Informal Institutions: An Overview

Informal institutions are unwritten rules that govern behavior and interactions within a society or organization. They are distinct from formal institutions, which are codified laws and regulations enforced by the government or other authorities. Informal institutions are created, communicated, and enforced through social interactions, cultural norms, and shared values.

Complementarity and Substitution

Informal institutions can either complement or substitute formal institutions. In some cases, informal institutions enhance the functioning of formal institutions by providing additional support and legitimacy. For example, social norms against corruption can reinforce formal anti-corruption laws. In other cases, informal institutions may undermine or compensate for the weaknesses of formal institutions. For example, informal networks of exchange can emerge in response to a lack of formal market institutions.

Corporate Governance

In emerging economies, informal institutions often play a greater role in corporate governance than in OECD economies. This is because formal institutions in emerging economies are often weak or underdeveloped. As a result, informal institutions, such as family and clan networks, business groups, and guanxi (personal connections), play a significant role in shaping corporate behavior and decision-making.

The impact of informal institutions on corporate governance can vary. Some informal institutions can improve governance by promoting transparency, accountability, and ethical behavior. For example, strong family ties can encourage long-term planning and investment. However, other informal institutions can conflict with formal institutions and lead to poor governance practices, such as cronyism, corruption, and tunneling (the diversion of corporate resources for personal gain).

Role in Development

Informal institutions can either help or hinder development. On the one hand, they can provide stability, social cohesion, and adaptive capacity. For example, informal networks of exchange can help communities cope with economic shocks. On the other hand, informal institutions can also perpetuate inequality, corruption, and inefficient practices. For example, social norms that discriminate against women can limit their access to education and employment opportunities.

Conclusion

Informal institutions are an important part of social and economic life. They can play a positive role in promoting stability, cooperation, and development. However, they can also have negative consequences, such as perpetuating inequality and corruption. Understanding the role of informal institutions is essential for designing effective policies and interventions that promote inclusive and sustainable development.

FAQs

What are informal institutions?

Informal institutions are unwritten rules that govern behavior and interactions within a society or organization. They are created, communicated, and enforced through social interactions, cultural norms, and shared values, rather than through official channels.

How do informal institutions differ from formal institutions?

Informal institutions are unwritten and enforced through social interactions, cultural norms, and shared values, while formal institutions are codified laws and regulations enforced by the government or other authorities.

What is the role of informal institutions in corporate governance?

In emerging economies, informal institutions often play a greater role in corporate governance than in OECD economies. This is because formal institutions in emerging economies are often weak or underdeveloped. As a result, informal institutions, such as family and clan networks, business groups, and guanxi (personal connections), play a significant role in shaping corporate behavior and decision-making.

Can informal institutions be beneficial?

Yes, informal institutions can be beneficial. They can provide stability, social cohesion, and adaptive capacity. For example, informal networks of exchange can help communities cope with economic shocks.

Can informal institutions be harmful?

Yes, informal institutions can also be harmful. They can perpetuate inequality, corruption, and inefficient practices. For example, social norms that discriminate against women can limit their access to education and employment opportunities.

What are some examples of informal institutions?

Some examples of informal institutions include:
– Social norms, such as the expectation that people will be honest and trustworthy
– Cultural values, such as the importance of family and community
– Religious beliefs, such as the prohibition of alcohol consumption
– Traditional practices, such as the exchange of gifts or the payment of dowries

How do informal institutions evolve?

Informal institutions evolve over time through a process of social interaction and learning. As people interact with each other, they develop shared expectations and norms about how to behave. These expectations and norms are reinforced through social pressure and sanctions. Over time, these informal institutions become deeply ingrained in a society or organization.

Can informal institutions be changed?

Yes, informal institutions can be changed, but it is a slow and difficult process. One way to change informal institutions is through education and awareness-raising. Another way is through policy and legal reforms that create incentives for people to comply with formal rules and regulations.