Government Failure, Social Capital and the Appropriateness of the New Zealand Model for Public Sector Reform in Developing Countries JOE WALLIS and BRIAN DOLLERY * University of New England, Australia Summary. Ð The policy problems posed by a lack of state capacity in developing societies now attract the attention of a growing number of scholars. Both the government failure paradigm, with its ``top-down'' emphasis, and the social capital theory, with its stress on ``bottom-up'' approaches, provide analytical frameworks that can be used to comprehend the symptoms of state incapacity reported by the much broader literature on policy implementation. This paper seeks to determine the implications of the government failure and social capital models for policy implementation. More speci®cally, the paper considers the contractualist approach to public management reform in New Zealand as the epitome of a top-down solution to government failure. It will also evaluate this model from a social capital perspective and suggest ways in which a balanced approach to public sector reform can take into account elements of both paradigms. Ó 2001 Elsevier Science Ltd. All rights reserved. Key words Ð civil society, governance, public sector reform, state capacity 1. INTRODUCTION The burgeoning literature that deals with the political economy of policy reform has been recently surveyed by Rodrik (1996). The point of departure for this survey is the observation that what is remarkable about current fashions in econom- ic development policy (as applied to both developing and transitional economies) is the extent of conver- gence that has developed on the broad outlines of what constitutes an appropriate economic strategy (p. 9). This strategy includes the now familiar components of (a) ``liberalization''Ðmicroeco- nomic reforms designed to open and free up markets and reduce and rationalize the role of the state in the economy; and (b) ``stabiliza- tion''Ðmacroeconomic policies designed to reduce debt and control in¯ation. Rodrik's claim that the so-called Washington consensus (Williamson, 1994) on the appropriateness of this strategy now enjoys general acceptance may, of course, be disputed. It does, however, indicate that the focus of the policy reform literature has shifted from an almost exclusive concern with the technical aspects of this strategy to an increasing interest in exploring the reasons for the observed unevenness in its implementation. The question of state capacity in developing and transitional societies now enjoys signi®cant scrutiny in the literature (Migdal, 1988). Grin- dle has summarized the evolution of thought on state capacity as follows: In recent years, considerable scholarly attention fo- cused on the state as political scientists, economists, and political economists debated its de®nition, as- sessed its strength and relative autonomy from groups and interests in national and international arenas, and discussed the role it should play in development. Inev- itably, these discussions, along with heightened con- cern about the causes and consequences of economic and political crisis, fostered questions about state capacity; considerable evidence accumulated during the 1980s to suggest that states varied widely in their ability to set the terms for economic and political interactions and to carry out the functions assigned to them. The notion of state capacity, long assumed to be an inherent characteristic of ``state-ness,'' be- came more frequently a matter of theoretical concern and empirical assessment (Grindle, 1996, p. 4). World Development Vol. 29, No. 2, pp. 245±263, 2001 Ó 2001 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0305-750X/01/$ - see front matter PII: S0305-750X(00)00092-9 www.elsevier.com/locate/worlddev * Final revision accepted: 5 September 2000. 245