Institutionalist Economic Theory

Some of the main critics to the Washington Consensus and its “neoliberal diagnosis” of development came from theorists of the so called “New institutionalists economics” (NIE). The key term “institutions” is used in different ways by different authors. However in general “institutions” are regarded as the “formal and informal sets of rules, norms and procedures of behavior” (Martinesseu, 253). NIE studies the economic phenomena in a wider social context and with different approaches (Martinesseu, 251) and its principal focus of analyses are the transaction costs. One of its main conception is that the more complex are the transaction, the higher will be the costs and consequently the higher will be the need for efficient institutional arrangements

Government failure therefore became the new substitute for market failure in development (Mehmet, 1995:116) and state intervention was considered again as fundamental. For instance, New Institutionalist economics scholars attributed the East and South Asian “miracle” to the efficiency of the state organizations and regulations and therefore to state-led reforms that took place in those countries, rather than on private capitalists and market forces (Torquinist,

Nonetheless what all that meant for the World Bank was democratization (Hewitt, 38). The World Bank strategy and abuse of the term “good governance” begun to be strongly criticized as it started to be interpreted by many as a mere attempt of only empowering on the surface the policy-recipient country, while rather pointing to control them, exporting its western values exactly how it was happening in the past with the modernization wave. (Hewitt, 39) As stated by Hewitt () “the democratization project implicit within the term good government also remains profoundly ethno-centric and conditional on capitalism, despite its commitment to seeing institutions in specific regional and cultural contexts”. Moreover, the report appeared quite dubious in its attempt to identify the precise social, economic and political forces that might enforce “good government” (Torquinist: 101), leaving its rhetoric full of weaknesses and more prone to criticisms. The good governance agenda although presenting itself as a reform agenda, full of elements of empowerment, participation, good policies and bottom-up approaches, in reality it seems to reassemble modernization theory approaches, especially in the very nature of its project that fundamentally aim at importing western values, such as democratization, in Third World