Introducing international development management
Introducing international development management

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Introducing international development management

4.4 Why do inter-organisational relations matter?

Development management necessarily and inevitably involves the management of relationships between organisations. As one development manager puts it:

Effectiveness means not just looking internally at whether you've got your personnel policies right, it means whether the managers of that organisation can take on the negotiation, networking, brokering, contracting work which is necessary … to relate across boundaries, with the public sector, with the donor community etc.

The fact that there are many actors with different resources, norms, values and practices means that relating to other organisations involves recognising those differences and the (likely) power relations involved. It also means that no single organisation is likely to have the monopoly of action on institutional development.

In the remainder of Section 3 we are going to look at the management of relationships in two ways. Here we will look at the different kinds of relationships that can be established, identifying them in terms of three types: competition, coordination and cooperation. In the next sub-section, we will look at one of the key skills required in managing inter-organisational relationships, the skill of negotiation.

Activity 12

Read ‘Why inter-organisational relationships matter’, linked below. This introduces ‘competition’, ‘coordination’ and cooperation’ as the three ‘ideal types’ of inter-organisational relationships. As you read, make notes on:

  • how the ideal types have been significant at different times in the history of development;

  • the warnings the authors give as regards the use of the term ‘partnership’;

  • the significance the authors attach to inter-organisational relationships for institutional development.

Click below to view the article (0.01 MB).

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Discussion

The significance of the ‘3Cs’ (i.e., competition, co-ordination and co-operation) is that they all represent ideas and practices which shape the institutional frameworks within which individual institutional development efforts take place. In reality, the distinctions between the three forms are not clear-cut.

However, the common associations made with each have been important to the way that institutional development initiatives are structured. As the article indicates, in the past a focus on the state has led to institutional development meaning action to support the development of government structures and of government's capacity to co-ordinate relationships with other groups (NGOs, for example). With the emergence of neo-liberalism, competition has been particularly favoured, implying changes in institutional frameworks, organisational types and inter-organisational relationships. And in recent history, the co-operation that (in an ‘ideal’ sense) has always characterised civil society has assumed a greater significance, resulting in the emergence of networks as important ways of organising for development.

The term ‘partnership’ is often used as though it is equivalent to co-operation and is characterised by trust, shared values and consensus about what is to be done.

The article hints at several points that this may not be the case. It asks us to make ‘sense of the politics which underlie the rather cuddly notion’ of partnership, the ‘real conflicts of interest and agenda which persist in all areas’ (p. 2) , and the processes through which these conflicts are managed. ‘“Partnership” often masks a complex reality’ (p. 13), one aspect of which may be the exercise of power by stronger partners to bring weaker partners ‘on board’ – or ‘into line’. The broader point that the article is making, though, is about the significance of inter-organisational relationships for institutional development. It argues that they ‘particularly matter when it comes to working towards broader, collective outcomes’ (p. 14), and that nurturing such relationships will ‘produce new and more desirable (read “effective”) institutions’ (p. 15). This reading presents the 3Cs as a framework for understanding these relationships, arguing that it ‘will help us to make sense of more complex realities’ (p. 4).

The following activity provides a brief example of this. It relates to a case involving the development of a micro-finance institution in Russia in the 1990s. With funding from the G7 countries and Switzerland, the European Bank for Reconstruction and Development (EBRD) established a package for promoting the development and growth of a small business sector in Russia. This package is called the Russia Small Business Fund (RSBF), and its wider goal was to contribute to the development of competition in the Russian economy. The activity will give you a sense of the network of inter-organisational relationships involved.

Activity 13

Watch the video ‘Micro-credit in Russia’, linked below. A list of interviewees is provided in the transcript. After viewing the video clips, read the short document ‘Russia Small Business Fund – Informal Note, July 1997’ (RSBF, 1997), also linked below. The document provides some detail of the way in which the Fund is structured and its operational mode. Make notes on the following questions:

  • What were the objectives of the RSBF?

  • How would you characterise the inter-organisational relationships between the main players in the programme?

  • How does the programme promote competition? How is competition viewed by the people involved in the programme?

  • Are co-ordination and co-operation also promoted or employed at different times by any of the agents involved? Can you give examples?

Click to view the video clip (9 minutes).

