Conference on Second
Generation Reform Home Page

Conference Agenda

International Monetary Fund. All rights reserved. For requests for permission to reproduce articles, see Rights and Permissions

Comments on "What Role Do Legal Institutions Play in Development?"
by William E. Holder, Deputy General Counsel, IMF
November 8, 1999


  1. An introductory remark
  2. The scope of the paper
  3. Reaction to conclusions
  4. The road not traveled

I am pleased to provide a few personal reactions to the paper of Professors Davis and Trebilcock. (300k pdf file. Use the free Adobe Acrobat Reader to view this file.)

1.  An introductory remark

Let me first make a comment about the nature of law. The explicit focus of this paper is the relationship between law and development. In this exercise, a lot will depend on the meanings understood by the terms "law" and "development."

Oddly enough, the meaning of the concept of law is not all that universal. Often, there is a tendency to think of law as only being made up of "black letter law," that is, the law in the statute books. In fact, this definition is quite limited and, in my view, far too narrow to be useful. For instance, the aspects of interpretation, application, and implementation of the law are diminished or excluded.

The authors take a broader stance; by using both the words "law" and "legal institutions" in a complementary fashion, they specify these to include three sorts of social phenomena: "rules that govern behavior in a given society, the means by which those rules are made, and the means by which the rules are administered or enforced" (p. 11). This definition thus includes judicial and other decision making, the process of litigation, and enforcement of judgments.

I welcome this relatively broad approach. My own view, however, is even broader: that law is a continuing process of authoritative decision, which clarifies and secures community interests. This policy-oriented and dynamic approach to law stresses that law serves as a creative instrument, both to promote minimum order in society and to achieve the shaping and sharing of other values (I attribute this to the so-called New Haven School, established by Professors Lasswell and McDougal). This policy-oriented approach to law, being contextual, problem-solving and multi-method in nature, is capable of bringing greater vigor, and therefore greater usefulness, to inquiries like that before us today.

On the concept of development, I will not try to expound in the company of this audience, although further explanation might again help to ensure our common understanding. (And the authors are, of course, quite forthcoming on the diversity of views on the matter).

2.  The scope of the paper

The paper before us is a major contribution. It sets out to provide a stock-taking of the relationship between law (and legal institutions) and development. It seeks to identify, organize, and synthesize the substantial literature on the topic. It succeeds in laying before the reader a vast panorama, objectively presented, together with brief assessments. Essentially, the paper dwells on two themes. First, it presents a historical section on the different theoretical perspectives on law and development. In elegant fashion, the authors identify six schools of thought, to considerable advantage, especially to remind the reader of the diversity and vivacity of approaches. Secondly, it prompts the reader to reflect, possibly nostalgically, on past involvements and exposures. For economists, we begin with Walt Rostow and Cyril Black; for lawyers, there are David Trubek and Marc Galanter. This leads to the thinking on dependency, on the one hand, and the focus on economic growth rates (the "Washington consensus"), on the other hand. Finally, the mixture includes the welfarists, feminists, and proponents of sustainable development (all somewhat later additions).

The second part of the paper turns to the literature on the empirical relationship between the various bodies of law and development. The authors first deal with a category of "aggregate studies," covering generally (i) the relationship between certain mixtures of law and development, and, specifically, (ii) the connection between democracy and development. Initially, the authors note the lack of adequately substantiated findings, especially because of the general methodological weaknesses of the studies. At the same time, in the author's tally, the studies generally indicate a positive correlation between economic growth and property rights and contract enforcement, and a negative correlation for corruption, bureaucratic inefficiency, and state intervention. For the relationship between democracy and growth, the record is "mixed," although the authors are inclined to postulate a stronger positive correlation.

3.  Reaction to conclusions

Out of this extensive review, the authors draw several conclusions. Clearly, in light of the underlying erudition, they deserve serious consideration; I will comment on each of them briefly.

a.  On the search for a causal relationship between law and development, the authors are cautious; while there is some evidence, the case is not proven. Too little is known, and the methodology and the criteria for assessment are unrefined. While perplexing, this conclusion is not surprising, for several compounding reasons:

(i) First, as the authors intimate, a good deal will depend upon the theoretical perspective on development that is employed. Much of the research is on the basis of economic growth. To the extent that the state should foster all values, that is, in addition to wealth, such things as respect, power, enlightenment, well-being, skill, affection and rectitude (note: my enumeration), probative evidence would need to stem from multifactoral analysis, and would have to identify and quantify trade-offs between values. The issue of direct causality, as distinct from indirect or mixed causality, is another complication. A recent ADB study, for example, found that the interplay between law, economic policy, and development was "multicausal" (ADB, The Role of Law and Legal Institutions in Asian Economic Development, 1960-95, Executive Summary, p. 6).

(ii) Similarly, certain types of law are preferred values themselves and not motivated by economic development objectives, in particular, democracy, human rights, and gender equality. Thus, these objectives or standards will be pursued and will be justifiable whether or not they impact on economic development. That link may be of interest; indeed, their proponents may rely on claims that they enhance development, but it is coincidental.

(iii) In addition, my impression is that the underlying studies dwell on black letter law, narrowing the focus of inquiry far too much.

b.  A second conclusion is that "enacting or adopting appropriate substantive bodies of law or regulation designed to vindicate the particular conception of development that motivates them has not been a major problem for many developing countries" (p. 107). With this conclusion, I have some difficulty.

