Growing a Legal System in the Post-Communist Economies Paul H
Total Page：16
File Type：pdf, Size：1020Kb
Cornell International Law Journal Volume 27 Article 1 Issue 1 Winter 1994 Growing a Legal System in the Post-Communist Economies Paul H. Rubin Follow this and additional works at: http://scholarship.law.cornell.edu/cilj Part of the Law Commons Recommended Citation Rubin, Paul H. (1994) "Growing a Legal System in the Post-Communist Economies," Cornell International Law Journal: Vol. 27: Iss. 1, Article 1. Available at: http://scholarship.law.cornell.edu/cilj/vol27/iss1/1 This Article is brought to you for free and open access by Scholarship@Cornell Law: A Digital Repository. It has been accepted for inclusion in Cornell International Law Journal by an authorized administrator of Scholarship@Cornell Law: A Digital Repository. For more information, please contact [email protected]. Paul H. Rubin* Growing a Legal System in the Post- Communist Economies Abstract Legal systems in the post-Communist economies are not well adapted to a market economy. This article uses the tools of law and economics to ana- lyze contract, broadly defined to include all voluntary exchange agree- ments. This article identifies real problems with this body of law, problems that are most severe in Russia. This article makes three interre- lated arguments. First, private mechanisms such as reputation and self- enforcing agreements can be used to facilitate exchange. Second, govern- ment can encourage the use of these mechanisms both to assist private parties in engaging in exchange and to economize on government resources. The most important such policy is a commitment by the gov- ernment to enforce private arbitration decisions if parties voluntarily agree to arbitration for dispute resolution. Third, government can incor- porate the results of these private decision processes into the law when legal code revisions occur. This article derives implications for efficient behavior of governments, private arbitrators, attorneys, trade associations, and private firms. Introduction: The Problem Addressed This article is a normative application of law and economics scholarship to the problem of securing an efficient (wealth maximizing) method of enforcing agreements and thus facilitating exchange in the post-Commu- * Professor of Economics, Emory University. BA, University of Cincinnati; Ph.D., Economics, Purdue University. This research was made possible by a grant from Institutional Reform and the Informal Sector at the University of Maryland. I would like to thank Peter Aranson, Martin Bailey, George Benston, Harold Berman, Chris Clague, John Lott, Todd Merolla and Fred McChesney for helpful comments. In addition, assistance in various forms, including discussions of Eastern Europe and information about sources of information, was received from Dan Drachtman, Cheryl Gray, Heidi Kroll, Russell Pittman, Nancy Roth Remington, and Jan Svenjar. In Europe, I had useful discussions with Ronald Dwight, Allan Farber, Peter Fath, Randall Filer, Attila Harmathy, ZoltanJakab, Laszlo Keckes, Vladimir Laptev, Katherine Martin, Ryszard Markiewicz, Carol Patterson, Andrew Pike, Vladimir Prokop, Roman Rewald, William Sievers, Tomasz Stawecki, Lubos Tichy, Boris Topornin, Tibor Varady, Karl Viehe, Alena Zemplinerova, and John Zimmerman. None of these people necessarily agrees with the implications of this paper, and of course, none is responsible for any errors. 27 COR1 .LLINT'L LJ. 1 (1994) Cornell InternationalLaw Journal Vol 27 nist countries.' This article does not set forth the detailed tenets of explicit law; it is not useful or even possible for anyone to do so. Rather, the reference in the title to "growing" is deliberate. This article discusses state-adopted policies which allow the law to evolve efficiently. In this scheme, no one need decide ex ante what the outcome of the process will be. This article does, however, indicate some broad principles of efficient 2 contract law. While it is generally agreed that all law needs improvement in post- Communist economies, most writing by economists on the "transition" has concerned property law3 and has focussed on privatization.4 The major controversy in this literature has been the optimal speed of adjustment: Should there be a "big bang" (rapid immediate privatization), or should the transition proceed at a more modest pace?5 Economists have devoted 6 relatively little scholarly attention to other branches of law. 1. I deal specifically with Russia, Hungary, Poland, and the Czech Republic, coun- tries that I have visited. I believe, however, that the general principles discussed are more widely applicable. 2. For a general discussion of what efficient contract law might look like, see RICH- ARD A. POSNER, ECONOMIC ANALYSIS OF LAW ch. 4 (4th ed. 1992); ROBERT D. CooTER & THOMAS ULEN, LAw AND ECONOMICS chs. 6-7 (1988). 