Q&A

Below is a list of questions and answers about credibility theory, its underlying concepts and methodology. The questions are derived from discussions during various international conferences, seminars and workshops. The answers are derived from Ho’s publications, and are classified in several categories: i) concepts and definitions; ii) theory; iii) methodology; iv) other matters; and v) issues for discussion.

The numerous participants of our events are gratefully acknowledged for their lively interaction and stimulating feedback that we’ve received over the years, as well as for their interest in and enthusiasm to help rethinking important issues, such the “credibility of informality”, dynamic disequilibrium, endogeneity, and unintended intentionality.

I. Concepts and definitions

Credibility is defined as the collective expression of the functionality of institutions, or, more specifically, the reflection of actors’ cumulative perceptions of endogenously emerged institutions as a common arrangement. This definition contains various critical elements. See P. Ho, “An Endogenous Theory of Property Rights”, Journal of Peasant Studies, 2016, 43/6, p. 1125.

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[C]redibility can be best conceptualized as a theoretical continuum that varies between “fully” or “partially credible” to “non-credible”, or even “empty institutions”, which exist on government, non-governmental, or firm paper only. That continuum is temporally and spatially determined, that is, an institution perceived as credible at one given time and location could well be entirely non-credible, thus empty, at another time and location, and vice versa.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, p.16

[C]redibility was initially coined as an explanandum for the success and failure of Western monetary, anti-inflationary policies in the 1970s (Kydland and Prescott, 1977; Fellner, 1979). The widely flaunted idea was that the success of economic policy ultimately depends on the (state’s) credible commitment to free markets, trade liberalization, the privatization of government-owned enterprises and resources, and legal security for property rights. In this sense, the initial reading of the notion of credibility has a distinct neo-liberal signature. See Peter Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China”, Land Use Policy, 2014, Vol. 40, September, pp. 15–16.

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However, in her critique of the neo-liberal interpretation of credibility, Grabel (2000, p. 1) hit the nail on the head when she stated that “the credibility criterion is used to privilege neo-liberal economic policies and associated institutions.” Yet, at the same time, she made the crucial observation that: “credibility is always secured endogenously (. . .) rather than exogenously by virtue of the epistemological status of the theory that promotes it.” If we conceptualize credibility along this dimension – an endogenous feature tied to the nature of institutions, instead of something that could be accomplished exogenously, the notion becomes devoid of neo-liberal axioms and political convictions.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, pp. 15-16.

An institution is seen as: “a set of endogenously shaped (…) social rules” See P. Ho, “Myths of Tenure Security and Titling: Endogenous, Institutional Change of China’s Housing and Land”, Land Use Policy, 2015, Vol. 47, p. 353.

An example

Defined along these lines, a formal law or right of ownership is an institution inasmuch as informal, customary law regarding forest, fisheries or mining may be deemed an institution. In addition, one should be reminded that terms like ‘contract’ or ‘ownership’ frequently refer to (Western) conceptualizations of how institutions should appear based on certain axioms or political considerations.” See: P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1129.

Similarly, also rural share-cropping or a federal reserve can be considered institutions in that they represent a set of rules instead of a single rule on how, respectively, peasants minimize environmental and socio-economic risk in collaborative agricultural production, and financial markets are to be regulated through interest rates, credit flows and monetary supply. In addition, their operations are also guided through (written and unwritten) internal rules varying from communication to membership, allocation and penalty.” P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, pp. 1129-30

The principle of endogeneity or endogenous development attempts to chart a way out [of the dilemma why it is so difficult to ‘get institutions right’, PH] by positing that institutions and property rights are the resultant of social actors’ and economic agents’ interaction. In this view, institutions are not shaped and enforced by a single, outside agent, but instead through the mutual interaction of that agent with others. The endogeneity principle therefore precludes an external agency that can shape institutions, as any actor is involved in the ‘game’, albeit institutions may be perceived as externally shaped.” See Peter Ho, “In Defense of Endogenous, Spontaneously Ordered Development: The Institutional Structure of China’s Rural Urban Property Rights”, Journal of Peasant Studies, 2013, Vol. 40, No. 6, 1091–92.

Credibility is different from actors’ “trust” in institutions that emphasizes the relationship between social actors, as for instance, Farrell and Knight, state in an interesting article: “If institutions may exert an independent effect on trustworthiness, and thus on how social actors trust or distrust each other, then it follows that the evolution of institutions may be expected to have an impact on trustworthiness, and thus on trust, and thus on cooperation among individuals (Farrell and Knight, 2003, p. 539).

Credibility, on the other hand, draws attention to the nature of institutions and property rights, and to how they are perceived. To understand that nature, one needs to go beyond form and assess the rules in use, what they represent, and what function they fulfill.” See Peter Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China”, Land Use Policy, 2014, Vol. 40, September, pp. 16.

