and convergence among legal systemsʼ Non-State Actors and .... pollution to the department responsible for the environ- ment, or to the department responsible ...
Multinational enterprises, international economic organisations and convergence among legal systemsʼ Non-State Actors and International Law 2: 23–39, 2002. Amanda Perry, Queen Mary, University of London. Introduction It is a fundamental principle of economic theory that it is generally prefer- able to have many producers competing to supply any given product. This is because, in their efforts to gain as much business as they can, producers will compete to provide higher quality products at lower prices. Consequently, it is argued that oligopolistic markets – that is, those which are dominated by a few producers – are generally of less benefit to consumers; and that monopolistic markets – that is, where there is a single producer – are generally not beneficial to consumers. The competition framework can usefully be applied to the study of legal change, by treating legal systems as products. It has been argued, in particular by Ugo Mattei, that there is a market for law, in which consumers of law choose between competing law products.1 This argument can be extended to cover ‘legal systems’ as a whole – that is both laws (procedural and substantive) and institutions (executive, legislative and judicial). This article explores the existence, nature and impact of the market for ‘legal products’; and in particular the role of non state actors such as multinational enterprises (MNEs) and international economic organisations (IEOs) in that market. It considers IEOs as producers of legal reform models; states as consumers of legal reform models, and producers of resulting legal systems; and MNEs as consumers of resulting legal systems. It argues that the market for legal reform products is oligopolistic, and thus not fully competitive; that competition does currently exist in the market for legal systems, due to the large number of state producers; but that such competition as exists is likely to fall as legal systems are forced to converge under the increasingly dominant of legal reform product offered by IEOs; that such convergence might occur naturally with regard to those aspects of legal systems as to which consumers such as MNEs hold, and act upon, homogenous preferences; but that to force convergence in those aspects of legal systems as to which consumers hold heterogeneous preferences interferes with competitive forces and is thus potentially damaging. It should be emphasised that the following analysis does not address the costs and benefits to host states of seeking to attract MNEs, nor the relative merits of attracting different types of MNE. Instead, the aim is to explain the possible
1
U. Mattei, Comparative Law and Economics (Ann Arbor: Michigan Press, 2000), Chapter 5. 1 Electronic copy available at: http://ssrn.com/abstract=665001
impact of any such efforts, whether prompted by local or international forces, upon the laws and institutions of national legal systems. Competition in the legal system market This section sets out a framework for examining the existence of competition in the market for legal systems. Producers If the components of legal systems are products, then who produces them? Mattei has argued that law is produced by legislators and judges. To see legislators as producers of law does not pose a significant challenge. In the UK, Parliament and the various regional assemblies create new laws on a regular basis, in much the same way as a farmer produces vegetables. In the context of a competitive market, whether the laws (or vegetables) are consumed or left to rot depends upon their relative attractiveness to consumers. In the absence of a competitive market, consumption of a particular product depends to a large degree upon the relative power of their producers, a point which will be considered further below. To see judges as producers of law is more controversial, especially in those civil law jurisdictions such as France in which commentators have ‘strenuously denied judges any lawmaking role, refusing to acknowledge the role of judicial creativity in filling the gaps of the Napoleonic Code or even in ignoring its provisions.’2 However, Mattei argues that all judges, whether operating within civil or common law systems, produce law in the form of individual case judgements. These judgements are produced by a process of using and/or ignoring existing ‘legal formants’ – that is, legislation, cases, and academic argument. In the terminology of economics, these ‘legal formants’ would be described as inputs, and the resulting law would be described as an output.3 Extending the analysis to the second component of legal systems, we can say that institutions are produced by the bureaucrats, judges, and legislators who create and run them. In the terminology of economics, the inputs to the production of institutions are the laws under which they are created, and the systems under which they operate in practice. The resulting institutions are the output. Consumers If the components of legal systems are products, then who consumes them? Mattei has argued that the consumers of law include lawyers, legislators and judges.4 It is interesting to note that lawyers, legislators and judges are therefore both producers and consumers of law. Lawyers consume law when they make
2
Ibid p. 103.
3
Ibid, pp. 102–108.
