Does Law Matter for Economic

Development?
Evidence From East Asia
 Introduction
• Law and economic development have been a significant concern in modern
social theory.
• In the 1970s, the "Law and Development Movement" aimed to use law as a tool
for social change, but it eventually declined, leading to reduced funding for legal
policy reforms in developing countries.
• However, there has been a renewed interest in the relationship between law and
economic development.
• The focus is on strengthening the rule of law in developing countries.
• Some scholars argue that law may not play a major role in Asian economic
growth, but others believe more research is needed to understand its
importance.
• Three recent studies have attempted to address this question.
• Overall, the importance of law in economic development is a topic of great
importance for both theory and practice.
 Theoretical Underpinnings of Law and
Development : Weber’s Ideas
• Rational law played a crucial role in the economic development of
the Protestant West by providing predictability in transactions.
• Legal institutions, particularly rational legal systems, underpinned
economic growth and provided an efficient framework for capitalism.
• Weber's idealist approach suggested that economic development
required a change in consciousness associated with cultural
transformations, such as the Protestant reformation.
• Weber's institutional approach emphasized the importance of
hierarchically organized state administration and codified law in
supporting capitalism.
 Theoretical Underpinnings of Law and
Development: Weber’s Ideas
• Weber's views inspired the first law and development movement in
the 1960s and 1970s
• During this movement legal rules and systems were seen as cultural
technologies exported to stimulate socioeconomic change
• Weber's influence shifted from an emphasis on cultural factors to
technical institutional arrangements
• This reflects a move towards neoliberal approaches in contemporary
development policy
 Theoretical Underpinnings of Law and
Development: Douglass North
• North's research emphasized that countries that protect property rights
and establish predictable rules for resolving contract disputes provide a
better environment for economic growth than those that do not.
• The rule of law, as developed in 17th and 18th century England, provided
a predictable and transparent environment in which capitalism later
flourished.
• North's explanation of the rise of capitalism shifts the emphasis from legal
"rationality" to effective constraint
• How effectively agreements are enforced is the most important determinant of
economic performance.
• Enforcement of Property rights and contract law enhances security for
both the state and private firms
• Saves time and makes cooperation and investment more feasible
 Theoretical Underpinnings of Law and
Development: Douglass North

• North's ideas significantly influenced development agencies during

the "second wave" of law and development in the 1990s.
• This wave emphasized the importance of establishing appropriate
institutions to facilitate economic growth
• Legal systems, property rights, and regulatory structures
• North's work highlighted that well-functioning institutions provide
incentives for investment, innovation, and productive economic
activities
Informal Alternatives to Law and the Challenge
of Chinese Capitalism
• Study discusses the importance of informal alternatives to law in the
context of Chinese capitalism.
• Both North and Weber emphasize the role of private actors in capitalist
development.
• North highlights the significance of the legal system in protecting property
rights and enforcing contracts to lower transaction costs and facilitate
economic growth.
• However, in traditional Asian societies, including imperial China, the
formal legal system did not play a major role in commercial activity.
• Instead, economic actors relied on informal institutions, such as family
groups, guilds, and clan groups, to coordinate economic exchange and
establish trustworthiness.
Informal Alternatives to Law and the Challenge
of Chinese Capitalism
• These informal mechanisms allowed them to avoid the unpredictable
exercise of formal law.
• Overseas Chinese communities, facing weak legal protection, have relied
on politics and long-term contracting to compensate for the lack of formal
legal support.
• Similarly, in many developing countries, informal mechanisms exist to
facilitate capital formation, property rights, and contract enforcement.
• While informal alternatives can be effective in close-knit trades, they may
limit transactions with unfamiliar partners in complex economies.
• Internalizing transactions within family firms can also lead to succession
issues and affect industrial structure.
Informal Alternatives to Law and the Challenge
of Chinese Capitalism

