STAGE 2: Diagnosis
Analyze the client country’s property and business sectors for the root causes of massive extralegality. Other Information:
Effective sustainable reforms have to be built on the facts of the legal and extralegal economies. It is crucial to know what
works and what doesn’t –on both sides of the economic divide. With the information from the Pre-Diagnosis in hand, the ILD
and the local team are prepared to dig deeper and wider into the client country’s property and business sectors for the root
causes of massive extralegality. During a full “Diagnosis”, the ILD sends teams of researchers into the underground economy,
a representative sample of the client country’s urban and rural areas, to detect and analyze the defects in the legal system
that create the kind of complexities, burdens, and excessive costs that encourage people to operate outside the law, the extent
to which the law promotes or hinders property rights, legal forms of business organization, or expanded markets (and all their
respective effects). The teams also document the local extralegal practices people resort to in order to protect their assets
and do business. The fieldwork and analysis activities of the Diagnosis require the practiced eye of those shantytown “paleontologists”
we train to detect the hidden assets and practices of the extralegal economy. DIAGNOSIS REPORT Size up the magnitude of extralegality,
including an estimate of the potential value of dead capital piling up in the nation’s extralegal economy; Identify the most
frequently used alternative procedures in the extralegal sector, evaluating the disconnection between what the law proposes
and what the people actually do; and Analyze whether and how the existing extralegal systems enhance or hamper the three basic
institutions indispensable for economic growth: - Forms of business organization and their effects. - Expanded markets and
their effects. - Property rights and their effects. Organize the different manifestations of extralegality into workable categories
that can be targeted by specific reforms; Examine whether these extralegal systems contain the necessary roots of an inclusive
formal law and of future inclusive formal organizations; Identify the shortcomings of the extralegal practices and organizations
plus pinpoint the need for formal law and formal organizations; Categorize the extralegal and dispersed local practices/strategies
that might be brought together under a single rule of law that can be enforced throughout the nation; Analyze the existing
legal system and its potential to provide the three essential institutions for comprehensive economic growth; Isolate the
laws and regulations that citizens identify as the origin of institutional obstacles to formality as well as assess the magnitude
of the costs involved; Describe the main burdensome/complex procedures that the state apparatus imposes, identifying the legal
obstacles to own property and operate businesses. Without this deep and nuanced portrait of a client country’s legal and extralegal
economies, proposals for reform are impossible. As should be clear from the contents of the Diagnosis Report, our researchers
dig up more than facts and numbers: critical to the ILD Program –and the success of the reforms resulting from it– is understanding
the whys and wherefores lying behind the effects, actions and attitudes of organizations, legal norms, and traditional customs
of ordinary people. In this Stage we employ methodologies that use different scientific methods, from surveys and focus groups
to in-depth personal interviews. We also employ quantitative and qualitative analysis as well as predictive models based on
institutional variables –all with the objective of preparing for the next stage: designing the institutional reforms that
the obstacles to inclusion call for. Stage Two is thus indispensable for building sustainable reforms. Time and effort can
change according to our assessment and relationship with the client. A sound diagnosis, however, is as important as the final
product itself. The diagnosis results also provide an essential building block for understanding any policies, plans and strategies
for institutional reform.
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