ON EFFECTING INSTITUTIONAL CHANGE

In this paper, we examine the role of policy intervention in engineering institutional change. More specifically, in a framework where the underlying political incentives determines the quality of a region's economic institutions, we examine the role of broad developmental policy in improving institutions and therbey welfare. Two effects emerge. First, by increasing political accountability, such policies encourage democratic governments to invest in good institutions - the incentive effect. However, such developmental policies also increase the incentive of the rentier elite to tighten their grip on political institutions. In some cases, this latter political control effect can outweigh the former incentive effect, and result in an overall deterioration of institutional quality. However, it may also indirectly encourage the elite to modernize. Taking this possibility into account, the framework has the potential to explain a diverse set of possibilites as a result of developmental policy.