The New Institutional Economics (NIE) combines economics, economic history, political science, and area studies. A good understanding of NIE is crucial to analyze the reasons for success or shortcomings of economic reforms in different countries, since this approach explains how and why reforms are affected by pre-existing institutional environments. In order to pursue successful reforms, one must first understand the limitations inherent in a given political, economic, and social system – and how they can be overcome within that particular context.

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Institutions and policies that will favor growth are more likely to be put in place in a democratic policy environment. Some argue that democracy is less conducive to economic growth than authoritarianism, since the latter lacks the constraints that prevent those in power from swiftly undertaking growth-spurring policies. Yet the empirical evidence does not support that claim. In fact, the very characteristics of democracy that distinguish it from autocratic rule – such as openness, checks on authority, rule of law, and freedom of association – are the ones that make it a better environment for sustained growth. True democracy and functioning market economy share the same values of transparency, accountability, responsiveness, and constructive competition. They complement each other and provide an enabling environment where policy ideas can be freely debated and tested, and where entrepreneurs can flourish because their rights are equally protected.

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