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Abstract
Drawing from the new institutionalist and public choice literature, this project frames institutions in contemporary states as products of negotiations between state elites and wealth-generating societal groups over the role and reach of the state, rather the product of bellicist processes. Data from eight months of fieldwork in Kampala, Nairobi, London, and Toronto is used to compare institutional development in Uganda and Kenya where state elites and the closed Asian-Ugandan and Somali-Kenyan ethnic business networks, respectively, are negotiating state policies and regulations affecting business activities. Each country case considers three separate negotiations between the two parties to illustrate how institutional linkages—both formal and informal—may form in contemporary states.
This project finds that in negotiating regulations, each party's internal cohesion and bargaining leverage account for institutional outcomes. Cohesive state elites are able to provide credible commitments through their patronage structure of rule and, as a result, the business network agrees to informal institutions' authority in governing their business activities. This occurs even if informal institutions are a less efficient outcome for the business network than regulation through formal institutions. By contrast, when state elites are unable to offer stability through their patronage networks due to their lack of cohesion, the business network will rely on internal mechanisms to facilitate communication, minimize risk, and maximize business interests. In such a scenario, when the business network faces greater costs than state elites from negotiations breaking down, it will engage in collective action to push state elites to abide by the formal institutional reforms that state elites only implemented to placate international agencies. The business network has no inherent preference for either formal or informal institutions. This has two important implications for our understanding of the role informal institutions play in developing states: first, they are not necessarily incompatible with sustaining a stable climate for business; second, their ability to promote business interests points to the limited effectiveness external interventions can have in promoting the development of robust formal institutions.
