Diverse Paths toward “the Right Institutions:”Law, the State, and Economic Reform in East Asia

Abstract

IVABSTRACTIn the wake of the global financial crisis that began in 1997, an influential body of opinionarose which argued that a primary cause of the crisis in the affected countries was a lack ofinstitutional transparency and accountability, and more generally, an absence of the rule of law. Thisargument reflected a growing international consensus in the 1980s and 1990s that different lawtraditions had differential effects on economic development. More specifically, the argument was thata common law tradition was more likely to promote economic development because it was the bestsource of and predictor for the rule of law, transparency and accountability. By the same token, thecivil law tradition was more likely to privilege state intervention in economic processes, and to be lesssensitive to concerns about the rule of law and transparency.I argue that however compelling this argument may be—and I lay the argument out insome detail—legal traditions and institutions do not determine the nature of the state, or its likely rolein the economy, nor do they critically determine the course of economic development. Therefore, thecurrent tendency of pointing to the “rule of law” as an elixir which will fix various contemporaryproblems of development may simply be wrong. Instead of common law leading to a minimal stateand the broadest extension of the market, or civil law leading to state intervention in the economy andcorresponding shrinkage of market activity, there may be no relationship at all between forms of lawand the role of the state. The current discourse about the rule of law, as well as the long intellectualpedigree behind the argument about law and economic development, may misguide us into thinkingthat we have unlocked the conundrum of economic growth and reform, when in fact we may be lesswell off today than when we tried to understand the reasoning behind state-directed developmentprograms. This is because of the built-in bias in this literature against the state, which is viewed as ipsofacto inimical to economic development. And it is the common law background that is assumed to beipso facto conducive to development and to the virtues of transparency and accountability.In this paper I review the core literature on the rule of law and economic growth; theinfluential arguments of some institutional economists on the relationship between law, finance andgovernment; and the current consensus on the part of international development agencies, like theWorld Bank and the Asian Development Bank, on these issues. In particular I will examine theinfluential argument by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and RobertVishny, on the superiority of the Anglo-American common law system (as versus the civil lawtradition of continental Europe, Latin America, and East Asia) in fostering financial development. Idemonstrate the inadequacy of these arguments on the rule of law and economic development, byflashing them against the backdrop of East Asia.