Legal Studies & Business Ethics

The Wharton School

University of Pennsylvania

 

Jon M. Huntsman Hall

Room 655

3730 Locust Walk

Philadelphia, PA 19104

 

nicholsp@wharton.upenn.edu

 


 

Emerging Economies

 

Emerging economies are those countries whose mode of conducting business, whose notion of contract, whose commercial institutions, are changing from a relational to a formal orientation. In other words, emerging economies seek to transform existing institutions or develop new institutions that will facilitate relationships among strangers rather than only among parties with preexisting relationships.

 

Institutions can be characterized and categorized in a number of ways. One very important distinction is between institutions that operate in an impersonal, formal manner and those that operate in a more personal, relational manner. The distinction between formal and relational is best framed in terms of how each type of institution facilitates relationships.

 

The distinguishing feature of a formal institution is its impersonality. Persons who facilitate relations through a formal institution need not have any prior relationship with one another. In Western societies, for example, marriage is a formal institution. Persons are allowed to marry any nonaffined person they choose, regardless of that person’s status.

 

The distinguishing feature of a relational institution, on the other hand, is its emphasis on pre-existing relationships or the status or position of persons. In societies that utilize relational institutions, a person might be required to marry a particular person, or only persons with a particular status, or persons within a narrow range of statuses.

 

It is unlikely that even in the West a person would marry a complete stranger. Relationships among strangers are more likely to occur in the commercial sector. The distinction between formal and relational applies in the commercial sector just as it applies to the institution of marriage. In labor markets, for example, much study has been made of “informal” labor. Although the concepts are poorly defined, the formal labor market is that which is regulated by the state, whereas the informal market is that which is regulated by kinship or other relational ties. State regulation tends to be impersonal and self-contained and opens the market to all participants, whereas the informal market relies on exogenous relationships and often limits entry to those who have those relationships. Similarly, sales transactions can be characterized as formal or relational. “Generally speaking, market transactions entail the use of money and tend to be impersonalized (taking the limiting form of arms’-length trading) while nonmarket transactions more often than not are of a barter type, interlinked and highly personalized” (Erik Thorbecke, “Impact of State and Civil Institutions on the Operation of Rural Market and Nonmarket Configurations,” 21 World Development 591, 592 (1993)). Hans-Dieter Evers and Ozay Mehmet provide a succinct description of intravillage buying in Indonesia: “In their own village prices are influenced, if not determined, by a ‘moral economy’ based on criteria as ‘just prices’ and by a predominance in the use value of basic commodities rather than the exchange value determined by competitive prices” (Hans-Dieter Evers & Ozay Mehmet, “The Management of Risk and Informal Traders in Indonesia,” 22 World Development 1, 6 (1994)).

 

The insights provided by institutional economics and sociological institutionalism substantiate the theory of emerging economies that is offered by this article. With respect to institutional economics, it is not difficult to hypothesize a motive for entrepreneurs in developing countries to seek change in commercial institutions. In keeping with the relational orientation of the commercial institutions in emerging economies, business in the nonmature countries is generally conducted in a manner that is more relational than formal in orientation. Relational institutions are dependent on socially recognized status and on preexisting relationships. Such institutions do not lend themselves to facilitating business among strangers: a person who is not a member of a given society has no status in that society and has no preexisting relationships. It is reasonable to assume, therefore, that relational institutions constitute a significant barrier to outsiders who wish to conduct business in a country.

 

Barriers to extrajurisdictional transactions imposes significant hardships on any country, but they pose the greatest danger for nonmature economies. The vast bulk of the world’s wealth is held by mature economies. The largest markets for manufactured goods are the mature economies. The largest markets for unprocessed goods are the mature economies. The largest market for services are the mature economies. Most of the world’s intellectual property is held in the mature economies. A businessperson who cannot enter into relationships with persons in mature economies will be cut off from those markets and those inputs, and will have little chance to grow. Clearly, the costs of changing the orientation of commercial institutions will at some point be less than the continuing lost opportunity costs suffered by that businessperson. In other words, this entrepreneur satisfies North’s description of an agent of change.

 

With respect to sociological institutionalism, the impetus for change is somewhat more subtle, but is discernible nonetheless. The financial collapse of the Soviet Union wrought fundamental changes in deeply held norms throughout much of the world. The political changes in Central and Eastern Europe in the waning months of 1989, when the soviet bloc shrugged off the grasp of the Soviet Union and the Soviet Union itself began to collapse, attract much of the attention given to the process of change. Change, however, is not limited to Central and Eastern Europe: Asia and Latin America are also reshaping themselves in dramatic ways. Around the world, fundamental changes occurred to the social structure and to the desires of countries to look outside of their own borders. Those changes would by their very magnitude change perceptions of appropriateness. Changes in perceptions of appropriateness would motivate persons to change institutions, including commercial institutions. Thus, whereas institutional economics perceives change anticipating opportunity, sociological institutionalism perceives change as response to change.

 

Under either iteration of institutionalism, the desired change would be one that would allow, and encourage, the creation of business relationships with persons outside of the extant society. This could be accomplished in one of two ways: first, by retaining relational institutions and somehow bringing outsiders within the society (by giving them status and relationships); or, second, by changing institutions so that they are more formal in nature. The first method is not viable. A society has little control over persons and entities that are outside of its ambit, so it is unlikely that outsiders could be forced to establish noncommercial relations before partaking in commercial activity. Thus, only the second method is viable. The only viable route for change is to transform the nature of the institutions themselves, from relational to formal. Such a process of change constitutes the definition of emerging economies.

 

 

from Philip M. Nichols “A Legal Theory of Emerging Economies,” 39 Virginia Journal of International Law 229-301 (1999)