5.2.2. Interaction between Informal and Formal Rules

Informal rules have an intimate relationship with formal laws, policies and standards. Formal rules often exist, and are most effective, when they codify informal norms that are already widely accepted. Equally, informal rules, norms and conduct do not only emerge from past traditions and habits influenced by culture, religion and gender: sometimes they also emerge as a response to formal institutions that fail to function to the benefit of the majority or a dominant group.

In many developing countries with weak judicial systems, written contracts are very difficult to enforce. Building trust and personalized relationships in value chains through repeated transactions can be more effective. For example, the suki system (or preferred supplier-buyer relations) in the Philippines exists to reduce risks of cheating and opportunistic behavior in a business environment where formal rules (e.g., written contracts) are not reliable.

Suki Trading Relationships in the Philippines

People in the Philippines generally do not believe that a written marketing agreement will protect them from opportunistic behavior and cheating. Likewise, there is a general perception especially in rural areas that written agreements can protect the rich but not the poor who lack the resources and power to enforce them. The depth of the suki relationship varies, but over time repeated transactions with the same person leads to the emergence of trust. On both sides, there are reduced search, negotiation and monitoring costs because the suki lives up to the norms and values of reciprocity and comes close to becoming part of the family mindset. The bonds between people engaged in the exchange are determined by informal rules or social institutions and serve to enforce the terms of the exchange.[1]

Informal rules contribute to the effectiveness of formal rules: most obviously where the norm is compliance with formal rules (e.g., adherence to grading standards even if the buyer does not always check). This vastly reduces enforcement costs. When the chances of detecting violations are negligible, most laws or regulations are ‘paper tigers’ unless such social compliance or civic cooperation exists. For more on nurturing value chain norms, see the 'Facilitating Behavior Change for Improved Competitiveness & Poverty Reduction' breakfast seminar presentation.[2] and the ‘Transforming Inter-firm Relationships to Increase Competitiveness’ briefing paper[3]

The breakdown of informal social norms or rules can, paradoxically, create the opportunity to formalize new rules in ways that challenge traditional patterns of economic exclusion. For example, traditional social norms that allocated and protected certain lagoon fishery resources for women in Sri Lanka were collapsing due to social and political changes. As a result, poorer women were being increasingly excluded. When it came time to formalize the lagoon fisheries management, Practical Action helped local fishery groups ensure that women regained access and a voice in the management of the common natural resource.


  1. Marian Boquiren, SDCAsia
  2. Boquiren, M. and Idrovo, I. (2010) Facilitating Behavior Change for Improved Competitiveness & Poverty Reduction
  3. Campbell, R. (2008) Transforming Inter-firm Relationships to Increase Competitiveness. ACDI/VOCA