Human Resouross Development and Operations PolicyThe World BankDecember 1993

HROWP 18

POPULAR PARTICIPATIONIN ECONOMIC THEORY

AND PRACTICE

Philip R. Gerson

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Popular Participation inEconomic Theory and Practice

by

Philip R. Gerson

Abstract

Development professionals have begun to emphasize the importance of allowing beneficiariesof development projects to influence their selection, design and implementation. Research byecono-nist; and others suggests that while greater knowledge of the preferences of beneficiaries isimortant, a number of difficulties may arise in attempting to incorporate greater "popularparticipation" in development projects. Some of t!iese pitfalls have been observed in participatoryWorld Bank projects. A knowledge of these potential problems may help project planners developmechanisms, which are likely to vary on a case-by-case basis, to anticipate and avoid theirrealization.

Contents

1 INTRODUCTION . .................................... 1

2 PARTICIPATION IN ECONOMIC THEORY ................. 12.1 Participation in General Equilibrium Theory ....... ................ 22.2 SocialChoice Theory ................................ 32.3 The Economics of Collective Action ............................. S2.4 Public Choice Theory .............................. ... 6

3 MICRO-LEVEL EXPERIENCE ................................. 7

4 CONCLUSION ................................ 15

REFERENCES ................................. 19

1 INTRODUCnON

Over the last quarter century the belief that whenever practicable the ultimate beneficiariesof a development project should be given as much input into its design and operation as possible hasgone almost from heresy to orthodoxy among development professionals. Despite near unanimityin the belief that participation is desirable, however, there remains considerable disagreement aboutprecisely who should speak for beneficiaries, about what type of input they should have, and abouthow development institutions can best organize themselves to receive and incorporate this input.

Perhaps as a result of these disagreements, relatively few World Bank projects to date havedevoted substantial resources to involving beneficiaries in their design, implementation ormanagement. Recently, however, efforts have been made to move beyond platitudes about theinportance of popular participation and to examine more precisely the circumstances under whichparticipation is desirable, how the project cycle at the World Bank and other development institutionscan be modified to incorporate greater participation, and other difficult but essential questions.

The goal of this paper is to examine how economic theory can contribute to this debate byhighlighting some of the likely benefits of popular participation and some of the pitfalls that maymake greater beneficiary input hard to come by. For the purposes of this paper, pardclioadon isdefied (following the defmition developed by the core team of the World Bank's Learning Processon Participatory Development) as "a process by which people - especially disadvantaged people -can exercise influence over policy formulation, design alternatives, investment choices, management,and monitoring of development interventions in their communities. 'I Thus, participation is not adiscrete event that may occur only at a specified point in a project's history but instead may berealized over the entire lifecycle of a development project. This paper will therefore examine theimplications of economic theory for participation both in the relatively early stage of choosing anddesigning projects as well as in the later stage of project implementation.

Section 2 of the paper will look at portions of the economic literature that may haveimplications for popular participation, and will develop a handful of testable implications of thetheory. Section 3 will then review a number of Bank-sponsored projects to attempt to test if thepredictions of the theory are actually being observed. Section 4 concludes.

2 PARTICIPATION IN ECONOMIC THEORY

It seems almost fatuous to state that economic theory is concerned with how individualsinteract with society. Indeed, economics is frequently define(' as the study of how a society's scarceresources are allocated among individuals. Although one could argue that the discipline has grownover recent years to encompass a wider domain, distributional issues still constitute a main focus ofeconomy theory. The goal of this section of the paper is to review some of the economic literaturethat may help to explain the experience of projects seeking to increase the degree of popularparticipation, and to develop some testable implications of this theory that may be used to determineif the theory reflects experience.

Bhatnagar and Williams, p.2.

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2.1 Paricdpation in General Equilibrium Theory

General equilibrium theory is primarily concerned with answering two questions: under whatconditions is equilibrium possible in an economy, and under what conditions will an equilibrium beefficient?2 In a series of papers, Kenneth Arrow and Gerard Debreu [Arrow (195la), Debreu(1951), Arrow and Debreu (1954)] demonstrated that under fairly general conditions an efficientequilibrium would occur in an economy solely through the interactions of self-motivated individuals.

Individual consumers play a fundamental role in the Arrow-Debreu economy: theirpreferences, along with the production technologies available to tne economy, determine theequilibrium prices and output levels of all goods. In general equ,librium each agent needs to beconcerned only with his own preferences or profits and with prices3: the market then does the workof producing an efficient equilibrium allocation. Moreover, efficiency of equilibrium by definitionstresses the role of the individual, since an equilibrium cannot be efftcient unless no individual canbe made better off without making another individual worse off. Of course, an efficient allocationmay not necessarily be an equitable one. The Arrow-Debreu model has come to define theneoclassical approach to economics, with its emphasis on individuals and its conclusions about theefficiency of unencumbered markets.

General equilibrium theory provides a strong motivation for the desire to increase the extentof popular participation in development projects. It also suggests that under appropriate conditionsthere is one method of ensuring popular participation in development projects that is almost costlessfor development institutions: the market. Markets allow individuals to express their preferencesaTnong available options and under quite general circumstances will ensure efficient equilibriumoutcomes. To use some simple examples, if a development institution is unsure which of variouspotential education projects will be most valuable for beneficiaries, one way to discover is to askbeneficiaries how much they would be willing to pay to participate in each of the programs. Theproject for which the most intended beneficiaries would pay the largest amount is clearly the one thatis most valuable to them. Similarly, suppose that an institution is choosing among various possiblesites for, say, a water treatment plant and wishes to identify the location where the costs involvedin displacing the local population will be the smallest. One way to do so is for the developmentinstitution (or the govermene of the country involved) to bid for the various sites through themarket. The site that can be purchased at the lowest cost is the one where relocation costs arelowest. Mloreover, the payments made to the sellers of the land should generally be sufficient tocompensate them for their loss. 4

2 Typically, an equilibrium is considered efficient if it is not possible to make anyone else better off withoutmakig someone else worse off.

