Development economics has progressively discovered what good governance and institutional quality mean for economic outcomes. Acting on those discoveries has proven harder than making them.
The Institutional Turn in Development Economics
The history of development economics is partly the history of progressively discovering the importance of institutions — the formal and informal rules, enforcement mechanisms, and organisations that structure economic behaviour — for economic development outcomes. The early development economics consensus emphasised physical capital accumulation and infrastructure investment. The Washington Consensus emphasised market liberalisation, privatisation, and fiscal discipline. The post-Washington Consensus that emerged from the failures of those policies added institutions, governance, and social capital to the list of development prerequisites. The institutional turn is empirically well-supported. The policy implications are less clear: the interventions that produce genuine institutional quality improvement are complex, context-dependent, slow, and resistant to the simple recipes that earlier development paradigms provided.
The Measurement Problem
The institutional turn has been complicated by measurement challenges more severe than those facing the measurement of physical capital or policy variables. Institutional quality is multidimensional, contextual, and evolving in ways that make robust cross-national comparison difficult. The institutional quality variable that explains so much of the variation in development outcomes is also the variable most difficult to measure accurately and most difficult to change deliberately.
Development economics knows that institutions matter enormously for development outcomes. It knows much less about how to produce the institutional improvements that would make those outcomes better. This is not a failure of analysis — it reflects the genuine difficulty of the institutional change problem, which is the central challenge of development.
Discussion