Corporate Crises Reveal New Relationship Between Global Legal Systems and Economic Development By Shari Cooperman, MBA ‘09 In the midst of a global economic crisis, it seems more relevant than ever to study factors that contribute to capital market strength and long-term economic growth in emerging economies around the world. On Tuesday, January 27, the Weatherhead East Asian Institute cosponsored a brown bag lecture with the Center on Japanese Economy and Business and the Harriman Institute titled “A New Approach to Law and Economic Development, with Reference to East Asia.”
The discussion focused on the findings presented in the recently released book, Law and Capitalism, which was coauthored by Curtis Milhaupt, Fuyo Professor of Japanese Law and Professor of Comparative Corporate, Columbia Law School, and Katharina Pistor, Michael I. Sovern Professor of Law, Columbia Law School. Hugh Patrick, director of the Center on Japanese Economy and Business, Columbia Business School, moderated the event. Professors Milhaupt and Pistor wrote Law and Capitalism to reshape the debate around the relationship between law, legal systems and economic development.
For over a century, the prevailing view was that common law systems, or law developed somewhat informally through decisions of courts and tribunals, is associated with larger capital markets and higher rates of economic growth than civil law systems, or law based on formal written code. Further, it was believed that well-designed legal systems and good enforcement lead to good economic outcomes; under this theory, this causation runs only one way and assumes that law is exogenous and fixed. Law and Capitalism challenges this long-accepted theory by pointing out that several major economic “miracles” in East Asia post-World War II happened in countries that do not fit in this fixed legal model, including China, Korea and Japan.
In using these countries as case studies, Professors Milhaupt and Pistor propose that we should rethink the relationship between countries’ legal systems and their economic development by considering it to be more fluid and “two-way.” They argue that legal systems can support markets in several manners: in addition to protecting and enforcing rights, they can also serve to coordinate (i.e. majority provisions bring leaders together to agree on issues), to signal (i.e. policy changes) and to enhance credibility (i.e. through leveraging authority).
Depending on how legal systems are used in a given country, that country’s markets can also support and bring change to its legal system. Based on this idea, Professors Milhaupt and Pistor developed a framework for organizing legal systems on two continuums: centralized to decentralized, and coordinative (those based on multi-stakeholder claims) to protective (those focused on protecting individual rights). They then analyzed “institutional autopsies” of firm-level scandals and failures in various countries around the world, as well as the related country’s institutional response, to extrapolate where that country’s legal system fits within their framework. Three specific East Asian corporate controversies – including China Aviation Oil in China and Singapore, SK in South Korea, and Livedoor in Japan – were all triggered by a clash of the domestic rule system and outside players.
Law and Capitalism notes that in each of these cases, the countries’ legal systems were challenged and eventually adapted by borrowing foreign models to better adjust to globalization. In Professors Milhaupt and Pistor’s two-continuum framework, China sits in the “centralized/coordinative” corner, diagonally opposite to the United States in the “de-centralized/protective” corner. Korea and Japan are in the middle, with Korea slightly closer to China, and Japan slightly closer to the U.S.
That being said, the institutional autopsies and government reactions studied in Law and Capitalism suggest that most East Asian countries are moving toward a more decentralized and protective approach to economic regulation. Milhaupt and Pistor believe that this is in part due to the worldwide movement towards transparency, and in part due to the borrowing of foreign law. The professors concluded by noting that although all of the countries studied in Law and Capitalism are economic success stories, they each have dramatically different approaches to legal regulation of markets.
While this suggests that there is no single “menu” for economic success - in contrast to previously prevailing beliefs - the common theme of these successes is adaptability when such change is necessary.
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