ASIAN DEVELOPMENT BANK EXECUTIVE SUMMARY THE ROLE of LAW and LEGAL INSTITUTIONS in ASIAN ECONOMIC DEVELOPMENT 1960-1995 Prepared for the ASIAN DEVELOPMENT BANK by Katharina Pistor and Philip A. Wellons Jeffrey D. Sachs and Hal S. Scott Senior Advisors Team Leaders: China : Fang Gang and Xin Chunying India : T.C.A. Anant and N.L. Mitra Japan : Hideki Kanda and Kazuo Ueda Korea : Seung Wha Chang and Kwang-Shik Shin Malaysia : Jomo K. Sundaram and Wong Sau Ngan Taipei, China : Tain-Jy Chen and Lawrence S. Liu The Role of Law and Legal Institutions in Asian Economic Development, 1960-1995, tests competing theories about law and its relation to economic development against experience in Asia. The role played by law in Asia’s remarkable economic growth dur- ing the second half of the twentieth century has been largely ig- nored, even disputed as irrelevant, and this study refutes that view. Law mattered. Its effect depended very much on the country’s ap- proach to the role of markets in the economy. This conclusion is the result of an interdisciplinary research effort by legal and eco- nomic experts from Asia and the West, commissioned by the Asian Development Bank. Oxford University Press is publishing the book setting out the comparative research results, and the Harvard Insti- tute for International Development is publishing portions of the country studies as part of its development papers series. ? Is law relevant to Asian economic development and are the uses of eco- nomic law converging, both within the region and with the West? These are the core issues for the study. The study tracks these questions to their conclusions by testing theories about law and its relation to economic development against the experience of six Asian economies—People’s Republic of China, India, Japan, Malaysia, Republic of Korea, and Taipei,China—during the thirty-five-year period after 1960, when economic growth took off in Asia. All achieved a certain economic success, four of them to a startling degree. The four economies—Japan, Republic of Korea, Malaysia, and Taipei,China—that experienced unprecedented economic growth rates are commonly considered responsible for the “East Asian miracle.” The other two—People’s Republic of China (PRC) and India—are now seen as having the potential to join the other four in making a significant contribution to another remarkable growth period. The six Asian economies provide a sample large enough to allow for some generalization but small enough for analysis in sufficient detail to ac- count for the complexity of law and legal institutions within economies. The time-frame, 1960 to 1995, covers a dynamic period in the economic develop- ment of the economies and is long enough to capture the usually slow change of institutional behavior. The legal histories of the six economies have common characteristics and important differences. All six received entire legal systems from the West, two 42 THE ROLE OF LAW AND LEGAL INSTITUTIONS IN ASIAN ECONOMIC DEVELOPMENT from Great Britain and four primarily from France and Germany. Historically, all six economies share a history of a strong bureaucracy. Two—India and the PRC—have experienced particularly extensive state controls in more recent times. LAW AND SOCIOECONOMIC CHANGE ? To what extent were the Western-style laws imposed or adopted in the colonial period used then or later? The striking degree to which they were not enforced during 1960 to 1995 has important implications for Western theories about the role of law in development. Legal Transplants before 1960 The creation of colonial empires led to a proliferation of Western legal systems in Asia from the second half of the nineteenth century. Other Asian countries, which had not been colonized, responded to the threat posed by Western powers by modernizing their legal systems. In this process they bor- rowed heavily from the West. Political factors, which included the military and economic conquest by Western powers, greatly influenced not only the source of law but the scope of legal change. Two of the six economies received common law and the other four took codified civil law. India and Malaysia received English law after British ad- ministration was established over their territories. By contrast, Japan inde- pendently adopted Western law primarily from French and German sources in an attempt to modernize its legal system and to fend off foreign pressure. From J apan, this new law was transferred to the island of Taiwan, which came under Japanese occupation in 1895, and to Korea, where Japan established a protectorate in 1905 and subsequently colonial rule in 1910. China, in a move similar to Japan’s, made a major effort, first at the very beginning of this cen- tury during the ultimately failed restoration and then again during the 1920s, to transplant codifications from the West. Continental European and, in par- ticular, German law again served as the primary source for these transplants. The comprehensive reception ofWestern law influenced the