(consistency over time) - Amka and the Three Golden Rules(2014) is a beautifully crafted film about a Mongolian child, Amka
, whose life turns into a nightmare after he finds a golden coin and hops onto a path of overspending, abandoning family duties and taking on unmanageable levels of indebtedness. Under pressure to repay his debts, he runs away, through the astounding Mongolian land-scape, to settle with an eccentric uncle who teaches him the three golden rules of life.
The Mongolian newspaper UB Post noted in 2014 that “the story is in many ways a symbol of how Mongolia must decide its own fate” to manage its growing levels of debt.
Indeed, as the movie was being released, the country was undergoing a third attempt to establish the rainy-day Future Heritage Fund to manage its windfall from mining revenues (mining is the country’s largest source of revenue). The attempt to transplant the design of a “future generations
fund” from international best practices had already
Experts from around the world had visited Mongolia over the previous decade, providing advice on the best existing rules for the distribution and management of revenues from natural resources. Technical solutions were available, and political will was palpable among several state actors. Yet, since 2007, attempts to establish rules for the use of mining revenues had been thwarted by political pressures. Hard-
fought parliamentary elections prompted Mongolia’s
political parties to promise to increase spending on
programs such as cash allowances, untargeted social
benefits, and investments in specific regions in order
to garner support. However, such promises could be
fulfilled only by depleting the resources going into the
reserve fund (Chimeddorj 2015). Thus no matter how
well policy makers designed the future generations
fund, unless the interests of the powerful groups in
society were to change, the commitmentto a policy of
fiscal prudence would continue to fail and the country would remain in debt. The process to reach and sustain agreements among decision makers on these policies had not created the conditions for people to be willing to cooperate and coordinate actions around specific long-term goals.
The parallels between Mongolia’s state of affairs
and the story portrayed in the movie were not a coincidence. The metaphor in Amka’s tale was a deliberate attempt, supported by opinion leaders and artists, to create awareness in Mongolian society about the importance of prudence in the management of resources (in Amka’s story, the golden coin). The movie was viewed as an instrument to reinforce people’s values of prudential management of wealth in an effort to coordinate support for the pursuit of the long-term goal of fiscal sustainability in Mongolia.
As this example illustrates, policy making does not take place in a vacuum. It is the result of a bargaining process among actors, who frequently have diverse and even opposing preferences and interests.
More important, the bargaining power of those actors
differs, derived from a variety of sources such as the
existing formal rules, informal norms, their ability to represent and mobilize other groups in society, or their control over resources. The complex process in which actors bargain over the design and implementation of policies, in a very specific social, historical, and economic context, is what in this Report is called governance
For decades, academics as well as practitioners have acknowledged the importance of institutions ,organizations and rules—to development.
Countries that are more secure, prosperous, and equitable tend to rank higher on the existing indicators that emphasize certain institutional forms. This pattern has created a perception that certain types of institutions unambiguously determine higher levels of development, and it has led many well-intentioned policy makers and development agencies to promote institutional reforms that aim at achieving those institutional standards—often referred to as institutional transplants.
In other words, in acknowledging that governance
matters for development, one implicitly accepts the
fact that the effects of governance are determined by
the characteristics of formal institutions.
However, institutional forms are not enough. Consider the challenge that Mongolia faced in following its own “golden rules.” The Mongolian government decided to adopt international best practices to manage fiscal revenues from natural resource extraction, but it failed to administer them with a long-term perspective. Although the counter cyclical management of fiscal policy to manage volatility has been viewed as a key role of institutions seeking to promote long-
term development, the form that those institutions
took in Mongolia was not enough to affect outcomes.
Political constraints, pressures from interest groups, existing social opinions about the need to accelerate progress in specific areas, and historical inertia had eroded the credibility of the commitment to prudential management of mining resources.
Often, when policies and technical solutions fail to achieve the intended outcomes, blame falls on institutional failure, and the proposed solution is to “improve” institutions. But development can occur under a wide variety of institutional trajectories, as examples around the world and throughout history demonstrate. Thus it then becomes essential to
uncover the underlying drivers of policy effectiveness. What makes some policies work while others fail?
In addition to the type of institutions that matter, it is relevant to ask what those institutional forms are trying to achieve, or what functionsthey are meant to perform.
This Report identifies commitment, coordination, and
cooperation as the three core functions of institutions
that are needed to ensure that rules and resources
yield the desired development outcomes.
Policy effectiveness can be explained by whether and how well institutions are performing these functions. Commitment is about supporting consistent policies over time to ensure that promises are delivered.
Coordination is about shaping expectations to enable complementary action. And cooperationis about limiting opportunistic behavior to prevent free-riding. Coordination and cooperation imply voluntary compliance—that is, the
preferred social action is the one that individuals are
actually willing to take.
Although policy makers may not think in terms of game theory, they play these games every day, and the models lend precision and objectivity to understanding their actions.
Commitment: Backing consistent policies over time to ensure promises are delivered.
Policies are not spot transactions such as buying a book or using a taxi; they require consistency over time. However, reaching and sustaining agreements can be difficult because economic and political conditions may change, and the incentives for policy makers to deviate from established goal-oriented policies can be strong.
To promote sustained development, it is particularly important to ensure that those in power can credibly deliver on promises made to citizens beyond the political cycle. Imagine that a worker would like to save for retirement by contributing funds to a pension. If that worker does not
believe the government can credibly commit to not
expropriating those funds and returning them in the
future, he or she will likely choose not to save. In line
with the economic theory of incomplete contracts,
policies must include commitment devices to ensure
Commitment devices help ensure the credibility of policies over time, even in the face of changing circumstances. In this sense, institutions can be thought of as technologies that allow society and individuals to engage in the pursuit of long-term goals, even in the face of changing circumstances.
In all countries, but mainly in low-income or fragile contexts, commitment is a fundamental condition to prevent the escalation of conflict to violence.
Whether conflicting parties are able to reach credible
agreements to renounce violence and endow the state
with a monopoly on the legitimate use of violence is
a crucial condition to prevent escalation .
When commitment to deals is not credible, contending sides tend to walk away from the bargaining table and violence prevails: warring factions may renege on peace agreements, policy makers may default on promises to transfer resources to discontented groups or regions, disputants may fail to abide by court judgments, or police officers may abuse
citizens instead of protecting them. The influence of
commitment is not exclusive to security. Economic
growth requires an environment in which firms and
individuals feel secure in investing their resources in
productive activities. Credible commitment to pro-
growth policies and property rights is, in this way,
also essential to ensure macroeconomic stability and
to enable growth.
People’s perception of the credibility of commitments can also increase their willingness to cooperate—say, through tax compliance—and to coordinate, following rules in response to the belief that others will follow as well. Theoretically, delivering on commitments builds trust in institutions over time and strengthens voluntary compliance.
Empirical results from lab experiments carried out for
this Report are consistent with this notion, whereby
binding commitments lead to greater cooperation
and more redistribution of resources among players.