This paper discusses issues to be considered in designing “second generation” reforms. These reforms should focus on improving the capacity of the public sector to implement economic policies. The paper contrasts these reforms with those known as first generation reforms, which essentially focused on macroeconomic policies. The paper discusses the role of rules and institutions. It concludes that a high–quality public sector is necessary to ensure that good policies generate desirable and durable effects. The creation of such a sector requires many second generation reforms.