4
Ibid Chapter 5. 2 Electronic copy available at: http://ssrn.com/abstract=665001
legal arguments before a court, or when they refer to laws in legal documents such as contracts. Legislators consume law when, in the process known as ‘legal transplantation’, they look to existing laws for inspiration in the creation of new laws. In addition, legislators may consume law by incorporating a reference to an existing law in the new law. Judges consume legal products when, as discussed above, they use (or ignore) existing ‘legal formants’ such as legislation and cases, in order to reach a judgement as to the state of the law. Turning again to the second component of legal systems, we can say that institutions are consumed by lawyers, legislators, judges and bureaucrats. For example, Legislators, judges and bureaucrats each consume their own institutions as part of their normal working life. Lawyers consume judicial institutions when they bring a case to court. Legislators consume bureaucracies by delegating tasks to them through legislation. Competition Competition arises wherever a consumer has a choice between more than one producer. In the context of the market for law, this will occur when the consumer can choose between two or more laws within a single state – for example, when a lawyer chooses between the tort law and the contract law of England when framing the legal grounds for bringing a case to court. But this is not the end of the story. As Mattei has argued, although lawyers generally ‘presume that the country in which they live has a monopoly on the production of law,’ in fact ‘legal issues are not constrained by national boundaries.’5 Competition can also take place between the laws of two or more states – for example when a lawyer (or in the event of a dispute, a judge) chooses between the contract law of France and the contract law of India as the applicable law of a contract.6 Turning again to the second component of legal systems, competition between institutions can take place either within or across national boundaries. So, legislators may have a choice between delegating the task of reducing transport pollution to the department responsible for the environ- ment, or to the department responsible for transport, or to a local government body. Similarly, a lawyer can choose between assigning jurisdiction for disputes relating to a particular contract to India or to France, or simply bringing an action relating to such a contract in either of those courts.
5
Ibid p. 101.
6
Competition between two or more international, supra-national, or private (as in arbitration) legal systems is not addressed in this article. For competition between private legal systems, see Y. Dezalay and B.G. Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (London: University of Chicago Press, 1996). 3
A 1998 study by the Asian Development Bank (ADB) provides useful evidence of the range of legal products available in Asia.7 The study classifies legal systems along the two “continuous” dimensions. The “allocative dimension . . . refers to legal rules that stipulate who determines the allocation of economic resources in society”. Allocation by the state is at one end of the spectrum, and allocation by the market is at the other.8 The “procedural” dimension “captures how law is to be promulgated and enforced as well as the functioning of legal and administrative institutions that support the enforcement of law”. These functions may be “rule-based” or “discretionary”. In “rule based” legal systems, “state action is bound by law”; second, “to be valid, pre-established legal procedures about rule making and rule enforcement have to be complied with”; and third, “in cases where these principles are violated, non-state actors have recourse to legal review”. By contrast, in “discretionary” legal systems state agents are able to set and enforce rules “without significant constraints”.9 The ADB study concludes that legal systems in Asia and the West have begun to converge in the 35 years since high speed growth in Asia began. Economic laws have generally moved from a “state-allocative model”, in which the State is responsible for determining the allocation of economic resources; to a “marketallocative model”, in which that function is increasingly played by the market. At the same time, legal institutions in the two regions have generally moved from creating and implementing laws in a “discretionary” fashion, towards a more “rule-based” approach. However, the move is far from complete. Substantial differences remain, both among the legal institutions of Asian countries, and between the legal institutions of Asian and Western countries. Importantly, Asian legal systems retain significant state-based and discretionary elements.10 In summary, it is true to say that the market for legal systems is populated by enough producers to allow for competition. A competitive theory of convergence According to traditional economic theory, the effect of competitive forces upon individual legal systems is to make them efficient. This argument ‘is based upon implicit appeal to the biological analogy of natural selection.’ So, ‘just as competition, working through the market, induces efficient outcomes in a static
7
K. Pistor and P. Wellons, The Role of Law and Legal Institutions in Asian Economic Development 1960–1995 (New York: Oxford University Press, 1998). 8
