Taxes, Banking, and Legal Development in Russia: Lessons About Institutional Complementarities and The Rule of Law

A significant challenge faced by rule-oflaw reformers is that newly created legal institutions frequently remain divorced from the de facto rules governing economic transactions. Firms instead rely on informal, and sometimes illegal, means of enforcing contracts, protecting property, and resolving disputes. This article proposes that one key to overcoming the chasm between formal legal institutions and on-the-ground practices is to adopt a broader understanding of legal development. In many cases, developments in spheres that are only indirectly related to formal legal institutions may be equally important, particularly if these developments either (1) increase the costs of illicit alternatives to reliance on law or (2) reduce barriers to firms' use of formal legal institutions. This article illustrates the argument with two key examples in post-Soviet Russia: banking sector development and improved tax compliance.