Chapter 3 : How Are Institutions Related ?

There is widespread consensus among economists that institutions matter for economic development or stagnation. A large literature indicates that wealthy countries are those where property rights are clearly defined and protected, the rule of law is established and enforced, citizens have political and civil liberties, and policymakers adopt sound monetary and fiscal policies.1 Poor countries tend to lack most, if not all, of the ingredients required for development. Given the widespread agreement regarding the importance of good institutions for economic growth, an important question for poor countries is to how to engage in effective institutional reform. Reform is a messy process as illustrated by the high variance in the economic performance of transition countries following the collapse of communism. Part of the difficulty stems from the fact that reformers must address issues of reform prioritization, sequencing, and selectivity. Further complicating the process is that economic and political reforms are highly context-specific. As Dani Rodrik notes, “appropriate growth policies are almost always context specific. This is not because economics works differently in different settings, but because the environments ... differ in terms of the opportunities and constraints they present” (Rodrik, 2007: 4). In general, when it comes to reform, economists know what institutions and policies are necessary to ignite economic growth but they know much less about how to go about getting those institutions and policies. Closing the gap between