Ibid., pp. 27 and 50. The rule-based legal system bears obvious similarities to the ‘logically, formally rational’ legal system identified by Weber and explained in D. Trubek (1972), “Weber on Law and Capitalism” Wisconsin Law Rev 720, 720. 9 10
Ibid., p. 27. Ibid., pp. 27, 263 and 289. 4
framework, the result over time will be an institutional frame- work conducive to growth and development. Only the “fit” will survive.’11 But how many ‘fit’ laws and institutions will there be? In the context of natural competition, ‘fitness’ is determined by consumers’ perceptions and expectations of legal systems. These perceptions and expectations inform consumer preferences, which in turn affect their decisions, which in turn unleash competitive forces on legal systems. Whether competition among the components of legal systems will naturally result in their convergence; and if not, whether such convergence should be forced is a line of inquiry addressed by Anthony Ogus.12 Building on the notion of a competitive market for law, Ogus examines the impact of any competition between law products on prospects for international convergence in the content of laws. He argues that competitive forces may result in natural convergence in some cases, but that in other cases convergence is unlikely to occur unless it is forced. Ogus’s analysis of competition between laws hinges on drawing a distinction between ‘heterogeneous’ and ‘homogenous’ laws. ‘Homogenous’ laws are those which are ‘facilitative’ of economic transactions, resulting in a ‘minimisation of legal costs consistent with ensuring the outcomes desired by those involved in the transactions’; and consequently, ‘as to which there is unlikely to be a significant variation in preferences.’ Since, by definition, there are no losers from homogenous law products, it is expected that competition will naturally result in a harmonisation of those products across national boundaries.13 Because their preferences are similar, consumers will repeatedly choose similar types of law. Producers of non-preferred law will eventually be forced to offer the preferred type. By contrast, ‘heterogeneous’ laws are ‘interventionist,’ in that they seek to force economic actors to act in a manner consistent with social or economic objectives; and create ‘winners (the beneficiaries of protection) and losers (the subject of legal obligations).’14 Since heterogeneous laws do create losers, Ogus argues that convergence is less likely to occur naturally among heterogeneous laws. Because their preferences differ, consumers will choose a range of laws. Producers will continue to provide a range of law products, each creating different winners and losers.
11
J. Harriss, J. Hunter and C.M. Lewis (eds.), The New Institutional Economics and Third World Development (London: Routledge, 1995), at p. 11. 12 13 14
Ogus. Ibid pp. 410 and 412–413. Ibid p. 410. 5
It is possible to extend this framework of analysis to include the second component of legal systems – institutions. Institutions which are “facilitative,” and therefore result in a ‘minimisation of legal costs consistent with ensuring the outcomes desired by those involved in the transactions,’ can be described as homogeneous.15 Institutions which are “interventionist,” and result in outcomes which are preferable for some, but not all, can be describedas “heterogeneous”. Ogus’s argument serves two useful functions for the purposes of this article. First, it provides a framework predicting the likelihood of natural convergence, which can assist in understanding the role of MNEs in the convergence process. Second, it provides a framework for determining whether it is justifiable to force convergence, which can be applied to evaluate the current legal reform policies of IEOs. In order to achieve these functions, Ogus’s framework must be refined. Refining the model I In order to consider the impact on legal systems of competition across national boundaries, the framework of analysis outlined above must be refined in two respects. The preceding discussion has examined the production of legal systems from a microeconomic perspective. Microeconomics is the ‘study of economics at the level of individual consumers, groups of consumers or firms.’ By contrast, macroeconomics is the ‘study of whole economic systems aggregating over the functioning of individual economic units.’16 In order to understand the transnational dimensions of this market, it is necessary to turn to a macroeconomic analysis of trends in the aggregated behaviour of those producers. From a macroeconomic standpoint, we can say that the aggregate behaviour of individual legal system producers (judges, legislators, bureaucrats) results in a legal system for each state.17 The existence of a variety of legal products is beyond doubt, as the above survey of Asia, and a cursory glance at any comparative law text book will confirm. The existence and degree of competition between those legal systems is less certain – a point considered further below. Second, and in order to understand the role of MNEs in the market for legal products, it is necessary to extend the framework to explicitly include the private sector. Mattei’s analysis does not directly address the role of the private sector as a consumer of law, or indeed legal systems as a whole. Instead it appears to present the private sector as at most a vicarious consumer of legal systems – that is, it is only through lawyers that the private sector gains access to the law. This perspective is at odds with current discussion on the role of legal systems
15
Ibid pp. 410 and 412–413.
