Exporting good economic institutions is as hopeless as exporting democracy. Institutional reform is essential for many societies to unleash their growth potential and it can happen as exemplified by successful cases of institutional reforms ranging from South Korea to Botswana. But such reform must have internal driving forces and what types of reforms can be successful will vary from country to country.
Importantly, the experience of both South Korea and Botswana highlights two important features of successful reform that we should bear in mind. First, history is not destiny. Countries can, and do, change in major ways and such change is what gives us hope that economic development will be more widespread during this century than the past one.
In fact, a distinguishing feature of the understanding that institutions matter is also the recognition that institutions, as the collective choices of the society as a whole, can be changed to improve the living conditions in a country. We do not have the recipe for successful institutional change. But the idea that institutions can change should be an important part of our approach to less-developed economies and should give us hope about the future.
Second, reform and the subsequent development of institutions must often rely on internal dynamics. In South Korea and Botswana, and in other cases, the path of institutional improvements would not have been possible without the participation and support of their population. Although there are cases, such as Germany and Japan after World War II, where external intervention played an important role in the subsequent development of institutions, these are exceptions rather than the rule.
Our best hope for institutional improvements lies with internal dynamics and we should strive to understand what generates positive internal dynamics rather than offering recipes for general institutional improvements.