As stated: “Legitimacy, derived from the Latin legitimare (i.e., to make lawful) inherently bears the connotation to externality and rational agency – either on the part of the governors (who allegedly can actively establish a certain rule), or on the part of those governed (who allegedly can actively change that rule). By contrast, the focus on institutional function rejects axioms of externality and rational agency, as credibility is a measure of how institutions are formed and perceived as a result of autonomous, endogenous patterns of interaction and power differences. See Peter Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China”, Land Use Policy, 2014, Vol. 40, September, p. 16.

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Furthermore, although credibility is undoubtedly related to distributional conflict, it does not posit that a “fully credible institution” – if that ever exists – would also be free from conflict. (…) Therefore, whereas legitimacy is perhaps more mono-dimensionally related to social conflict and discontent, credibility by definition presupposes a wider array of indicators by which it could and should be measured, depending on the temporally and spatially determined functions of institutions.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights”, Land Use Policy, 2014, 40, Sept., p. 16. 

 

Endogeneity – as an important premise in Original Institutionalism– holds that institutional structure is not the result of intentional design by which institutions can be “wrongly” or “rightly” engineered. Instead, it emerges in an autonomous fashion resulting from actors’ incessant, multitudinous interactions. Put differently, although actors may have intentions, institutions spontaneously emerge as an unanticipated outcome of actors’ infinite bargaining and conflict; in effect, result from an endogenous, Unintended Intentionality.” See Peter Ho, “Who owns China’s housing? Endogeneity as a lens to understand ambiguities of urban and rural property“, Cities, 2017, Vol. 65, pp. 66-77.

An empty institution is defined as “[institutional] compromises over sensitive political issues. The interests opposed to them ensure that they are established in such a way that they cannot achieve their aims, whereas the interests supporting them win a pyrrhic victory as their rules, as represented by the new institution, have no practical impact on social actors’ behaviour .” In: Peter Ho, Institutions in Transition, Oxford University Press, 2005, p. 73.

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“Its disassociated status allows those governed to generally continue with what they were doing, while those governing can “enforce without enforcing.” The symbolic nature of such an outcome represents an institutional compromise and often features a lower level of conflict.” In: Peter Ho, Unmaking China’s Development: Function and Credibility of Institutions, Cambridge: Cambridge University Press, 2017, p. 204.

 

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II. Theory

The Credibility Thesis holds two critical implications in relation to Institutional Form and Persistence:

” Institutional function presides over form; the former can be expressed by its credibility, that is, the perceived social support at a given time and space.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept., p.14.

“The Credibility Thesis posits that “institutions that exist and persist, fulfill a function, and are credible; otherwise they would have fallen into disuse or shifted into other types.” See P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1126.

The premise that persisting institutions have a function does not imply that institutions and their credibility are fixed in stone. When functions change, institutions change, and thus also the levels of credibility – a process evident in shifts in conflict.” See P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1134

“For instance, the historical ‘persistence’ of share-cropping (Byres 1983) led Cheung (1968) to conclude that it is efficient (i.e. credible and functional). That premise turns around the neo-liberal, neo-classical argument, but by no means entails that credibility or functionality is equal to harmony and peace.” P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1127.

Other examples include the China’s cadaster and housing.

[C]redibility is undoubtedly related to distributional conflict, it does not posit that a ‘fully credible institution’ – if that ever exists – would also be free from conflict. Instead, credibility assumes that distributional conflict is part and parcel of any property rights arrangement.” For this reason: “[O]ne might argue that a steady status is never reached.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept., p. 16.

The theorem on “Dynamic Disequilibrium” is defined along two dimensions (depicted in Fig. 1):

  • Dynamism, or the premise that institutions are in perpetual flux, moving onward from one state to the other. That change, however, can manifest itself at different speeds – sometimes infinitesimally, imperceptibly small (resembling a nearly horizontal line, e.g. t3–t4); sometimes with great velocity, strides and shocks (depicted as a steep curve, e.g. t2–t3);
  • Non-equilibrium, i.e. the premise that institutional change never reaches a state of balance between actors’ interests, power and resources, as tension and conflict is present in any institutional arrangement.

See P. Ho, “A Theorem on Dynamic Disequilibrium: Debunking Path Dependence and Equilibrium via China’s Urban Property (1949-1998)”, Land Use Policy, 2017, , in press, p. 4

Figure 1

[W]hen an actor forcefully aims to change institutions against the functions that other actors accord to it, the result will be a struggle of power.” See P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1134.

In this sense one should be reminded that: “[O]rdaining and prohibiting belong to a mode of institutional intervention that will only work when the function of what is intended already concurs with what locally exists as actors’ aggregate perceptions. Ironically, … governments often chose ordaining and prohibition in a symbolic demonstration of resolve or to strike deals with other powerholders. The outcome is a contested institution lacking credibility, or an empty institution decoupled from actors’ daily praxis.” See ibid., p. 1141.

