The Distributive and Institutional Context
As soon as a social phenomenon has been fully explained by a variety of converging approaches and is therefore understood in its majestic inevitability and perhaps even permanence, it vanishes . . .1 Albert O. Hirschman (1981, p. 134) I. OBJECTIVES OF THE BOOK Something quite extraordinary took place in the last twenty or thirty years, a rather short period of time in the evolution of economic thought and ideas.2 The ‘received view’ of the 1960s and 1970s about the sources of economic development changed to what amounted to a new conceptual paradigm, that is that incentives and institutions are the key explanatory variables of long term development across countries and even cultures. The theory of incentives appears to be the most important development in economics in the last 40 years (Arrow, 2002) and there is broad consensus that the quality of institutions, more than anything else, determines economic performance over time. According to Douglass C. North ‘We cannot understand today’s choices without tracing the incremental evolution of institutions’ (1990, p. 100). In brief, the new paradigm in the political economy of development and in the economics of politics3 is that the ‘right’ or the ‘wrong’ institutions emerge from endogenous4 and history5 determined processes where information asymmetries,6 political regimes,7 opportunism8 and self interested rational9 choices10 play the most important roles.11 Notwithstanding the empirical problems related to measuring the links between the ‘right’ and the ‘wrong’ institutions and development, the ‘institutions hypothesis’ has come to be regarded as the key explanatory...