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The crucial role of institutions for economic development is not challenged by anybody in the New Institutional Economics. Yet, to be empirically convincing – and to keep the NIE on its growth path – reliable measures for both external and internal institutions are needed. Internal institutions are those rules whose non-compliance is sanctioned by members of society – not by representatives of the state. This chapter argues that some important questions in the NIE can only be answered if good measures for institutions are made available. This is true in particular for internal institutions. These questions include: (1) What role do internal institutions play for economic development? (2) What are the fundamental determinants of internal institutions? (3) What are the effects for economic development when external and internal institutions are in conflict? (4) Under what conditions will internal institutions be replaced by external ones? (5) Are conflicts between internal and external institutions an important reason for the incomplete implementation of external ones? (6) Are internal institutions likely to change if two groups following different sets of internal institutions interact frequently?

Islam, and political Islam in particular, has been stylized in the West as incompatible with some fundamental norms of Western democracies. In this chapter, we ask whether political Islam is compatible with the rule of law. We argue that Muslims who prefer a traditionalist interpretation of Islam are unlikely to appreciate the rule of law. We further discuss specific areas in which Muslim societies might struggle with implementing the rule of law and discuss empirical evidence on the realization of the rule of law in Muslim and non-Muslim countries.