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ETHNICALLY HOMOGENEOUS COMMERCIAL ELITES IN DEVELOPING COUNTRIES*
I. INTRODUCTION
In recent years, the once moribund field of law and development has experienced an impressive revival. Many development practitioners have embraced the idea that improving the quality of legal institutions is critical to development, and it is now commonplace for lawyers from developed countries to be consulted on law-reform initiatives in developing countries.1 Not surprisingly, there has been a corresponding increase in interest in law and development among members of the legal academy.
Historically, one of the central concerns of law and development scholars has been whether and how legal institutions transplanted from developed countries should be adapted to reflect the distinctive social and economic features of developing countries. In this Article, this tradition is continued by focusing on one distinctive characteristic of many developing countries: ethnic minority dominance of the economy, or at least large sectors of it. Recently, Amy Chua suggested that this phenomenon has significant, yet under-appreciated, implications for the design of legal institutions in developing countries.2
This analysis is intended to reflect and contribute to broader debates over paradigms of economic development and their implications for institutional design. Within the last decade, a major paradigm shift has occurred in the thinking of international economic agencies, economists, and others concerned with theories of development. This paradigm shift contains two elements. First, there is a greater reliance on domestic and international private markets as the drivers of economic development, rather than on the dirigiste development policies that have often prevailed in the past. Second, notwithstanding the contraction of some of the functions of the state envisaged by the first element, the paradigm shift contains an enhanced concern with the quality of public-sector governance institutions. This new perspective is often referred to as New Institutional Economics.3
In the context of this Article, New Institutional Economics makes two claims, one positive and one normative.4 The positive claim is that low quality institutions play a large role in explaining reliance on truncated intra-ethnic group contracting networks for non-simultaneous exchanges. The reasoning in support of this claim recognizes that spot market and hierarchical (corporate integration) transactions require little support from the judiciary, whereas middle range transactions, in particular long-term contracting involving non-simultaneous exchanges, are particularly vulnerable in the...