16
Penguin Dictionary of Economics . The same can be said of the legal systems of regional or international organisations. 17
6
as a determinant of foreign direct investment.18 Policy emerging from international economic organizations such as the World Bank heavily emphasises the need for potential host states to make them- selves attractive to multinational enterprises (MNEs).19 MNEs are therefore treated as customers of potential host states. Furthermore, this policy insists that a potential host state’s legal system is an important component of its appeal (or lack of it) to MNEs. Therefore, it is in keeping with current trends to conceive of MNEs as consumers of host state legal systems, and of those legal systems as potentially competing products. Convergence by competitive forces: The role of MNEs MNEs are perhaps the single most influential category of consumers in the international legal system market. Like other consumers, MNEs have the opportunity to choose to between a range of law products, for example in choosing the applicable law for their transactions; and between a range of institutional products, for example in choosing a jurisdiction for the resolution of disputes. However, it can be argued that the influence of MNEs in the international market for legal products exceeds that of other consumer groups as a consequence of two factors. First, the frequency and variety of occasions on which they make such choices ensures that they have a higher per capita rate of demonstration of preferences for a wide range of legal products. Second, they are required to make what is arguably the most high profile of legal product related choices – namely, within which national legal system to locate their investment (locational decision making). These choices are particularly noticeable because of the increasing importance ascribed to inward FDI as an economic objective; and because the scope of their impact – that is, the subjection of the entry, operation and exit of an entire investment to a particular legal product – vastly exceeds that of individual legal product choices made by other consumers. The ability of MNEs to influence their legal environment through contractual arrangements, lobbying of home and host states and IEOs, and the development of substantive norms of international business law are complex and important matters which has been addressed elsewhere.20 The purpose of this analysis is
18
For a critique and empirical testing of this debate, see generally A. Perry, Legal Systems as a Determinant of FDI: Lessons from Sri Lanka (London: Kluwer Law International, 2001). 19
For an analysis of the relationship between host states, home states and MNEs, see J.M. Stopford and S. Strange, Rival States, Rival Firms: Competition for World Market Shares (Cambridge: Cambridge University Press, 1991). 20
See generally P. Muchlinski, “Global Bukowina’ Examined: Viewing the Multinational Enterprise as a Transnational Law-making Community”, in G. Teubner (ed.), Global Law Without a State (Aldershot: Dartmouth, 1997). 7
to explore the role of MNEs in the legal product market by investigating the potential impact of their demonstrated preferences, as evidenced by their locational decision making, on production patterns. Each locational decision of product choice can be construed as a demonstration of an MNE’s legal preferences. Such decisions should, in theory, exert a competitive force on legal systems around the world. As states increasingly seek to attract inward FDI, so any demonstration by MNEs of preferences for particular types of legal product should result in the reform of legal systems towards those preferred products. According to Ogus’ analysis, as consumers of legal products, MNEs should be uniformly attracted to homogenous products – that is, those legal systems which reduce costs and thus create no losers. These converging preferences should unleash competitive forces upon states, which will take action to translate those preferences into a convergence of legal systems. This action will take the form of legal reform. With regard to heterogeneous legal products, MNEs should be attracted to those heterogeneous legal products under which they will be ‘winners’, and repelled by those legal systems under which they would be losers.21 Since the competitive forces exerted by MNEs in heterogeneous sectors of legal product market are divergent, they should not naturally result in convergence of legal systems. It is not easy to predict the impact of MNE preferences on the legal product market for three reasons. First, it is by no means easy to predict what the impact of any legal system on any individual will be, and therefore to which consumers (MNEs) it should appeal. For example, predictions by foreign investors in Sri Lanka as to the impact of a particular component of the legal system on the value of their investment have been shown to vary significantly.22 Furthermore, MNE preferences may not be internally uniform. An MNE’s customers, competitors, shareholders and lenders all have an impact upon its preferences, which may in turn affect MNE’s locational decisions. Second, MNEs like all economic decision makers, operate within the confines of bounded rationality. Even where it is theoretically possible to predict the impact of a given legal product, MNEs may in fact be unable to find and/or analyse the information necessary to make such a prediction. For example, the majority of respondents in a survey of foreign investors in Sri Lanka reported that they had been surprised by their experience of their host state’s legal system.23
21
Ogus, op. cit., at p. 413. This analysis can also be used to explain the behaviours of States during the negotiation of treaties such as the now failed Multilateral Agreement of Investments. 22
Perry 2001, op. cit., pp. 128–133.
