Capabilities,conversion factors and institutions

I Introduction

Sen’s capability approach attempts to view well-being beyond the conventional metric of achievement as measured by commodities or income. Sen, through the capability approach, pays due regard to more fundamental issues such as freedom and choice in the pursuit of well-being. The capability approach is concerned more with the flowering of capabilities and pursuing a life that one values, rather than confining oneself to commodities.

The achievement of capabilities has to be considered against the constraints that obtain in society. The purpose of this article is to draw attention to the issue of constraints that restrict the capabilities that individuals can pursue. This is a necessary exercise for three reasons. First, in describing communities that are subject to social exclusion or relative economic deprivation, an accurate portrayal cannot be provided without duly conveying the constraints that individuals live amidst. Second, the challenge of improving capabilities cannot be fully appreciated without some familiarity of the constraints that individuals have to work within. Third, policy design cannot be effective unless it is directed towards overcoming the specific constraints that have to be overcome in order to achieve a higher level of capabilities.

Constraints occur within a social context and this necessarily requires an institutional analysis. Constraints are often of an institutional nature, or have an institutional component to their functioning. This article suggests that this is a useful research agenda for the capability approach. Further, it illustrates, using a case from Malaysia, how institutional change helps improve capabilities.

The next section of the article provides an outline of the capability approach and suggests that institutions have a role to play. The second section discusses the constraining effect of conversion factors. The third section discusses the case of a credit cooperative in Malaysia and demonstrates how the constraining effect of conversion factors can be addressed. The final section offers some concluding remarks.

II Functionings, capabilities and institutions

Sen’s notions of functionings and capabilities figure predominantly in his capability approach (see Robeyns, 2000). Functionings are referred to as the ‘beings and doings’ of a person (Sen, 2000: 75). Functionings are the more foundational term in that they refer to all that a person is and does. But they do not fully encapsulate a person’s abilities since they do not include the choice that a person would exert in determining what exactly a person would be or do. The element of choice, or more accurately of freedom to exercise choice, is more properly present in the notion of capabilities. Capability is a broader concept since it is a set of vectors of functionings. It is because it is a set of functionings that specific configurations of functionings can be selected from it. This act of choosing specific combinations endows a person with the ‘freedom to lead one type of life or another’ (Sen, 1992: 40).

In discussing commodities, Sen (1985: 9–10) makes it clear, as does Lancaster (1966), that people seek commodities because they possess certain characteristics. The characteristics approach leads to functionings because a good’s characteristics make possible a functioning. People derive the functioning of energy from rice and the functioning of mobility from a car. Goods, because of the characteristics that they possess, make possible functionings. A commodity has a basket of characteristics, all of which are not of equal value. These characteristics can be ranked. A commodity would be chosen because it contains a sub-set of characteristics that are valuable for the functionings that they make possible and which are valued.

As conceptualized within the capability approach, a person converts the vector of commodities into functionings, and this is accomplished depending upon personal, social and environmental factors. As Sen points out: ‘the freedom of agency that we individually have is inescapably qualified and constrained by the social, political and economic opportunities that are available to us’ (Sen, 2000: xi–xii). This process brings into play the exercise of individual agency, as expressed through the ability to participate in the life of the community (see Deneulin, 2005).

Sen admits that a person’s freedom to convert commodities into functionings is dependent upon the social and political opportunities that are available. It must be explicitly recognized that opportunities are never present in some abstract manner. More fundamental is the manner in which people respond to opportunities. This would include the habits, for instance, that guide responses. The many choices that have to be made in arriving at a capability set are accomplished in and through an individual’s participation within the community in which he lives. The extent of participation can be limited by the prevailing institutions. This could make it difficult, if not impossible, to take advantage of the opportunities that present themselves. This brings the role of institutions into play because how individuals carry out their activities (economic or social) is very much moulded by institutions. Indeed, institutions enable or restrict the operation of political and economic activities, and in so doing they have an important influence on the achievement of capabilities.