3 However, individuals need to have perfect foresight about future prices.

I In addition, some of these types of activities have been advocated in the literature on popular participation.For example, Gow and Van Sant (1985) argue for requiring beneficiary contributions to development projects toreduce the resource commitment required from the government, to give beneficiaries a greater stake in the successor failure of the project, and to ensure that beneficiaries are 'rongly supportive of the aims of the project.

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Of course, there will be situations where the rlarket is unable to produce an efficientoutcome. For example, when a dam can only be constructed at a single location, local propertyowners can be expected to exploit their monopoly power to demand greater payments than are strictlynecessary to compensate them for their losses. In addition, there are obviously circumstances wherepopular participation is essential to gain greater understanding of beneficiary needs before alternativeproject designs could be made available in the market, or where the use of market mechanisms isotherwise inappropriate. Nevertheless, it is important to bear in mind that the market is a simple,low cost way for beneficiaries to make their needs and desires known to project planners anddesigners and therefore can be an important tool for those who seek to increase the degree of popularparticipation in development efforts.

2.2 Social Choice Theory

Genieral equilibrium theory, such as the work of Arrow and Debreu, is typically concernedwiti decisions that individual consumers and producers make by and for themselves, rather than withdecisions to be made by and for society as a whole. In almost any case in which a society mustchoose among alternatives, it is likely to be the case that some members of the society will preferone choice and other members of society will prefer a different one. In such cases, the society mustchoose how these conflicting preferences can be reconciled into a single social choice. Social choicetheory is concerned with how individual preferences are aggregated into social preferences, or howa society takes the preferences of individual agents into account when determining its actions. Moregenerally, social choice theory looks at how "social welfare functions" take the set of preferencesof each member of a society and turn them into a single preference for the entire society.5

In his book Social Choice and Individual Values (195lb) Kenneth Arrow imposed fourconditions that any social welfare function should meet:

3 Independence of Irrelevant Alternatives. If an individual's preferences betweenchoices C and D change, this should have no impact on the social preference betweenchoices A and B.

* Pareto Optimality. If all members of society prefer choice A to choice B, then thesocial welfare function should choose A over B.

* Unrestricted Domain. The social welfare function should be capable of producinga social preference no matter what the preferences of the members of society are.In other words, no matter how divided the members of the society are about a choice,the social welfare function should be able to produce a choice for society.

* Non-Dictatorship. There is no individual in the society such that if he prefers choiceA to choice B then the social welfare function will define A as society's choiceregardless of what the other individuals prefer.

5 Usually thse preferences are defned in terms of preference 'orderings," where members of a societyconfronted with a choice among several different options list these options from first to last according to theirdesirability.

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Arrow's "Impossibility Theorem" shows that if the number of individuals in a society isfmite, if the society is choosing among at least three alternatives, and if individuals are capable ofexpressing preferences among all outcomes (i.e. there is no choice A versus B where an individualcannot say that one outcome is at least as good as the other) there is ro possible social welfarefunction - including wrajority rule or consensus - that can satisfy all four of these seeminglyreasonable conditions.

A different but related issue in social choice theory concerns the problem of "manipulation,"in which an individual can benefit by misrepresenting his preferences to society. For example, asocial welfare function is manipulable if an individual who prefers option A to B and B to C canachieve a result that is more beneficial to him by reporting that he prefers B to A or C to B and A. 6Allan Gibbard (1973) and Mark Satterthwaite (1975) established that every non-dictatorial votingscheme with at least three distinct outcomes must be manipulable.

Another important result in social Ohoice theory concerns "cycling," in which society isunable to make a choice because no matter which option it selects there is an alternative optior. thatis preferred by a majority of voters. Consider the example of a society of three voters who arechoosing among three possible actions, A, B and C, and who will let the majority rule. Suppose thatthe first individual prefers A to B and B to C, the second prefers C to A and A to B, and the thirdprefers B to C and C to A. In that case the social preference will be for A over B (by virtue of thevotes of individuals 1 and 2) for B over C (by virtue of the votes of individuals 1 and 3) and for Cover A (by virtue of the votes of individuals 2 and 3). There is no equilibrium social choice underthese circumstances, because there is no available optihn that would not be voted down in favor ofanother choice. Not only is cycling theoretically possible when at least three individuals are makinga decision among at least three options under majority rule, but the conditions under which cyclingcan be ruled out are actually quite limited. In the case of a society choosing among three options,then if at least one individual prefers A to B and B to C, then cycling is impossible only if everyperson who prefers C to A also prefers B to A. If even one person who prefers C to A is at leastindifferent between B and A, cycling must be possible. Moreover, McKelvey (1976) demonstratedthat when individual preferences would lead to cycling, when voters express their preferencestruthfully (and do not attempt to manipulate the system) and when an individual who has the powerto determine the order of voting between pairs of options (the "agenda setter") knows voters'preferences, ther. the agenda setter can lead the voting body to any outcome he desires simply bymanipulating the order in which options are considered. Even when these conditions are not metprecisely, it is clear that the agenda setter has significant ability to influence the social cho;ce in thedirection he chooses.

The implications of social choice theory for popular participation are profound. First, thetheory suggests that even if planners were able to meet with every single beneficiary of a proposedproject, there is no mechanism the planners could use to turn these views into a social choice thatwould not violate one of Arrow's conditions. Moreover, there is no reason to believe that proposed

6 Consider a simple scheme where each individual lists his preferences in order, with the top preferencereceiving three votes, the second two votes and the last one vote, with the option receiving the highest aggregatevote being chosen by society. This mechanism is manipulable because an individual whose preference order is ABCmay find it optimal to list C higher than B in order to improve the chances that A will be selected over B.

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beneficiaries would not misrepresent their preferences to try to affect the du'ion reached by projectplanners. Finally, there is no way that planners can be sure that the preferences expressed bybeneficiaries were not distorted by the order in which available options were presented to them. Thetheory therefore suggests some reasons why efforts to increase popular participation through votingor other schemes might not meet with success.

