a dependent rather than an independent variable. The social science literature on institutional change is too large to be dealt with comprehensively. The discussion is restricted to three perspectives that are relevant to the question under what conditions institutions can change for the better in mineral-rich countries.

The technocratic perspective

Policy advisors have been inclined to suggest that institutions can be re-designed once a government has decided that this is what it wants to do.Unfortunately this view leaves unclear whether and under what conditions particular domestic conditions enable governments to be more or less ‘willing’. From the agency-focused perspective it is to be asked why policy-makers, who have been identified as causing the problems in the first place, would suddenly agree to accept institutions that are likely to cause them material or political disadvantages. For the case of Norway, there are governments who have accepted for themselves special fiscal institutions that constrain their choices in the future. This is not to say that reform proposals to introduce such institutions are flawed in principle, but to point out that their effectiveness is conditioned by additional factors. Rather than assigning them to a black box labeled ‘political will’, these factors should be made the subject of investigation.

Institutional reforms targeting the privatisation of previously state managed enterprises have in some cases led to efficiency gains and better service delivery. But in others they have provided political elites with opportunities to engage in self-enrichment without delivering on the objectives that reforms have set out to achieve.

Targeted sector reforms can also run the risk of undermining institutional changes in other sectors. For example, pressing needs to quick-fix macroeconomic and fiscal problems in the short run can undermine the development of political institutions if they increase and leave unconstrained the power of the executive the legislature. The same may apply to the mineral sector if foreign investment remains one of few or the only immediate prospect for generating much needed foreign exchange and government revenue.

Case studies conducted by the ICMM, the World Bank and UNCTAD have shown that impressive improvements in macroeconomic and fiscal management at the national level have not in all instances been matched by equal improvements at the sub-national level and with respect to other sectors’ outcomes. In Peru for example fundamental legislative and regulatory changes to the mineral sector were undertaken by executive decree by a government which was later ousted for corruption and authoritarianism. These circumstances have led to a political settlement involving a decentralisation process which not least has contributed to politicising the fiscal institutions governing resource revenue management. Indonesia also provides an example of a mineral-rich country with rather good macro-economic and efficient resource rent management but a poor record on corruption. In Indonesia decentralisation has also formed part of a political settlement which has not made it easier to achieve efficient resource revenue management.

The evolutionary perspective

A second perspective suggests that institutional change resembles an evolutionary process. Exogenous shocks may render existing institutions inefficient and entice individuals to collaborate to replace them with more efficient ones. A positive suggestion is that those benefiting from more efficient institutions will replace institutions that have become inefficient and that this will benefit everyone. The reform literature of the 1980s and 1990s proposed that economic crises provide a unique opportunity for executive policy makers and their supporters to garner political support for the introduction of fundamental changes to property rights and other institutions.

Others have suggested that in the wake of exogenous shocks some actors may be better placed to capture the opportunity for challenging a status and will be inclined to re-designing institutions to serve their particular rather than wider public interests. This view cautions that new outcomes need not automatically be more efficient, at least not for everybody or not immediately. Although an exogenous shock triggers change, the actual outcome of transformed institutions is conditioned by the existing distribution of power and transaction costs and how they affect collective action. This view allows for the possibility that similar institutional reforms may to varying degrees be captured by particular interests which may or may not serve the broader development objectives. Variance in outcomes across countries that have pursued similar types of reforms is at least possible. As pointed out in section 2, this would appear to be the case for mineral-rich countries were similar types of reforms have led to different outcomes.

Historic analysis of the development of mineral rights in the American Midwest referred to earlier, made the case that the prospects for institutional change following an exogenous shock is conditioned upon the distribution of benefits and power under the old and the new property rights system. In addition, the ability to compensate losers and as well as to correctly foresee the likely effects of a proposed institutional change in light of bounded rational and information asymmetries also matters to whether positive institutional change will actually take place.

Institutional change as an evolutionary process also suggests that ‘time’ is an important factor. Pooling annual data on institutional indicators as if each year observation for the same country could be treated as a separate case misses this point. Similar exogenous shocks can trigger either positive or negative institutional change, depending on how the initial configuration of variables conditions the direction of change. If explanatory variables are seen to affect outcomes independent of the values of other variables, configurations of variables cannot be analysed. This suggests that for clues as to how institutional change was brought about a comparative analysis of mineral-rich countries should try and compare case configurations in relation to time. Moreover, in order to specify causal linkages an explicit theoretical explanation is also required.

The distributional conflict perspective

A third perspective suggests more strongly that distributional conflicts drive institutional change. Irrespective of whether change is put in motion because of a strong exogenous shock, this view suggests that the initial set of institutions supplied by a public authority provides the arena within which private agents engage with each others in bargaining processes and conflicts to change institutions to their advantage. The outcome of the battle is conditioned by the relative power of the parties involved in the confrontation.

This view is similar to that of the less optimistic view of evolutionary institutional change. But it focuses more on what happens to the policy preferences of previously opponent economic, social or political groups in the context of a distributive struggle. If policy preferences change it is possible that this results in greater convergence. This at least allows for an opportunity that institutional change leads to broad-based rather then interest-group specific improvements in living conditions. This view on institutional change leaves open when and how convergence of policy preferences could evolve and who would be the winners and the losers. Individual actors could play an important role in the process, as for example in the case of Botswana first post-independence president.

Institutional change as the outcome of distributional conflicts poses no expectation that institutional change will necessarily be efficient. Inefficient outcomes could arise because potential losers can block change half-way, or potential winners cannot credibly commit to compensating powerful losers. What matters according to this view is whether (re-) alignments between elites and/or between groups of elites and no elites lead to institutional changes that support broad-based economic activity and greater social and political inclusion.

Viewing institutional change as the outcome of distributional conflicts requires propositions that allow for changes in policy preferences over time and theories that can explain such changes.

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