FORMAL AND INFORMAL INSTITUTIONS IN BOSNIA AND HERZEGOVINA

FORMAL AND INFORMAL INSTITUTIONS IN BOSNIA AND HERZEGOVINA - DETERMINANTS AND RELATIONSHIPS - 1 Dr Adnan Efendic Marie Curie IAPP Conference Zagreb, 01 September 2015

INTRODUCTION A little bit about theory Some initial inputs about institutional environment in Bi. H Empirical research on the link between formal and informal institutions Remaining challenges for empirical research Implications 2

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 3

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 4

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 5

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 6

FORMAL INSTITUTIONS IN BIH 7

FORMAL INSTITUTIONS (HFI - EF) 8

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 inefficiency Post-conflict nature – formal institutions were overburdened if not absent so that people often had to rely on informal institutions to cope. 9

SURVEY DATA Survey data from 2008, UNDPBi. H (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” 10

DESCRIPTIVE STATISTICS Dummy QUESTIONS Q 1. To what degree do you agree with this statement? "I am confident that the legal system will uphold my contract and FORMAL property rights in business/household disputes". Q 3 a. Can you estimate how much you use informal links (like links with your relatives, friends, colleagues, etc. ) in your everyday life activities? 0 – Agree Valid % Mean value 58. 3 41. 7 0. 39 1 - Disagree 0 – Little/not 73. 7 26. 3 0. 25 1 –Moderately/lot Q 3 b. Can you estimate how much you use INFORMAL 0 – Use little/not informal rules (like unwritten rules, codes, norms, customs, conventions, etc. ) in your 1 –Moderately/lot everyday business (life) activities? 76. 2 23. 8 0. 24 11

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 FBi. H and RS Ethnic status – minority vv majority Residence – urban vv rural area Gender – male vv female Timing - surveys 12

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 Bi. H 2. Institutions “specific” influences 3. Complexity hardly “(un)observed” in the model 13

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

BASE-LINE MODEL RESULTS The dependent var. in the 1 st equation is DPROPER (0=’agree’; 1=’disagree’) The dependent var. in the 2 nd equation is D 3 INFRULE (0=’use little/not’; 1=’use moderately lot’) DPROPER D 3 INFRULE Variable Coef. Std. error z-stat. Coef. CONSTANT - 0. 82 0. 08 - 10. 6 0. 000 D 4 DIR 10 - 0. 15 0. 07 - 2. 10 0. 036 - - D 4 DIR 30 - 0. 25 0. 06 - 4. 19 0. 000 - - D 4 IND 5 - 0. 04 0. 08 - 0. 54 0. 586 - 0. 45 0. 06 - 7. 15 0. 000 D 4 IND 20 - 0. 12 0. 06 - 2. 24 0. 025 - 0. 27 0. 05 - 5. 91 0. 000 D 5 NATWOR 0. 18 0. 09 2. 08 0. 038 - 0. 11 0. 09 - 1. 22 0. 223 D 5 NATSAME - 0. 09 0. 07 - 1. 38 0. 168 - 0. 06 0. 07 - 0. 90 0. 367 D 5 ENTWOR 0. 67 0. 09 7. 33 0. 000 - 0. 22 0. 10 - 2. 24 0. 025 D 5 ENTSAME 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. 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 SEPT 08 0. 21 0. 04 4. 79 0. 000 - 0. 18 0. 05 - 3. 91 0. 000 NOV 08 0. 10 0. 05 1. 88 0. 060 - 0. 40 0. 06 - 6. 76 0. 000 P> Std. error z-stat. 0. 08 - 3. 78 - 0. 30 P> 0. 000

MARGINAL EFFECTS AFTER SUPM The dependent variables are DPROPER=1 and D 3 INFRULE=1 Variable Explanation of the variables dy/dx Std. error z-stat. P> D 4 DIR 10 Direct costs, 1=range 0 -10%. - 0. 01 - 2. 11 0. 035 D 4 DIR 30 Direct costs, 1= range > 10 -30%. - 0. 02 0. 01 - 4. 20 0. 000 D 4 IND 5 Indirect costs, 1= range 0 -5%. - 0. 06 0. 01 - 6. 58 0. 000 D 4 IND 20 Indirect costs, 1= range > 5 -20%. - 0. 05 0. 01 - 5. 70 0. 000 D 5 NATWOR Change in state instit. ; 1=” worse” 0. 01 0. 02 0. 03 0. 977 D 5 NATSAME Change in state institutions; 1=’same’ - 0. 02 0. 01 - 1. 43 0. 151 D 5 ENTWOR Change in entity instit. ; 1= ‘worse’ 0. 02 1. 17 0. 241 D 5 ENTSAME Change in entity institutions; 1=’same’ 0. 04 0. 01 3. 55 0. 000 DENTITY Entity in Bi. H; RS=0, FBi. H=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 2. 54 0. 011 SEPT 08 Survey from September 2008=1 - 0. 01 - 0. 68 0. 498 NOV 08 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 18

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 – FBi. H 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 19

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 20

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 . . . 22

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! 24