Prof. Kevin DavisHow Important is the Legal System?

Professor Kevin E. Davis*

Law and development is definitely in vogue. Although their ranks still tend to be dominated by economists, mainstream development scholars and practitioners now typically regard institutional reforms in general and legal reforms in particular as central components of an effective development strategy. In other words, one of the most dominant theoretical frameworks in contemporary development studies is the institutional one and more often than not the institutions at the centre of attention are legal institutions. Developing countries that were once directed to focus upon 'getting the prices right' are now being told to concentrate on 'getting the institutions right'.

But what do the right legal institutions look like? Which aspects of legal institutions matter? Generally speaking, scholars have adopted one of two approaches to answering these questions. The first approach focuses upon substantive law and attempts to identify the types of legal rules that are more or less conducive to development. This approach has been especially popular amongst financial economists. Perhaps most notably, in a widely cited series of papers La Porta, Lopez-de- Silanes, Shleifer and Vishny, have argued that legal rules offering relatively large degrees of protection for creditors and minority shareholders are important determinants of companies' access to capital and so are indirectly important determinants of economic development. Many legal scholars, however, have great difficulty with the idea that there is a uniquely optimal set of legal rules and point to evidence that efforts to transplant legal rules from one jurisdiction to another have met with limited success. These and other concerns have led most scholars interested in the project of identifying the attributes of good law to adopt a second approach, one that focuses less upon substantive legal rules and more upon the manner in which they are enforced.

This second line of research on law and development is inspired and guided by a number of cross-country studies showing that measures of judicial efficiency, respect for the rule of law, and corruption are all correlated with economic development. The standard interpretation of these studies appears to be that whether or not the substance of legal rules matters, the quality of law enforcement is an important determinant of development. The obvious policy implication is that developing countries can improve their economic prospects by investing in improving the efficiency and integrity of institutions charged with administering the law, i.e. courts, administrative agencies and police forces. Many development agencies have taken this wisdom to heart and committed extensive funds to projects aimed at judicial reform and the elimination of corruption.

It almost goes without saying that efficiency and integrity are desirable features of legal institutions. The question I wish to pose here, however, is whether the well-documented correlations between respect for the rule of law and corruption on the one hand and economic development on the other hand tell us anything more than that efficiency and integrity are inherently good things.

In order to assess the significance of the empirical studies on the relationships between the rule of law, corruption and development, it is important to understand the nature of the data upon which they rely. The principal source of rule of law data is a private publication known as the International Country Risk Guide (ICRG), which provides quantitative assessments by unidentified experts of the strength of the law and order tradition in various countries. The law part of the equation is a measure of the strength and impartiality of the legal system while the order part refers to the extent of popular observance of the law. In other words, the ICRG's law and order index reflects assessments of both the quality of legal institutions and the extent of compliance with the laws that they enforce.

Data on corruption are usually generated in much the same way as the ICRG's rule of law data. They are typically produced by private organizations and represent the results of surveys of experts who are asked to assess either the frequency of various types of improper transactions or the extent to which the presence of such transactions poses a threat to foreign investment or an obstacle to doing business. The focus of these surveys is clearly upon bribery of public officials by private parties. Ultimately therefore, like the rule of law data, the corruption data represent assessments of the qualities of both public institutions and the private individuals with whom they interact.

 

Developing countries that were once directed to focus upon 'getting the prices right' are now being told to concentrate on 'getting the institutions right'

The dangers inherent in relying upon subjective assessments of behaviour that purport to reduce the behaviour of a large population of actors to a single dimension should be obvious to all concerned. Reliance upon this kind of data is particularly troubling where there is a strong probability that some of the assessments are prepared by foreigners and represent efforts to measure the incidence of behaviour that is illicit and so unlikely to be publicized. On a more positive note however, users of this data often point out that notwithstanding its potential deficiencies the data has passed a market test: businesses routinely pay large sums of money for data of this sort, suggesting that it is of at least some validity.

 

Even if we assume, however, that this data is reasonably reliable there remains the question of what to do with it. The dominant interpretations seem to presume that poor rule of law and corruption scores tell us that a society either has bad substantive laws (for example sentences that are too lenient) or weak law enforcement (for example underresourced, inefficient and easily corrupted judges and police officers). It seems to me, though, that these interpretations overlook the possibility that a society's performance on the rule of law and corruption indices tell us as much about the members of a society as they do about the content of its laws or the efficiency and integrity of its law enforcement institutions.

The reason for this is simple: as we have seen, both these sets of data measure, at least in part, the extent of compliance with laws. Regardless of the pretensions of lawyers and law enforcement officials, compliance with the law is almost certainly a function of both legal variables and a number of factors that have little to do with the quality of the legal system. For example, low crime rates in a given society might reflect the existence of a harsh criminal code or a large or dedicated police force. Those rates might, however, also reflect the fact that members of the local population are unusually willing to report crimes, appear as witnesses in legal proceedings and shun offenders, or that they have particularly deep ethical commitments to law abiding behaviour. Similarly, low rates of corruption might reflect the presence of severe penalties for bribery or efficient and incorruptible law enforcement agencies. But they may also reflect the fact that the members of the society in question, or at least the potential bribe-payers among them, find the idea of paying a bribe morally offensive.

More generally, prevailing ethical norms and the extent of law-abidingness are likely to depend upon an array of factors such as the strength of families and other informal social networks, the extent of poverty and economic inequality, and the degree to which state officials are perceived as exercising legitimate rather than illegitimate authority. Legal rules and the manner in which they are enforced which they are enforced may influence some or all of these features of a society, but any causal relationships are likely to be subtle, indirect, and context-specific. Theoretically speaking, it is even possible that strengthening laws or improving law enforcement will undermine the ability of moral values and family structures to serve as alternative methods of inducing compliance with the law.

The inherent complexity of the role of law in society suggests that the task of 'getting the institutions right' from a developmental perspective will be significantly more challenging than it might first appear. There is a distinct possibility that for the next little while further academic research in this area will confuse as much as it enlightens. However, given the magnitude of the potential benefits to be achieved, the challenge of identifying the attributes of good legal institutions seems like one well worth taking on. Thus in my view, the study of law and development ought to remain in vogue for some time to come.

This essay is adapted from a longer paper with the working title "What Does the Rule of Law Variable Measure?" and is part of ongoing research being conducted jointly with Professor Michael Trebilcock.

This article first appeared in the Spring 2003 issue of Nexus, which focused on Law and Development.

*Prof. Davis has moved to NYU (New York University) since the publication of this article.