• Despite potential disadvantages, family businesses may have

advantages during uncertain times, as social ties can be more
resilient than business ties and may strengthen during economic
difficulties.
• Research on the efficiency properties of formal and informal social
ordering in Asia could shed light on their impact on social structure
and economic development.
 The Challenge of the "Developmental State"
• The tension between the "developmental state" in East Asian economic
growth and conventional development theory
• Political scientists emphasize the significant role of the state in Asian
growth, as the government led the process using various instruments to
promote growth.
• However, the law was often absent or manipulated to facilitate these
efforts.
• This "developmental state" challenges the conventional understanding of
law and economic development.
• Some scholars argue that market forces explain East Asia's success, and
they study specific institutions that shape negotiation and information
flows.
 The Challenge of the "Developmental State"
• These coalition-oriented accounts challenge the assumption of
general and uniformly applicable rules in conventional theory.
• They also question the emphasis on government constraint rather
than empowerment in the liberal view of law.
• The tension between the role of the state in East Asian development
and the emphasis on secure property rights and contract
enforceability calls into question assumptions about the role of law in
economic growth.
• The content explores various approaches to these issues.
 Improving the Base of Empirical Evidence
• The Role of Law and Legal Institutions in Asian Economic Development,
1960-1995, written by Katharina Pistor and Philip A. Wellons (1999)
• Funded by the Asian Development Bank (ADB)
• Executed by the Harvard Institute of International Development
• The study covers India and five of East Asia's high-growth economies,
namely, Japan, China, Korea, Taiwan, and Malaysia, for the years of 1960-
1995.
• The selection of cases thus includes variation in political regime, cultural
background, common law/ civil law legal tradition, and economic
performance
 Improving the Base of Empirical Evidence
• For each country, leading local scholars were asked to address a
common set of questions on legal and economic change
• The study identifies different policy periods for each country and
examines the evolution of legal institutions and key substantive areas
of law, including corporate governance and capital markets and credit
and security interests.
• Author tried to seek whether legal systems are or ought to be
converging to facilitate development
Four Hypotheses on the relationship between
law and economic development
• First, laws and legal institutions may converge with economic
development, if not formally, then in a functional sense.
• Second, laws and legal institutions may diverge. Law matters for
development, but there are no discernible trends across autonomous
legal systems.
• Third, law may be irrelevant for economic development, so there is no
link between economic growth and legal change.
• Fourth, the response of law may be differentiated, thus some parts of
legal systems may converge while others may develop
idiosyncratically
 State Intervention v/s Law
• The period 1960-1995 was not one of radical legal reforms in Asia except China
• The causal arrows of the hypotheses and the inquiry run in two directions: law influences
development, but development also influences law.
• In all the economies state discretion played an important role in economic ordering at
the outset of the period.
• The study notes that "a relatively high level of state involvement was compatible with,
and perhaps even conducive to, economic growth
• State involvement acted as a substitute for legal ordering
• By the mid-1980s, all the economies had initiated efforts to reduce the role of the state
and its discretionary power over the economy.
• As policies shifted to more market-oriented solutions, law became more important.
• Ultimately, "law mattered for economic development in the period after the policy shift"
• As economies grow and become more complex, pressures arise for
legal structures to regulate private transactions
• A study sponsored by the Asian Development Bank (ADB) rejects the
simplistic view that development leads to a decline in traditional
social institutions
• Instead, it highlights increased reliance on formal law over time in
most countries, except Japan
• Litigation rates have risen, raising questions about how economic
development impacts legal culture
• Study has introduced a legal framework involving economic allocation
and procedural dimensions.
• Legal systems vary based on state-market economic allocation and
the extent of rule-based decision-making.
• Countries shifted from discretionary state allocation to rule-based
market mechanisms, except Malaysia which increased controls.
• However, the framework's limitations are acknowledged, particularly
its single-dimensional representation.
 Globalization's effects on legal culture
• The shift toward reliance on law echoes modernization theory but is driven
by specific political and economic pressures, rather than universal cultural
change.
• The study also considers the impact of economic liberalization on legal
convergence, highlighting that globalization doesn't guarantee convergence
due to diverse economic niches.
• The study delves into specific areas of economic law such as corporate
governance and credit markets.
• It challenges earlier notions that informal substitutes for credit marginalize