2.3 The Econonics of Collectve Action

The economics of collective action studies the behavior of indii iduals within a group ofpeople who share a common goal. One of the central problems of collective action is the so-called'free-rider" problem: if all the members of a group share a common interest, any action that furthersthat interest benefits each member, whetier or not he bore any of the costs of the action. Theexistenbe of the common interest therefore need not provide any incentive for individual action thatwould further the aims of the group. In fact, the common interest may make it less likely that anymember of the group will participate in a collective action to further its aims. If all members of alarge group benefit from the election of a political candidate, for example, there is no reason toassume they will join together to contribute funds to his campaign. In a large enough group eachis likely to see the impact of his individual contribution on the probability of election to be-insignificant, so that his contribution costs him money but in no way improves either the chance thathe will receive a benefit or the size of the benefit he can expect. Ordinary market or voluntaryaction will fail to obtain the objective the group is seeking (the election of the candidate) because thebenefits being sought are not exclusive: they are available to all members of the group whether theyparticipate actively or not.

There are two conditions under which collective action by members of a group sharing acommon interest is likely. The first of these is when the group is small enough so that the actionsof each member can have an appreciable impact on the likelihood of success. Under thesecircumstances, members of the group will find it worthwhile to bargain with each other to determinehow much effort each should stupply toward the common aim.7 The second is when some benefitsof success can be made exclusive, through what Olson (1982) has described as 'selective incentives.'A selective incentive can be either positive or negative, depending on whether its aim is to rewardthose who participate or to punish those who do not. One simple example of a negative selectiveincentive is the "closed shop," where workers who refuse to join a union are bared fromemployment. Without such a condition, workers would have an incentive not to join the union, asthey would receive any benefits the union achieved without having to pay dues. Similararrangements exist for lawyers, where membership in a bar association is typically a requirement forpractice.8 Positive selective benefits include special insurance programs, travel discounts andjournals available only to members of an organization.

7 Esmn and Uphoff (1974) make the same point when they argue that relatively small local organizations amemore likely to be effective than larger ones because, 'In collective ventures everyone will know who contributeswell and who contributes poorly, with the fomer being awarded with local esteem and the latter being sanctionedby social pressures." Cemea (1985) advocates homogenous' small organizations for similar reasons.

8 Calavan (1986) notes some non-formal examles of negative selective benefits that can also induce collectiveaction, such as gossip, ill-will and social pressure.

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Again, the implications of this theory for popular participation may be dramatic, because itsuggests that local voluntary organizations are unlikely to reflect broad public opinion. As notedabove, the greater the number of people who share a common goal, the less likely they are toorganize thtmselves effectively to achieve that goal. As a result, local organizations are likely tobe at the extremes of public opinion (although of course they will argue otherwise) rather than at themainstreami, and to pusn for project components whose benefits are limited to a small group ratherthan being available generally. In fact, in this case greater popu'ar participation can actually havethe perverse effect of allowing small interest groups to put their own interests ahead of those of themajority.

2.4 Public Choice Theory

Public choice theory uses the techniques of c iornic iieory to study questions usuallyaddressed by political scientists. Traditionally, when economists studied such public policy issuesas whether or not a protective tariff should be established they operated from the assumption thatgovernments were inherently benevolent and sought to maximize social welfare. Of course,economists typically assume that agents are largely self-motivated in their actions. The maincontribution of public choice theory, then, is to analyze questions of governance relying on theassumption that elected officials and bureaucrats, like voters, act to further their own interests andnot necessarily to maximize the welfare of society.

One of the earliest discoveries of public choice theory was that a rational voter would notbother to be very well-informed about the votes that he casts, for the reasons discussed in the sectionon social choice above: voters are unlikely to pay the costs of becoming well-informed when theykmow that the likely effect of their vote on their own weifare is trivial.9 Moreover, voters are muchmore likely to be informed about their special interests than about more general matters. Sinceorganized interest groups will make an effort to propagandize voters about these issues, voters aretherefore likely not only to have very little information about most issues, but also to have onlybiased information about the issues they do know about. Each of these results has been confirmedby empirical studies of voters.

Public choice theory views politicians as people who make their living being elected byvoters, and thus act in ways that maximize the likelihood that they will be re-elected. In particular,elected officials have a strong motivation to vote for legislation that their constituents favor ratherthan for the legislation that may be best for their constituents."' Obviously, the cost to the publicof this kind of behavior could be considerable.

Turning to the bureaucracy, public choice theory argues that the typical bureaucrat isinterested in retaining his job and gaining promotion. In a modern civil service system, of course,most bureaucrats are effectively insulated from their superiors with respect both v being fired and

I Similar arguments are often used to explain the extremely low voter turnout in elections in the United Statesand other countries: if voters feel that the impact of their individual votes on election results is trivial, they areunlikely to be willing to put up with the opportunity costs of casting their ballots.

I Given that their constituients are likely to be poorly informed, the distinction between legislation that thecommunity favors and legislation that is good for the community may well be meaningful.

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to promotion. As such, their motivation for furthering the aims of senior officis is minimal. Infact, the typical bureaucrat has no reaso.. to work hard or to be we0-informed about hisresponsibilities. Those who do so are generally those who have strong personal feelings about howthe government should behave, and tend to act in ways that further their own beliefs (which may ormay not conform to the policies favored by their superiors). Instead, bureaucrats do have amotivation to seek to enhance their own prestige, which typically involves expanding the scope oftheir activities and increasing the size of their departnents. Thus, bureaucracies tend to grow overtime both in influence and in sheer numbers.

Inevitably, given the financial ana other costs of meeting wit, large numbers of potentialbeneficiaries of proposed projects, it will often be necessary to rely on local elected (formally orinformaly) officials as representat;ves. Unfortunately, public choice theory suggests that there islittle reason to expect that meetinu with these officials will yield much understanding of the needsand desires of beneficiaries. Few voters are likely to make an effort to inform themselves about theIssues facing society (since the marginal impact of their votes on the policies that governments willfollow is zero), meaning that elected officials have little reason to learn about the needs of theirconstients and instead are likely to act in accordance with their own preferences. Only as newelections near do elected officials have an incentive to learn the wishes of the (poorly informed)median voter. The problem is even worse with a modern civil service, where bureaucrats are notdependent on their superiors for protection from firing or for promotion, and therefore have littlereason to inform themselves about the needs of citizens or even the goals of elected officials. Thus,while some development professionals might hail the birth of democratic movements around the.globe as a step toward greater popular participation in development activities"1 public choice theory(and, for that matter, experience in western countries with relatively long democratic histories)suggests that participation by elected officials or government bureaucrats is unlikely to be an highlyeffective substitute for participation by beneficiaries. Of course, these concerns hold even morestrongly in those countries where the tradition of representative government is weak or wheregovernments rule by coercion rather than by consent.