All communities are qualified and constrained by the institutions that define the social, political and economic opportunities that are made available. Rather than to claim that the freedom of agency is constrained by the opportunities that are available to us, it would be more precise to state that our agency is constrained by the institutions that shape our societies. The distinction between the social, political and economic opportunities and the institutions that characterize, or permit their operationalization, is an important one because the nature of the existing institutions determines the real opportunities that exist. For instance, democracy could be notionally present in a society, but if existing institutions limit the actual functioning of democracy, the real opportunities for political participation would be limited.

To further pursue the distinction between notionally available opportunity and real or effective opportunity we can take the example of gender discrimination in education. Although schools may be available in a village, if the social institutions that discriminate against female participation in receiving education prevail in certain cases, the functioning of education will not be available to many female children. Clearly, institutions can have a role to play in constraining the achievements of capabilities. In as much as capability-constraining institutions can prevail in society, capability-enhancing institutions can also exist. The present article will restrict itself to discussing capability-constraining institutions. There are two reasons for this. First, if the space of capabilities that is to be achieved is to be enlarged, it is only natural that we understand the constraints that confine this space. Second, in developing economies, particularly where considerable deprivation exists, there would be considerable interest in understanding capability-constraining institutions, since policy effort would have to be directed towards relaxing these constraints.

III Institutions and conversion factors

The capability approach is set amidst the understanding that individuals make choices, transforming the characteristics of goods into functionings, and choosing from the available set of functionings a particular vector that allows them to be and do as they value. This entire process occurs within a social context that is defined by its constraints. In the absence of an account of the constraints to the achievement of capabilities, it would not be clear why individuals do not pursue those capabilities that would lead to a higher state of well-being. Nor would it be clear how the constraints could be overcome.

North (1990: 3) defines institutions as ‘rules of the game in a society or, more formally...the humanly devised constraints that shape human interaction.’ North elaborates that institutions provide structure to everyday life and that they shape human interaction. Sen is fully aware that an individual lives and operates within a social setting. More specifically, Sen articulates the significance of institutions when he observes:

Individuals live and operate in a world of institutions. Our opportunities and prospects depend crucially on what institutions exist and how they function. (Sen, 2000: 142)

A proper incorporation of the role of conversion factors can be accomplished by placing them within their institutional context, since social interaction cannot be devoid of it.

There are three conversion factors that inhibit or encourage the transformation of characteristics into functionings (Sen, 2000; Robeyns, 2005). These factors are: (a) personal characteristics; (b) social characteristics; and (c) environmental characteristics. By personal characteristics are meant those characteristics that a person is endowed with and which affect his bodily operation as well as his psychological make-up and operation. Examples of such characteristics include a person’s intelligence, psycho-motor skills, metabolism, physical or mental handicaps, and height. Thus a person who receives ample supplies of food may not be able to convert them into the functioning of nutrition if he suffers from a persistent medical condition that affects his absorptive capacity. Similarly, a person who is given a car cannot convert it into the functioning of mobility if he cannot coordinate the movement of his feet with his hands.

Social characteristics include gender practices in a society, social norms, social hierarchies, and government policies. Many striking examples can be given to illustrate the efficacy of social characteristics in inhibiting the conversion of commodities into functionings (Nussbaum, 2003; Robeyns, 2003; Sen, 1992, 2000). In a society where women are not allowed to walk along streets, an otherwise good transportation system cannot be converted into the functioning of travel. Similarly, if there are religious constraints to women assuming positions of authority in society, then education and individual talent will not convert into the functioning of power. An example can be given from caste-ridden societies (see for example, Srinivas, 1962 and Gang et al., 2006). In such societies there are proscriptions which prevent those members of the lower castes from using specified public tanks or wells. This makes it more difficult for women from these castes to obtain good quality water although they may have pots. This makes water as a commodity more difficult to obtain, it also makes the functionings of cleanliness and health more problematic for those households that belong to the lower castes in such societies.

The third conversion factor is made up of environmental characteristics such as the provision of public goods (such as parks, street lighting, water supply), climate, and infrastructural facilities. It will be useful to give some examples to illustrate how these conversion factors can act as a constraint to the acquisition of functionings. The absence of street lighting, for instance, can restrict the ability of people to gain the functioning of mobility at night even if they have cars. If governments do not provide parks, people who have the time for leisure may not be able to enjoy the functioning of leisure that is specifically associated with walking through a park, or having a picnic in a park. When the infrastructure in a country is inadequate it hinders trading, commerce, and the distribution of goods. This will discourage businessmen and could suppress the flourishing of the functioning of entrepreneurship, although businessmen may not have problems in obtaining the necessary inputs and credit.

