The Emperor's Law Stops at the Village Gate: Questioning the Primacy of Formal Institutions in Vietnam's Land Law Reform.

• Author: Ellett, Rachel

1. Introduction

   Institutions delineating property rights are essential in support of market activities, which, in turn, are the foundation of economic prosperity. Some scholars interpret strong property rights as secured private property rights for a broad cross section of society (Acemoglu, Johnson, and Robinson 2001). For policymakers, this view has been distilled down to the formalization of private property rights (de Soto 2000). Yet, scholars such as Upham (2018), Clarke (2018) and Rodrik (2004) question this premise, often citing the example of China--a country that did not privatize land ownership during its transition to a market economy, yet still saw dramatic economic progress in the rural and agricultural sectors.

   This paper moves the debate forward by discussing another interesting country case study, Vietnam. Similar to China, Vietnam is an authoritarian state and transitioned from central planning to a market economy without significant institutional reform--in particular without complete privatization of land ownership. The paper seeks to answer the following question: does Vietnam's land law reform support or contradict the view that institutional change, in particular the formalization of institutions, is a prerequisite to successful economic growth? In addition, it explores the reasons for slow, incremental and partial land law reform and analyses the complex interaction between formal and informal institutions in Vietnam. (1) This study concludes that, in Vietnam, effective formal institutions are not preconditions for economic growth; rather, institutions evolve alongside economic change in a non-linear, uneven process shaped by a complex interaction between formal and informal institutions.

   The paper is structured as follows. In the next section, we review the literature on the role of formal versus informal institutions in the evolution of property rights. The subsequent section provides background information on Vietnam's economy and political institutions, and an overview of the history of the land tenure system. The fourth summarizes and analyses key characteristics of the evolution of Vietnam's land laws, while the following section outlines our central argument about the complex interaction of informal and formal institutions in Vietnam's land law reform and land conflict resolution. The final section concludes with some lessons for development policy and suggestions for future research.

2. Literature Review

   In his seminal work "Toward a Theory of Property Rights", Harold Demsetz (1967) hypothesizes that property rights are not static but dynamic, and that property rights emerge when the social benefits of establishing such rights exceed their social costs. But as Thomas Merrill (2002) argues, Demsetz (1967) leaves important questions unanswered. In particular, it is unclear what the factors determining the costs of a property regime are; what the precise mechanism by which a society determines that the benefits of property exceed the costs is: and, what form that emergent property rights regime is likely to take. This paper contributes to this literature by detailing how land rights emerge and evolve in Vietnam, and discussing the form that it takes.

   This paper also contributes to the debate about whether formal institutions and legal private property rights are preconditions for economic growth, known as the "rights hypothesis" (Clarke 2003). On one hand, scholars such as Acemoglu, Johnson and Robinson (2001), de Soto (2000) and leading international institutions such as the World Bank argue in favour of "hard" property rights. On the other, Upham (2018) questions the premise that "legal property rights are necessary for economic growth", and even claims that "this view is incomplete, misleading and dangerous". Clarke (2018) disregards the relevance of formal private ownership, arguing that, in the case of China, state ownership can easily accommodate various institutional arrangements that serve different functions aimed at promoting economic growth. Similarly, Dani Rodrik (2004) challenges the approach of "identifying institutions solely with the formal legislated rules in existence" and argues that desired institutional outcomes do not neatly map onto unique institutional designs. Vietnam and China are two countries where we see, in Rodrik's words, unorthodox institutions working "[p]recisely because they produced orthodox results" (Rodrik 2007). In both countries, collective ownership of land during the command economy period produced devastating results, and land tenure and land law reforms were targeted as critical areas of institutional development. Yet during their transition to market economies, neither country fully privatized land ownership, and both countries saw remarkable productivity improvement, economic growth and poverty reduction in the rural and agricultural sector. China reconciled this apparent contraction by "retaining the importance of security of property rights but substantially downgrading the importance of a formal legal system that provides effective enforcement of contract rights" (Clarke 2003).

   In the literature on Vietnam, we see similar debates. Measured by GDP growth, the Vietnamese economy demonstrates rapid success but, in order for this growth to be sustainable, Chand, Duncan, and Quang (2001) argue that institutional development, specifically the establishment of private property rights, strengthening the planning and administrative capacity of provincial offices, and improvements in law enforcement are critical. Others contend that Vietnam was able to achieve economic change without any major institutional change, external technical assistance or capacity building (see Pincus 2015 and Riedel 2015). But most scholars (for instance, Reidel 2015) simultaneously acknowledge that if Vietnam is to move beyond middle-income status, it must recognize the centrality of "[s]ound, market-friendly and non-extractive political institutions" (Leung 2015).

   Furthermore, Vietnam offers insights on the roles of formal versus informal institutions in shaping a country's economic change. Many scholars view formal institutions as inherently more advanced, and paint a picture of a linear progress where formal institutions eventually replace informal institutions as the economy grows. For instance, North (1991) and Demsetz (1967) posit that a robust formal institutional rule of law and independent courts are essential to the protection of property rights, and depict formal and informal institutions as competing or in conflict with one another. They also assume that formal institutions, or formal laws, can change quickly while informal institutions can only change slowly. Guthrie (1998) claims that, in China, for example, informal institutions have dissipated over time as the formal laws offer more efficient means of resolving conflicts of enforcing contracts. In contrast, Bian (2010) argues that increased market competition and uncertainty have maintained an ongoing need for vibrant informal networks and institutions in China.

   Turning back to the case of Vietnam, Steer and Sen (2008) find that informal and formal institutions have complemented one another: "Vietnam maintained many of its existing 'home grown' institutions while new institutions were gradually developed". They go on to argue that informal networks were able to handle risk management for business enterprises: "Firms acquire information and trust through long term relationships and social and business networks are significant reputation mechanisms" (Steer and Sen 2008).

   As we explain later, in Vietnam, there is no clear distinction between formal and informal institutions, and formal institutions change gradually while informal institutions change faster relative to what North (1991) and others assume. We characterize Vietnam's case as a hybrid institutional arrangement (see Leftwich 2009), in which formal and informal institutions are tightly interwoven and evolve at converging speeds. Both types of institutions change incrementally, are highly functional (rather than ideological), and ultimately serve to help ensure long-term institutional stickiness of land reform. In Vietnam, we witness the simultaneous "informalization" of formal institutions and "formalization" of informal institutions.

3. Background: Vietnam's Economy, Political Institutions, and the Role of Land

   To understand Vietnam's land law reform, it is important to recognize that land has always taken centre stage in the country's modern history, and that it is at the root of the Vietnamese Communist Party's legitimacy. During the war for independence from France (1945-54), the anti-colonial resistance movement, the Viet Minh, gained peasants' support by promising land redistribution. The transfer of land controlled by the French or large Vietnamese landlords to poor peasants started during the war; and after the victory against the French in 1954, Vietnam was divided into North Vietnam and South Vietnam. In the North, family farming did not last long and, by 1957, agriculture was fully collectivized.

   In South Vietnam, consecutive US-supported governments pursued land policies that aligned with the interests of large landowners, and as a result lost the support of the rural population. The resistance movement, known as Viet Cong, continued to use its strategy of land redistribution to gather farmers' support and loyalty. In 1975, after unification, large tracts of land were redistributed in the South, helping to reduce landlessness. Efforts to collectivize agriculture in the South soon followed but were largely unsuccessful because of resistance from farmers.

   Collectivization of land and production was disastrous. The Vietnamese government became increasingly aware of grassroots movements to revert to family farming, but turned a blind eye. The momentum was set for decollectivization, which informally started in the early...