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Transcript: Video 5

Nichola McAuliffe, narrator
If entrepreneurship is seen as a useful tool in development another situation where this is very evident is in the new Russia. In Moscow, as everywhere else in Russia, there have been incredible changes in the past few years. From the former Soviet Union and the Communist Party, the West has moved in at a breathtaking pace. Now the shops in Moscow bristle with Western consumer goods. Business is booming it seems. New business is flourishing and banks have never had so many clients.
The EBRD, the European Bank for Reconstruction and Development, and the Russia Small Business Fund play a significant part in the changes taking place.
Elizabeth Wallace, Senior Banker, EBRD
The Russia Small Business Fund is a three hundred million dollar fund that revolves over a ten year period. It was set up to help Russia's transition. It has two main objectives, the first is rather obvious and this is providing finance for micro and small enterprises. These were companies that because of lack of banking history, lack of collateral, small size and perceived high transaction costs, were left out of the formal financial system. These were mainly Russia's smallest firms and production firms that need longer term money than was available in Russia, which was typically one to three months. And you cannot, of course, have a service sector firm or an industrial enterprise if you have to pay back a loan within such a short period of time.
The second objective which is totally inter-related was to increase the skills of the Russian banking system to do credits at all and to take in these small enterprises, to change the hierarchical structures of banks and get them to lend.
Martin Holtmann, Programme Co-ordinator, International Project Consultancy
Our job consist in basically providing the physical infrastructure, finding premises together with the bank, finding loan officers, credit experts, usually, not from within the bank. In most cases they come from outside the bank, training these people, bringing them clients into the bank, together with those loan officers, installing all the procedures and mechanisms that one needs for small business lending.
Hence in that sense there is a physical aspect of institution building because there is a department where there was none before. It can even be as trivial as there being a sign that there is a, whatever, micro-credit department inside that bank. So that's point number one.
The other part of institution building is that we, we change the institution that we work in, if you think of the bank as being an institution, then we add a new activity to their, to their existing set of activities that they carry out.
Narrator
The old way of doing things was perhaps nowhere more evident than in the previously closed town of Tula. Before Perestroika it was an arms manufacturing town and changes have been dramatic and difficult for many. It's meant having to find a new way of living. Opening a new business has provided a livelihood for a number of people. One such new business is that of Nadezhda and Tatyana who run a pet supply shop and breed dogs. The EBRD aimed to target such businesses.
Elizabeth Wallace
The programme was started to create economic activity and to create employment. The former Soviet Union had 50 per cent of all employment and income coming from the military sector. Usually large industry. You had a very skilled workforce that was thrown out of their jobs and you need to start new activities so this programme was designed in a way to give them a start to do that and in that way you could say, yes, its helped people. It's maybe empowered them. They know that they can run a professional business.
Narrator
That's certainly the case here. Nadezhda and Tatyana have a very successful business but they needed the EBRD to enable it to develop.
Tatyana Vinogradova
We wanted our shop to develop but we were short of money. So we made up our minds to apply to the bank for a loan. We applied to the first bank and they refused. The reason they gave was that we weren't a proper firm, that we had no bank account of our own, and we were not a legal entity. So we left empty handed. Then we saw an ad in a newspaper saying that the European Micro-credit Programme gives assistance to small business. So we decided to try our luck again. We were given a loan and we used it to vary the assortment in the shop. The number of our customers grew and the shop became much more interesting.
It's three years now since we've been working with the bank. We have just taken our sixth loan and we're very happy. We've also replaced our old car with a new one, which allows us to deliver more goods, so now we're thinking of opening a veterinary consultancy, so we can give help to animals.
Julia Abakayeva, Credit Specialist, IPC
I think the main value of the programme is its impartiality. That is any person, irrespective of their nationality or material wealth can apply for a loan and get it if they have a business of their own, and if the business brings in a profit. It's often said that to obtain a loan in a banking environment one must have connections or special qualities or approaches to borrow money. We tend to serve quickly, impartially and help those who deserve support.
Narrator
Nevertheless, there are many hurdles to get over before the EBRD will give out a loan. They have a very thorough vetting procedure, which some might say is very invasive.
Tatyana Vinogradova
First, we sent a loan application. Then an EBRD expert came to us and started to ask questions. He looked round our shop, he watched us at work. He analysed our turnover, our property in the shop. He then went to our house. Of course, it seemed very unusual to us that a bank officer would come to our home to see how we live and what we have at home. He even saw our nurseries, our dogs and cats. He liked everything and listed it all down. It was agreed finally that the bank would give us a loan.
We didn't expect it to be so fast. It took about three days to get the money. We hadn't expected this at all. Since then we've been working with the bank on the basis of mutual trust.
Nadezhda Goryelova
For the bank itself it must be good because the bank does not know the borrower yet. It's hard for the bank to pay off debts if that's how it turned out. I believe it is a necessity really for the bank officers to go and see the way a borrower lives, his property, if there is collateral one might use later in the case of the unexpected. You never can tell. I believe it's right
Prof Paul Mosley, University of Reading
It's invasive by design. It intends to step in directly and explicitly wherever it feels that either the banks or the borrowers are getting something wrong and it only admits borrowers on those terms.
There is great disagreement amongst the micro-credit community about whether it is necessary for banks and their sponsors to interfere in the projects, which borrowers put forwards. Or whether borrowers should be left as the best judges of what is going to be most profitable for them. But the EBRD has decided that interference in order to improve the rate of payment performance of banks is necessary, both in the behaviour of the banks themselves and in the projects of borrowers, and if that turns out to be effective in making better projects, then I guess the invasion is useful, we shall never know.
End transcript: Video 5
Video 5
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Transcript: Video 6