23
Perry 2001, op. cit., p. 91. See also pp. 43–45 and 72 for bounded rationality. 8
Third, the impact of any consumer’s (MNE) preferences upon the behaviour of the producer (state) will depend upon ‘the relative power’ of a customer ‘to influence legal developments.’24 There is disagreement as to how much influence MNEs have over state legal reform policies by lobbying, contracting and so on.25 More importantly for the purpose of the present analysis, it is not clear how much flexibility MNEs really have to relocate their activities at will. For example, John Gray suggests both that MNEs ‘can locate their capital and their operations almost anywhere, either physically, or using information technology’; and that they are ‘often weak and amorphous organisations,’ which are culturally diverse, which cannot relocate freely and without cost. However, it is true that the more aggressively a state pursues FDI, the more ‘leverage’ MNEs preferences are likely to have on that state’s decision making.26 Of course, not all states are equally desperate for the grace and favour of MNEs. Nor is the legal system the only determinant of locational decision making. Nonetheless, the more desperately a state prostitutes itself to its punters, so it increasingly loses the ability to ignore those customers’ preferences – whether related to the legal system or otherwise. Fourth, disagreement exists as to the extent to which producers of legal products (host states) are actually willing and able to react to demonstrations of MNE preferences. It has repeatedly been noted by institutional economists that inefficient or otherwise inappropriate legal systems often remain first, because of the phenomenon of ‘path dependence’ – the tendency against change – and second, because those who benefit from existing legal systems are in a strong position to prevent reform.27 However, aspiring host states are certainly being pushed by IEOs to break the patterns of path dependence and self preservation, and to react to perceived pressure from MNE consumers. Convergence by dominance: The role of IEOs Total convergence has not occurred naturally in Asia, whether by the competitive forces of MNEs or otherwise. It is therefore interesting to ask whether convergence should be forced; and if so, how. Bearing in mind the particular focus of this article on non-state actors, these questions can be rephrased as follows: To what extent are IEOs currently contributing to forced convergence of legal systems; and if so would the resulting legal product be attractive to MNEs?
24 25
Ogus, op. cit., p. 413. Muchlinski, op. cit., pp. 90–101.
26
J. Gray, False Dawn: The Delusions of Global Capitalism (London: Granta Books, 1998), pp. 63, 67–68, 70, 75, 204 and 234. 27
J. Harriss, J. Hunter and C. M. Lewis (eds.), The New Institutional Economics and Third World Development (London: Routledge, 1995), p. 11. 9
Ogus suggests that, ‘the case for [forced convergence] is weaker than comparative lawyers tend to assume.’28 Because convergence is expected to occur naturally, and towards the optimum outcome, in relation to homo- geneous legal reform products, the case for forcing it is not strong. Further- more, since heterogeneous products are, by definition, not beneficial to all consumers, it is particularly difficult to justify forced convergence of such legal systems.29 The ADB study does not seek to predict whether all legal systems will or should eventually harmonise towards any particular model, except to say that some variety is likely to remain. However, contemporary IEO prescriptions for legal reform do generally fall squarely into the Market-Allocative Rule- Based (MARB) quadrant of the ADB typology. Refining the model II The above discussion has demonstrated that it is instructive to view states as producers of legal systems, and MNEs as their consumers. In it is now necessary to clarify the somewhat obstructive role of IEOs in the legal system market. In recent decades, IEOs such as the World Bank have argued that legal systems and foreign direct investment (FDI), both separately and in tandem, support and promote economic development. FDI is said to provide the capital and technology necessary promote economic growth. ‘Effective’ legal systems are said to promote the certainty and low transaction costs necessary to promote economic activity. Since foreign investors are thought to understand the role of ‘effective’ legal systems in improving economic environments, it is argued that inward FDI is best promoted and supported by ‘effective’ legal systems. IEOs have therefore supported legal reform projects in less developed states, many of which are at least partly aimed at promoting inward FDI. In the context of the market legal systems, we can say that IEOs are the producers of a major input (legal reform projects) which are necessary for states of limited economic and technological capacity to produce legal systems, of which MNEs are the end consumers. As the following discussion explains, IEOs such as the World Bank have highlighted and promoted consideration of the proper effects of MNE’s legal system preferences on the production choices of aspiring host states. However, those very IEOs have simultaneously shortcircuited that potentially competitive relationship by presuming a homogeneity of legal system preferences among MNEs, and pushing aspiring host states to reform their legal systems towards those presumed preferences.
