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This article reviews research on institutions, governance and aid. Three constructive themes emerge: how and with what qualifications 'institutions rule'; the limitations of the instruments easily accessible to development assistance organisations; and the idea of context-sensitive facilitation of institutional change. Research indicates that both institutions and policy choices influence development outcomes. The nature of the 'right' institutions is context- and time period-specific, and institutional change is not self-generating. Aid needs to become more context-sensitive, more politically-informed, and less supply-driven. Donors should abandon formulaic 'best practice' interventions and think about how to build on institutions that already exist. Researchers should deliver more finely-tuned ideas about the building blocks, and the potential room for manoeuvre, in facilitating appropriate and feasible institutional innovations.

Research on institutions in the 1990s demonstrated that the quality of a country's institutions is central in explaining economic growth. On the other hand, it appears that differences in policy choice have been responsible for substantial differences in growth and poverty-reduction performance. Both institutions and policy content shape development outcomes. For example, political factors influence the implementation (or non-implementation) of policy. In addition, institutions are important partly because they frame the likely policy choices. Some types of regime are more inclined than others to adopt and consistently implement wise policies.

Historically, institutions have changed slowly, and mostly due to internal conditions. Evidence of a contribution by aid through institutions to growth seems particularly weak. Aid is likely to do actual harm if it is managed without taking proper account of institutional features. Nevertheless, aid does have the potential to impact positively on the institutional constraints that limit its own effectiveness.

Further, research suggests that external actors might have a role to play as active facilitators of institutional change. Recognising what there is to build on could be the first step towards a position where development agencies, supported by researchers, are able to act in small ways as facilitators of changes that would not otherwise happen.

During the period of academic reflection on institutions, the policy world has focused on the challenges of aid conditionality and achieving country 'ownership' of aid-funded development. Insights include the following:

• Poverty Reduction Strategy Papers (PRSPs) were limited by the difficulty of transforming technocratic ownership into political ownership. Attempts to tackle this have not solved a fundamental problem: that poverty reduction should be treated as a political rather than a technical issue.
• Neither the Paris Declaration on Aid Effectiveness nor the Accra Agenda for Action have made it easier to tackle the political reasons for the rarity of serious, politically-owned development projects in poor, aid-dependent countries.
• Donors have taken one of two paths. The first involves a reversion to political conditionality, emphasising governance quality indicators. However, experience suggests that country ownership cannot be achieved by tweaking disbursement modalities or other technical changes.
• The second path is based on the idea that donors should devote more effort to understanding the deeper realities and needs of the countries they are dealing with. Development policy and practice should therefore be informed by the best research and analytical work, and vice versa.

A better understanding of country contexts needs to be supplemented by more nuanced understanding of how to facilitate institutional reform. In particular:

• Supposedly universal 'best practice' concepts will not be fit for purpose unless they are radically adapted to the conditions of specific countries.
• Donors should 'begin where the country is' by asking three questions: What is there to build on? What is the degree of complexity and difficulty of the proposed intervention, given the context? Is there likely to be room for manoeuvre in the process of change?
• Countries' trajectories may differ not just in the pace and the sequence in which institutional advances are introduced, but in more creative and less predictable ways. This may involve mapping out paths not previously followed by anyone.
• It is important to go beyond blanket terms such as 'neopatrimonialism' to develop middle-range concepts. In Africa, for example, this may mean considering that several of the 'troublesome' institutional elements may have a positive side.