The World Bank and the New Institutional Economics

Abstract

In the course of the 1990s, the policy prescriptions of the World Bank for developing countries have shifted from the neoliberal emphasis on a minimal state, symbolized by the Washington Consensus, to a perspective that emphasizes a much more active and efficient state. Through the 1980s and early 1990s, the World Bank encouraged trade and investment liberalization, domestic market deregulation, fiscal discipline, and a reduction in both the size and the role of the state through the privatization of public enterprises and dramatic reductions in social spending. In the mid-1990s, however, the bank discovered the importance of the state and came to argue that institutions matter for development. As a consequence, it began to advocate the construction of state institutions that would promote economic efficiency and growth. It placed particular emphasis on a series of second-generation reforms that built upon the earlier neoliberal reforms by seeking to strengthen judicial systems, banking regulations, and capital markets, combat government corruption, make bureaucracies more efficient and responsive to client needs, and decentralize administrative, fiscal, and political power from central to subnational levels of government. The bank's central argument for these reforms, according to Burki and Perry (1998: 3), was that macro [economic] policy is not enough; good institutions are critical for macroeconomic stability in today's world of global financial integration. A number of political and economic forces converged to move World Bank policy prescriptions beyond the neoliberal orthodoxies, including massive social protests around the world against the destructive effects of the bank's structural adjustment policies and its own recognition that its policies had failed to reduce poverty significantly and actually contributed to growing inequality.' The focus here, however, is on the theoretical roots of the bank's prescription of a more activist, efficient state, which lie in a body of work commonly referred to as the new institutional economics. Since the late 1990s, a new-institutional-economics perspective has become evident in a wide variety of World Bank publications, including in particular the bank's 1997 and 1999/2000 World Development Reports and many specific studies on