Looking at Communities and Markets

Abstract

The article is about how a discourse on community and culture facilitates economic exchanges by lowering transaction costs, especially in poor and marginalized communities.

The availability of capital and credit has been deemed to be a necessary component of the economic development process. Yet those who are poor have little collateral or capital base to qualify for credit. In an effort to expand the availability of credit to low income communities on non-discriminatory terms, the Equal Credit Opportunities Act and the Community Reinvestment Act were passed. Although this public law framework has been effective at remedying discriminatory lending, I argue that it has been less effective at correcting lending behavior motivated by economic rationale. Banks continue to be unwilling to lend to certain communities because of the high transaction costs involved in screening, monitoring and enforcing small loans. This pattern has been described by economists as "rational redlining" or "credit rationing."

Given the limitations of public lawmaking, I argue that the private law model of immigrant communities, which utilizes community cohesiveness to manage what I call a "community market" for credit, should supplement the public law framework. I argue that where market imperfections pose barriers to entry, a parallel system of private lawmaking in which people "contract back" into community and status relationships can be effective in promoting economic exchanges that cannot be promoted in the open market.

In this respect, the article studies the Korean "kye," the Chinese "hui," the Ethiopian "ekub," and the West Indian "esusu," ?- culturally based entities organized wholly outside the formal economy and outside the apparatus of state law. Immigrants who have no resources or credit history as required by conventional banks rely instead on community mechanisms by contributing a set amount into a lending circle, which rotates among members on the basis of need, lottery, or bid. This community market for credit functions only if every member who has already claimed her share of the "pot" does not default by defecting but rather continues to contribute until the final rotation when every member has had a chance to collect.

The community's social capital base of social norms, identity, and trust functions, in essence, as the equivalent of economic collateral. This community market is able to maintain its effectiveness only by relying on a number of non-legal measures that lower the screening, monitoring and enforcement costs associated with formal institutional lending. The article thus studies how social capital produces economic capital and concludes by exploring the ways in which the law should react to such entities.