First and foremost, the neo-classical and neo-liberal schools hardly consider that the institutions they propagate are the result of power as well.” See Peter Ho, “Empty institutions, non-credibility and pastoralism: China’s grazing ban, mining and ethnicity”, Journal of Peasant Studies, 2016, Vol. 43., No. 6, p. 1151

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Thus, the idea that formalization and privatization, too, are driven by power dynamics does not play any significant role in the analysis of neo-classically trained scholars, and Acemoglu and Robinson are no exception. By contrast, formalization (and privatization) (…) [are in the credibility view] taken as a fundamental point of departure to study how divergences in power may work out.

Second, in the neo-classical view formalization and privatization are seen as exogenously designable interventions. From there it is not a far step to establish democracy, good governance and human rights in other economies, societies and cultures in the name of freedom, open markets and private property rights.” See ibid., p. 1151.

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“Yet adhering to endogeneity implies that actors’ action is inevitably followed by reaction, triggering chains of interdependent actions and reactions, that tie an alleged external ‘designer’ of institutions into a spontaneously ordered game in which intentions are inherently watered down into something different or unintended.” See ibid., p. 1151. 

“Third, in the endogenous view power is not to be seen in moral terms of inefficiency, but in the way it structures institutions into credible, non-credible or empty arrangements.” See ibid. p. 1151.

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“Ergo, when institutions persist over time and space, they are credible and functional, as they have evolved from a spontaneously ordered evolution, regardless of how that has been engendered by divergences of power. This principle equally applies to the change and extinction of less and non-credible institutions, as apparent through rising levels of distributional conflict, contestation and cleavage.” See ibid., p. 1151.

It is not being insinuated that a single body of literature exists that represents the ‘neo-liberal’ or the ‘neo-classical’ theory that is consistent in its entirety. Instead, their premises comprise diverse inconsistencies and constituent elements that may concur or be contradictory in nature. However, it is asserted that certain neo-liberal, neo-classical postulates or assumptions exist around which scholarly debate and regular empirical validation occur. These wield significant ascendancy over developmental policy and intervention. These postulates include: (1) institutions can be designed exogenously (i.e. intentionally) and subsequently enforced; (2) institutional change is characterized by equilibrium; and (3) the form of institutions (i.e. formal, secure and private property rights) is imperative for development and growth.

By contrast, alternative postulates are put forward.” See: P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1124.

ALTERNATIVE POSTULATES
The constituting premises of the Credibility Thesis are as follows:

  1. “Institutions are the resultant of endogenous, unintentional development. Although actors have intentions there is no agency that can externally design institutions, as all actors’ actions are part of the same autonomous, spontaneously ordered game.”
  2. “Institutional change is driven by disequilibrium. Contrary to the notion that institutions settle around equilibrium, actors’ interactions are seen as an ever-changing and conflicting process in which stable status is never reached. One could see it as a ‘Dynamic Disequilibrium’ or institutional change as perpetual alteration, yet with alternating speeds of change: sometimes imperceptibly slow, sometimes sudden and with shocks.”
  3. “Institutional form is subordinate to function. In other words, the use and disuse of institutions over time and space is what matters for understanding their role in development, not their appearance.”

See P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, pp. 1124-25.

Within neo-institutionalism, there is a group of scholars that assumes that the evolution of institutions has a certain purpose, directive principle, or ultimate goal. For instance, it is posited that institutions tend to evolve from informal to formal, from “second-best” to “best”, and from autocratic to democratic arrangements. On this issue, credibility theory states that:

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“Secure, democratic, and participatory institutions do not imply that they are credible. Contrarily, neither do insecure, autocratic, and (semi)authoritarian institutional arrangements mean that they are by definition non-credible or empty. In fact, democratic and transparent institutional arrangements, such as codes of good conduct or regulations for Corporate Social Responsibility (or CSR), might actually be disruptive in certain contexts, while autocratic, authoritarian, and non-transparent ones might not. (…) The credibility thesis makes no prediction of institutional teleology, nor does it pass moral judgment on institutional form, as it is concerned with function alone. Yet, the thesis does postulate that one might be able to gauge the extent to which institutions are credible or contested, as indicated – among numerous other indicators – by the level, incidence, and source of generated conflict.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, p. 23.

The idea of convergence or the teleological principle of an ultimate final form has incited considerable debate and scholarly confusion (Radice 2000, Streeck and Thelen 2005), not least because empirical study has yielded a dazzling variety of institutional forms. (…). The notion of credibility, or what could perhaps be termed the ‘credibility thesis’, posits that even when rejecting the neo-liberal reading, we might in fact still be examining the question within the same paradigm, as we reason from the importance of form over function.” See P. Ho, “In Defense of Endogenous, Spontaneously Ordered Development: The Institutional Structure of China’s Rural Urban Property Rights”, Journal of Peasant Studies, 2013, 40/6, p. 1093 and 1096.

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“Instead of focusing on what out of paradigmatic necessity must be considered an ‘empirical anomaly’ through the lens of neo-liberal institutional teleology and evolution, we had better first focus on the question of how institutions function, or fail to function, at a given time and place. Then, and only then, can we – through meticulous description of the ‘rules of the game’ that constitute the institution – establish what its form is. That scholarly endeavor – the meticulous description of institutions – is done far too little, yet is absolutely critical to understand the distinction between form and function.” See P. Ho, “In Defense of Endogenous, Spontaneously Ordered Development: The Institutional Structure of China’s Rural Urban Property Rights”, Journal of Peasant Studies, 2013, 40/6, p. 1096.