The conversion factors that have hitherto been discussed have a social component, and they are actually embedded in social relationships. The capability approach distinguishes social characteristics as being different from environmental or personal characteristics. Nevertheless, institutions are the underlying thread that these factors share. The constraining effect of personal, social and environmental characteristics are expressed through institutions as seen in the rules, norms and conventions that govern economic and social transactions.

The rules, norms and conventions that constitute institutions are often expressed as habits and routines. In justifying the use of habits and routines, North (1990) points out that it is inefficient for economic agents to continually reassess, evaluate and measure pertinent variables every time they enter into a transaction or an exchange. Habits save us the trouble of having to re-evaluate how we wish to respond to events that occur with some regularity. Hodgson correctly sums the problem when he writes:

Habits are essential to deal with the complexity of everyday life; they provide us with a means of retaining a pattern of behaviour without engaging in global rational calculations involving vast amounts of complex information. (Hodgson, 1993: 233)

A closer examination of these conversion factors will reveal the play of institutions in society. A constraint that is physical in character may evoke certain institutions in society. One society may elicit compassion towards children with physical disabilities, while another may react by prescribing exclusion. The aged could be regarded as repositories of wisdom and so worthy of respect in one society, while they could be seen as an economic burden in another, and treated as a cost. Social interactions are influenced by social conventions that frame how individuals think and respond in situations involving these issues. Without an appreciation of the institutional framework in society the capability approach would be weakened.

Individual attempts to achieve functionings that revolve around social characteristics would involve individuals responding on the basis of social conventions. It must be emphasized that Sen’s notion of agency is the outcome of institutional constructs. Agency and freedom are, indeed, social constructs, in so far as they occur within society and within the ambit of socially determined rules.

A capability approach that is based on institutions calls into question cognitive systems, through which situations are perceived, and responses made (Denzau and North, 1994; Greif, 2006: 131; Mantzavinos, 2001). A woman could have difficulty obtaining credit because of gender bias among moneylenders in a village. An NGO that wants to reverse this situation would have to overcome the social constraint that revolves around gender bias in the granting of credit. The response of moneylenders in this case is the outcome of rules that are embedded in individuals’ thinking, rules that moneylenders respond to when a woman asks for credit. Clearly to judge the capabilities that women have access to depends on the social institutions that have been commonly accepted.

An account of the capability approach that is motivated by institutional analysis would seek to uncover the workings of institutions in constraining capabilities. Due regard would then be paid to habits in constraining capabilities. The institutional perspective, Hodgson argues, accords habits a privileged position because when habits are diffused throughout society, they strengthen institutions (Hodgson, 1998, 2000). Many of the conversion factors that constrain the achievement of capabilities are the result of habits that discourage the flowering of capabilities. Conversely, good habits such as hard work, thrift, respect for women, and good hygiene would help foster the attainment of capabilities. Habits are important because they result in individuals unthinkingly accepting cognitive frameworks and responding accordingly to information and situations.

Hodgson (2006: 2) correctly points out that ‘institutions both constrain and enable behaviour.’ The constraining effect of institutions can be observed in the capability approach when the conversion factors are examined. Social characteristics, as conversion factors, admit the role of institutions. However, institutions do impact upon personal and environmental characteristics. Favourable institutions can mitigate the presence of negative personal or environmental characteristics, and in that sense can soften the constraining effect of these conversion factors. A society that values compassion can soften the disability of blindness. Similarly, a society that encourages children to enjoy playing, using whatever natural objects are available, can mitigate the absence of playgrounds.

Many of the actions that are performed regularly can be called routines. Nelson and Winter (1982) use the term ‘routine’ to include the various procedures and processes that are carried out in firms, ranging from personnel recruitment, to the ordering of inventory and policies regarding investment and research and development (R&D). The activities that have to be performed regularly to obtain credit or manage a household involve routines that become habitual. Individuals who are disadvantaged, as the poor are, get accustomed to a set of habits and routines that perpetuate their existing state of capabilities. Individuals, then, adapt to the conversion factors that they are used to, and do not attempt to overcome their constraints. An external agency such as a non-governmental organization (NGO) can work with a community of disadvantaged individuals to help them change their habits and routines.

