Formal rules, informal rules, and economic performance

Abstract

In this article the author tries consider a question important for economic development: what happens when formal rules and informal rules of economic behaviour are in conflict. Under such circumstances even the best, wealth creation-enhancing rules must bring about different outcomes if introduced in the different political, economic, and socio-cultural environments. These considerations begin with the overview of possible balances and imbalances in the relationships between formal and informal rules and potential conflicts that may arise in the latter cases. The next step is the selection of institutional characteristics that facilitate the explanation and prediction of outcomes of formal rules&informal rules interactions. The third, and final, step considered in the article concerns the adjustment of rules (formal, informal, or both) over time and possible patterns of adjustment.

Fostering productive entrepreneurship in post-conflict economies: the importance of institutional alignment

“…Reforming formal institutions and changing informal institutions are of critical importance for fostering productive entrepreneurship, yet change takes time (Winiecki, 2001;Estrin and Mickiewicz, 2011). Policy makers often favour formal institutional change as it is simpler to affect (Williamson, 2000), and tend to neglect informal institutions.…”

“…Indeed, it is the relationship between formal and informal institutions which is important for growth, as opposed to their development in isolation. As Winiecki (2001) states, new formal rules are mediated by the interaction with informal norms, and as such the interplay between the two will determine outcomes. The dominant view suggests that formal and informal institutions interact in two key ways.…”

“…Williamson (2000) demonstrates how institutions operate at different levels and influence each other, with informal institutions often emerging spontaneously but influenced by the calculative construction of formal rules. Formal rules are mediated by interaction with informal norms, and the economic outcomes of these interactions change over time (Winiecki, 2001), with norms affecting how rules are designed and implemented and whether they are followed. As noted above, this has been reduced to two key interaction dynamics, the complementary and the substitutionary.…”

“…Consequently, the challenge to reform informal institutions is similar yet distinct to other transition economies. However, affecting informal institutions is not easy and will only occur over time (Winiecki, 2001;Estrin and Mickiewicz, 2011;Williams and Vorley, 2015a).…”

“…However, more than the nature of institutions, it is also important to consider the institutional arrangements and how formal and informal institutions both align and relate (Winiecki, 2001;Williams and Vorley, 2015a;Williams and Shahid, 2016).…”