Law and the Private Sector in Tanzania

Abstract

Policy makers and scholars increasingly have acknowledged the role that law and legal institutions play in the economic development process. Much of the recent literature on law reform in developing and transition countries focuses primarily on the supply of legal institutions by the state – the assumption is that, as long as the state supplies properly-designed laws and legal institutions, the desired results will automatically follow. This condition may be necessary, but it is not sufficient. The “law and development” literature largely ignores other factors that shape levels of social demand for reformed laws and legal institutions. For law to play a role in promoting economic development, and more generally for the rule of law to emerge in Africa, law and legal institutions must matter to social actors. If law is irrelevant to private sector actors, it is largely irrelevant to private sector development. Under what conditions will law become relevant and meaningful to social actors in Africa? Synthesizing theoretical insights from socio-legal studies and the new institutional economics, the paper hypothesizes that private sector demand for law is a function of both (1) the characteristics of transactional networks within business communities and (2) the perceived credibility of the state-provided legal system. Demand for law is shaped by the characteristics of both informal social institutions and formal state-supplied legal institutions. The paper examines this hypothesis by analyzing survey data collected from business firms in Dar es Salaam, Tanzania. Probit analysis of the data suggests that demand for law among private sector actors is very much shaped by informal market institutions – the characteristics of business networks developed and maintained by firms. The results suggest further that these “demand side” variables matter more than the perceived quality and credibility of the legal system in the eyes of private sector actors, a “supply side” variable emphasized in the social science literature. The paper concludes by considering the implications of these findings for law and development research.