Governments define and protect property rights, which facilitate investment, regulate economic activities to manage externalities, and provide the public goods and services necessary for a healthy, educated and productive workforce. Governments perform these functions well when institutions create incentives for leaders to act in the public’s interest (the politics) and state administration has the capacity to deliver on its commitments (the policy). When states are weak, they perform these functions poorly and economic development falters. This chapter maps common patterns of state failure and synthesizes recent evidence on reforms that can strengthen institutions and build capacity in low- and middle-income countries. Emerging themes include the deep historical roots of contemporary poverty that are difficult to ameliorate, governance reforms that are imperfect and yet still impactful, and the increasing desirability of cost-neutral reforms in light of contracting foreign aid budgets. While opportunities for sweeping governance overhaul are rare and challenging to implement, numerous examples reveal pathways to escape low-incentives, low-capacity governance traps.