Informal Contract Enforcement PDF Download

This paper addresses the role of formal contract law and contract enforcement institutions in economic development. Its inquiry is consequentialist: whether the existence of a formal contract law and enforcement regime significantly contributes to economic growth in developing countries. We also address the related issue of the extent to which it is possible for a state to adopt an effective formal contract law and enforcement regime, without also adopting a particular type of political regime. Our inquiry further addresses the extent to which political theorizing about the role and structure of private law (in our case, contract law) applies universally, or whether such theorizing is highly contingent on context-specific political, cultural, and social values and practices. As the paper elaborates, two different hypotheses emerge from the literature. One takes the view that strong formal contract law and enforcement mechanisms are indispensable to economic development, while the other contends that much economic development is realizable through informal contracting mechanisms. To test the validity of these two hypotheses, we provide a critical review of existing literature, including literature on two cases of great contemporary development significance: the so-called 'China Enigma' and the 'East Asian Miracle.' In both of these cases, high rates of economic growth have been achieved, often in the absence of strong formal contract law and enforcement regimes. We argue that at low levels of economic development informal contract enforcement mechanisms may be reasonably good substitutes for formal contract enforcement mechanisms, but become increasingly imperfect substitutes at higher levels of economic development involving large, long-lived, highly asset-specific investments or increasingly complex traded goods and services, especially outside repeated exchange relationships. In the case of the 'China Enigma,' for example, even if the lack of effective formal contract enforcement has not been a major impediment to economic development to date (although some commentators contend otherwise), weak rule of law surely carries other significant costs in a more complete conception of development which embodies other non-instrumental values. We conclude that on one of the central questions in contemporary development debates - do good institutions cause growth, or does growth cause good institutions? - the answer, in the context of contract enforcement mechanisms, is a nuanced one.