See the links at the Wikipedia page.

 

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III. Methodology

If one aims to understand how institutions function (i.e. to open the institutional “black box”), institutions need to be dissected in minute detail and over time. This effort can be concentrated around several indicators.

 

Interviews or surveys are just but one possible source to assess the credibility, thus functionality, of institutions. It is why credibility theory advocates “multi-angulation” (figure below), the coupling of various qualitative and quantitative, as well as socio-economic, political, legal, historical and cultural sources.

Equally important is the way in which the research (be it founded on archival study, agent-based modeling, participatory observation, interviews or surveys) is structured around the variables, which one aims to measure. In this context, the FAT Framework and Conflict Analysis play a critical role.

Multi-angulation (more info)

There is a dual dimension to this question. First, it needs to be recognized that conflict is present in any institutional arrangement, credible and non-credible ones. Thus, even when an institution is credible, that does not mean it is harmonious, peaceful and conflict-free. Second, credibility theory makes a distinction between the levels of analysis, and the levels at which institutions emerge. Thus, an institution that emerges between a group of actors at the grassroots level could be credible (i.e. functional) inasmuch an institution that emerges at the national level could be non-credible or empty, and vice versa.

Credibility is not a matter of acceptance, it is a matter of what has endogenously emerged from actors’ interactions. In this sense, “[i]t is also vital to see that an institution is spontaneously (i.e. endogenously) shaped and being shaped by different stakeholders. (…) From this it logically follows that the question of ‘whose credibility?’ is not so much of interest for its divergences per interest group – as their perceptions obviously may vary – but from the vantage point of a total, accumulative outcome for an institution. Ergo, the credibility of shared tenancy and the federal reserve is not gauged by merely asking respondents on the (village and city) street, but by probing respondents’ perceptions from all the interest groups that shape and are shaped by its rules, and from it hermeneutically read what its workings are at that aggregate level.” See: P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1130.

This question is related to the questions:

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Credibility has been described as “a status of two least evils that at times appears stable or stagnant, and at times engenders bursts of explosive development and growth, or upheaval and crisis.” See: P. Ho, “An endogenous theory of property rights: opening the black box of institutions”, Journal of Peasant Studies, 2016, 43/6, p. 1125.

 

[T]he perceived support for land reallocations transcends individual actors’ interests for the larger benefit of the collective and sets this proxy apart from other proxies. It namely resonates with the definition of credibility as a measure of individual actors’ aggregate perceptions of an institution as a jointly shared arrangement. (…) [T]he Chinese state’s failure to establish a secure, formal, and registered lease system tells us something about the collective perception of an institutionalized, insecure land tenure that needs to be upheld, even when going against individual interests. We will see below, that exactly this divide between collective versus individual interests is also shown in the answers of the respondents.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, p. 18.

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“[T]he survey also indicates a paradoxical distinction between collective versus individual interests. Whereas we saw earlier that the overall majority of farmers support an insecure tenure as a means of collective social security, a certain proportion also hopes for more secure tenure for themselves. (…) At this point, we can clearly see a distinction between farmers’ perceptions of the social need for readjustments by the collective versus the legal protection of their individual rights. In other words, the land readjustments might at the individual level lead to discontent, yet, at the collective level they are still perceived as a credible, common arrangement as the readjustments guarantee that everyone has equal access to land.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, pp. 21-22.

This question is related to the questions:

Credibility is not about the individual acceptance of a rule. Instead, it relates to the aggregate perceptions of institutions as a common arrangement. For example, if an individual believes that others will behave in a certain way and have no incentive to deviate from the rule by which they are governed, that rule (institution) will be perceived as credible.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, p. 16.

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“It is thus not whether an individual actor – be it a farmer, entrepreneur, or state official – personally accepts a rule, but whether an actor expects that other actors will abide by that rule. Consequently, credibility is not about changing rules but about shifts in expectations, while institutions are only credible to the extent that actors expect others to act accordingly.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, p. 17.

This question is related to the questions:

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IV. Other matters

Politics would in the view of the Credibility Thesis be seen as part of the incessant interactions, bargaining and conflict between actors as a result of which institutions endogenously arise (the notion of spontaneous order as put forward by Ferguson, Menger, Veblen, and – surprisingly, on the other theoretical side: Hayek). See: P. Ho, “In Defense of Endogenous, Spontaneously Ordered Development”, Journal of Peasant Studies, 2013, 40/6, p. 1092.