3 MICRO-LEVEL EXPERIENCE

The review of some aspects of the economic literature conducted in Section 2, above,suggests both why greater popular participation might lead to greater project effectiveness in certaincases, and why efforts to increase the degree of popular participation might fail in other cases.Briefly, general equilibrium theory suggests that individual agents expressing their preferences in adecentalized environment may more easily achieve an efficient outcome than can govermnents orinternational institutions attempting to act on their behalves. At the same time, the theory suggeststhat problems are likely to arise when individual preferences must be aggregsxd into a social choice.

Several specific predictions can be drawn from the theory. The first group of p.edictionsconcerns how and when popular participation would be effective in particular projects. ihe secondgroup concerns more general problems with discovering the true preferences of intended beneficiariesand obtaining the cooperation of government officials regardless of the type of project under

Keans, for example, argues that 'people-responsive leaders - like Havel, Salinas and others ... will neednew practices to identify and design sound development programs and projects that will really and economically takecare of the concerns of their people.'

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consideration. In either category, participation is considered to be "successful' if it provides amechanism for beneficiary populations to express their views, or if it otherwise increases the equity,efficiency or sustainability of a development project.

A. Problems Relating to Project Design

1. Projects attempting to incorporate greater popular participation are more likely to besuccessful when participation occurs through the use of market mechanisms directly involvingthe ultimate beneficiaries, such as contributions in cash or kind, than when it occurs throughconsultations with elected officials and voluntary organizations, through towii meetings, etc.("Informational Efficiency").

2. Popular participation is more likely to be successful when the benefits of a project canbe restricted to a particular group (as in an irrigation or housing project) than when they areavailable to everyone (as in a flood control project). ("Free-Rider Problem").

3. In theory, market mechanisms requiring individuals to contribute time or money inexchange for benefits can be equally efficient. However, when individuals do not haveaccess to credit, temporal contributions may be more efficient than monetary ones.Moreover, requiring individuals to contribute their labor, or even simply requiring them towait in a queue, makes participation less expensive for those who place a lower value ontheir time (who also tend to be poor). Thus, market mechanisms that require a contributionof time or labor may enhance the effectiveness of development projects not only by avoiding"free-rider" problems and exploiting the informational efficiency of the market but also bydirecting the flow of benefits to poorer segments of the population.

B. Problems Relating to Preference Revelation

4. Potential beneficiaries of proposed projects may misrepresent their true preferences tomanipulate the project design process and obtain a more favorable result. ("Social ChoiceTheory").

5. Local voluntary organizations are likely to hold more extreme positions than the generalpublic, or to push for measures whose benefits will accrue to a relatively small fraction ofsociety, making them poor proxies for public opinion. ("Economics of Collective Action").

6. Even in countries with strong traditions of representative government, public officialscannot be assumed to be well-informed about the views of the citizens they represent. Evenwhen elected officials are informed, non-elected civil servants who do not share the opinionsof their bosses will feel little compulsion to carry out the policies they have endorsed. Thus,elected officials cannot may not favor project components that their constituents like oroppose components that their constituents do not like. Moreover, even when elected officialsdo support policies favored by their constituents, bureaucrats may prevent their adoptionanyway. ("Public Choice Theory").

The goal of this section of the paper is to examine some specific World Bank projects to

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determine if these predictions of the theory have actually been observed.

1. Informational Efficiency. A large number of Bank-sponsored projects have relied oninterventions that are at least partly market based in an effort to identify the preferences of potentialbeneficiaries, and there is substantial anecdotal evidence that this method has been more successfulthan an approach based simply on educated guesses about the needs of target populations.

For example, the Beneficiary Assessment conducted for the Zambian Social Recovery Fundfound that subprojects that required even very small contributions from beneficiaries were morelikely to be successful than those requiring no beneficiary contributions. In the Batungwa WaterProject, financed by the Social Recovery Fund, a local nun approached the Fund to obtain resourcesfor digging 12 boreholes to relieve the severe water shortages that have plagued Batungwa for sometime. The local community was not required to make any contribution to the project. At the timeof the Beneficiary Assessment all but two of the boreholes had broken down. Beneficiaries were notwilling to make repairs, arguing that the boreholes were the responsibility of the Church. Localauthorities also refused to make any repairs, arguing that if they had been consulted they would nothave recommended digging boreholes. The Beneficiary Assessment concludes that prospects forsuccess of this project are minimal.

By contrast, under a pilot program launched in Ivory Coast, villagers were trained to makerepairs on hand pumps and then were required to maintain them at their own expense. The programresulted in a substantial improvement in the reliability of water service in rural areas, with thebreakdown rate for pumps falling from 50 percent to just 11 percent. Interestingly, when thegovernment chose to expand the program to a national basis local chiefs were instructed to fornvillage Water Committees that would sign repair contracts with the government. Althoughcommittees were formed representing 94 percent of villages nationwide, in about 45 percent ofvillages these committees became inoperable. Based on a study of 26 of these villages the primaryfactor was the absence of a clear demand for pump water. This lack of demand might not have beendetected if villagers had not been required to contribute time and money for repairs. Similarly, inthe Nepal Irrigation Sector Program villages were required to form Farmers' Irrigation Associationsthat would negotiate with the government over infrastructure investments. However, beneficiarieswere required to contribute 1 percent of investment expenses up front, and 10 to 25 percent of totalproject expenses in cash or labor. In the opinion of the Task Manager for the program, thecontribution requirement served as an important check on the Irrigation Associations, ensuring thattheir officers remained responsive to their constituents.

The drive for greater popular participation in development is motivated, at least in part, bya belief that the potential beneficiaries of a development project know their own needs and aspirationsmore intimately than any outside agency like the Bank ever can. The anecdotal evidence cited abovesuggests that those living within beneficiary communities, even when well-intentioned, may also beunable to fully appreciate the needs and desires of the other members of those communities.Fortunately, the evidence also suggests that requiring potential beneficiaries to contribute some ofthe costs of a project can be a simple, effective and inexpensive measure to ensure that it meets theirneeds. If potential beneficiaries are willing to contribute to a project, they must be getting somethingfrom it.

