The New Institutional Economics Approach to Economic Development: A Discussion of Social, Political, Legal, and Economic Institutions

The last 50 years of development economics have seen hopes for global development raised high and dashed time and again. While there has been positive, sometimes even impressive, growth in many countries, in most of the world experience has not matched expectations. The accumulation of physical capital and human capital, liberalisation and privatisation have all been proposed as the elixirs of growth. While all these arguments have some merit, by themselves they are incomplete solutions to the problem of development. The disappointing performance of the post-Communist transition, the slow growth of the 1970s and 80s in Africa and Latin America, and the Asian financial crisis of the 1990s were all rooted in poor governance. Good governance involves aligning the incentives of agents with the interests of principals in both economic and political spheres. This paper describes some insights from New Institutional Economics on how best to design these incentives.