Narrator
Another successful client is Yekaterina Orlova who makes children’s clothing.
Yekaterina Orlova
I’m very grateful to the bank that they gave me the loan, because if we hadn’t received the first loan, it’s quite possible we would have closed down because the rent was on the increase all the time. We wouldn’t have been able to pay the rent and develop the business, working on just the three machines we had at the time. The enterprise would have closed down. We wouldn’t have existed.
Of course it’s helped a lot. Without it we couldn’t have developed, our output would have remained the same. With the new industrial machines, we have new opportunities. For example, we are now knitting clothes for teenagers as well as children. We’ve also started to produce clothes without special motifs. This was a speciality before and the product was finished at home. Now we have a wider range, so using the new equipment we’ve increased our output
Narrator
Nadezhda, Tatyana and Yekaterina have been able to expand their businesses more quickly because of such loans. The clients and the EBRD are happy with the partnership but how have the Russian banks responded to their part in the programme?
Elizabeth Wallace
The banks have different reactions. I mean most of the banks do want in the programme now. When we started we were absolute beggars. Banks had no trust in small enterprises, this had been illegal before. So we had to first convince banks that all of the target group, once we received a good reputation in Russia because of good repayment, banks welcomed us. But when it came to really day to day work, we found out there were, there were tensions all the time because we were coming in to these institutions and we were saying, you need to change the way that you work if you’re going to do this profitably, if you’re going to do this efficiently you have to have different procedures.
Martin Holtmann
We had initially very bad experiences with existing bank staff that were nominated by some of our partner banks, because most of these bankers so to speak were used to a very comfortable banking environment where they didn’t really have to leave the bank for any thing, except to go home in the evening. Their job was usually very heavily based on analysing documents, balance sheets and things like that. We found it very difficult to convince and entice these kinds of bankers to go out and visit customers, especially in the Siberian winter which is an additional dimension of micro-banking here in Russia, that is harder than in most more exotic places.
We also found that many bankers from inside the banks had a real bias against the target group, maybe for social reasons. Bankers I think in Russia are one of the few people who really represent middle class or upper middle class which in Russia has almost evaporated. It’s not really there any more, it’s one of the biggest social problems of this country, and like many other people who’ve moved up from lower class to middle class, they try to distinguish themselves from their former background, by not wanting to deal with the lower class anymore.
Narrator
Banks certainly seem to feel that they have brought something positive to the programme.
Vladislav Pershin, SBS Agro Group, Moscow
The programme was very important to Russian banks in terms of training the original loan officers, because when the programme appeared in Russia in 1995, there was no real experience of giving loans to small business. Neither with the ‘old’ type of banking system, the Sperbank of Russia, nor with the banks of the ‘new’ generation, such as Rossyiski Kredit, Inkombank and SBS Agro.
None of us had that experience and everyone was regarding it as a sort of schooling, learning process. In putting it all into practice, we did find some errors in the programme itself. Not perhaps errors as such, but they didn’t take into consideration the specific character of Russia in terms of the Russian legal systems and the lack of an infrastructure when investigating a borrower. The banks actually added something to the programme, especially evaluating the credit worthiness of a borrower.
Martin Holtmann
Trust plays a very important role in the whole process of institution building, because institution building usually will include at some point, changing the objectives in the mind set of senior management and the owners of an institution. And, this can’t work without trust and since we usually have very little time here to build up trust, quite often we take a real gamble with some of our partners and they take a gamble with us. And we try to do our best to establish this trust as quickly as possible and even though we may often have very big differences of opinion, we may fight about branch credit limits, we may fight about approval systems, procedures, all sorts of things, we do lots of things in order to develop this trust in our partners. And, I think on average, we have been rather successful with that.
Narrator
But how successful has the programme been in creating something sustainable, and does it contribute to poverty alleviation?
Elizabeth Wallace
The Russia Small Business Fund is going to be here permanently, and the reason for this is not the European Bank’s presence, it’s not that micro and small enterprises are socially good, it’s that the programme is profitable for banks.
We have some branches of banks that are running only because of this programme, because each month they are making enough from interest income to cover all of the expenses of the whole branch. This makes the banks wake up and take notice, and not only want to keep the programme going, but to expand it, to expand it within branches and to also take it to every region of Russia. So as a business, and as part of our business strategy, the banks have added micro and small lending.
Narrator
While the programme has been profitable and attractive to the private sector, it has been difficult to create and maintain long term interest in micro-finance programmes.
Prof Paul Mosley
There is a lot of mysteries surrounding the failure of commercial banks that become involved in micro-credit, because now there are several thousands micro-credit operations around the developing worlds, most of which are profitable, some of which are highly profitable. If you ask why they don’t, it must be a question of risk as perceived by those finance houses. I stress as perceived by those finance houses because the real risk, if you average it across all micro-finance organizations seems to be quite small. But micro-finance is a business which is new to most finance houses, which seems a little bit strange and which seems also to be uneconomic, because it involves making lots of small loans to thousands and thousands of unknown clients. And so that description of the nature of the business makes it look very risky and unprofitable.
Narrator
Micro-finance is being employed in a wide variety of places and has become an important tool in institutional development. As we have seen micro-finance programmes can take very different forms and have different priorities. Some like the Shreyas and Rasta programmes in Kerala integrate social development objectives such as gender issues, education and training. Others like the EBRD programme in Russia are more commercial and focus on developing longer term financial sustainability with priority given to changing banking structures
Questions about real contributions to poverty alleviation and empowerment and the longer term interest of the private sector may remain but micro-finance has clearly already had a major impact on thinking about economic and social development.
End transcript: Video 6
Video 6
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Discussion

