A basic framework for classifying institutions and thinking about their role in economic development is illustrated with the colonial experience of the British and Spanish empires in the eighteenth and nineteenth centuries, and Japan in the nineteenth century. Institutions are the ‘rules of the game’. Primary rules are rules that apply directly to individuals and their relationships. Secondary rules are the ‘rules for making the rules’. The secondary rules governing the Spanish Empire located the procedures for making new rules and changing existing rules in negotiations with the king. Secondary rules in the British Empire located many of the processes for making new rules in the colonies themselves. Faced with independence and the end of monarchical rule in the late eighteenth and early ninteenth century, the institutions in the former Spanish colonies had to be reinvented from whole cloth, as the basic structure of secondary rules was no longer viable. In the British North American colonies, secondary rules allocating authority to colonial legislatures remained in place and were gradually transformed after independence. Japan, in contrast, wrestled with how to structure secondary rules in the events leading up to and following the Meiji Restoration.

The Problem of Economic and Political Development

Success in economic as well as political development depends primarily on improving institutions. This has become the consensus among economists over the last twenty years, as the world has witnessed many development failures in spite of abundant capital, natural resources, and educated populations, who emigrate or stagnate if institutions do not put them to good use. The question now is: What institutions are right? As elaborated later in this chapter, some argue that developing countries should emulate the institutions of the most successful, high-income economies of the OECD. We and others, however, see evidence that most low- and middle-income countries are not ready to utilize many Western European or North American institutions or that these institutions function very differently if transplanted into these low- and middle-income economies.

The purpose of this volume is to develop and apply an alternative framework for understanding the dynamic interaction of political, economic, and social forces in developing countries, which was first laid out by North, Wallis, and Weingast (2009, hereafter NWW). The standard approach begins with neoclassical assumptions that growth will occur whenever profitable opportunities present themselves unless the intervention of political or social impediments prevent markets from working. In contrast, the alternative perspective presented here begins with the recognition that all societies must deal with the problem of violence. In most developing countries, individuals and organizations actively use or threaten to use violence to gather wealth and resources, and violence has to be restrained for development to occur. In many societies the potential for violence is latent: organizations generally refrain from violence in most years, but occasionally find violence a useful tool for pursuing their ends. These societies live in the shadow of violence, and they account for most of human history and for most of today’s world population. Social arrangements deter the use of violence by creating incentives for powerful individuals to coordinate rather than fight. The dynamics of these social arrangements differ from those described in neoclassical models, and this difference limits the value of the neoclassical tools for understanding the problems of development.

Thinking of developing countries as limited access orders with their own social dynamic rather than as flawed or incomplete open-access societies affords new insights into the impediments and paths to development. The perspective distinguishes between two development problems that are normally conflated. The second development problem involves the transition of societies from LAOs to OAOs. The first development problem involves the movement of LAO societies toward forms of social organization that enable more economic output, reduced violence, stable political outcomes, and greater individual well-being. World Bank borrowers face the first development problem: developing as an LAO, from fragile to basic and from basic to mature LAO, while avoiding regression. The lessons we draw from the case studies presented in this volume are primarily concerned with enabling places like the DR Congo to accomplish social outcomes that more closely resemble Mexico or Zambia. We also draw lessons about making transitions to open access, but our primary focus is on the first development problem because it is first in terms of human priorities. Understanding better the logic of limited access societies and the dynamics of how they change holds out greater rewards in terms of reducing poverty and violence.

The control of violence is central to the logic of all LAOs and hence is central to the problem of development. The traditional economic development framework focuses mainly on the second development problem and fails to understand violence or incorporate an appreciation of the dynamics of violence into policy recommendations. Indeed, the Washington consensus of the 2000s was dominated by efforts to embed institutions of open-access orders – property rights, entry into markets, elections, or institutions of good governance – directly into limited access orders. Because these reforms ignore the logic of the LAO, they often fail to produce development and sometimes exacerbate the problem of violence. The traditional development perspective typically treats violence as a country-specific phenomenon and leaves dealing with violence for local police and courts. By doing so, this perspective fails to understand that LAOs are organized to prevent violence and that this often hinders traditional reform efforts.