Almost two decades ago, the World Bank published its landmark study TheEast Asian Miracle, analyzing why East Asian economies grew faster thanemerging markets in Latin America, Africa, andelsewhere. These economies, the study concluded, achieved high growth rates bygetting the basics right, promoting investment,nurturing human capital, and opening up to export manufacturing.

But that was not all. The World Bank also acknowledged, grudgingly, that governments intervened – systematically and through multiplechannels – to foster development, including in specific industries in specificlocations via subsidies, tax incentives, and financialrepression.

In the intervening years, particularly after the Asian Financial Crisis,the pro-market, anti-intervention Washington Consensus fellout of favor. A “New Institutional Economics” (NIE) gained ground by filling in the gaps left bymainstream models, which ignored the central importance of institutions inmanaging the change and uncertainty that affect resource allocation and socialchoice. Indeed, in light of today’s Great Recession and the current Europeandebt crisis, the main question remains that of the role of the state inpromoting growth and development.

It was the collapse of the Soviet bloc’s planned economies that spurredboth free-market hubris and the realizationthat institutions matter. But it was China’s ability to sustain rapideconomic growth for three decades that necessitated a revisionistlook at statist capitalism.

Nobel laureate economist Douglass North argued early on that human societycreated institutions to deal with information asymmetry,but that their creations immediately gave rise to the problem of how toconstrain such institutions to fulfill their intended objectives. In 2000,Oliver E. Williamson classified four levels of social analysis for institutions– informal institutions, customs, traditions,norms, and religion;formal institutions with rules governing property rights, social order, the judiciary, and the bureaucracy;governance structures and their alignment toeconomize on transaction costs; and decentralizeddecision-making in resource allocation (the domain of neo-classicaleconomics).

According to Williamson, NIE is primarily concerned with the economic andpolitical ramifications of formal rules and governance structures. But, formany emerging economies, it is the embeddedness of informal rules, norms, andbeliefs, and their slowness to change, that prevents many economies’breakthrough to more advanced, knowledge-based growth.

Francis Fukuyama’s new book The Origins of Political Order attemptsto address this problem. He examines the emergence ofthree categories of political institutions – the state, the rule of law,and accountable government, the latter two being constraints on the state thatprevent it from becoming despotic.

Fukuyama argues that patrimonialism– defined as the natural human propensity to favor family and friends – as the bane of the rule of law and accountablegovernment. But, while patrimonialism may well be the main barrier tocountries’ advance to middle-class democracy – and a key reason for autocratic states’ fragility– it may also be a more general feature of all political and economic systems.

Witness the current debate about whether governments in advanced economieshave been captured by financial interests – a question that Gillian Tett posesin a recent reviewarticle in Foreign Affairs. “Should governments rein in finance tocrush the elite,” she asks, “or should they simply accept incomedifferentials and financial savings as the inevitable price of dynamicsocieties?”

This is not a trivial question, given the role of unabatedinequality in growing social unrest and even revolution around the world.Indeed, the real surprise is that protests such as “Occupy Wall Street” haveresulted in so little change, suggesting that institutions, once established,are “sticky” in preserving the status quo.

This is particularly relevant to Asia’sgrowth story. Former British colonies like Indiaand Malaysiainherited common law and institutional checks and balances, but several todayconfront institutional decay, risingcorruption, and creeping patrimonialism.Other economies, such as China,are seeking ways to establish the rule of law by strengthening theinstitutional framework within the framework of one-party rule.

Both Fukuyamaand North conclude that strong state-led economies can be accountable, butbecome fragile should the ruling elites fail to respond to popular majoritiesand to global norms of behavior and governance. North argues that competitionis a key force driving adaptive efficiency among institutions.

A basic insight of NIE is that measuring transaction costs in variousfactor and product markets can reveal inefficiencies and barriers to betterperformance. An examination of transaction costs in global and domestic supplychains would reveal the extent to which rent-seeking activities and policydistortions deter the emergence ofcompetitive markets.

For advanced economies, the study of Williamson’s levels two and three –formal institutions and their governance – can lead to important insights. But,for emerging markets in Asia and elsewhere, weare convinced that the study of informal institutions, behavior, and normsoffers a better understanding of the challenges of managing growth andperformance.

Simply put, in many emerging markets, it is not a lack of understanding ofinternational best practices that holds back economic performance. Rather, itis the conflict between these practices and traditional or domestic socialrelations and practices that entrench vestedinterests opposed to change.