Introduction

How may we explain the varied performance of the world's many economies? The founders of modern economics – especially Adam Smith – would have had no trouble pointing to the institutions of each nation including issues such as the security of property rights, the presence of stable rules, and the reliability or avarice of the nation's rulers as playing a large role in the explaining these differences. After several decades of paying a great deal of attention – probably overmuch so – to issues like the availability of capital, the presence or absence of natural resources, or access to the latest technology, the economics profession is once again coming round to the classical view of the central importance of institutions in economic performance. But this time around the study of institutions is taking place with the benefit of the tools and insights of modern theory developed in the last century.

It is important to begin with a definitional clarification. Throughout this work we use the word institutions in the way first advocated by Douglas North. Using this definition, institutions are the rules and laws, both formal and informal, and the enforcement mechanisms that make up a given institutional matrix or environment. The word “institution” is often used in everyday parlance to refer to groups like the World Bank or the US Treasury. However, following the usage advocated by North, these are not institutions but rather, organizations.