However, it should be remembered that the fact that potential beneficiaries are willing to

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contribute to a project simply suggests that the benefits they expect to receive exceed their costs.Of course, it does not suggest that the proposed project is necessarily the best possible use ofresources, only that it is an acceptable one. For example, the Lukulu Rural Health Center Projectfinanced the extension of the Center under the auspices of the Zambian Social Recovery Fund. Theproject was initiated by a former senior clinical officer who was at that time the seci try of theHealth Center Advisory Comnmittee. Although members of the community contributed funds andlabor to the project, and are generally pleased with the results, the Beneficiary Assessment notes thatthe majority of beneficiaries interviewed indicated that they would have preferred a new school orpost office to the extension of the health facility. Thus, the project appears to be meeting a need ofthe community, but perhaps not the need they find the most pressing.

2. Free-Rider Problem. The idea of the free-rider problem is so well established, evenamong non-economists, that it should not be surprising to anyone that problems have arisen inparticipatory projects whose benefits can Dot be restricted to those who contribute. For example,in some education projects sponsored by the Zanbian Social Recovery Fund local Parent TeacherAssociations (who initiated the projects) were forced to bar the children of parents who refused tomake contributions in order to ensure full participation in the projects. The Beneficiary Assessmentfor the Fund also noted that projects constructing bridges, roads and culverts were extremely difficultto finance because the benefits of these projects were available to anyone, regardless of whether heor she contributed funds or labor to them. In many cases, benefits from these projects would accrueto people who were not even members of the community asked to contribute to them.

In Ivory Coast, a private company, SCGECI, was contracted by the government to providewater services. The company achieved a high quality of service in urban areas, but the widedispersion of the rural system led to high repair costs. In 1982 SODECI was authorized by thegovernment to charge user fees from rural villages to help defray operating costs, but the companywas not authorized to cut off service to villages that declined to pay. Accordingly, villages notpaying the fee would have their water use subsidized by villages that did pay.12 Not surprisingly,the general reaction to the plan was negative and, the MOP for the Water Supply and SanitationSector Adjustment Program notes, the collection rate never exceeded 40 percent. The result wasdeterioration of the rural water supply system and the introduction of the local repair systemdiscussed above.

As a final example, the nearshore fisheries component of the Central Visayas RegionalProject in the Philippines financed the establishment of artificial reefs, the replanting of denudedmangrove areas and the establishment of coral reef sanctuaries at four subsites in four provinces.The draft Project Completion Report for the project notes, however, that implementation of thiscomponent of the project was hampered by the inability of participants to adequately capture thebenefits from their labors. Municipal Fishermen's Associations, which helped implement thiscomponent, had no legal right to exclude outsiders from municipal fishing grounds, artificial reefsor locally-created reef sanctuaries.

The previous section argued that anecdotal evidence from several projects suggests that

t2 However, this strategy worked only until water facilities in a village broke: SODECI withheld repair senrvcesfrom villages that refused to pay their fees.

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requiring beneficiaries of a proposed project to contribute towards its costs is an inexpensive methodto ensure that the project addresses their needs Experience with. free-rider problems in projects,however, suggests that even when a project would be valuable to potential beneficiaries they maynevertheless refuse to contribute to it if they believe that they can obtain the benefits without doingso, or if they believe that others may do so at their expense. Accordingly, although willingness topay for a project can be an important measure of project suitability in some cases, the evidenceabove confirnz the theoretical prediction that when the benefits of a proposed project cannot berestricted to contributors a lack of willingness to pay for a project may give misleading informationabout its value to participants. It may also suggest that some worthwhile projects could be moresustainable if financed coercively (for example, through a mandatory tax) than if financedvoluntarily.

3. Efficiency of In-Kind Contributions. Thleory suggests that requiring beneficiaries tocontribute time or labor to projects and then restricting benefits to those who make contributions willtend to direct the flow of benefits to the poorest members of a community. The BeneficiaryAssessment for the Zambian Social Recovery Fund provides some evidence that bears out thisconclusion: 44 percent of urban projects financed under the Fund contained a cash only contribution,versus only 5.6 percent of rural ones. Almost 31 percent of rural projects involved only in-kindcontributions, versus 18.2 percent of urban ones. On average, rural areas in Zambia tend to bepoorer than urban ones. In fact, interviews conducted for the assessment indicated that in manyurban projects beneficiaries were unwilling to contribute their time or labor to projects because theirhigh incomes made it relatively more expensive for them to contribute time than money.

However, the Beneficiary Assessment does note one potential problem when beneficiariescontribute labor to a project. Some projects financed by the Social Recovery Fund paid skilledworkers while allowing others, primarily unskilled, to make their contribution to the project in theform of free labor. This tended to generate resentment among the unpaid workers (who apparentlyplaced a higher value on their own time relative to that of skilled workers than did local labormarkets) and reduced the extent of their participation. This suggests that when projects allowbeneficiaries to choose between cash and in-kind contributions, organizers should take pains to ensurethat the methods for valuing those contributions are as transparent as possible.

4. Social Choice Theory. As discussed in Section 2.2 of the paper, Arrow's Theorem statesthat there is no non-dictatorial method of aggregating individual preferences among more than twochoices into a social choice that is not subject to manipulation by community members, who canmisrepresent their true preferences in order to obtain a more favorable result. This prediction is themost difficult to test among all those investigated in this section, because in order to know whetheror not an individual is misrepresenting his preferences we must know what his true preferences are.Of course, the fact that it is extremely difficult for one individual to determine the preferences of anyother individual is one of the motivations for enhanced popular participation in the first place.

