What explains the difference in the performance of the world’s nations? Why do some succeed, and others fail? I argue that the primary determinants of development are two dimensions of a country’s institutional setting. The purpose of this study is to explain the effects of the two dimensions (infrastructural power and inclusiveness) on three indicators of socio-economic performance: economic growth, income distribution, and human capital development. Infrastructural power is the effectiveness with which state exercises its authority throughout its territory and over society, and inclusiveness concerns balance of power between the state and society. While infrastructural power is necessary to function effectively, only in a highly inclusive country does the society have the bargaining power, and the state the incentive, to improve social welfare. To test my hypotheses, I perform a cross-sectional analysis on a sample of 161 countries. Although I find empirical support for my hypotheses, the statistical analysis provides me only a cross-national snapshot, and does not illuminate how institutional choices might be changing. The Former Yugoslavia provides a natural experiment in which descendant countries pursued separate paths after the dissolution of their mother country. I propose that the differences in their current situations are the result of different institutional paths each country followed. Qualitative analysis confirmed that while exercise of infrastructural power by the state gives rise to economic effectiveness, only in a country where there is a balance of power between state and society, can we speak of sustainable development.