3. See, e.g., Christopher Clague, Introduction: TheJourney to a MarketEconomy, in THE EMERGENCE OF MARKET ECONOMIES IN EASTERN EUROPE (Christopher Clague & Gordon C. Rausser eds., 1992);Jfinos Kornai, The PostsocialistTransition and the State: Reflections in the Light of HungarianFiscal Problems, 82 AM. ECON. REV. 1 (1992); John M. Litwack, Legality and Market Reform in Soviet-Type Economies, 5 J. EcoN. PERsP. 77 (1991); Henry Manne, Perestroikaand the Limits of Knowledge, 11 CATOJ. 207 (1991); William Niskanen, The Soft Infrastructure of a Market Economy, 11 CATO J. 233 (1991); Jan Svejnar, Microeconomic Issues in the Transition to a Market Economy, 5 J. EcoN. PERSP. 123 (1991). 4. For a sampling of this literature, see THE EMERGENCE OF MARKET ECONOMIES IN EASTERN EUROPE (Christopher Clague & Gordon C. Rausser eds., 1992); INVESTING IN REFORM: DOING BusINEss IN A CHANGING SOVIET UNION (Michael P. Claudon & Tamar L. Gutner eds., 1991); PRIVATIZATION Am ENTREPRENEURSHIP IN Posr-SoCLAUsT CouN- TRIES: ECONOMY, LAw AND SOCITY (Bruno Dallago et al. eds., 1992); MAKING MARKETS.: ECONOMIC TRANSFORMATION IN EASTERN EUROPE AND THE Posr-Sovmr STATES (Shafiqual Islam & Michael Mandelbaum eds., 1993); TIALS OF TRANSmON: ECONOMIC REFORM IN THE FORMER COMMUNIST BLOCK (Michael Keren & Gur Ofer eds., 1992); 1 THE TRANsI- TION TO A MARK=T ECONOMY. THE BROAD ISSUES (Paul Marer & Salvatore Zecchini eds., 1991); THE POLITICAL ECONOMY OF THE TRANSITON PROCESS IN EASTERN EUROPE (Laszlo Samogyi ed., 1993). 5. For a non-technical discussion, see Peter Passell, Dr.Jeffrey Sachs, Shock Therapist, N.Y. TIMES MAG.,June 27,1993, at 20. Anders Aslund and William D. Nordhaus, among others, are advocates of a relatively fast "big bang." ANDERS AsLuND, POST-COMMUNIST ECONOMIC REVOLUTIONs: How BIG A BANG? (1992); William D. Nordhaus et al., Do Borders Matter? Soviet Economic Reform afler the Coup, 2 BROOKINGS PAPERS ON ECON. AcMv- rry 321 (1991). Peter Murrell, in several papers, has advocated a slower transition. PETER MURRELL, CONSERVATIVE PoLIrlCAL PHILOSOPHY AND THE STRATEGY OF ECONOMIC TRANSITION (IRIS, Univ. of Md., Working Paper No. 7, 1991); PETER MURRELL, EvOLU- TIONARY AND RADICAL APPROACHES TO ECONOMIC REFORM (IRIS, Univ. of Md., Working Paper No. 5, 1991); Peter Murrell, Evolution in Economics and in the Fxonomic Reform of the Centrally Planned Economies, in THE EMERGENCE OF MARKET ECONOMIES IN EASTERN EUROPE, supra note 4, at 35. Ronald McKinnon also has advocated a slower transition. Ronald L McKinnon, Spontaneous Order on the Road Back From Socialism: An Asian Perspec- tive, 82 AM. EcoN. REv. 31 (1992). 6. INTERNATIONAL MONETARY FUND (IMF) ET AL, A STUY OF THE SovEr ECONOMY 249 (1991), indicates that "the civil dispute resolution system has, as yet, received lim- 1994 Post-Communist Legal Systems This article primarily concerns the law governing transactions and exchange. This area of law is quite important. For example, Douglass North, a leading economic historian studying growth of western econo- mies, indicates: "How effectively agreements are enforced is the single most important determinant of economic performance."7 This article also considers property rights, particularly Russian property rights, where there are particular difficulties in enforcing such rights. "Transactions and exchange," in this context, mean more than "con- tract" as defined in legal literature; they include the law dealing with all voluntary agreements. Although this article focuses on contracts for exchange of goods, the principles developed apply more broadly. Securi- ties law, the law of secured property, labor law, and bankruptcy are all areas where parties form voluntary agreements and where this article's arguments are relevant. Indeed, even product liability law, commonly 8 treated as tort law, should be covered by contract. Contemporary western legal systems have erred by interfering exces- sively with freedom of contract. For legal systems of newer economies attempting to grow quickly, it is especially desirable not to commit similar errors. For example, in the postwar period, the highly successful Erhard reforms in Germany "paid remarkably little attention to equity considera- tions. In marked contrast to the fashionable welfare state policies, the Erhardian reforms... limit[ed] social concern to the provision of a mini- mal, though comprehensive, social security net." 9 Contract law is easier to reform than property law because the con- tracting parties ex ante are engaged in a positive sum, cooperative game. During the contract negotiation stage, the parties' interests are symmetric; both seek the most efficient contract possible to maximize the surplus to be divided between them. For example, the parties would be expected to ited