28
A. Ogus, “Competition between National Legal Systems: A Contribution of Economic Analysis to Comparative Law” (1999) 48 I.C.L.Q. 405. 29
Ogus, op. cit., pp. 415–417. 10
The legal reform market IEOs, and the World Bank in particular,30 are the major suppliers of legal reform for developing countries, and as such have achieved a position of market dominance. Although a some private law firms, bilateral aid donors and NGOs are also legal reform producers, the barriers to entry into the market are high and their impact is limited. IEOs have (relatively) huge capital at their disposal; wield enormous brand name recognition, and can offer attractive low interest rate financing. In addition, those competitors which do exist tend to offer products almost indistinguishable to those offered by IEOs. As a result of these factors, both inter and intra brand competition in the institutional reform market are limited. Furthermore, there has been a significant degree of vertical integration in the legal reform market, since the financing and policy are both largely dominated by IEOs. How does this description of the legal reform market fit with Ogus’s (adapted) framework for considering the impact of competition on convergence of legal systems? It can be argued that the structure of the legal reform product market is such that convergence of legal systems towards the dominant MARB model is effectively forced. From the perspective of the MNE, the market for legal systems is poten- tially competitive, populated as it is by as many legal products as there are aspiring host states. But the market for legal reform products is oligopolistic, and thus offers limited potential for competition. Convergence among legal systems might occur naturally with regard to those aspects of legal systems as to which MNEs hold, and act upon, homogenous preferences. However, to force convergence in those aspects of legal systems as to which consumers hold heterogeneous preferences interferes with competitive forces and is thus potentially damaging. Therefore, if the effect of IEO dominance in the legal reform market is to force convergence of legal systems, this could be cause for concern. The important question for the purposes of this article is whether IEOs offer a product (the MARBM) of the quality which consumers such as MNEs would choose in a competitive market. If the answer is definitely yes, then from the perspective of MNEs and those states who wish to attract them, such forced convergence is not a wholly bad thing. If the answer is no, then a greater diversity in legal reform products is required. The answer to this question lies in
30
L. Tshuma (1999), ‘The Political Economy of the World Bank’s Legal Framework for Economic Development’ 8:1 Social and Legal Studies 75, p. 76. See also A. Perry, “Inter- national Economic Organisations and the Modern Law and Development Movement” in A. Seidman, R. Seidman and T. Wälde (eds.), Making Development Work: Legislative Reform for Institutional Transformation and Good Governance (London: Kluwer Law International, 1999). 11
whether legal reform is a heterogeneous product, a homogeneous product, or a combination of the two. The dominant legal reform product Legal reform products offered by IEOs have generally followed a fairly uniform set of specifications. As has been described in detail elsewhere, the key features of these specifications can be boiled down to two essentials: efficiency and certainty.31 It is argued that the ideal legal system for attracting FDI is efficient. An inefficient legal system increases transaction costs by failing to provide cheap mechanisms for enforcing legal rights and obligations. Low transaction costs are ensured where a host state’s laws are of good quality – that is modern; and its courts and bureaucracies are provided with adequate infrastructure, and trained and properly compensated staff.32 Second, it is argued that ‘deficiencies’ in ‘the lawmaking process, the public administration and enforcement of laws, and the judicial interpretation of laws’33 in host states can result in uncertainty.34 Legal systems which fail to provide credible information regarding the status of legal rights and obligations must be reformed in order to create greater certainty for foreign investors. The World Development Report of 1997 relies upon a survey of domestic and foreign investors which showed correlations between political credibility, as perceived by the private sector, and investment levels: countries with high perceived political
31
Perry 2001 and 1999, op. cit; A. Perry (2000), ‘Effective Legal Systems and Foreign Direct Investment: In Search of the Evidence’ 49 ICLQ 779–799. 32
See for example, World Bank, Governance and Development (Washington DC: World Bank, 1992), p. 4, World Development Report 1996 (Washington DC: World Bank, 1996), pp. 94–95 and World Development Report 1997 (Washington DC: World Bank, 1997) pp. 7–8 and 99–100; Foreign Investment Advisory Service (FIAS) Administrative Barriers http//:www.fias.net/services/barriers.htm, 1999; Commission of the European Communities Directorate General for Economic and Financial Affairs European Economy: Reports and Studies 1993, pp. 25–32; UNCTAD World Investment Report 1995 (Geneva: United Nations, 1995) p. 277; and I.F.I. Shihata The World Bank in a Changing World (London: Martinus Nijhoff, 1995) pp. 234 and 590, and ‘Preface: Good Governance and the Role of Law in Economic Development’, in A. Seidman, R. Seidman and T. Walde (eds.), Making Development Work (London: Kluwer Law International, 1999) p. xix. 33
