FORMAL AND INFORMAL INSTITUTIONS IN BOSNIA AND HERZEGOVINA

- DETERMINANTS AND RELATIONSHIPS -

Dr Adnan Efendic

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Marie Curie IAPP Conference Zagreb, 01 September 2015

INTRODUCTION

A little bit about theory Some initial inputs about institutional

environment in BiH Empirical research on the link between formal

and informal institutions Remaining challenges for empirical research Implications

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THEORY

Institutions - defined as FORMAL and INFORMAL rules of the game (North, 1990)

A good institutional arrangement is one that provides effective interaction between a set of formal and informal institutions (De Soto, 2000)

Informal institutions has been relatively neglected dimension, partly due to data limitations

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THEORY

Formal and informal rules of the game - the meaning of “and” not very clear

The whole range of potential links, from unrelated to mutually endogenous, related either as complements or substitutes.

Possibilities: Complements (desirable) Substitutes (non-efficient interaction) Gaps (transition open up the gap) Informal institutions explain the formal once

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EMPIRICAL INVESTIGATION

Quantitative investigation based on survey data and probability modelling

Determinants which affect confidence in formal institutions and reliance on informal institutions in the focus

The link between formal and informal institutions particularly investigated

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FORMAL INSTITUTIONS IN BIH

Complex institutional structure, which was established through the DPA in 1995

14 different government levels and types Overlapping and indeterminate jurisdictions

between the levels of government A top-down approach in creating institutional

set-up in the country Experience: not widely recognized or viewed as

credible, lack legitimacy, difficult to enforce and more reliance on informal institutions is likely

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FORMAL INSTITUTIONS IN BIH

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FORMAL INSTITUTIONS (HFI - EF)

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0

0.2

0.4

0.6

0.8

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Aggregated2007

Regulation Trade Fiscal Gov't Monetary Investment Financial P ropertyRights

Labour

BIH AVERAGE 27

INFORMAL INSTITUTIONS IN BIH

“If you want to suceed, you should have your own network??”

Why?: different reasons, but primarily:To deal with (formal) institutional

inefficiencyPost-conflict nature – formal institutions

were overburdened if not absent so that people often had to rely on informal institutions to cope.

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SURVEY DATA

Survey data from 2008, UNDPBiH (Early Warning System) and 2012 (RRPP project – 1 survey)

Sample: representative of the different entities, regions, municipalities, ethnic groups, genders and urban/rural areas

Pooled data from 3 surveys 2008 – (different intercepts); 7,617 observations

Construct varaibles which code respondents’ perceptions on “institutional questions”

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DESCRIPTIVE STATISTICS

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QUESTIONSDummy Valid

%Mean value

Q1. To what degree do you agree with this statement? "I am confident that the legal system will uphold my contract and property rights in business/household disputes".

FORMAL

0 – Agree 58.30.39

1 - Disagree 41.7

Q3a. Can you estimate how much you use informal links (like links with your relatives, friends, colleagues, etc.) in your everyday life activities?

INFORMAL

0 – Little/not 73.70.25

1 –Moderately/lot26.3

Q3b. Can you estimate how much you use informal rules (like unwritten rules, codes, norms, customs, conventions, etc.) in your everyday business (life) activities?

0 – Use little/not 76.2

0.241 –Moderately/lot 23.8

VARIABLES BASED ON THEORY

“Institutional variables” that control for: Formal institutions – confidence – property rigthts,

contracts Informal institutions – reliance – informal rules

and networks Direct costs of institutions (taxes, fees, admin

costs, …) Indirect costs of institutions (estimated costs –

time, lack of enforcements, lack of efficiency,…) Change in institutions – national/entity over the

last 5 years Istitutional structures – entities FBiH and RS Ethnic status – minority vv majority Residence – urban vv rural area Gender – male vv female Timing - surveys

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LINK FORMAL-INFORMAL INSTITUTIONS

Institutional environment – formal and informal institutions - two (separate?) parts of one story

Theory – the link is very “complex” - complements/substitutes/gap

Possibilites in empirical context:1. “Common” observed variables influence

the both types of institutions in BiH2. Institutions “specific” influences3. Complexity hardly “(un)observed” in

the model13

SUPM MODELLING - FEATURES

SUPM - allows for a more complex (seemingly unrelated) pattern of joint determinations than simple simultaneity

Formal and informal institutions are related as joint outcomes of a wider system of influences

The relationship (FOR-INF) is modelled: implicitly through the unobserved correlations in the

error terms, explicitly by controlling for common observable

variables in the system,explicitly by controlling for equation specific

variables in the system.14

CONFIDENCE IN FORM ALINSTITUTIONS

(Confidence in contractand property rightsprotection in BiH)

RELIANCE ON INFORM ALINSTITUTIONS

(The estim ate of how m uchinform al rules/links have

been used in BiH)

SPECIFIC VARIABLES

- d irect costs paid(taxes, fees, adm in costs)

SPECIFIC VARIABLES

- Urban/Rural area- Gender of respondents

INDIRECT COSTS OF INSTIT.

(lack enforcem ent, lack effic iency,tim e-spending procedures, ...)

THE DIRECTION OF INST.CHANGE LAST FIVE YEARS

(Better, Sam e, W orse)

ENTITIES W ITH DIFFERENTINST. ENVIRONM ENT

(FB iH and RS)

ETHNIC STATUS

(M inority or Majority)

OM M ITED INFLUENTIALFACTORS

(e.g. the war and post-war effects,specific religious environm ent, ...)