IV Enhancing capabilities: Experiences from a credit cooperative in Malaysia

The purpose of this section is to investigate an NGO in Malaysia that seeks to improve the capabilities of its members. The organization selected for this study, Koperasi Kredit Rakyat (KKR) (or, the People’s Credit Cooperative Society), was a youth social club in the early 70s. As a social club its goal was to improve the socio-economic status of estate workers, which it endeavoured to achieve by conducting tailoring classes and offering tuition and pre-school instruction to the children of plantation workers. In 1975, the club became a member of the Credit Union Promotion Club (CUPC) and was registered as a credit cooperative. The CUPC, which was registered a year earlier under the Societies Act of Malaysia was, together with the National Federation of Credit Unions in Malaysia (NAFCUM), a pioneer in introducing credit unions throughout the country. NAFCUM was established in 1970, but has remained an informal organization. Following the success of KKR, credit unions were established for workers (Koperasi Kredit Pekerja or the Workers’ Credit Cooperative) and tribals (the Indigenous Peoples’ Credit Union). These cooperatives may be collectively referred to as the Credit Union Movement (CUM), a title by which the founders refer to these organizations.

CUM has a membership of more than 40,000 persons. This population is drawn from a total of about 460 credit unions, 50 per cent of which are based in rural areas. It has generated more than RM35 million (US$12 million) in the form of savings, and extended loans amounting to more than RM106 million (US$35 million) to its members since its inception. With this huge source of funds it is easy to see how CUM can offer services ranging from loans, to assistance in small business development, agricultural business development, housing for the rural poor, and assistance for single mothers and widows (Siwar and Quinones, 2000).

CUM is committed to three objectives: (a) to eradicate poverty; (b) to eradicate ignorance; and (c) to identify and nurture grassroots leaders. These objectives were targeted with the plantation workers in mind. Plantation workers were chosen because from the late 1970s, rubber ceased to be an important contributor to the Malaysia economy. This made plantation workers a vulnerable group that deserved CUM’s attention.

One of CUM’s principle goals has been to ‘consolidate and strengthen the existing human and financial resources among the poor’ (Sinnappan, undated). The organizers of CUM look beyond increasing the incomes of their members; they seek to improve capabilities such as education, health, self-esteem, and entrepreneurial skills. Other goals that CUM has sought to achieve include helping members’ children attain higher levels of academic and technical education, and forming networks with ‘progressive’ NGOs. CUM has also been keen on achieving social justice and gender-based egalitarianism.

CUM permits only the poor to join its groups. It classifies the poor into three categories: hard core poor (those earning less than RM 350 (US$115) per month; those beneath the poverty line (that is, all households earning less than RM 500 (US$150) per month but more than RM350 per month; and those with little upward mobility (that is, those earning less than RM 1,000 (US$330) per month but more than RM 500 per month). Also, the following are encouraged to become members: tribals, single mothers, widows, the physically challenged and youths who have no gainful employment.

The choice of membership indicates that CUM tries to ensure that marginalized groups can be assisted by improving their capabilities. CUM’s focus, in terms of the conversion factors that were earlier discussed, is largely directed at the social characteristics of the communities that it works with. The limited budget that is available to CUM does not allow it to attend to the environmental characteristics that constrain the capabilities of individuals. It is not possible for this organization to build parks, provide street lighting or to improve the infrastructure of the communities it works with. In fact most of the members of CUM come from areas where there is no lighting and no computer facilities. Neither does CUM concentrate on improving the personal characteristics of its members. It is most pressing for the members to improve their incomes, but CUM goes about it in a more fundamental fashion by trying to increase their savings.

