ABSTRACT
This chapter explores the relationships among the state, the institutional environment, and development outcomes. It argues that results that were developed for the World Development Report to try and make a strong empirical case for a refocus on the institutional capability of the state—to bring institutions into the mainstream of our thinking on development outcomes. The chapter discusses a framework for improving the effectiveness of the state and its impact on the institutional environment. It examines how the quality of institutions affects not only the business environment but also the environment for the implementation of development projects. The chapter shows the impact of institutional capability on project rates of return for 293 projects in 28 countries. The first issue is the distinction between institutions and policies used in the studies, which has significant implications. The aggregation of institutions into a single index transforms it into a kind of a black box, making it difficult to draw policy implications.