Unfortunately, papers by Bank staff evaluating the experience with participation do not oftenaddress the issue of "strategic bias" among beneficiaries. For example, Cynthia Cook and PaulaDonnelly-Roark (1992) examine popular participation in 35 Environmental Assessments (EAs) inBank-sponsored projects in Africa. They find that the two EAs that focussed on allowing potentialbeneficiaries to influence project design achieved "more positive results" than the eight that soughtonly to inform affected populations of the details of projects. They cite the Gabon

12

Forestry/Environment project as one example of a successful EA, because consultations with projectbeneficiaries led to a greater emphasis on agro-forestry in the final plan. Similarly, Gordon Appleby(1992) reviews EAs for Bank projects in a number of regions and cites several examples whereconsultations have led to changes in project design. For example, the height of the Puk Mun damin Thailand was lowered so that fewer people would be resettled, and details of the Berke dam inTurkey were altered after discussions with affected populations about the importance of variousroutes taken to markets. Neither paper appears to consider the possibility that changes in projectdesign occurred because potential beneficiaries deliberately overstated their importance in order tomanipulate the assessment process. Indeed, Cook and Donnelly-Roark note that they reviewed anumber of reports where participants in EAs expressed strong fears or criticisms about the impactof projects that were evaluated by EA team members and found to be improbable. Cook andDonnelly-Roark chastise Bank staff for "denjying] the validity of ... locally based views incomparison to those of the 'expert' who may or may not be able to predict the outcome moresuccessfully." The authors do not, however, discuss the possibility that EA team members wereappropriately discounting extreme statements by project beneficiaries who might be seeking toincrease their own benefits at the expense of another group.

The problem of uncovering the true preferences of community members arises often whengovernments must determine how much of a public good to supply. In order to know how muchpublic park land to set aside, for example, governments must have some idea how valuable parksare to citizens. One method used to value demand for public goods is contingent valuation, in whicha sample of citizens is asked fairly detailed questions about how much they would be willing to payfor various public goods. Of course, contingent valuation surveys are subject to strategic bias:individuals who like the outdoors have an incentive to vastly overstate the value of public parks,while those who wish to minimize their taxes might have an incentive to understate their value. Onoccasion it is possible to compare results from contingent valuation surveys with market data to testfor the presence of strategic bias among respondents. For example, a study conducted in AnambraState, Nigeria [reported in World Bank Water Demand Research Team (1993)] examined demandamong households for various potential improvements in water services. Most households werespending six to 10 percent of their annual incomes buying water from tanker truck vendors. Whenasked how much they were willing to pay per month for access to a public tap or a privateconnection to a piped distribution system, they indicated amounts significantly less than they werealready paying vendors. For example, 30 percent of those surveyed were already paying vendorsor neighbors about $7 for water in the dry season, but only two percent of respondents said theywould be willing to pay $7 per month for a private connection. Apparently, many households feltthat the government had a responsibility to provide them with clean water, and that understating itsvalue would reduce the price they would be charged for it.

Another example somewhat further removed from the Bank's particular area of expertise isreported in Bishop and Heberlein (1986). They offered a randomly selected sample of hunters whohad won a Wisconsin lottery for the right to hunt Canada geese various dollar amounts to forego theright. They also asked a sample of hunters who had entered the lottery but had lost to considerhypothetically whether, if they had won, they would have foregone their right to hunt in exchangefor various dollar amounts. The expected value of a permit was $63 for a cash offer and $101 fora hypothetical one. When a third sample of lottery winners was asked to assume that they had lostthe lottery and then asked whether they would be willing to pay various amounts for the right tohunt, the expected value of a permit was only $21. Clearly, there is a bias in the contingent

13

valuation method used in this study: respondents indicated that they would reject hypothetical offersthat they were in fact willing to accept as cash offers. In addition, the hypothetical value of a permitmeasured in terms of willingness to buy was dramatically lower than the hypothetical or cash valueof a permit measured as willingness to sell.

The risk of strategic bias among survey respondents is greatest when participants believe thattheir responses will affect the amount provided or the price of goods and services. Afterconsiderable examination, however, practitioners now generally agree that the greatest problem forcontingent valuation arises not from strategic but from 'hypothetical bias" [see, for example,Cummings, Brookshire and Schulze (1986)]. Simply put, hypothetical bias occurs because peoplehave little practical experience evaluating hypothetical offers and so are more likely to make'mistakes' when they respond to hypothetical offers than when they respond to cash offers. Whetherit arises from deliberate attempts to manipulate results or from difficulty deciding among hypotheticaloptions, however, project designers need to be aware of the potential for biased responses wheninterviewing project beneficiaries. This does not suggest that the opinions of beneficiaries shouldnot be solicited, but rather that considerable care must be taken to design mechanisms for popularinput that minimize potential sources of bias. It also suggests that while beneficiaries may know theirpreferences, they will not always accurately relay them, either intentionally or by accident.

5. Economics of Collective Action. An analysis of the economics of collective actionsuggests that because large groups are more difficult to organize effectively than are small ones, theopinions of nongovernmental organizations (NGOs) and private voluntary organizations (PVOs) areunlikely to reflect those of the majority of the community. There is substantial anecdotal evidenceamong Bank-sponsored projects to support this prediction.

For example, in the Ivory Coast Water Supply and Sanitation Sector Adjustment ProgramBank staff found that generally the larger the village the more difficult it was to organize competinginterests into an effective water committee. In a number of instances violence broke out betweenrival ethnic or other groups regarding who would sit on the water committee. In some villagesconflict also arose between local elites and those who had emigrated to urban areas but maintainedclose ties to the village. In about half the villages the chief simply took over the process of selectingthe comnmittee and named its members himself.13

In the Philippines, the Philippine National Oil Company's geothermal project in the Mt. ApoNature Park is being strongly and uniformly opposed by various domestic and foreign enviromnentalgroups. However, opinion among the indigenous population of the park is much more divided onthe benefits and costs of the project, particularly because of its employment aspects: people livingin the park have been promised priority in recruitment to fill new jobs. Thus, the barangay captainon Ilomavis, the sole remaining local village on the slopes of the park, supports the geothermalproject. While NGOs continue to argue against the project, some local populations appear to have

13 The project deliberately provided villages with no rules for selecting committee members to ensurecompatibility with local practices and traditions.