Savings are mobilized by encouraging members to save. This is done on an entirely voluntary basis. Since CUM’s members are poor, the biggest obstacle faced by facilitators is in convincing members to save. This is done by analyzing the family and personal budgets of members with their participation. This is followed by an examination of expenditure patterns. Subsequently, the officers of CUM show their members how to save. At first glance, the primary objective of this exercise is to help members save. But, more fundamentally, CUM seeks to inculcate the saving habit among the poor. By introducing the saving habit, members will improve their access to credit and, ultimately, acquire a broader basket of capabilities.

The methodology that CUM employs in creating enabling institutions revolves around the participation of the community, and, in particular, it encourages the formation of networks among members of the community (see Teschl and Derobert, 2001). The first step is primarily one that encourages the community to organize a survey so that the intuition of the community is verified through a socio-economic survey that they undertake. This step is useful in understanding the existing position of the community and the capabilities that they lack. The second step is a natural sequel to the first: it offers an opportunity for presenting the concept of a credit union. This is followed by a pre-membership course. This course introduces the potential members into an understanding of what the formation of a credit union would entail in terms of obligations and commitments that would be expected of the members. The meetings that are organized by the CUM facilitators presses individuals into forming networks with a view to overcoming the constraints within the community. In the course of discussing issues relating to the problem at hand, members come to know each other better and so pave the way for the final step, which is the election of leaders. CUM encourages its members to form networks and to gain a greater degree of empowerment. This is, in part, done by conducting courses of different types (for example, lessons on leadership, membership empowerment and refresher courses).

Because of its visible and immediate nature, the exercise of lifting the constraint on access to credit attracts and sustains membership. In the rural communities, the individuals initially borrowed money from the credit unions for reasons such as the repayment of debts, to meet marriage and funeral expenses, and to cover the costs of celebrating festivals. More recently, the shift in borrowing patterns is for purposes such as increasing agricultural production, starting businesses, covering the cost of education and for the purchase or renovation of houses. There is a change in the pattern for which individuals borrow. There is a shift from borrowing for social events to borrowing for more economic or business-oriented purposes.

Relaxing access to credit (which appears to be a focal point of CUM) helps members acquire the capability to save. But gradually it leads to gaining other capabilities, such as the capability of entrepreneurship, education, and housing. Individuals shift their attention from thinking about their own survival towards gaining a greater interest in community issues.

CUM guides its members in the latter, too. As an example, it takes an active position on gender issues. It has instituted gender programmes which seek to help women struggle against the stronghold of patriarchy. At a more concrete and micro-level, there are programmes to help its female members acquire managerial skills as well as to conduct micro-enterprises. Women are also provided with leadership training to improve their self-esteem and confidence. Programmes are also conducted to conscientise men, so that they become more responsible husbands and fathers and equal partners in the house. The aim of this move is to reduce domestic violence and to get men to share household chores with their wives, besides inducing men to spend more judiciously. CUM attempts to address a wide range of issues as would befit an organization that seeks to empower its members.

CUM takes into account the socio-economic context and spatial location of the target groups. It modifies its strategies to take into account locational differences (Subramaniam and Duncan, 2000). Broadly, CUM distinguishes between groups based in plantations, urban squatter communities, and indigenous villages and land settlement schemes. In the case of its activities in the plantation sector, CUM addresses issues such as monthly wages, rights to basic amenities, sale of estates for development purposes, health security and issues relating to migrant workers. CUM in its work with urban squatters provides support in issues relating to the eviction of squatters, the sale of squatter land and the provision of basic amenities (for example, water, drainage and play centres) in squatter areas. Finally, the set of issues that are addressed in regard to indigenous people is quite distinct. One of the prime problems that indigenous people face is with regard to their customary rights of land, which is often not respected by land developers. Similarly, the threat of deforestation poses difficulties for their livelihoods and presents challenges when it comes to relocation.

In keeping with its objectives of striving for social justice and helping the disadvantaged participate in the broader national economic activities, CUM provides training and education in many areas. These areas include youth, gender and children development programmes. Education is also provided in consumer and environmental issues. CUM has also attempted to organize farmers and agricultural workers to fight for their rights. Indeed, it has also run programmes to provide para-legal training. A brief listing of these areas as well as recognition of the fact that it works towards ‘gender egalitarianism’ suggests that CUM takes its role of social mobilization very seriously. Although CUM works with target groups that have varying levels of education, this has not discouraged it from conducting workshops on issues as diverse and topical as globalization and the World Trade Organization. This is noteworthy because most of its members do not have a post-primary education (that is not more than six years in school). It has also sought to increase the awareness of individuals in its communities on specific issues such as the impact of the Agreement on Agriculture and the Trade Related Intellectual Property Rights on consumers.