According to Elizabeth Wallace (Senior Banker at EBRD) and the Informal Note, the programme has two principal objectives. The first is to help small business develop with the help of loans. The second objective is to build capability in the banking sector so that small firms have access to finance on a permanent basis. Loan officers are trained by the programme so that they have the skills to judge requests for loans on the basis of business plans and a more general analysis of businesses, and on the basis of the people asking for loans, rather than collateral or connections. As Martin Holtmann from International Project Consultancy (IPC) notes, consultants are also willing to assist the banks in more general ways to ensure their own survival in the new environment.

The EBRD has a great deal of power and is co-ordinating this programme through IPC. The Russian banks have to work with EBRD in order to get the funds, and as Elizabeth Wallace comments, they ‘need to change their banking practices’ if they want to succeed in the new economic climate. The entrepreneurs themselves, while having little formal power, seem pleased to have a new source of income and are keen to work with the banks. The programme is clearly designed to help small businesses compete successfully in the new capitalist environment. Entrepreneurs who have received loans all testify to the contribution that the loans have made to their ability to be competitive and to enable their businesses to grow.

Competition is promoted in other ways. Competition requires a complex regulatory framework, and appropriate institutions have to be developed so that competition can not only thrive, but deliver on improved quality, choice and, most importantly in this case, the growth of employment opportunities. You may be able to see elements of the framework in the structures which EBRD and others are trying to put into place. As you will have noted from the video and the Informal Note, a number of different banks are involved in the programme at this stage. The EBRD considers this to be very important in constructing a positive competitive environment in which banks will become more efficient. The development of trust, by establishing and maintaining shared norms and practices, and the growth of social capital, improving the skills and expertise of both bank officials and entrepreneurs as well as their ability to work together, are both important to the successful development of competitive services and businesses. Thus, from the beginning, while the RSBF is a programme based on improving enterprise through competition – competition between banks and between businesses – the main implementer, EBRD, uses co-ordination to get the banks moving in the same direction, to initiate appropriate regulatory frameworks, and to establish shared norms around the development of new banking services. However, there is no doubt that co-operation is also important – employees and entrepreneurs have to believe in the new practices and make changes because it is in their own self-interest to do so.

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