Solution-driven development approaches are falling out of favour: they have been shown to be ineffective, and weaken countries’ capacities to fix their most crucial development problems. Problem-driven iterative adaptation (PDIA), on the other hand, focuses on solving locally nominated and defined problems. In this and other respects, it is a compelling formula for addressing complex development challenges.

Despite this recognition, there have been few good examples of PDIA in practice, especially amongst those large programmes supported by mainstream donor funding. Until now.

Nepal’s Economic Policy Incubator (EPI) is a five-year programme, led by senior Nepali economists and funded by the UK’s Department for International Development (DFID). It is not yet a mature programme, and its policy work has not yet had time to feed through into development results. But it’s worthy of attention because of the way it answers challenging questions, about how to support economic transformation and about how to apply PDIA with donor funding.

1. Focus your economic transformation efforts

EPI aims to revive the manufacturing industry in Nepal, after years of conflict-induced economic stagnation. In particular, it wants to facilitate the establishment of at least one well-run Special Economic Zone on the border with India. In this respect it aligns well with last year’s most important development book: Justin Lin and Célestin Monga’s, Beating the Odds. Lin and Monga advise policy-makers pursuing economic transformation to:

• not be intimidated by the lists of preconditions that form the basis of much conventional advice;

• carefully identify your potentially competitive manufacturing niche by emulating countries that have roughly twice your per capita income; and
• focus your scarce resources closely on exploiting this opportunity and getting an initial foothold in a dynamic global value chain.

Any country can do this, the authors say, but they largely avoid the question of how to get their advice followed consistently in the dysfunctional political context of the typical developing country. On this, EPI is providing answers.

2. Build problem-driven alliances

A wide range of problems affects industrial policy in Nepal. When selecting which ones to focus on, EPI relies on two criteria: technical soundness (is there a plausible pathway of change from alleviating the problem to the desired development outcome?) and political feasibility (are there influential stakeholders, in government or elsewhere, who genuinely want to find a solution?). It then works adaptively, by trial and error, to arrive at workable alliances and tailored methods for fixing missing coordination and collective action around each problem. The main challenge here is staying on course, exploiting the strengths of this method and avoiding being diverted, for example into routine technical assistance.

3. Get serious about country leadership

Of course PDIA interventions should be well led. But they also should be led by nationals of the country in question, and by people who have the right combination of professional distinction, inside knowledge and networking skills: development entrepreneurs. With EPI, DFID has been prepared, unusually, to go all the way in supporting this local leadership principle. The programme is led by a distinguished Nepali.

This approach differs from the ‘country ownership’ dogma to which donors signed up some years back. The principle that programme leaders should be locals is realistic about the limited importance of formal government plans and budgets under typical political conditions. But it retains the fundamental insight that genuine problem solving requires indigenous drivers and facilitators.

4. Tell the truth about what works and why

As Pablo Yanguas recently argued, development progress is messy, political and unpredictable. So is the contribution of aid; yet the politics of aid requires us to claim certainty. The technical side of this is that even when aiming to be adaptive, big programmes seem impelled to use results frameworks which perpetuate the fiction that we can know in advance precisely what will be achieved and by what means. Monitoring specialists have resisted the suggestion that adaptive programmes should be judged primarily on the quality of their adaptation. How to measure quality has also been less than clear.

Here, again, EPI shows a way forward. The programme’s performance is judged by DFID on the basis of what it actually does, rather than on a largely fictional ‘blueprint’. Its monitorable outputs are the typical steps in its agreed problem-selection and iterative adaptation processes. The outcomes to which it is expected to make a difference are an evolving selection from an initial menu of important and potentially feasible improvements to Nepal’s economic policy framework. This holds the programme to account while also stimulating, disciplining and rewarding consistent PDIA-type practice.

In these ways, the EPI experience in Nepal is giving us a solid illustration of what it takes to practice PDIA within a large donor-funded programme supporting economic transformation.