14

worked out a compromise acceptable to themselves."4 Consultations with environmental NGOswould therefore not reflect the diversity of opinion regarding the project among the local affectedpopulations. Similarly, in preparing the community-based resource management component of theIntegrated Protected Areas System in the Philippines, local NGO consultants were hired to canvasslocal opinion and disseminate information on the proposed project. Bank staff believed, however,that these consultations were done poorly and by consultants who were more sensitive to biodiversityprotection than they were to v . . ncerns of individuals living in affected areas. Accordingly, Bankstaff organized return visits to , -posed project sites to sanmple local opinion, uncovering - amongother things - much greater concern for issues of economic livelihood and development than hadoriginally been reported by some NGO consultants.

The examples above involved NGOs and PVOs external to the affected populations. Evenwhen an organization grows out of the indigenous community, however, there is no guarantee thatit will act in the best interests of the local population rather than for the benefit of its own members.For example, in the Central Visayas Regional Project in the Philippines community-level forestryorganizations (Forest Output Stewardship Associations) were used to allow forest residents to legallymanage areas of existing forest and to provide for salvage of dead, standing timber (from forestfires). The leaders of these Associations were not directly elected by forest residents but wereexpected to be responsive to them. The Bureau of Forest Development initially refused to provideresource access instruments for the Associations, but 18 were finally issued in 1986. Before anyadditional instruments could be issued, however, the 18 were canceled following instances of livetree harvesting, apparently resulting from collusion of Association leaders and lowland timbermerchants.

6. Public Choice Theory. There are numerous examples of occasions where elected officialsor government bureaucrats attempted to block policy changes occurring through Bank-sponsoredprojects, even when these new policies were endorsed by political officials at the highest levels. Forexample, the Central Visayas Regional Project in the Philippines, which attempted to incorporategreater popular participation in its various elements, experienced harassment from central governmentofficials, from local politicians and from the Commission on Audit, even though (or, perhaps,because) the project was designed to support the government's policy for the devolution of powerfrom Manila to regional and local governments. An extreme example of this harassment was theCommission on Audit's requirement that all mortality among disbursed livestock be explainedthrough post mortems carried out by veterinarians with an auditor in attendance. In some cases, goatswere exhumed months after their deaths and autopsied. In the Ivory Coast, even though thePresident publicly advocated the program shifting water pump maintenance away from the private

14 The compromise seems to be consistent with Coase's Theory, an economic theory that argues that so longas rights are well-defined, efficient market solutions exist for a variety of problems formerly believed to be solvableonly through government intervention. Consider, for example, the situation facing a homeowner who livesdownstream from a polluter. It has often been argued that because the costs of pollution are borne not by thepolluter but by his downstream neighbor, no market solution exists to prevent the pollution. Coase argued that solong as there was a well-defined right to pollute, or to pollution-free water, the polluter and his neighbor cannegotiate an agreement that provides adequate compensation for the neighbor (if he has a right to clean water butthe agreement involves continued pollution) or the polluter (if he has a right to pollute but the agreement involvesno pollution). In this case, the solution appears to be that the local community has traded certain environmentalrights for greater employment opportunities.

15

water company to villages, some elements of the Ministry of Public Works opposed the change andattempted to block the plan. Similarly, although official government policy in Nepal supported localrehabilitation and construction of irrigation systems, vested interests in the government opposed thepolicy shift. In both cases these bureaucratic efforts to derail reforms were defeated only though thedeterrnination and intervention of officials at the very highest levels of the government.

The Zambian Social Recovery Fund provides numerous examples of the difficulties that canarise when local government officials are put in charge of project management, even when theseofficials are elected and thus theoretically responsive to the interests of their constituents. Forexample, the Beneficiary Assessment notes that projects run by local district councils almostinvariably lack accountability, and that the few cases of misappropriation of funds occurred whenproject monies were channelled through district councils. Even when outright fraud was not aproblem, the priorities of elected officials were not always those of the communities theyrepresented. For example, the Mpika District Council designed the plans for the Lukulu RuralHealth Center discussed in point 1, above, even though the majority of the local population later toldthe Beneficiary Assessment staff that they would have preferred a new school or post office.

Projects run by local politicians tended to involve minimal community participation and tobe identified with the ruling UNIP party. This became a particularly serious liability when UNIPlost the 1991 general election: community members had little incentive to take over management ofthe projects themselves, while newly elected officials sought to distance themselves from theirpolitical opponents. Indeed, the identification of many projects with the government became aserious problem even before the general election, when some opposition MMD candidates stated thatthe party would suspend all self-help projects and provide government funding for their completion.These statements of course discouraged participants from making further contributions of time orlabor to many projects. For these reasons the Beneficiary Assessment recommended that DistrictCouncils and politicians no longer be used as implementing agencies.

4 CONCLUSION

Ibis paper began by describing some of the statistical studies of the effects of popularparticipation in development projects. It then reviewed the economic literature to see whatcontributions economic theory could make to understanding the likely effects of enhanced popularparticipation. Some simple predictions about participation were made, and in the last section of thepaper several World Bank projects were examined to determine the extent to which the predictionsof the theory were actually realized. For the most part, the predictions of the theory were supportedby the evidence: projects requiring beneficiary contributions of time or money do seem to have beenmore effective than those requiring neither; free-rider problems have arisen in projects whosebenefits cannot easily be limited to contributors; potential beneficiaries of projects have sometimesengaged in strategic misrepresentation of their attitudes; local voluntary organizations have sometimesheld more extreme opinions than the populations they claim to represent; and elected officials andespecially bureaucrats were at times out of touch with the needs and interests of their constituents,or even actively hostile to local initiatives. Of course, it is dangerous to generalize broadly from asmall sample, and even more so from a sample that is not randomly selected, but the projectsexamined in the previous section do provide some illustrative examples of the kinds of problemspredicted by the theory of Section 2.

16

The implications of economic theory for popular participation may appear to beoverwhelmingly negative. However, it should be remembered that as pointed out in Section 2.1,above, neoclassical economic theory is deeply sympathetic to the ideas underlying the drive forgreater popular participation. One of the most powerful implications of general equilibrium theoryis that when self-motivated agents are able to express their needs and desires through the market theywill achieve an efficient equilibrium. No outside agency attempting to act on behalf of these agentscould, without an intimate knowledge of all of their preferences, obtain an efficient equilibriumexcept by chance. Thus, the predictions of economic theory examined in Section 3 of this papershould be not be interpreted as reasons to avoid greater popular participation but rather as indicationsof the types of pitfalls that may face participatory projects and of the need to exercise considerablecare in designing the components of these projects.

