A good portion of income risk that rural households in low income countries face is not common among the villagers, but idiosyncratic to the household. The risk of falling prey to illness or death, of damage to stored grain from pests or a leaky roof, or of loss of a draft animal, are incidents that can befall any household.215 The iddir serves as a communitarian insurance arrangement in wide use in Ethiopia (there are variants elsewhere in sub-Saharan Africa). Small landholders who join their local iddir make a fixed and regular payment of money into a common pot (the ‘premium’ is usually smaller for poor women), and withdraw an amount owed to them in the event of a bereavement. No contracts are signed, members know one another. The rules are mutually enforced.216
215 See Bardhan and Udry (1999). This is not a self-evident empirical observation. A common mental picture of calamities in low income societies, drawn from newspaper articles or news programmes, is that they befall entire communities at once (drought, flood, and so on).
216 Aredo (2010) is an excellent reference to the workings of the iddir.
Chapter 6: Laws and Norms as Social Institutions
A not entirely dissimilar class of communitarian institutions, known as rotating savings and credit associations (ROSCAs), are widespread in Asia.217 In the absence of commercial banks, which may in any case be unwilling to lend to poor households, ROSCAs enable people to avoid storing money for a lumpy expenditure. In detail they differ, depending on the terrain, among other things, but there is a common thread running through them. A stylised version would run as follows:
Imagine that each of 12 individuals needs an asset (e.g. a draft animal), which costs US$120.
Each person is able to put aside US$10 each month. If they acted alone, each individual would be able to purchase such an asset in 12 months’ time. Until then, the accumulating saving would be lying idle under the proverbial mattress. Suppose now they establish a ROSCA, with the agreement that each person would contribute US$10 every month into a common pot for 12 months. The agreement also says that at the end of each month the US$120 that had accumulated in the pot would be awarded by a fair lottery to a member who had not yet won a lottery. At the beginning, all face the same odds (i.e. probability 1/12) that they will be able to purchase the asset in a month’s time, the same odds (of 1/11) that those unlucky at the first draw will be able to purchase it in two months’ time, and so on.
The only person who would not gain ex post is the person who lost at each round of the lottery. But they will not have lost either, because they will be able to purchase the asset at the end of the 12th month.
Observers have reported that in the ROSCAs they had studied, every transaction was observed by every ROSCA member at every meeting (Aredo, 2010). That ensured observability – an essential feature of exchanges that involve mutual enforcement.
6.6 Social Capital and Identity
In contrast to norm-based transactions, the hallmark of transactions enforced by the law of contracts is that they can take place among people who do not know one another. In the modern world people are mobile, a pattern of behaviour not unrelated to the fact that we are able to do business even with people we do not know. We all too often do not know the salespeople in the department stores where we shop, nor do they know us. When someone borrows from their bank, the funds made available to them come from unknown sources.
Literally billions of transactions take place each day among people who have never met and will never meet. Often, the exchanges take place only once, unlike exchanges based on long-term relationships. Markets are prime examples of institutions offering such opportunities. In contrast to communities, markets are impersonal and inclusive. Witness the oft-used phrase: ‘My money is as good as yours.’
And yet, markets cannot function without communities, for as we have seen, mutual
enforcement is the basis on which external enforcement (e.g. state enforcement) acquires its force. We have also seen that mutual trust rests on a system of self-confirming beliefs about one another. And that leads to the thought that mutual trust is potentially a fragile state of minds.
Like ecosystems, societies need to possess a certain amount of modularity if they are to protect and promote trust. Modularity makes it more likely that a breakdown of trust in one sector of society does not infect the rest but is instead revived by actions taken by some other sector of society.
Despite societal modularity, people could end up not cooperating even if they care a lot about the future benefits of cooperation. To reconfirm that, imagine that each party believes that all other parties will renege on an agreement. It would then be in each one’s interest to renege at once, which means of course that there would be no cooperation. Even if people were
217 Geertz (1962) is the classic reference. His field study was based in Indonesia.
Chapter 6: Laws and Norms as Social Institutions
far-sighted, a belief that others will renege can be a cause of a failure to cooperate. No doubt it is only mutual suspicion that ruins the chance to cooperate, but the suspicions would be internally self-consistent. We should conclude that even when appropriate institutions are in place to enable people to cooperate, they may not do so. Whether they cooperate depends on mutual beliefs, nothing more.
We now have in hand a tool to explain how a community can skid from cooperation to non-cooperation. Ecological stress – caused, for example, by rising population and prolonged droughts – can result in people fighting over land and natural resources. Political instability – in the extreme, civil war – could in turn be a reason people who previously formed a society become antagonistic toward one another, forming groupings that rely on past relationships for use against others. One group becomes concerned that their source of livelihood will be destroyed or confiscated by another, so they now discount the future benefits of cooperation with the other at a higher rate.
Similarly, if the parties fear that their government is now more than ever bent on destroying communitarian institutions in order to strengthen its own authority, they would discount future benefits and losses at a higher rate. For whatever reason, if the parties discount the future at too high a rate, relationships break down. The points at which those switches occur are bifurcations, the points themselves are tipping points (Chapter 3). Social norms work only when people coordinate on trust.
Ominously, there are subtler pathways by which societies can tip from a state of mutual trust to one of mutual distrust. We have argued that even if people are far-sighted, non-cooperation is a possible outcome. That tells us that a society could tip over from cooperation to non-cooperation owing merely to a change in beliefs. The tipping may have nothing to do with any discernible change in circumstances; the entire shift in behaviour could be triggered in people’s minds. The switch could occur quickly and unexpectedly, which is why it would be impossible to predict and why it would cause surprise and dismay. People who woke up in the morning as friends would discover at noon that they are at war with one another. Of course, in practice there are usually cues to be found. False rumours and propaganda create pathways by which people’s beliefs can so alter that they tip a society where people trust one another to one where they do not.
The reverse can happen too, but it takes a lot longer. Rebuilding a community that was previously racked by civil strife involves building trust. Non-cooperation does not require as much coordination as cooperation does. Not to cooperate usually means to withdraw. In order to cooperate, people must not only trust one another to do so, they must also try to coordinate on a social norm that everyone understands. That is why it is a lot easier to destroy a society than to build it.
How does an increase or decrease in cooperation translate into macroeconomic statistics? The numerical example in Box 6.2 captured a salient point, that an increase in cooperation raises wealth by permitting a more efficient allocation of resources. So now consider two communities that are identical in all respects, except that in one community, people have coordinated at a set of mutual beliefs where they trust one another, while people in the other have coordinated at a set of mutual beliefs where they do not trust one another. The difference between the two economies would be reflected in the economy’s productivity figures, which would be higher in the community where people trust one another than in the one where they do not. Enjoying greater income, individuals in the former economy are able to put aside more of their income to accumulate capital goods, other things being equal. So, asset accumulation there is higher.
Mutual trust would be interpreted from the statistics as a driver of economic growth – Chapter 8 offers empirical evidence of this.
The economics of biodiversity says that societies that have become rich were able to coordinate their mutual trust in activities that helped in the accumulation of produced capital and human
Chapter 6: Laws and Norms as Social Institutions
capital, but that they did so at the expense of natural capital, often in distant lands (Chapters 4, 14 and 15). Many economies have followed that route to economic development. They have degraded their own natural capital, allegedly as a price for economic growth. The choice of activities on which people coordinate their trust in one another matters enormously. Trust on its own cannot save the biosphere from ruin. The agenda on which trust is to be made to play will prove crucial.