On Institution Building

for their comments. In this paper, we examine the role of policy intervention in engendering institutional change. We argue that successful intervention is difficult since local political interests often undermine even benevolent policy interventions. In particular, we show that first order changes in the political structure (e.g. introduction of democracy) may be accompanied by institutional persistence and no improvement in the quality of governance. In this scenario, we identify two effects of develop-ment policy as a tool for institutional change. One, by increasing political accountability, it may encourage nascent democratic governments to invest in good institutions — the incentive effect. However, we show that it also increases the incentive of the rentier elite to tighten their grip on political institutions — the political control effect. Which of these dominate determine the overall impact on institutional quality. Under some conditions, by getting the elite to align their economic interests with that of the majority, development policy can lead to democratic consolidation and economic improvement. However if elite entrenchment is pervasive, then comprehensive change may require more coercive means. Thus for successful policy intervention, a good knowledge of local conditions and an appropriately tailored policy is needed for bringing about comprehensive change.