Perhaps the most important result developed from the analysis is that no uniform approachcan exist for incorporating greater popular participation in development projects. Instead, whetherand how to enhance popular participation will depend on the particular problems addressed by aproject. Projects ;aquiring contributions of money or time may work well when the goal is toconstruct a school (so long as the children of those who fail to contribute will be barred fromattendance) but are less likely to be successful when the benefits of a project cannot be restricted toparticipants, for example in the construction of a culvert. In these circumstances it might be moreefficient to ask members of a community if they are willing to approve a compulsory tax that chargeseach family its share of the project costs, eliminating the risk of free-riders. Of course, thisapproach will only work so long as voters understand that if they fail to approve the tax the projectwill not be constructed, as they may otherwise believe that by voting down the tax they will causethe government or some other agency to finance the project at no cost to beneficiaries. Whenpotential beneficiaries believe that the project to which they are being asked to contribute might bepaid for by someone else, they are unlikely to cooperate even if the benefits of the project wouldexceed their contribution. The particular form that participation should take will therefore dependcritically on individual project circumstances.

More generally, the paper suggests that from the viewpoint of economic theory the questionof how to ensure a greater degree of popular participation in development projects is somewhatmisspecified. Economic theory suggests that the market is a simple tool to obtain the benefits ofpopular participation. For example, if you wish to know whether a target population would prefera new post ofrice to an additional health clinic, ask them to contribute funds to each. The one theyare willing to pay more for is typically the one they want more. The problem is overcoming thekinds of obstacles to efficient functioning of the market that are highlighted in Section 2 anddocumented in Section 3 of the paper. Viewed from this perspective, the difficult part of increasingthe degree of popular participation in development projects is not creating grand mechanisms todivine the opinions of beneficiaries but rather designing methods, which are likely to vary accordingto the social and political conventions of beneficiaries, to eliminate free-rider problems and reducethe inc^-itives for strategic manipulation. Sociologists, anthropologists and economists can allcontribute to these efforts.

Considerable attention needs to be devoted to defining the appropriate role for outsidetechnical experts in project evaluation and design. While these experts must be sensitive and opento the opinions of beneficiary populations, they need to do more than simply facilitate the flow ofinformation between beneficiaries and Bank staff. Instead, technical experts need to serve as sources

17

and filters of information. First, in order to capture the greatest possible benefit from popularparticipation it is essential that potential beneficiaries be aware of all the possible alternatives opento them."' The technical expert therefore needs not only to seek out the opinions of potentialproject beneficiaries but also to ensure that they are well-informed of the benefits and costs of allconceivable options: beneficiaries, after all, have expert knowledge of their own goals and desiresbut not of all possible methods of meeting them. Second, while the expert has an obligation to bereceptive to the opinions of beneficiaries, he has a responsibility to consider the extent to which theseopinions are based on accurate assessments of the costs and benefits of the project for allbeneficiaries. As noted above, NGOS and PVOs can and do tend to reflect the beliefs of a relativelynarrow segment of the population. While the opinions of these groups should be solicited and treatedwith respect, it is essential that the outside expert evaluate the extent to which they are based onlikely, or even possible, events and consequences. Listening to and agreeing with the opinions o.special interest groups claiming to represent beneficiaries are two separate actions. Enhancedpopular participation demands the first of them but not necessarily the second.

The paper discuss the hostility that participatory projects may encounter from elected officialsand bureaucrats but offers no easy solutions for the problem. In Ivory Coast, Nepal and Egypt(where the Social Fund faced considerable opposition from lower and middle level governmentofficials) efforts to derail participatory projects were defeated only by the support for popularparticipation expressed at the very highest levels of government. This experience highlights theessential role that central governments must play in enhancing popular participation, an issue that isnot often discussed in the literature on popular participation. Simply put, opposition within thegovernment to local initiatives can make otherwise well-designed participatory projects futile, whilestrong support for participation at the ministerial (or higher) level can lend these projects sufficientprestige and visibility to overcome bureaucratic obstacles. The implication is that Bank staff needto work collaboratively with member governments at the highest levels to develop among seniorofficials an appreciation of the benefits that can accrue from greater popular participation beforeattempting to design and implement participatory projects. Ministers need to be boosters for theparticipatory approach, as mere tolerance of participatory projects is unlikely to be sufficient todefeat the hostility bureaucrats and local elected officials may feel. (An alternative approach,creating new government agencies with sole authority for participatory projects, only creates newbureaucracies that may in time develop their own inertia and self-interests, and thus is at best a short-term solution).

This paper has made no attempt to answer broad questions like "Is participation worthwhile?"or "How much participation is enough?" Participation by project beneficiaries is essential, and, ofcourse, already occurs to a limited extent in many World Bank projects, particularly those benefittingfrom good cost-benefit analysis. A more appropriate question than 'Is participation worthwhile?"is 'How can popular participation best be enhanced in the context of a particular project?"Judgments about the appropriate extent and form of popular participation in a project are best madeon a case-by-case basis by individuals familiar with local customs and conditions (which is verymuch the argument for popular participation by project beneficiaries in the first place). Instead ofdictating a blanket solution, this paper has attempted to identify some of the possible benefits and

1- Recall from Section 2.1, above, that market allocations cannot be assumed to be efficient if, among otherthings, agents do not have perfect information about goods available to them and their prices.

18

costs of participation, to assist project staff in making decisions appropriate to the particularcircumstances of each case.

Finally, because economics is the study of the allocation of scarce resources, it would beinanpropriate to conclude this paper without pointing out that participation is itself a scarce andsometimes costly commodity. Developing methods to overcome the difficulties identified in thispaper will require additional funds and time, and may not always yield benefits sufficient to justifytheir costs. In the frictionless world of general equilibrium theory popular participation is ideal, butin the second-best world in which development institutions (and the rest of us) operate some sort ofimplicit cost-benefit analysis must be applied, and theoretically second-best solutions must sometimesbe applied.

19

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