Most of these failings do not show up on standard macroeconomic measures of performance, yet they are deeply inimical to development. Societies with weak institutions have not developed the basis for complex economic interactions; they have neither the software nor the hardware for development. The result is dysfunctional markets, weak competitive pressures, and private sectors dependent on government cronyism and corruption. Incentives are misaligned, so that entrepreneurial individuals “invest” their time and resources in competing for rents from the political system. Social norms form around clientelism, rentseeking, and factional competition, rather than social cohesion and progress. These destructive norms become rational for the individual, despite their negative collective effect, and they often prove difficult to unravel.

The breakdown in governance, erosion of institutions, and collapse of social cohesion are typically associated with a radical decline in living standards and rise in inequality—as in Moldova, the Caucasus, and Central Asia in the post-Soviet transition period. Heavy regulation and weak property rights exclude the poor from doing business.

The institutions of developed economies vary greatly, whether in regulation, social protection or labor markets. Even the meta-institution of democratic governance does not have unambiguous effects. The formal institutions of democracy do not always ensure checks on weak governance. Nor are these checks always absent in authoritarian regimes. Contrasting experiences in less democratic East Asian countries in the 1970s and more democratic African ones in the 1990s illustrate that mechanisms of accountability can take varying forms, defying a simple classification of formal political institutions. Not only are successful institutions highly varied in structure, but their origins are complex as well. Institutions are highly endogenous: they are not easily manipulated by governments as exogenous levers, but instead arise and evolve in historical contexts. These factors make the analysis of institutions a great challenge, one that development studies have just begun to grapple with seriously. But the recognition of the central role of institutions and governance itself marks a major advance in development thinking (Dethier 1999).

2.4 From the “Washington Consensus” to Country Specific Approaches With the dogmas of the state-market debate came an insistence on “monocausal” explanations of development. This led to one-size-fits-all policy approaches, as the general models left little room for actual conditions. When mainstream development thinking discarded one model in favor of another, the result was too often major changes in policy recommendations without room for nuance. The most recent (although certainly not most simplistic) manifestation of this was the “Washington Consensus” at the beginning of the 1990s. Its list of preconditions for growth encapsulated many neoliberal precepts in what was often interpreted as a neat recipe for development. Perhaps unfairly, that Consensus came to stand for a package of measures aimed largely at getting the government out of the economy—and it was applied with excessive uniformity across countries. Common sense tells us that no one approach will work everywhere, since the binding constraints to development are unlikely to be the same across countries. Development theory is catching up with this view. Even under the simpler earlier models, outcomes of policies depended on the parameters assumed for a given country. But the case for country specificity received a boost in the late 1980s and 1990s, as a flowering of theoretical work on new multiple-equilibrium and endogenous-growth models emphasized initial conditions.

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