Not always, but there are examples. For instance, with regards to the titling or privatization of informal housing and settlements, governments sometimes opt not to enforce, although legally prohibiting such arrangements. As a result, the level of conflict is low. This is a typical example of an “empty institution”, because “[p]articularly when sensitive issues are at the center stage of social and political debate, ‘empty’ institutions tend to surface as a sort of institutional compromise. In these situations, institutions can become detached or ‘decoupled’ from social actors’ behavior to avoid conflict. As such, the empty institution is, by and large, ineffective and ignored, yet simultaneously socially accepted, little contested and, in effect, to a certain degree credible.” See P. Ho, “Empty institutions, non-credibility and pastoralism: China’s grazing ban, mining and ethnicity”, Journal of Peasant Studies, 2016, 43/6, p. 1147.

This question touches on the eternal dilemma between Institutional Form versus Performance that the Credibility Thesis aims to solve through a refocusing towards Function. For this reason: “One should be careful not to idolize state or common property, lest one commits a mistake to the same degree that neo-liberal and neo-classical thought idolize private property.” See: P. Ho, “An Endogenous Theory of Property Rights”, Journal of Peasant Studies, 2016, 43/6, p. 1138.

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“Rather than overemphasizing state-led or communal development as a panacea for economic and societal ills, the assembled studies have a fundamentally different story to tell: private property rights are not as important as the neo-liberal, neo-classical paradigms want us to believe, as other ownership types have equally critical roles in development. It all depends on time and place. Yet state, communal and private ownership should never be regarded as a given or precondition, but like any other institutional arrangement, they change endogenously according to the function they fulfill under ever-shifting socio-economic, political and cultural environments.” See: P. Ho, “An Endogenous Theory of Property Rights”, Journal of Peasant Studies, 2016, 43/6, p. 1138.

This question is related to the questions:

Informality is only accepted inasmuch as it fulfills a function for social actors and economic agents. The fact that institutions are informal (or formal, for that matter), is of no relevance, what counts is the level of credibility (i.e. functionality) that these institutions rally at a given time and space. Thus, the fact that informal housing and land tenure are credible today is not implying that they might still be credible a few years down the road, or in another spatial context. That outcome depends on the interactions, bargaining and conflict of actors that shapes institutions.

This question is related to the questions:

 

Not necessarily, and it depends on how flexibility is defined. If “flexibility” is interpreted as “informal” (as opposed to “inflexible”, formal institutions), the Credibility Thesis predicts that one might encounter situations in which flexible institutions could lead to less investments, inasmuch as we would find situations in which they lead to more investments, or we find no influence at all. Similar confusion would result from studies into the relation between inflexible institutions and investment behavior. For the same reason, regression analyses aiming to correlate form to performance yield contradictory results (regardless whether we replace “flexibility” with “democracy” or “private property”, and “investments” with “GDP” or “price”).

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In effect: “Tenure security and formal title might rally social support in some cases; yet exactly the same thing could be said for insecure and informal property rights.” It is the reason why it is posited “that what ultimately determines the performance of institutions is not their form in terms of formality, privatization, or security, but their spatially and temporally defined function.” See P. Ho, “The ‘Credibility Thesis’ and its Application to Property Rights: (In)secure Land Tenure and Social Welfare in China“, Land Use Policy, 2014, 40, Sept, pp. 13-14.

This question is related to the questions:

As credibility theory is predicated upon endogeneity – i.e. dependent and independent variables mutually influence each other – there seems  little cause for modeling institutional change. It is why it is  difficult to propagate endogeneity as a principle albeit evident when observing real-life phenomena. Yet, the contrary is true. It depends on the premises of the model. If that starts from endogeneity (such as agent-based modeling) much is possible.

Some would hold that “endogeneity and spontaneous order imply conservatism – that is, preservation of the status quo. Bluntly put, no matter whether informal, customary land rights or child labor is involved, endogeneity allegedly assumes an autonomous evolution in which any development intervention is futile. That is not the message (…), nor is it the case. As aptly worded by Aligica and Boettke (2009, 25): ‘Design and spontaneous order are not irreconcilable’.” See P. Ho, “An Endogenous Theory of Property Rights”, Journal of Peasant Studies, 2016, 43/6, p. 1138-9.

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“Driven by the use and disuse of their function, institutions spontaneously arise, persist and vanish, much like ocean currents arise, persist and vanish. However, in sailing the currents of development, good seamanship is indispensable, which entails knowing which waters are easy to negotiate, and which waters are not. That knowledge signifies comprehension or, minimally, the recognition of the array and scales of development interventions that can be used, in relation to the endogenous conditions under which they may produce an effect or are likely to fail. In this context, [we put] forward a possible ‘checklist’ for a ‘no-go’ that links levels of credibility to possible intervention and non-intervention. It is hoped that this ‘Credibility Scales and Intervention’ (CSI) checklist can assist policymakers in becoming aware of, and better reviewing, their opportunities and constraints.” See P. Ho, “An Endogenous Theory of Property Rights”, Journal of Peasant Studies, 2016, 43/6, p. 1139.

This question is related to:

  • How is credibility related to intentionality (or agency)?

