Law, Development and Finance in Rising Powers

The project will explore the role of law in economic development in the four 'rising powers' of China, Russia, India and Brazil. For over a decade, with the encouragement of the World Bank and western governments, developing countries have adopted programmes of legal and financial reform combining privatisation of state-owned banks and enterprises with the enactment of enhanced legal protections for shareholders and creditors. These reform initiatives were supported by research which suggested that the legal framework governing corporate governance and financial markets had a pivotal role to play in creating the conditions for economic growth in low and middle-income countries. More recently, an emerging body of empirical work, based on case studies of emerging markets including those of the 'rising powers', suggests that law-centred reforms have been irrelevant or counter-productive. Formal legal institutions, it is suggested, crowd out economic cooperation based on trust, and obstruct the developmental role of the activist state. The example of China is often cited in this regard. China's rapid economic growth has been associated with a continuing role for informal business networks and with the active involvement of state institutions at both local and central level. China's case also demonstrates the advantages of sequencing, with partial privatization of state-owned enterprises proceeding alongside the growth of stock markets and the development of legal institutions. In Russia, by contrast, the mass privatisation of the early 1990s occurred before legal institutions had had time to mature. A 'self-enforcing' corporate law model, developed along western lines, failed to generate liquid and transparent capital markets. Since the late 1990s, Russia has seen a reconcentration of economic power in the hands of the state and of integrated financial and industrial enterprise groups. While these two cases are instructive on the issue of sequencing, drawing wider lessons from them on the role of law in development is, however, not straightforward. China's recent experience demonstrates the value of a developing legal framework in overcoming limits to growth in an informal, trust-based economy, while Russia is actively seeking to put in place the necessary legal and regulatory structures for market-based financial development. In Brazil, the example of the Novo Mercado, a new stock market segment which has attracted a large number of high-tech IPOs, suggests that a strategy of allowing firms to opt into a shareholder-rights based regulatory regime can work in promoting flows of equity finance in an emerging market context. In India, too, there is some evidence that recent corporate governance reforms have led to greater transparency on the part of listed firms and to increased investor confidence, although critics of the reform process argue that it has not gone far enough. The picture emerging from these experiences is one in which formal and informal institutions do not necessarily operate in tension. Rather, they may complement each other in providing the foundations for sustainable economic growth and societal development. Our research will explore this process through a combination of quantitative analysis of macro and micro-level data and extensive field work in the countries concerned. Using these multiple methods, we will arrive at a richer and more nuanced picture of the role of the legal system in economic development than has so far been obtained. The work will provide a clearer understanding of the institutional barriers to growth in emerging markets and of the role of legal and financial reforms in overcoming them. It will be of considerable interest to policy-makers in international financial institutions and national-level governments and to a range of private-sector actors including industrial, financial and legal service firms with interests in the economies of the rising powers.

The potential beneficiaries of the research are users in international financial institutions including the World Bank, IMF, EBRD, Asian Development Bank and Inter-American Development Bank; officials of national governments including civil servants and regulators; commercial parties and business users in the countries that are the focus of the case studies; users in financial and legal service firms and exporting companies and other industrial enterprises in the UK and other trading partners of the rising powers; and NGOs, policy advisers, and journalists and commentators interested in issues of legal and economic development. Each of these groups is in a position to benefit from the findings of the research which will throw light on the relationship between legal and financial reform and economic development in the rising powers.

The international financial institutions have been major sponsors of research on the issue of law and development since the early 1990s and have helped to stimulate debate on it. They organize extensive programmes of technical advice on legal and financial matters to national governments. For example, the World Bank has been prominent in ranking the business environments of countries though its 'Doing Business' Reports, and the EBRD has helped to initiate law reform programmes in the area of insolvency law in a number of countries. Our research has the potential to inform these activities by throwing new light on the preconditions for the successful implementation of law reform initiatives in emerging markets.

National governments will also be in a position to benefit from the research. The governments of the case study countries and those of their trading partners including the UK will benefit from the analysis of the prospects for development in the rising powers.

A wide range of commercial organizations will be interested in the research. Legal service firms, financial service firms and investment companies with a base in London as well as those based outside the UK will be in a position to use insights from the research into the current state of legal and financial development in the countries concerned and the sustainability of their current growth paths.

NGOs, policy-makers, commentators, journalists and others with an interest in development issues will also be able to make use of the research findings. The prospects for future growth in the case study countries, the likely course of their integration into the global economy, and possible barriers to sustainable development in these countries, will be of interest to each of these groups.

In terms of timescale, the immediate benefits, realisable within the course of the project, will take the form of up-to-date information on the current state of legal and financial development in the case study countries. Our findings will directly inform analysis of the legal and financial risks and opportunities faced by UK and other overseas firms doing business in developing countries.

In the medium term, results will be available from a more in-depth analysis of the fieldwork data, and from their integration with the macro-level data on legal and financial variables that we will also be collating and analyzing. Within 1-2 years of the project's completion, results with the potential to make a significant contribution to research in this area will be ready for publication in academic journals and for dissemination to a wider audience of business, commercial and governmental users.

In the longer-term, the research has the potential to make a fundamental theoretical contribution to the understanding of the relationship between law, finance and development, of the kind that can guide the design of institutions and policies at international and national level.

The potential relevance of the project to non-academic users is indicated by the willingness of a global law firm and an NGO to co-fund it.