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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. The ‘Washington consensus’ in the 1980s urged developing country governments to liberalise their banking systems, privatise inefficient state enterprises, and reform their tax structures—all of which were causes of serious fiscal problems—and this advice was likewise passed on to the post-Communist countries of Europe and Asia in the early 1990s. However, such liberalisation, privatisation, and tax reforms in fact created serious instability, inequity and inefficiency, because they were carried out without the regulatory and legal frameworks, and government rules and structures, that make banking systems, corporate governance, and tax collection work effectively in advanced industrial countries. Some of the most useful applications of NIE are to show what institutions are required to make the standard economic policy advice actually work in practice. In contrast to the old institutional economics, which was focused on case studies of organisation and preference formation, the New Institutional Economics (hence NIE) combines economic theory with the analysis of institutions. In contrast to the old

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