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V. Issues for discussion

Similar to the questions listed below, this question touches on the eternal dilemma between Institutional Form versus Performance. According to the Credibility Thesis there is no way to relate informality (= Institutional Form) to efficiency (= Institutional Performance) as both are time and space-dependent.

This question is related to the questions:

Moreover, in his paper, Eggertsson suggests that informality (or as he terms it “non-market institutional arrangements”) are emblematic for “traditional farm societies”, while “intertemporal market transactions” typify the “advanced industrial economies” (1998: p. 5). Credibility theory would steer away from teleological considerations. Differently worded, informality is not excluded to “traditional farm societies” to the same degree that formality is not exclusive to “advanced industrial economies.”

See Thrainn Eggertsson (1998), Sources of Risk, Institutions for Survival, and a Game against Nature in Premodern Iceland, Explorations in Economic History, 35(1), pp. 1-30.

This question is related to the question:

 

Michael Kolocek (University of Dortmund) posited in the PLPR special sessions on the Credibility of Informality (Hong Kong, 20-25 February 2017) that: “institutional forms that are illegal, but considered credible by the states, are more likely to be called informal.”

This is an important, emerging field for study within credibility theory. A typical example of “informality at the top” and its effects on credibility is the case on the expropriation of the indigenous Orang Asli community, and the way how formal procedures for Environmental Impact Assessment were changed to legitimize the construction of the Kelau Dam. Its effects on credibility have been well-documented.

Watch: https://www.youtube.com/watch?v=CNQ1YRSeO5c&feature=youtu.be

See: Nor Hisham Md Bin Saman and Peter Ho, “A conditional trinity as ‘no-go’ against non-credible development? Resettlement, customary rights and Malaysia’s Kelau Dam”, Journal of Peasant Studies, 2016, Vol. 43, No. 6, pp. 1177-1205.

In line with a general transaction costs perspective it may be hypothesized that informal housing – as an institutional arrangement – is less efficient than formal housing. In effect, informal housing would lead to higher transaction costs for information, contracting and enforcement (in comparison with formal housing). These higher costs are needed for: i) information on the property (e.g. is the seller the rightful owner?); ii) contracting (e.g. how to track payment of the property transaction from seller to buyer?); and iii) enforcement (e.g. how to monitor and sanction if the seller or buyer violates the contract?). Due to these higher costs for transaction, informal housing is not as easily transacted on the market. As a result, it is transacted against a lower price (= discount) than formal housing.

However, there is a potential problem with this argumentation: there has been such a huge and exploding market in China’s informal housing that one may question whether informal housing is less easily transacted on the market than formal housing. Ergo, does informal housing as an institution really lead to higher transaction costs, and is it, therefore, less efficient?

The credibility theory has a different take on the issue, and would hypothesize two points:

  1. Informal housing does not necessarily lead to higher transaction costs.
  2. The discount (lower price) of informal housing is the result of its  function, not the transaction costs;

Below please find a shortened version of a discussion on informality between PLPR members.

Peter Ho and Rachelle Alterman

“Informal development is often labeled as inefficient or at most, “second-best” as compared to formal and codified property rights. Yet, the experience in various settings – developed and developing alike – has demonstrated that informality might actually perform an important function amongst social actors, which does not substantially detract from the legal, institutional performance in a socio-economic, cultural or environmental sense.”

Chris Webster

“Our various research projects looking at ‘small property rights’ housing in China (hundreds of millions of Chinese city dwellers live in this kind of housing) is attempting to measure the informality premium in housing markets and also looking at the institutions that add credibility to housing sales with less than full property rights. One finding so far is that transactions endorsed by the collective village government are considered more credible than other forms of endorsement.”

Benjamin Davy:

“[H]ere are my 5 cents: If there’s an informality premium on land sales (uses), why doesn’t this work in London or Berlin or New York? Or does it?”

Chris Webster:

“My immediate response to your question is that the markets in informal (limited property rights) homes in London, NY and Berlin might be too small to attract a clear market (negative) premium (i.e. Discount). Informal PR homes in London, would include, for example, variations on squatted property (including ‘guardianship’ property rights, where tenants occupy vacant property under special terms in order to prevent illegal squatters occupying the property). Shared- equity homes in London would be another category.”

Neil Harris:

“On the question of informal property rights in London, I completed some research a couple of years ago with planning enforcement officers in London. A key issue related to informal property rights for some of these officers was ‘beds in sheds’, a term used to refer to unauthorised properties located within a usually residential plot. These were of varying degrees of physical permanence and quality – some of very good quality and specification – yet all shared the quality of being unauthorised development. Many are occupied by immigrants. (…).

The ‘beds in sheds’ phenomenon was so prevalent in some boroughs that a team of officers would be working full-time on them, with financial assistance from central government. The phenomenon was a typical ‘cat and mouse’ game between property owners and regulatory enforcement teams – the income generated by letting out informal properties was so significant that it was worth the financial risk of being caught and action potentially being taken…”

Chris Webster:

“Very interesting phenomenon. Are there any statistics on the prevalence of beds in sheds? In HK and China, our informal PR homes have sufficient legality to allow an open market to build around this housing sub market – unlike the London case, where the market is a black one.”