CUM illustrates how a group of people can offer the necessary agency in order to help disadvantaged individuals achieve the capabilities that will improve their livelihoods. A capability approach that ignores the institutional dimension will fail to capture the mechanics through which the enhancement of capabilities can be achieved. In the case of CUM, we find that this organization provides the agency through which disadvantaged individuals form connections. These individuals, be they the poor or women, are able to form connections with other disadvantaged individuals and by doing so are able to achieve certain capabilities that they value. Thus, these individuals are able to enjoy capabilities such as education, nutritious food, housing, and a life free from violence, to mention some examples. As we have seen, higher incomes are not the only thing that CUM assists individuals in achieving. Self-esteem and self-confidence are equally important in their scheme of objectives.

There are several levels at which institutions are touched upon in an effort such as CUM’s. The first relates to developing new routines, since the disadvantaged have to learn routines, or ways of doing things, that are in consonance with their attempts to move away from their initial positions of disadvantage. For women who have no familiarity with doing business or being employed, it is necessary to develop appropriate routines. As a consequence of participating in the leadership and planning programmes that are offered by CUM, these women gain the confidence to create suitable routines to handle the tasks that they now have to undertake. Similarly, by equipping the poor to acquire the necessary skills to set up their own micro-enterprises the poor are being encouraged to develop the necessary routines, be it to apply for licences or in matters relating to farming.

Second, learning, which is central to any theory of institutions, plays an important role in the activities of the CUM. One may add, without running the risk of stating the obvious, that disadvantage individuals know their condition. However, an explicit awareness of this condition is brought out through meetings, and, particularly, through the socio-economic survey that is carried out at the start of CUM’s programmes with any community. The regular meetings fulfil two functions: (a) they aid in making explicit and sharing in the public domain what the disadvantaged realise, anyway; and (b) they help forge connections among fellow disadvantaged individuals, which is necessary for the execution of the programmes. Meetings as well as the training programmes are used in two ways: (a) to learn about the pre-existing capability situation; and (b) to learn routines that would help overcome the norms and conventions that support the path dependent nature of capability-restricting institutions.

The third manner in which institutions are drawn upon is through the formation of networks. The connections which go to constitute networks lay the basis for a fresh set of institutions (rules and routines) that are able to overcome negative institutions. Meetings of all manner help to create these networks, so that a set of networks is formed among members who share the common goals of CUM.

V Conclusion

The capability approach focuses on the freedom that people have to lead the lives that they choose, and this choice comes from the specific bundle of functionings that are selected. However, the choice that is exerted is not without its constraints, since there are personal, social and environmental factors that could restrict the transformation of the characteristics of commodities into functionings. We have tried to argue that the notion of constraints needs to be explicitly acknowledged within the capability approach. Further, the constraints that feature are often of a social nature, best captured by the institutional arrangements that obtain in society.

Obviously, the constraints to the achievement of capabilities are embedded in society. These constraints (be they personal, social or environmental characteristics) have to be relaxed if individuals are to be able to enjoy higher capabilities. One option is to admit government intervention. Alternatively, it is possible to have the active participation of NGOs who would work with members of the community.

As we have seen in the case of CUM, NGOs are well-suited to relaxing social constraints and improving the capabilities of the disadvantaged. For this to be possible, first, communities have to be encouraged to strengthen their networks. Second, they have to improve their capabilities, but this must be distinguished from higher incomes. Third, the capabilities of the disadvantaged have to be improved in such a way that a broad range of capabilities has to be addressed. This means that the capabilities of education, health, self-esteem and self-respect, and entrepreneurship, have to be increased. Third, while NGOs can intervene in communities, a large part of the impetus for capability improvement must come from the participants themselves. Finally, NGOs must work towards inculcating positive habits and introducing useful routines among individuals in the concerned communities. Capabilities cannot be improved without enabling institutions.