In this paper, institutions are regarded as the main variable that explains political life and the reason certain states fail or prosper. States are seen to consist of formal as well as informal structures that shape and determine the range of possible outcomes.
I depart from the social contract by arguing that states fail when they are unable to deliver security and basic public goods. The state is seen to constitute the interests and preferences of a society and is established to serve the people. In an institutional perspective, the purpose of the state and its institutions is seen to solve collective action problems and enhance social welfare. Failed states are seen to be unable to create purposeful incentive schemes consisting of constraints and opportunities. The inability of these states to constrain decision-making, strike a power-balance, enforce the rule of law and create economic opportunities are regarded main variables that explain state failure. Subsequently, failed states are unable to infuse their structures with collectively shared values. Instead of adopting values such as inclusion, cooperation and tolerance, these institutions are often based on wealth-accumulation, favoritism and self-maximization. In the absence of transparent formal institutions, failed states are seen to generate institutions based on informal networks and personal relations. The possibilities of generating large sums of wealth and the access to spoils in combination with exclusive practices are seen to raise the political stakes and enhance social cleavages. By relying primarily on distributing economic and political privileges, the institutions in failed states have been described as rent-seeking, predatory, neo-patrimonial, clientelist and cleptocratic. The institutional arrangements are seen to be based on structures of unequal relations in contrast to transparent structures based on merit and equal access. I argue that failed states replicate unproductive institutional patterns due to historical legacies and deeply embedded social practices. The inability to change is associated with inflexible structures that are incapable to accommodate changes in the external environment and unable to integrate interests and align with preferences of the society. I apply the cases of Congo, Afghanistan and Haiti to exemplify the different trajectories toward state failure and the cases of Botswana and Costa Rica to contrast with countries that could have ended in failure but that emerged as relative successful. The former are seen to have missed the opportunity to change policy courses during punctuated equilibriums and to have continued to maintain largely repressive structures of resource extraction and subjugation.