Rachelle Alterman:

“Ines Calor and I have a new paper (…) on illegal development in advanced economy countries (…). Illegality is a reality not only in developing countries. And it merits much more theorizing and empirical analysis.”

Peter Ho:

“Thanks for this very lively discussion on informality, which just demonstrates all the more that it is a really critical issue. (…) The basis from which our research on property rights starts is the ‘Credibility Thesis.’ In other words, the premise that institutions once they have emerged and persist over a certain period, they perform a function for actors and are thus, in essence, credible. If not, they would have changed or gone extinct.

The thesis was formulated in reaction to three postulates of neo-institutional or neo-classical thought, i.e.

  1. That institutions can be exogenously designed.
  2. That institutional change is characterized by equilibrium.
  3. That the form of institutions determines institutional performance.

In contrast, the Credibility Thesis posits:

  1. That institutions arise from an endogenous, spontaneously ordered development;
  2. That institutional change is characterized by disequilibrium, i.e. in eternal flux, albeit at varying speeds.
  3. That institutional Form follows from Function, and not vice versa. In other words, it does not matter if institutions are private or public, formal or informal, secure or insecure. What matters is their Function or what they do and mean for a group of actors at a given time and space.

The Thesis has been used to validate the credibility of China’s agricultural land lease, informal housing, and urban real estate, all of which have been typified as insecure, inefficient, or at times, even “perverse”. By contrast, through the measurement of credibility (done through the FAT Framework and CSI-Checklist), we found:

  1. Chinese rural land lease is highly credible despite its insecurity, as it performs a function for social welfare (a finding also critically underscored by Ben’s research in other contexts).
  2. Informal housing is equally credible, as it too performs a function in the provision of social security, i.e. access to the city, education, employment, and health care for low-income groups.
  3. The property rights or urban real estate are highly ambiguous, yet, have fulfilled a credible function in propelling China’s explosive property development.

There’s, a panel organized at the EAEPE annual conference, which aims to test the Credibility Thesis for different institutions and in different settings, including labor markets in India, state-owned enterprises and banks in China, housing in The Netherlands, and mutual aid societies in Mexico.”

Slavka Sekovic:

“In Serbia there is research about illegal development (illegal construction, illegal/ ‘grey’ economy). In the paper Zekovic S., Vujosevic M., Maricic T. (PLPR conference in Volos, Greece, 2015) we mentioned that in Serbia there are 1.6 milion illegal buildings (in Belgrade some 400,000 buildings in 2015)!”

Chris Webster:

“I like the Credibility Thesis postulates. One question, though: how would you know if an institution were not credible? Do the measurement devices/variables give sufficient precision? Or is this an empirical work in progress? Our findings so far on the difference in efficacy and price premium between urban village collective endorsed PR and other forms (for example notary), are supportive of the credibility postulates.”

Peter Ho:

Hi Chris, Just a quick reaction (…). The measurement of credibility is done along 2 main dimensions: 1) Actors’ aggregate perceptions of the function of institutions, which is operationalized along the FAT Framework (that is, the “Formal”, the “Actual” and “Targeted” property rights); 2) Actors’ aggregate perceptions of the level of conflict generated by institutions, operationalized along 7 dimensions, including the conflict’s frequency, nature, length, outcome, etc.”

Adam Sheppard:

“Hello all. This is a very rich area for exploration. From the UK perspective the ‘beds in sheds’ phenomenon is indeed very interesting in this context. There is a long running saga that some of you will be very familiar with concerning concealment and involving a certain Robert Fidler in the UK:

http://planninglawblog.blogspot.co.uk/2015/11/mr-fidlers-castle.html.

Cases such as this led to a change in our regulatory framework: http://www.ivylegal.co.uk/deliberate-concealment/4586683809. But with mixed results: http://planninglawblog.blogspot.co.uk/2012/05/concealed-development.html. The issue of active and conscious planning ‘avoidance’ remains a real issue – The motives for pursuing unauthorised development are varied and though I approach this from a practice perspective in general I find the theoretical debate interesting here too and agree there is scope to explore this further…”

Rachelle Alterman:

“There is a historical narrative in the UK of interest too; the Plotlands movement: http://www.spatialagency.net/database/the.plotlanders. The inadequacy of the regulatory framework was a key element here. Hardy and Ward’s book is a lovely read by the way, should you not have come across it yet.”

Benjamin Davy:

“One more author should be mentioned who has engaged rather early in informality/planning/property research in Europe: Paulo Silva (University of Aveiro, Portugal). His latest publication is with Helena Farrall: Lessons from informal settlements: a ‘peripheral’ problem with self-organising solutions, TPR, 87 (3) 2016 doi:10.3828/tpr.2016.21.

But what exactly does it mean to pursue informality as a research topic? The whole area is loaded with opposing values. Remember, for example, when Cathy said that ‘in Sydney … no one would want these arrangements to be considered credible, because they violate basic housing standards enshrined in residential tenancies legislation.’ Peter Ho and Chris seem to accept that informal housing exists and examine its economic efficiency or social credibility. But this acceptance does not turn informality into something good.

