How Does Good Governance Come About? On Evolution of Institutions

Abstract

Economic welfare rests on entrepreneurs, competition, and good governance. All three have a positive effect if embedded in a set of good institutions. Major question here is: how do we get good institutions? The paper concentrates on the example of governance. Good institutions and good governance are not solely the result of discrete policy decisions; as far as beliefs and informal rules are concerned, they are also the result of an evolutionary process of longue durée. The core of paper is a discussion of evolutionary institutional change. Three theoretical approaches are discussed: the Marx-Schumpeter approach and its neoclassical offsprings, a further extension by the Stanford economists Aoki and Greif, and Hayek's 'spontaneous' evolution. Change at the institutional frontier and imitation or catching up to the institutional frontier seem to be different processes. Why countries fail to catch up constitutes a challenging puzzle for incumbent institutions show a remarkable persistence. Findings are illustrated by developments in post-socialist transformation.