What might happen if formal institutions do not effectively function?

When formal institutions do not function effectively, it creates a void that informal institutions can fill. Informal institutions refer to unwritten rules, norms, and social practices that govern behavior in society. In the absence of effective formal institutions—like laws, regulations, and official bodies—people and organizations often rely on these unofficial structures to guide their actions and interactions. This can lead to a situation where informal practices become the norm, sometimes overshadowing or completely replacing the established formal framework. The result is a reliance on personal relationships, social networks, and informal agreements, which can lead to unpredictability and potentially foster corruption or inefficiency.

In contrast, a lack of effective formal institutions does not automatically guarantee an absence of economic order; informal institutions can create their own form of order, albeit less structured and more vulnerable to instability. Similarly, rather than strengthening formal institutions, the dysfunction of these entities typically results in a weakened governance structure. Regulatory bodies stepping in may occur, but this is more likely when formal systems are inadequately functioning, rather than directly a consequence of their failure since they operate under the framework of formal institutions themselves. Thus, without effective formal institutions, the role and influence of informal institutions become significantly more pronounced.