formal law, noting that these substitutes themselves rely on underlying
legal norms.
• The analysis also indicates that formal or informal substitutes depend on
relative prices.
 Bringing the State Back in to Theory
• This is based on "Law, Capitalism, and Power in Asia: The Rule of Law and
Legal Institutions," edited by Kanishka Jayasuriya.
• It has challenged the conventional view that links markets, liberal politics,
and the rule of law.
• It tried to provide an alternative perspective on the rule of law and its
connection to economic development.
• Jayasuriya and contributors challenge the liberal paradigm that connects
the rule of law, markets and economic development.
• The book aims to develop a new theoretical model based on non-cultural
commonalities and specific historical and institutional contexts in Asia.
 Bringing the State Back in to Theory
• The alternative model proposed is rooted in the normative
understanding of state power, governance, and a managed form of
capitalism.
• It emphasizes the developmental state concept as influential in East
Asia's political economies.
• The book asserts the differentiation of Asia from other regions,
requiring a distinct theoretical framework for understanding the role
of law and society.
• It underscores the importance of grounding the rule-of-law ideal in
historical and institutional specificities.
 Bringing the State Back in to Theory
• Jayasuriya's paper on judicial independence examines China, Singapore,
and Indonesia.
• It proposes a corporatist model of judicial-executive relations, contrasting
with the separation of powers in liberal models.
• The focus is on collaboration between the judiciary and executive
influenced by state-society relationships.
• The text highlights the impact of political forces, both domestic and
international, on shaping the role of law in various contexts.
• It explores the competition between the rule of law and state-centric legal
frameworks, such as "rule by law" in Vietnam, demonstrating the role of
political considerations in reform decisions.
 Bringing the State Back in to Theory
• The discussion emphasizes that legal reforms are often contested and
incomplete due to political factors.
• Enforcement of judgments and the influence of power dynamics impact
the effectiveness of legal changes.
• The argument is made that even when not fully enforced, laws still shape
market behavior by their mere presence.
• The volume concludes with a methodological essay by Penelope Nicholson,
advocating for a moderate postmodern approach to comparative law.
• The essay acknowledges subjectivity but maintains the usefulness of
comparative work in understanding legal systems.
 The Dangers of Eclecticism
• The book "Asian Economic and Legal Development: Uncertainty, Risk, and
Legal Efficiency" by Robert S. Brown and Alan Gutterman argues that
inefficient legal systems hinder economic development and advocates for
transparent rules.
• However, the book falls short in providing strong evidence for its thesis.
• It introduces a theoretical framework but fails to apply it effectively and
lacks comparative analysis in its country reports.
• The selection of areas of law is questionable, and the book contains errors
and inaccuracies.
• Empirical testing is missed, and the differentiation between informal and
formal rules is inadequately addressed.
• As a result, the book's credibility and utility are compromised.
 Future Directions
• Looking ahead, the analysis of law in Asian economic development should
focus on the interplay between formal and informal rules.
• Historically, Asian economies have relied on informal norms, networks, and
social norms for economic behavior.
• The aftermath of the Asian Crisis in 1997-1998 highlighted the importance
of informal norms, challenging the perception of "crony capitalism."
• Yet, research on the roles and impacts of these norms remains limited.
• The relationship between formal and informal rules needs exploration,
considering factors like enforcement mechanisms, trust, corruption, and
their effects on economic development.
 Future Directions
• The reaction of informal structures to economic changes, as seen during
the Asian Crisis, requires deeper investigation.
• Changes in economic relations due to the crisis broke some social and
economic ties while reinforcing others.
• The role of traditional social institutions, like family ties, in Asian societies'
capital accumulation also demands further exploration.
• Exploring the political underpinnings of the rule of law in transitioning from
personalistic social relations to transparent systems is another crucial
avenue.
• Additionally, rational choice approaches can shed light on the incentives
sustaining legal institutions and how they interact with historical and
institutional contexts.
 Future Directions
• Research into the law's role in conditioning foreign investment is essential,
as assumptions about its impact are often made without concrete
evidence.
• Understanding the balance between formal law and local customs is vital
for policy effectiveness.
• Collaboration between development agencies and researchers, as well as
sophisticated studies on legal transfers and intentional reforms, can
provide valuable insights.
• Comparative research on role conception's relevance to judicial activism or
passivity in different legal systems is also a promising direction.
• Lastly, investigating how gaps between formal rules and local customs
impact corruption and rent-seeking can offer a better understanding of
these dynamics in Asian economic development.