Favouritism persists in many countries despite its detrimental effects on economic, social and political development. Theoretically, four different factors may explain this phenomenon: (i) disincentives for individuals to change their behaviour, (ii) a lack of awareness, (ii) the jamming force of socio-cultural values and norms, and (iv) the opposition to change of an influential elite. All of these factors must be addressed when fighting fa-vouritism and its negative impacts.
Favouritism may constitute an informal institution when it is very common and accepted in a society. New institutional economics define institutions as “the rules of the game in a society, enforced either through law or through other mechanisms of social control that shape human interaction”
(Mantzavinos 2001, 83). According to Mantzavinos, individuals are per-manently engaged in solving problems in order to maximise their utility.
Due to limited cognitive capacity however, they cannot decide anew each time how to solve their problems. Therefore they tend to use a solution re-peatedly once it has proven to be useful for a specific class of problems.
Within this framework, institutions are solutions for recurring problems.
They are used whenever a problem appears to resemble previous ones. In-stitutions – like favouritism – are called ‘informal’ if they are enforced by society rather than the state.
Unfortunately, such institutions are not automatically replaced or changed when they are no longer the best or even good solutions at all. New institu-tional economics argues that such institutions are maintained until a criti-cal mass of individuals within a society experiences that they are no longer satisfactory solutions for their problems. Only in this case will people try new solutions and adopt the most successful one as a new institution (Mantzavinos 2001, 7).
Substitution of a new, more beneficial solution for an old one can thus fail to take place for different reasons. Four of the most important are:
— People are not aware of the disadvantages of the old institution.
— Although the new institution would be more beneficial than the old one for society as a whole, it is not for the members of society from their individual perspective (perverse incentives).
— The old institution is connected with or derived from other institutions on a meta-level (social norms and values).
— The advocates of change are unable to overcome their opponents.
Lack of awareness
A first reason for the persistence of favouritism is a lack of awareness. On the one hand, people may not think about its effects. They may disregard the fact that favouritism in state-business relations leads to unfairness and may fail to consider its cost to the state and, thereby, to taxpayers. In addi-tion, even if they are aware of these direct consequences of favouritism, people may not think about its far less obvious long-term impact on the social, political and economic development of their country.
On the other hand, people may still adhere to favouritism even when they know about its negative effects on the micro- and macro-level. This may be due to a lack of awareness of alternatives, i.e. people may not be able to imagine other patterns of interaction that are based on formal rules rather than personal relations. If they have tried during their whole lives to solve their problems by favouritism, they may not realise that it has become pos-sible to solve these problems in a legal way (Newell / Simon 1972, 72).
Perverse incentives
Favouritism may also persist due to tension between collective and indi-vidual benefits and costs. In this case, the incentive structure may resem-ble the model of ‘collective prisoners’ dilemma’ already mentioned (Eigen 2001): Every member of society would be better off if all adhered to for-mal rules rather than favouritism. However, as long as all others continue to provide and seek preferential treatment, the individual only worsens his own situation by abstaining from favouritism. And even if all others were to comply with formal rules, every individual could still improve her/his own possibilities by reverting to favouritism, unless this behaviour is pe-nalised. As a result, individuals are better off if they use favouritism – re-gardless of what the others do – until collective action is co-ordinated, e.g., by punishing favouritism and rewarding the adherence to formal rules.
Social values and norms
A third reason why favouritism persists is that it may be considered as a social norm and is associated with values such as solidarity, fidelity and the reciprocity of giving and taking. Many people believe, for example, that loyalty to friends and tribesmen manifests itself in the provision of preferential treatment. To refuse a favour is perceived in such circum-stances as a violation of the rules of society (Andvig / Fjeldstad 2001;
Tanzi 1995, Shunnaq 1997).
This does not mean, however, that culture is at the root of favouritism.
Cunningham / Sarayrah (1994, 182) write that solidarity and loyalty to relatives have “top priority in the Arab value system” and that wasta is seen by many Arabs as an expression of these values. In addition, they state that wasta within the family and clan, but also among friends, is a matter of course in Middle Eastern societies. This does not mean, how-ever, that favouritism is a specific feature or outcome of Arab or Middle Eastern culture. A link between social norms and favouritism can be found in every country and every culture, which emphasises values such as soli-darity and loyalty. In addition, the link must not necessarily exist in real-ity: favouritism is difficult to overcome even when people only believe that it is tied to their norms (Kaufmann 2005c, 89; Krastev 2006, 20).
Opposition to change
A fourth factor for explaining the persistence of favouritism is opposition to change. Even a large majority of the population can fail to eradicate fa-vouritism if an influential minority resists. Two arguments explain why small groups can be so powerful.
The first is public choice theory. As Olson (1965) explains, small groups are better able to team up and achieve their aims than large groups. They incur lower transaction costs in organising themselves and defining com-mon goals. They can more easily implement positive and negative incen-tives for their members to act collectively. They face less information asymmetry as to the effective behaviour of their members, and are there-fore better able to punish deviations from the rules of the group. Last but not least, the members of small groups accrue comparatively large gains from collective action, while the members of large groups acquire only small shares of collective gains.
The second argument can be derived from political economies. Minorities sometimes consist of the most affluent and dominant members of a society and can thus influence policy-making more easily than the majority. The elite group often benefits disproportionately from widespread favouritism and therefore has no interest in measures against it. In many countries, a small number of key supporters are sufficient to stabilise a political re-gime, which is based on clientelist structures and informal, personal deci-sion-making. The political leaders use the reciprocal mechanisms of fa-vouritism to strengthen their position. They grant benefits to their support-ers and obtain loyalty in return. The elite is thus composed of people with privileged relations to the regime and substantial influence on political de-cisions. Since any action against favouritism would weaken their position, they resist reforms (World Bank 2005g, 108).