This paper takes the form of an extended literature review, outlining the key ideas that will need to be developed further in the course of the IPPG Research Programme. After an extended introduction, the next two sections are conceptual, the former elucidating key concepts and definitions, the latter examining various approaches to the analysis of institutions relevant for economic growth. Then the paper reviews much of the available evidence linking institutions and growth and covers in some detail the evidence regarding economic institutions, confirming that institutions matter. However, the findings from different studies are far from consistent in terms of identifying exactly what it is that matters. Given the prevalence of weak or poorly functioning states amingst the poorest countries of the world, the paper also reviews literature on the political aspects of development, particularly in relation to the role of institutions. Likewise, the paper selectively illustrates the ideas of earlier sections through the discussion of two topics: trade policy and the institutions needed for it to work well; and institutions that make for a good business environment. The final section outlines some preliminary working hypotheses about institutions and development. While emphasizing pro-poor growth throughout, the paper finds that growth itself is a fundamental, necessary condition for achieving pro-poor growth. Given that, a serious analysis of institutions and growth must pay attention to the need for institutions that foster and promote profit-seeking accumulation (without which little sustained growth is likely to occur).
IPPG Discussion Paper Series Number Three, DFID, London, UK, 53 pp.