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Law and Economics with Chinese CharacteristicsInstitutions for Promoting Development in the Twenty-First Century$
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David Kennedy and Joseph E. Stiglitz

Print publication date: 2013

Print ISBN-13: 9780199698547

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199698547.001.0001

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Analyzing Legal Formality and Informality: Lessons from Land Titling and Microfinance Programs 1

Analyzing Legal Formality and Informality: Lessons from Land Titling and Microfinance Programs 1

Chapter:
(p.112) 3 Analyzing Legal Formality and Informality: Lessons from Land Titling and Microfinance Programs1
Source:
Law and Economics with Chinese Characteristics
Author(s):

Antara Haldar

Joseph E. Stiglitz

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199698547.003.0004

This paper critically examines the validity of the prescriptions of conventional law and economics theory using evidence from two programs aimed at poverty alleviation through improving access-to-credit. The two programs illustrate alternative approaches to institutional reform—the land-titling program (for instance, as advocated by Hernando de Soto in Peru) represents the formalist perspective, while microfinance (as exemplified by Muhammad Yunus’ Grameen Bank, a trust-based program) provides evidence on a more informal, norm-based approach. On a ‘static’ analysis, it finds that the Yunus model outperforms the De Soto model (both in terms of efficiency and equity)—thereby underscoring the benefits of a more socially-rooted norm-based system, at least in the short run. But, on a ‘dynamic’ analysis, it finds that the rapidly expanding microfinance sector in Bangladesh itself shows evidence of increasing formalization. This comparative study thus questions the widespread belief in the importance for development of formalizing legal institutions and arrangements. It demonstrates not only that formal law may not be a necessary pre-requisite for development in the short run, but that some countries might do better focusing on alternative institutional reforms. At the same time, it shows that, in the longer run, formal and informal legal systems may be complements rather than substitutes. This analysis has direct and important implications for the evolution of legal arrangements in China: It thus argues that it is crucial for China to reject the assumed superiority of formal law per se, as well as the false dichotomization between formal and informal systems.

Keywords:   microfinance, land titling, Grameen Bank, Institute for Liberty and Democracy, Muhammad Yunus, Hernando De Soto, access to credit, formal law, informal law, norms, legal formalization, social capital, trust, collateral, peer monitoring, Chicago-school, private property, property rights, contract enforcement, collective action problem

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