COM M ON OBSERVED FACTORS

COM M ON UNOBSERVEDFACTORS

BASE-LINE MODEL RESULTSThe dependent var. in the 1st equation is DPROPER (0=’agree’; 1=’disagree’)The dependent var. in the 2nd equation is D3INFRULE (0=’use little/not’; 1=’use moderately lot’)

DPROPER D3INFRULE

Variable Coef. Std. error z-stat.P> Coef. Std. error z-stat.

P> CONSTANT - 0.82 0.08 - 10.6 0.000 - 0.30 0.08 - 3.78 0.000

D4DIR10 - 0.15 0.07 - 2.10 0.036 - - - -

D4DIR30 - 0.25 0.06 - 4.19 0.000 - - - -

D4IND5 - 0.04 0.08 - 0.54 0.586 - 0.45 0.06 - 7.15 0.000

D4IND20 - 0.12 0.06 - 2.24 0.025 - 0.27 0.05 - 5.91 0.000

D5NATWOR 0.18 0.09 2.08 0.038 - 0.11 0.09 - 1.22 0.223

D5NATSAME - 0.09 0.07 - 1.38 0.168 - 0.06 0.07 - 0.90 0.367

D5ENTWOR 0.67 0.09 7.33 0.000 - 0.22 0.10 - 2.24 0.025

D5ENTSAME 0.59 0.07 8.30 0.000 - 0.10 0.07 - 1.36 0.174

DENTITY 0.28 0.04 6.25 0.000 0.15 0.05 3.08 0.002

DMAJOR 0.05 0.05 0.96 0.338 - 0.15 0.05 - 3.07 0.002

DURBAN - - - - 0.12 0.04 2.90 0.004

DGENDER - - - - 0.11 0.04 2.55 0.011

SEPT08 0.21 0.04 4.79 0.000 - 0.18 0.05 - 3.91 0.000

NOV08 0.10 0.05 1.88 0.060 - 0.40 0.06 - 6.76 0.000

z z

P> z

MARGINAL EFFECTS AFTER SUPM

The dependent variables are DPROPER=1 and D3INFRULE=1

Variable Explanation of the variables dy/dx Std. error z-stat.

D4DIR10 Direct costs, 1=range 0-10%. - 0.01 0.01 - 2.11 0.035

D4DIR30 Direct costs, 1= range > 10-30%. - 0.02 0.01 - 4.20 0.000

D4IND5 Indirect costs, 1= range 0-5%. - 0.06 0.01 - 6.58 0.000

D4IND20 Indirect costs, 1= range > 5-20%. - 0.05 0.01 - 5.70 0.000

D5NATWOR Change in state instit.; 1=” worse” 0.01 0.02 0.03 0.977

D5NATSAME Change in state institutions; 1=’same’ - 0.02 0.01 - 1.43 0.151

D5ENTWOR Change in entity instit.; 1= ‘worse’ 0.02 0.02 1.17 0.241

D5ENTSAME Change in entity institutions; 1=’same’ 0.04 0.01 3.55 0.000

DENTITY Entity in BiH; RS=0, FBiH=1 0.04 0.01 5.93 0.000

DMAJOR Ethnic status; minority=0, majority=1 - 0.02 0.01 - 1.82 0.069

DURBAN Type of area; rural=, urban=1 0.02 0.01 2.90 0.004

DGENDER Gender; female=0, male=1 0.01 0.01 2.54 0.011

SEPT08 Survey from September 2008=1 - 0.01 0.01 - 0.68 0.498

NOV08 Survey from November 2008=1 - 0.04 - 0.01 - 5.13 0.000

Note, dy/dx is for discrete change of dummy variable from 0 to 1. Source: Authors’ calculations using STATA 10.

CONCLUSION ON THE LINK

A mutually endogenous relationship between confidence in formal institutions and reliance on informal institutions

The success or failure of formal institutions is mirrored by the decreasing or increasing role of informal institutions

Hence, the result supports substituting relationship between formal and informal institutions

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SPECIFIC FINDING - DETERMINANTS

Indirect costs matters the most – the highest marginal effect in the model – higher indirect costs associated with lower confidence in F.INST and more reliance on INF.INST

Institutional structure matters – FBiH entitiy respondents are less confident in formal and use informal institutions more than those from RS.

Ethnicity matters - Minority - have lower confidence in F.INST and more reliance on INF.INST than majority

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SPECIFIC FINDING - DETERMINANTS

Lack of improvements in inst. – lower confidence in F.INST and more reliance on INF.INST (no strong evidence for INF.)

Higher direct costs – higher expectations from F.INST – less confident

Urban vv Rural - more reliance on INF.INST

Male vv Female – more reliance on INF.INST

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ROBUSTNESS PROCEDURES

Logit, probit, multinomial Logit

Full sample with “Don’t knows”

Different proxies for informal institutions (i.e. Informal rules or Informal networks)

Inclussion or exclussion of some ommited variables – model diagnostics

New survevy data from 2012 confirms the main finding - substitution 21

INVESTIGATE FURTHER

Ommited infuences – no possiblity to control Our analysis cannot identify fully the

underlying causal relationships between formal and informal instititons

Dynamic panel context would be an advantage

Comparison of the results with other countries – extend the research?

Different types of formal/informal institutions ...

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IMPLICATIONS

Puts into question assumptions either that formal and informal institutions are unrelated or that informal institutions are exogenous with respect to formal institutions

The quantitative effects of indirect costs of institutions are substantially larger than the effects of direct costs

Informal institutions are more persistent than formal ones – changes in formal institutions do not influence the degree of reliance on informal institutions 23

THANK YOU!

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