2.2.2. Informal Regulation

Introduction

MSEs and other firms operate within a business environment that imposes both formal and informal rules. This section considers the informal dimension: the norms, customs and codes of conduct that affect people’s attitudes, behaviors and access to resources and markets—and which are not captured by specific formal laws, regulations or contracts. In most contexts of poverty, these unwritten rules of society have a particularly strong influence on the functioning of value chains, and hence the prospects for creating wealth for poorer members of the community. Such rules often compensate for or fill a gap in legislation. Even formal written laws, regulations and policies are usually influenced by norms and values that also reflect the dominant social institutions in a society. For more on the interaction between informal and formal rules, click here.

The informal rules or regulations found in any business environment do not arise arbitrarily. They have historical roots, and are strongly determined by the social institutions of that community, including gender, ethnicity, religion, caste and class. These social institutions exist because they serve a social purpose—which is often to protect the power or privilege of particular groups.

An essential part of value chain analysis is the consideration of power, and in particular the power relations that emanate from different social institutions. Understanding power in value chains is not merely about recognizing when one actor can affect the incentives of another to do something s/he would not otherwise have chosen to do. It must also take into account “the way in which the institutions have evolved through the past operation of power (including through violence) to define the options available, and the way social and cultural norms (informal rules) contribute to their ongoing reproduction, for example, through the credibility of reputation or threats.”[1]

Importance of Informal Regulations

Social institutions—via the values, norms and informal rules which they inspire—have a major influence in shaping what roles and activities are seen as socially acceptable for different people and enterprises. This social regulation in turn can strongly affect whether and how individuals participate in value chains, the incentives to which they respond, and the benefits they accrue. Informal rules are reflected in the way a community shares income and property, addresses learning and innovation, and values (or discourages) social mobility. Social institutions can affect value chain development in ways such as the following:

Less obviously, informal rules and social norms can be observed when individuals are reticent to stand out from the crowd, or when tension arises between social and commercial values. For more on such observed behavior, click here.

Understanding informal regulations is essential because they may at times present themselves in behaviors that seem apparently unproductive, but may actually serve an important purpose. Failure to understand informal rules leads to inappropriate or misguided interventions. For example, in some agricultural communities men traditionally gather together after the harvest in social celebrations that apparently “waste resources”. However, these events often play an important role in managing social relationships, which are vital to sustaining critical social safety net functions. Individuals who neglect such social norms may be ridiculed, ostracized or even suffer physical attacks on property.

People often have good reason to favor behaviors that strengthen their social safety nets. These might include shared access to incomes, a shared understanding of property, and some rigidity in social structure to ensure key roles are maintained. Behaviors that value chain practitioners tend to regard as necessary (at least to some extent) for competitive value chains—such as entrepreneurialism, risk taking, social mobility and individual wealth accumulation—may be resisted if they jeopardize these social safety nets. The design of effective interventions to foster behavior that increases value chain competitiveness and wealth creation in poor communities, therefore relies on a good awareness and understanding of the informal rules in the particular value chain context, including their underlying social purpose.

Social institutions continuously change, and the particular rules of the game in any community evolve over time in response to exposure to new technologies or interaction with new cultures. Changes in end markets may drive behavioral responses that challenge informal rules. Or the underlying purpose of specific rules or norms may become less important to a community over time. For example, once technology makes it easier for relatives in urban centers to send remittances home, rural households may rely less on neighborhood solidarity to survive shocks such as crop failure or disease outbreak. Understanding informal rules thus makes it easier to design effective value chain programs that align interventions with existing trends in the evolution of informal rules, for example, or that avoid unwittingly confronting social norms head-on.

Framework for Understanding Role of Informal Rules

The conceptual framework below seeks to characterize the relationship between social institutions, formal and informal rules, and their impacts on value chain performance.

In the wider social and political environment, we find:

  • Social institutions [2] are complex, enduring structures or mechanisms of social order (and cooperation) that govern customs and recurring behavior patterns important to a society. They are usually identified with a social purpose (e.g., mitigating conflict, validating an elite). Enduring institutions such as gender, race or ethnicity, class and religion help to shape individuals’ beliefs and expectations.
  • Historical experience provides the context within which social institutions are manifested. Cultural beliefs and political economy are grounded in a society’s past; for example, experiences of conflict (or peace), colonization, famine, isolation or integration.

