In his keynote to the IMF-sponsored "Conference on Second Generation Reforms," then-president of the World Bank James Wolfensohn said, "The second generation issues focus around the questions of the structure of the right institutions, of the improvement of the administrative, legal, and regulatory functions of the state, addressing the incentives and actions that are required to have private sector development and to develop the institutional capacity for reforms." His focus on institutions found resonance in the World Development Report, 2002, entitled "Building Institutions for Markets," and reflected Jeffrey Nugent's (1998, 8) calculation that the institutional content of the Journal of Development Economics increased from 15 percent to 27 percent after the 1970s, while that in the Handbook of Development Economics rose from 7.5 percent to 36 percent from the second to the third volume. This provides evidence that institutionalism has indeed won the development debate and Philip Klein's 1977 statement is again true: "[I]n the field of development economics the victory [of institutionalism] has been so complete that many economists fail to realize it" (785).
Klein was referring to "old" institutionalism, rooted in Veblen, Commons, and Ayres, in which the economy is a system that "embraces a body of knowledge and of skills and a stock of physical equipment; it also embraces a complex network of personal relations reinforced by custom, ritual, sentiment, and dogma" (1977, 789). This is certainly not the institutionalism of the World Bank, which privileges "institutions for markets" and explicitly states that "the recognition of the crucial role of institutions, organizations, and political economy restrictions is not tantamount to a rejection of the neoclassical model" (IBRD 1998, xi). One institution, the market, remains the focus of the international financial institutions such as the World Bank.
Nonetheless, institutionalism has again become central to development thinking, accompanied by an appreciation of the variety and complexity of institutional evolution. The result is not the "old institutionalism" of Thorstein Veblen and Clarence Ayres or the "new institutionalism" of the early Douglass North. Rather it is a pragmatic combination of the constructs and approaches of the former with the epistemological and methodological advances of the latter, all brought to bear on the many issues of development. The challenges of the development process, and its resistance to reductionism, are the roots of modern institutionalism's contribution to understanding both development and the policies and processes that can guide development initiatives. I will term the current combination the "modern institutionalism of development."
The "New" New Institutional Economics (NNIE)
North (2000, 491) reflects the evolution quite well. While he still holds that "we know the economic and the institutional conditions that make for good economic performance," he no longer reduces that to the expansion of markets. Rather he calls for "a clear understanding of the new institutional economics," development of "a body of political-economic theory," and "a better understanding of the social norms and informal constraints" that affect performance. An "old" institutionalist could rightly suggest that that tradition provides a wealth of literature and methodological insights that should be part of this effort.
North (2005) has attempted to meet his own challenge by developing a comprehensive approach to economic change. In doing so, he discards the neoclassical model and substitutes institutionalist categories: beliefs and culture displace rationality, the imperative for understanding dominates maximization, and path dependence characterizes historical processes rather than an ahistoric continuity. This allows him to develop a set of constructs that he fruitfully applies to a variety of historical experiences, from the Spanish colonization process to the demise of the Soviet Union. His NNIE conclusion is...