(i) First, legal measures are generally not designed to vindicate a particular conception of development: this would hardly be the case for a central bank law, an income tax law, or an exchange control law (e.g., preventing capital transactions). But this may be a semantic point.

(ii) Secondly, what is an "appropriate" substantive body of law? A lot is involved here: laws should be indigenous, not transplanted; their technicality and sophistication should match the level of development of the country; they must be firmly based and be workable in light of available support, resources, and institutions.

(iii) In any case, laws will result from complex national political processes; some accommodation of conflicting interests, and even costly compromises, can be expected.

c.  A third conclusion is that developing countries' "capacity to enhance the quality of institutions charged with the responsibility for enacting laws and regulations and institutions charged with their subsequent administration and/or enforcement has proven a daunting challenge" (p. 107). This is, of course, a major qualification--and one that rings true. The judiciary is identified as the major culprit in this regard; for a variety of reasons, it often lacks competence and resources, and its independence, integrity and objectivity are too often in question. In sum, the courts cannot be relied upon, which results in the frustration of the enacted law.

This is, of course, a travesty of the proper pursuit of development objectives; moreover, it brings the law into disrespect and qualifies the use of law as an instrument of social justice.

d.  As a fourth and final conclusion, the authors go even further down this road. In light of hostile court systems, an alternative for law implementation is to rely on government departments or agencies, or specialized or regulatory bodies. But these, in turn, are generally neglected, undernourished, unreliable, and even corrupt. Therefore, upgrading these legal institutions by reaching into government and public administration, is an even more difficult challenge than cleaning up the judiciary. In other words, state institutions often thwart effective pursuit of development.

4.  The road not traveled

As stated by the authors, in addition to the specific law and development focus, two additional questions could be added: (i) for those countries with poor "legal capital," "what set of historical, political, economic and cultural reasons explain this deficit?" and (ii) for the laggard countries, "what set of legal reform strategies are likely to be both significant and feasible?" (p. 109). They close on the blunt note that, unless law can be shown to be a determinant of development, "these questions need never be answered" (p. 109).

The paper by Professors Davis and Trebilcock thus follows a relatively narrow path-- calling implicitly for further inquiries. Despite the negative concluding tone of the paper, it provokes broader questions related to this conference. Accordingly, I would conclude with three general comments.

a.  First, the inquiry into law and development should be broadened to that of the preferred legal framework for development. In particular, if it is assumed that development is best pursued within a market-based system, then one needs to postulate that framework and develop strategies for its achievement. In this framework, what is the role of law?

It identifies and defines the governmental structure for official decision making (legislative, executive, judicial, governmental agency); it provides sufficient access to property, contracts and capital to allow private parties to become established, and to compete for business; it establishes the framework for controlling the relationships between government and private legal persons; it establishes the basic principles for the exercise of governmental discretion and judgments, and for their review; it provides for impartial adjudication; and it imposes limits on the behavior of market participants.

The question then becomes, not whether a particular law can be shown to foster development, but whether it should be part of the framework that, in turn, conditions development. (This approach may, in fact, be endorsed by the author's final statement.)

b.  In the law and development experience, the authors highlight the blockage that can be brought about by legal and state institutions. What is to be done? Pursuit of the legal framework will depend on the capacity of the state. That capacity must be established, and rational steps taken. As summarized by the 1997 World Bank Development Report (p. 14), sustained reform will require the leadership of reform-oriented political leaders and elites, and the cooperation from all groups in society. In addition, international organizations have a supporting role--of technical assistance, the introduction of cross-country experience, financial assistance, and the mechanism of external commitments. Meanwhile, there is the question of the efficacy of reform of particular non-responsive state agencies--such as an obstructive judiciary. Here, reforms need to be incremental. For example, resources for legal administration need to be raised, salaries for judges and support staff raised, judicial training and improved legal education must be put in place, and high profile anti-corruption legislation must be promulgated and applied energetically. All of this takes, of course, political will.

c.  I am inclined, finally, to recall the interaction between the Fund's activities and law and legal institutions. The Fund has long been involved in identifying, assessing, and advising on national law, especially, for example, under the widening scope of surveillance, during the formulation of adjustment programs, and in its technical assistance. Now, that involvement has intensified. In the circumstances of the Asian crisis, even deeper structural measures were called for, because of "the nature of the crisis and the complementarity of different reforms" (IMF Annual Report, 1999, p. 38). (To take one example, in the Fund work on the prevention and resolution of crisis, it has been postulated that an orderly and effective domestic insolvency mechanism strives to support the financial system (ex ante) and, in a crisis, to provide an appropriate balance of interests to help its resolution and encourage the workout process. Accordingly, bankruptcy reform has been included in certain programs, and at times has been elevated to performance criteria.) ESAF has generated a similar recognition of the significance of legal measures, with the Board noting recently that "the regulatory and legal framework for private sector activity should be streamlined and rigorously enforced." (Ibid., p. 88). In addition, under the umbrella of surveillance, the Fund is developing country reports on both international standards and under the Financial Sector Assessment Program--again with strong legal components.

In these major areas, the work of Professors Davis and Trebilcock contains lessons and implications, and in this respect will serve to stimulate the thinking of this conference.