My previous question was ‘If there’s an informality premium on land sales (uses), why doesn’t this work in London or Berlin or New York? Or does it?’

Fortunately, Chris and others misunderstood me (…) and unfolded a very interesting narrative on ‘beds in sheds’ and plotlands. What I had meant, however, was this: If informality yields a premium or is more efficient than formal property, what did Western countries/cities do for the past 200 years? Clearly, the history of Western cities shows a strong sense of moving from the informal to the formal (and students of urban planning are told about the great fires and the hazardous open sewage typical of unplanned cities) (and only a few teach their students that fires and open sewage closely depended on the definition and distribution of property rights in urban land).

So, why don’t we see more informal housing in London or Berlin or New York? The obvious answer: Formality, after all, works better. Yet, the important add-on: ‘under certain circumstances’. I wonder what exactly is different between the informal housing that Peter, Rachelle, Chris, Paulo and others have been studying and the formal housing developments in London or Berlin or New York? What are the ‘certain circumstances’?”

Chris Webster:

“Jaywick Sands (and Canvey Island on the other side of the Thames Estuary) and plotlands is the perfect way of connecting informality, illegality and regulation. I’ve always taught my students that these early 20th century English developments are examples of urbanisation in advance of infrastructure, which characterises trailer homes in the USA and informal suburbs in low income countries. They are remnants of a period before regulations required infrastructure to be put in first (…).

The Thames Estuary on both sides – Kent and Essex – was littered with such developments before WW2. (…) The same economic logic applies within cities: where ambiguous or absent property rights allow (…), people will colonise space without, or prior to, infrastructure to support residential use. HK’s caged subdivisions (200,000 of them) are a modern example in a wealthy world city.”

Chris Webster:

“In China we are estimating the informality (negative) house price premium (i.e. Discount). So our hypothesis is that people bid a lower land premium for less complete property rights. We have also looked at the question of whether incomplete property rights is less or more efficient than more complete property rights. One of my HKU colleagues has a paper published showing that although people live much more densely in urban villages in China than in formally developed land in a similar location, the aggregate land value in urban villages is lower. This implies that informality is LESS efficient. The question is an empirical one, not a theoretical one.

I suspect that with HK’s cage homes (people bed-sharing at 1 person per square meter), informality might be economically more efficient than the formal equivalent. This is because there is less scope than in Mainland Chinese cities to create value by design. In that circumstance, more people is always better (in terms of raw economic efficiency defined in terms of $ rent/meter square). This is not a comment on the desirability, morality or social efficiency or allowing people to live in such squalid conditions.”

Paolo Silva:

“What we really found interesting (…) in our research was to see that informality itself could work as a trigger, as part of a specific context in which formal institutions behave differently – expressing an unusual malleability. That suggested leading not only to short term reaction to informality but also to reflect in the long-term on the role of formal institutions towards formality and informality.”

Peter Ho:

“The question of morality and desirability is a critical one, yet, the Credibility Thesis leaves it aside (in perhaps a similar vein as Chris suggested), to zoom in on what institutions mean for actors. Within the credibility paradigm, that meaning – or function, if you wish – is comprehensively construed, thus, does not stop at economic efficiency, but includes other dimensions as well (e.g. social welfare, security, cultural or social cohesion, etc.). The issue of function brings me to the excellent question [Ben] posed: ‘What is the difference between the informal housing that Rachelle, Chris, Paolo and others have been studying and the formal housing developments in London or Berlin or New York? What are the “certain circumstances”?’

In my view, the “certain circumstances” depend on the function that actors accord to institutions. This has three implications:

  1. There might be little value in labeling “Formality” as better or superior to “Informality”, or vice versa. It’s because the institutional form of Formality or Informality, for that matter, is derived from a certain institutional function as it has endogenously emerged and persists amongst a group of actors.
  2. Formality and Informality are no institutional prerogatives of a “developed North” versus a “developing South.” Thus, we should be careful to depict informality as a treat of China, Brazil and India versus formality as specific to London or Berlin or New York. In fact, I daresay that in a developed context, informality is perhaps as omnipresent as formality. In this context, I’d also like to draw attention to Marja Elsinga’s work on the importance of informality in the housing sector of Western countries.
  3. The “certain circumstances”, can most likely be measured as long as we care to delve into the credibility (i.e. functionality) of institutions. In other words, once we aim to assess (qualitatively or quantitatively) actors’ perceptions of institutions and the level of conflict they generate over time and space. Hence, the focus on “FAT” or “the Formal”, “the Actual” and the “Targeted”, and the focus on the 7 dimensions of institutional conflict.

Sadly though, that exercise – delving into the Function – rather than the Form of institutions, is oft disregarded, not in the least by decision-makers eager to demonstrate political resolve in dealing with certain socially or morally contested “hot potatoes”. 

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