formal legal system in all six economies prior to World War II, but for economic law, the distinction between common (English) law and civil (continental European) law has had little bearing on the development of these economies’ legal sys- tems. The content of substantive economic laws and legal processes was determined initially by the source of these transplants. Subsequently, the in- fluence of the original donor country became less important as these econo- mies began to borrow from multiple sources. As an example, US law was brought to Japan under American occupation following World War II. From EXECUTIVE SUMMARY 53 there it was transferred to the Republic of Korea, which used Japanese models when revising its own laws. The study therefore refers to specific country sources of law and legal reforms, but for the most part refrains from grouping economies into legal families. Limited Use of Western Law Superimposed on Asian concepts of authority, Western approaches to law have sometimes been ignored or slow to gain acceptance. The content of many laws on the books is still a legacy of this earlier legal borrowing and might suggest that legal systems had converged long before the onset of eco- nomic growth in the 1960s. However, in the more authoritarian phase of policy- driven growth, many of the borrowed laws appear to have been ignored in practice. They were in fact superseded, at least temporarily, by new rules and regulations that allocated substantial authority to the state. Asian theories of law, legal evolution, and the interaction between legal and economic development suggest that law would not play an important role. Theories of law are closely related to the concept of authority, and East- ern concepts of authority differ substantially from those in the West by allo- cating significant power to the ruler. This helps to explain how formal law, in the Western sense, could be ignored in practice. Western Theory Applied to Asia Theories about law and economic relations that evolved mainly in the West seem inadequate to explain development in Asia. The major legal changes establishing formal legal systems modeled largely on Western law occurred long before Asia’s economic takeoff, and much of the transplanted law may have been ignored during the early years of the takeoff. This immediately puts in question the causal relationship between legal and economic devel- opment posited by many Western theorists. Western theory accepts that there is a significant correlation between ef- fective legal systems and economic growth. Western theories about law and social change view legal change primarily as an important but evolutionary process that interacts with a similarly evolutionary process of social and eco- nomic change. This view is based on the European experience, although even there it is not always congruent with historical facts. Certainly the most influ- ential theories on the role of law in economic development were developed in Europe and played an important role during the Enlightenment. One obvi- ous reason for their influence is that the most dramatic change in legal and economic relations—the development of capitalism—took place in the West and influenced the world view of Western scholars. 64 THE ROLE OF LAW AND LEGAL INSTITUTIONS IN ASIAN ECONOMIC DEVELOPMENT In Asia, by contrast, the specific economic and legal developments chal- lenge Western theory. Imperialism disrupted the evolutionary process of le- gal and socioeconomic development in the last century. This helps to explain the inadequacies of Western theories of law and development. Legal Change and Legal Transplants, 1960-1995 The process of socioeconomic change after 1960, and particularly since 1980, revived and encouraged the assimilation of largely foreign legal sys- tems that had remained for the most part dormant until that time. Between 1960 and 1995, the legal systems of the six economies under- went major changes. Of these the most fundamental occurred in the PRC where, after the introduction of economic reforms in 1978, a new legal system was created virtually from scratch. The new system relied to some extent on legal reforms introduced during the first decades of communist rule. But the PRC also made substantial use of other concepts and systems including the com- mon and civil law systems. In the other five economies of the study, borrowings from foreign sources between 1960 and 1995 were primarily supplementary and occurred for dif- ferent reasons. In some cases legal transfers were imported as part of techni- cal assistance programs. In others, law reform was initiated after crises, such as environmental disasters or blatant misuses of monopoly power. The areas of law most affected included antimonopoly law (competition), environmen- tal and consumer protection law, intellectual property rights, and securities and exchange regulations. A striking feature of the history of these transplants is that many of them were left unenforced for years after they had been enacted.