In the business enabling environment of a specific value chain, we find:

  • Formal rules consist of the written laws, government policies, formal regulations and industry standards that are formally documented and (sometimes) enforced. They are in part shaped and influenced by the informal rules of that society or business community. In turn, they influence how informal rules are expressed in the performance of the value chain.
  • Informal rules are unwritten, tacit rules that define acceptable roles and activities for different individuals based on a combination of social norms, culture and historical factors. Any specific business community (or set of value chain actors) tends to adopt such rules, codes of conduct and regulations based on a combination of norms associated with these different social institutions. Sometimes these informal rules fill an obvious gap in formal legislation. Informal rules are often psychologically internalized: not merely unwritten, but beneath people’s conscious attention.

In their impact on the performance of specific value chains, we observe:

Informal, unwritten rules and norms combine with formal laws and regulations to affect the performance of specific value-chains. For the purposes of this wiki, the influence of the business environment on value chain performance is described in terms of three categories: MSEs' access, their relationships and their behavior.

  • Access relates broadly to four factors: resources (land, water, labor, inputs, etc.), information, services and markets. Lack of access is a major constraint on wealth creation in poor communities. Informal rules can either facilitate or constrain access for different groups of individuals or types of MSEs.
  • Relationships with other firms and organizations is a critical aspect of value chain performance. Informal rules affect how buyers and sellers relate to each other in commercial relationships along the value chain (vertical linkages). They also influence how value chain actors relate to their peers as competitors or collaborators (horizontal linkages). Social norms determine what relationships are permissible and set boundaries for the terms of these relationships.
  • Behavior necessary for competitiveness, such as entrepreneurialism, risk-taking and innovation. Informal rules influence actors’ willingness and ability to invest in improving their business activities (i.e., upgrading), how resources are used, and acceptance of social mobility and individual wealth creation.

For more on the impacts of informal rules on value chain performance, click here.

Tools and Methods

See Tools for Influencing Informal Rules for step-by-step guides to the methods and tools presented in this section.

This section focuses on how organizations gather information about and gain insights into informal rules and social norms that might affect their value chain projects. It is worth remembering that informal rules have a ‘double-edged’ nature: they are sometimes inhibit innovation, and often reinforce social inequalities. At the same time, they often serve a social purpose, which may be very positive (for example, reducing business risks, managing uncertainty and bolstering the social fabric of communities on which poorer households rely).

Analytical Methods

Experienced practitioners emphasize the importance of taking adequate time to investigate informal rules. Particularly in projects financed and/or implemented by people from outside the community, it is critical to listen and interpret the unwritten rules in place. It takes time, but there are some tools and methods that can be used to facilitate the process:

  1. Participant observation uses observation of and participation in a community to understand multiple perspectives within that community.
  2. Institutional ethnography looks at the paperwork involved in processes to examine power relations.
  3. Participatory approaches encourage the stakeholders within the community to analyze key issues themselves.
  4. Root cause analysis enables stakeholders and project staff to think beyond the obvious symptoms of a problem to identify the deeper issues at work.
  5. Analysis of social influencers helps project staff to identify individuals or groups with the ability to impact the change process and develop a strategy for managing these stakeholders.
  6. Behavior change perspectives on gender and value chains can help researchers and project staff better understand how gender influences men's and women's incentives for upgrading. 

Methods of Influencing Informal Rules

Social norms affecting value chain performance can be influenced in a number of ways.

  1. Behavior change methods of dealing with informal rules draw from fields such as health education and organizational change. These methods look at people's incentives and abilities to carry out certain behaviors.
  2. Addressing mechanisms for enforcing informal rules. Informal rules are typically enforced through community feedback mechanisms that maintain compliance. It is essential to understand the underlying driver of a rule, what its social benefits are and the various feedback mechanisms used for enforcement.

Footnotes

  1. ↑ Johnson, S. (2006) Making markets work for poor people: the role of social regulation, DSA presentation paper
  2. ↑ ‘Social institutions’ in Stanford Encyclopedia of Philosophy