Why Rules Matter More in Some Economies Than Others

Read this blog post to learn more about:

• Why rules are more effective in some economies than others

• How culture shapes trust in laws, institutions, and government

• Why informal social norms can be as influential as formal legal systems

• How culture and institutions together influence corruption, investment, and economic development

In economies and those with a legitimate state‚ there is an internalization of compliance‚ as tax compliance‚ labour laws and contract compliance become less a question of legal obligation but more one of social obligation to a well-functioning society(North, 1990; Levi, 1997)․ This reduces the cost of enforcement for the government and allows firms to invest in productivity and innovation‚ rather than in risk management or bribery(Fukuyama, 1995; Acemoglu & Robinson, 2012)․ By contrast‚ in economies with generally extractive rules‚ the government is viewed as being unaccountable to its citizens and setting the rules themselves to be negotiated (Acemoglu & Robinson, 2012․ In such contexts, social networks and relationships often supplant formal legal institutions as a means(Helmke & Levitsky, 2004).

Differences in attitudes towards hierarchy and authority‚ and risk dislike have also been used to explain the differences‚ with Geert Hofstede's cultural dimensions theory explaining differences in power distance and uncertainty avoidance(Hofstede, 2001)․ In power-distance cultures‚ discretionary enforcement is a fertile ground for corruption․ In uncertainty avoidance cultures‚ strict and certain rules are more popular(Treisman, 2000)․ Actual institutions that deliver this are not always effective‚ however‚ and people in uncertainty-avoidance cultures may instead rely on informal social customs that they believe to be more reliable than the law(Helmke & Levitsky, 2004)․

Such patterns are associated with better governance and with firms with less corruption and greater efficiency․ In rule-based economies companies can trust contracts‚ courts‚ and regulators to solve disputes‚ and they have a longer time-frame (North, 1990)․ In relationship economies‚ the price paid is less important than maintaining personal relationships with officials or intermediaries․ This gives some flexibility in the short run‚ but limits competition‚ is disadvantageous to newcomers and is less efficient overall(Fisman & Miguel, 2007․ Empirical studies from such organizations as Transparency International also suggest that where rule-following norms are stronger, countries are less likely to be perceived as corrupt and more likely to attract investors (Transparency International, 2023).

While culture does not determine the outcome‚ "good rules" can function in a bad environment‚ and institutional reform is likely to fail if the underlying informal norms are ignored․ For example‚ anti-corruption reforms will be ineffective if social norms legitimize corrupt survival strategies‚ although soft institutional reforms that align incentives with social norms (Persson, Rothstein & Teorell, 2013) (such as transparency‚ reduced bureaucratic discretion and enhancement of accountability) may gradually change behavior and expectations in a positive direction. (North, 1990; Acemoglu & Robinson, 2012).

To sum up‚ rules matter more in some economies‚ where they are embedded in cultural and informal institutional settings‚ where the normative environment reinforces legality and trust‚ and rules are likely to work well․ Where they are at odds with the particulars of customary authority or with existing institutional experience‚ rules are effectively only symbolic․ Understanding the interaction between culture and institutions‚ therefore‚ is essential both for explaining the different outcomes of the same economic policies in different contexts and for the successful implementation of institutional change․(North, 1990)

Reference list:

Acemoglu, D. & Robinson, J. A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown Publishing.

Fisman, R. & Miguel, E. (2007). “Corruption, Norms, and Legal Enforcement: Evidence from Diplomatic Parking Tickets.” Journal of Political Economy, 115(6), pp. 1020–1048. (JSTOR)

Fukuyama, F. (1995). Trust: The Social Virtues and the Creation of Prosperity. New York: Free Press.

Helmke, G. & Levitsky, S. (2004). “Informal Institutions and Comparative Politics.” Perspectives on Politics, 2(4), pp. 725–740. (JSTOR)

Hofstede, G. (2001). Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations (2nd ed.). Thousand Oaks, CA: Sage.

Levi, M. (1997). Consent, Dissent, and Patriotism. Cambridge: Cambridge University Press.

North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press.

Persson, A., Rothstein, B. & Teorell, J. (2013). “Why Anticorruption Reforms Fail—Systemic Corruption as a Collective Action Problem.” Governance, 26(3), pp. 449–471.

Transparency International (2023). Corruption Perceptions Index. Berlin: Transparency International.