M.J. Trebilcock, ‘What Makes Poor Countries Poor?: The Role of Institutional Capital in Economic Development,’ in E. Buscaglia, W. Ratliff and R. Cooter (eds.), The Law and Economics of Development (Connecticut: JAI Pres, 1997), p. 40. 34
World Bank 1997, op. cit., p. 43. 12
credibility had high investment rates, and vice versa. The Report concludes that ‘government’s credibility- the predictability of its rules and policies and the consistency with which they are applied- can be as important for attracting private investment as the content of the rules.’35 So, predictable legal systems are considered to be key (but not lone) determinants of locational decision making. But how is predictability best achieved? According to the dominant legal reform product, a legal system is most likely to be predictable where the laws are stable, accessible and clear; the discretionary powers of the state (including its bureaucrats) are limited; corruption is low and powers are separated among branches of government, in particular through the creation of an independent judiciary.36 The connection between efficiency and certainty on the one hand and the MARB classification on the other is that increased market-allocation of resources is expected to produce increased efficiency, and increased rule-based decision making is expected to produce increased certainty. Whether IEOs have correctly identified the MNE preferences to which developing states should pander as homogeneous is debatable, and the subject of the following section. Evidence of MNE preferences The findings of the survey of foreign investors in Sri Lanka referred to above provide a limited but useful indicator of whether MNEs have strong preferences regarding legal systems; and if so, whether those preferences are indeed homogeneous.37 Since the 1990s, the Sri Lankan government has been working with the World Bank Legal Department and Foreign Investment Advisory Service
35
World Bank 1997 op. cit., pp. 4, 32 and 43. The concept of credibility was developed by S. Borner, A. Brunetti and B. Weder who conducted a survey of 28 developing countries: Political Credibility and Economic Development (London: St Martin’s Press, 1995) pp. 36, 26–46 and 77–78. 36
See for example, World Bank 1996, op. cit., pp. 93–97 and 1997, pp. 7–86 and 103–106; Commission of the European Communities Directorate General for Economic and Financial Affairs, op. cit., pp. 25–32. 37
Questionnaires were sent to the CEOs of each of the 402 companies in Sri Lanka which are offered extra incentives by the government because they are either export oriented, or operating in a priority sector. Sixty seven usable questionnaires were returned. In addition, 33 background semi-structured interviews were conducted with representatives of the legal profession, academia, non-governmental organisations and business in Sri Lanka. Research was conducted in 1997–1998. The findings are further analysed in Perry 2000 and 2001 op. cit. 13
on legal reform with a view to, among other things, promoting FDI.38 However, it is not at all clear that these efforts will pay off. Strength? As noted above, the current IEO emphasis on the importance of legal systems in supporting FDI is based on the premise that MNEs have strong preferences as to what type of legal system they wish to operate under. Interestingly, the Sri Lanka survey provided little support for the proposition that MNEs have strong preferences as to the nature of legal systems. Less than half of the respondents had investigated the Sri Lankan legal system at all before investing, and less than a quarter had conducted a meaningful investigation – that is, one which went beyond a cursory examination of the written law.39 It would seem that any preferences held by these investors cannot be strong. Homogeneity? IEOs tend to present legal reform as a homogeneous product. In reality, it seems that while some aspects of legal reform products can be considered as homogeneous, and potentially suitable for forced convergence; other aspects appear to be more heterogeneous, and therefore less suited to such convergence. In order to consider whether forced convergence is damaging or desirable, it is necessary to identify to what extent institutional reform is comprised of homogeneous and heterogeneous aspects. The Sri Lanka survey indicated clear differences among the preferences of various investors. Respondents were asked to indicate whether they expected the impact of each in a list of non-MARB features in a hypothetical legal system to be good, bad variable or none. If the dominant theory is correct, then respond- ents should overwhelmingly indicate that each aspect of this hypothetical (non-MARB) legal system would have a bad impact upon the value of investments. When responses to all aspects of the hypothetical legal system are considered collectively, it is clear that nearly three quarters of ratings were bad. However, a quarter were other than bad – that is, ‘good,’ ‘vari- able’ or ‘none.’40 When the ratings returned by individual respondents are examined, it appears that just under a third of respondents indicated that they expected every characteristic of the hypothetical legal system to have a ‘bad’ impact upon their investment. Those responses support the dominant theory. However, contrary to theory, the remaining two thirds of respondents expected that at least one aspect of the hypothetical legal system would not necessarily have a ‘bad’ impact. Indeed, one third of respondents expected that at least three of the nine hypothetical characteristics would not necessarily have a bad impact upon their investment;
38
W. M. Tilakaratna, Issues of Transparency in Sri Lanka: A World Bank Study (Colombo: Econsult, 1995); FIAS, op. cit.; and Interview 10. 39 40
Perry 2001, op. cit. Excluding don’t know, don’t understand and blank responses. 14
and 10 percent expected that more than five hypothetical characteristics would not necessarily have a bad impact. There is clearly room for believing that legal systems might be a heterogeneous product. Finally, the Sri Lanka survey indicated clear differences between the predicted and actual preferences of investors. Responses indicated that investors perceive the Sri Lankan legal system to deviate in many respects from the MARB type advocated by IEOs under the dominant legal reform product. Nevertheless over three quarters of respondents indicated that they would still have invested in Sri Lanka if they had known then what they know now about its legal system. Contrary to IEO predictions, investors did not show strong preferences against the (non-MARB) legal system.41 There are two possible explanations for the fact that, contrary to the predictions of IEOs, MNE preferences appear to vary. First, it is possible that some investors are not aware of, or are not sufficiently worried about, the potential damage which an inefficient and unpredictable legal system can cause to their investment. Second, it may be that legal systems which deviate from the MARB are nonetheless perceived to offer enough efficiency and predictability. These possibilities have been explored in detail elsewhere,41 but for the purposes of this article, it is useful to provide a few illustrations of the evidence supporting these contentions. For example, 30 percent of respondents to the Sri Lanka survey indicated that the inconsistent enforcement of laws by bureaucrats would not necessarily have a bad impact upon their investments. Therefore, the heavy emphasis placed by the dominant legal reform product upon bureaucratic consistency appears to be somewhat misplaced. Furthermore, 29 percent of respondents indicated that ambiguity in laws would not necessarily have a bad impact on their investment. In interviews it was suggested that ambiguity can leave room for bureaucrats to manoeuvre on behalf of the investor and therefore ‘a smart guy may see vagueness as a competitive advantage, while others would see it as a reason to panic.’42 Finally, 24 percent of respondents to the Sri Lankan survey indicated that even ‘unreasonable’ delays would not necessarily have a bad impact upon the value of their investments.43 As one interviewee suggested, a degree of certainty can be achieved by ‘important’ litigants who sometimes have the power to increase or shorten court delays.44
41
This result might in part be explained by a reticence on the part of respondents to admit to having made a poor decision. 42 Perry 2000 and 2001, op. cit. 43 Interview 20. Supported by Interviews 23, 26 and 27. 44
Sri Lanka Law’s Delays and Legal Culture Committee Report of the Sri Lanka Law’s Delays and Legal Culture Committee (Colombo: Ministry of Justice of the Government of Sri Lanka and the Asia Foundation, 1985), p. 2. 15
Conclusion There are good grounds for believing that the MNE decision making is unlikely to result in a natural convergence among legal systems. This is because, to the extent that they seem to hold a preference about legal systems, MNEs may well have divergent perceptions and expectations of host state legal systems. That is, in the context of FDI, legal systems are a heterogeneousproduct. Furthermore, the relative heterogeneity of MNE preferences may vary depending upon the aspect of the legal system in question. MNEs may be uniformly keen on the existence and enforcement of secure property rights, but their preferences regarding the existence and enforcement of strong environmental law may vary.45 Whether forced convergence towards the MARB is desirable depends to a large extent upon whose perspective is taken. For Western states, convergence may well be desirable, in that their MNEs might be expected to interact more effectively with host state legal systems which are of the more familiar MARB variety. The nexus between the perceived needs of MNEs and the legal reform policies of IEOs may well be seen as supporting evidence for those who consider that the agendas of IEOs are dominated by those western states. Cynicism aside, it is clearly ‘wrong to assume that all market actors have the same preferences.’46 Even in those areas in which the preferences of MNEs coincide, the case for forced convergence of legal systems is not clear. Just as ‘market actors may be indifferent to divergent legal formulations provided they lead to outcomes which match their preferences,’47 so they may be indifferent to divergent legal systems, provided the outcome matches their preferences. If this is the case, then why pay for legal reform towards the MARB model, when existing or alternative models may be as, or more, effective in attracting MNEs?
45
Interview 1.
46
See Perry 1999, op. cit., p. 30.
47
Ogus, op. cit., p. 410. 16
