Current Legal Issues Affecting Central Banks, Volume III.
Chapter

Chapter 2 Developments at the International Bank for Reconstruction and Development: Effectiveness of Legal Reform

Author(s):
Robert Effros
Published Date:
August 1995
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Author(s)
ANDRÉS RIGO

Introduction

In the 1970s, a commentator on the role of law in the development process deplored the neglect of law in development circles.1 This situation has certainly changed in recent years, and it is now well accepted that an appropriate legal and regulatory framework, including functioning institutions, is a prerequisite for sustainable development.2 This change is mainly due to the desire of many countries to institute structural changes in their economies to achieve better economic performance, the increasing focus on private sector development and better public sector management, and the transformation of formerly centrally planned economies. Gradually, reform activities have expanded from the macroeconomic areas to encompass sectoral and institutional issues. In this process, it has been realized that the reforms “cannot be effective in the absence of a system which translates them into workable rules and makes sure they are complied with.”3

Given the complexity of development, the reticence of the legal profession in dealing with development problems is understandable. Indeed, “legal reform requires profound knowledge of the economic and social situations in the country involved and can only be useful if it is done by the country itself in response to its own felt needs.”4 This deep knowledge of the country is not easily acquired or available, and the interconnections of the many elements of the legal and socioeconomic puzzle are not easily understood or evident.

Legal reform is inherent to the sovereignty of states. Support by the International Bank for Reconstruction and Development, also known as the World Bank, for legal change has been in response to countries’ requests for assistance. The World Bank should pay “full respect to the exclusive jurisdiction and responsibility of each country over its own legal and institutional framework.”5 Legal reform cannot be successful without the full conviction and political commitment to it of the governments concerned. World Bank support has been limited to legal change relevant to a country’s economic development and to the success of its lending strategy in that country. However, the World Bank’s mandate to promote economic development is very broad and the areas of assistance have been wideranging, including the substantial rules of a market economy and their implementation, as well as the institutions involved in the legal process: the judiciary, the legal profession, registries, and so forth.

This paper reviews the major factors contributing to the effectiveness of legal reform and how they have been taken into account by the World Bank in recent years.

Awareness of Cultural Aspects

Law is intertwined in the fabric of society; it forms part of the culture of a particular country. It is essential that, in devising reforms, the authorities remain aware of how the rule being reformed is linked not only to other laws but also to the country’s social context. The effectiveness of legal reforms will depend, to a large extent, on how the reforms take into account the social, religious, customary, geographical, and historical factors that affect the organization of a given society. If such extralegal considerations prevail, as they often do in traditional societies, the mere change of positive laws may not achieve their objectives unless the changes are deeply rooted in the basic social consensus on which laws ought to rest. Failure to consider the social milieu is highlighted in a 1977 review of the law and development movement. The review concluded that this movement “declined because it was, for the most part, an attempt to impose [foreign] ideas and attitudes on the third world.”6 The following are a few examples that illustrate the dangers of cultural insensitivity.

In the 1880s, the Liberal Party in Holland argued that the Dutch Government was ruining the economy of what is now Indonesia by not letting the forces of the market play freely. It halted the forced cultivation of tea, indigo, and tobacco and, in support of “freedom of contract,” repealed compulsory labor laws. Despite the change in the laws, plantation managers continued to recruit labor in the usual way—through the traditional authorities in the very hierarchical structure of Javanese culture. Locally, there was no concept of a labor contract, and the laborer did not understand that he could refuse the terms offered and demand higher rates. The well-intentioned changes introduced by the Liberal Party to bring prosperity to a wider group of Indonesians had no effect on the lives of the Indonesian laborers and served merely to divert profits to private Dutch capitalists.7

The introduction of a modern system of land registration is usually defended on the grounds that it brings certainty to the housing market and facilitates ownership transfers and the obtainability of credit. Nonetheless, the following example shows that this is not always sufficient to accomplish these objectives. Morocco instituted in 1915 an impressive land registration system based on the Australian “Torrens” model that has survived to this day and is effective in securing land tenure. Nevertheless, large areas of Moroccan land remained unregistered because complex systems of land ownership predating the registration system complicated the initial registration process. Moreover, inadequate appreciation in rural areas of the benefits of registration and cumbersome land-use regulations discouraged land registration.8

A good example of how important it is to assess the cultural elements of a proposed change in the law can be demonstrated by those instances where security-backed lending by commercial banks, a concept well developed in the Western world, has been contemplated. Several reports have pointed out that in parts of Africa it can be difficult for financial institutions to sell houses and other immovable property on which they are foreclosing because in the context of execution on collateral in rural areas “people do not like to buy property from someone else against his will, as the acquirer risks [appropriating to] himself some of the personality of the unwilling seller.”9 Other problems of collateral execution derive from the fact that in some places hundreds of thousands of people may share a common name.10 This difficulty in identifying the debtor is compounded by the difficulty in finding him or her; streets may have no name and buildings no number.

Of course, the World Bank is not immune to providing advice and supporting reforms that do not pay enough attention to social and cultural preconditions and are either ineffective or have unwanted effects. The World Bank tries to avoid such failures by carrying out thorough sector work, investigating not only what legal texts may need to be changed but also what other elements may affect the effectiveness of the changes. In the subsequent appraisal of these projects, an effort is made to consult with the users of the legal systems, particularly businessmen, and with various groups in the legal profession, such as lawyers and judges. In some countries, workshops sponsored by the governments have taken place with support from the World Bank and the participation of interested parties, such as private law practitioners, government lawyers and regulators, and private businessmen. These workshops have proved to be an effective way to initiate a local assessment of the legal system and formulate a response based on local needs rather than on external models. Legal reform should be approached with a great degree of modesty and heavy reliance on local expertise.

Need for Economic Reform

If the law is changed but economic reform does not follow, the reform will not be effective. Normally, legal reform is not ahead of the economic pace of reform but is a response to the changing needs of the business environment. However, this is not always the case. For example, China enacted an economic contract law in 1981. Enterprises continued to be owned by the Government and had no economic responsibility. In these circumstances, the law was not relevant to the resolution of contractual disputes, which continued to be resolved through government supervisory bureaus rather than through courts or arbitration. Only when enterprise managers are allowed to resolve disputes without intervention of the government bureaus will the legal provisions and enforcement mechanisms become important. This example illustrates that an economy based on market mechanisms has a greater need for legal rules to govern transactions than a centrally planned economy.11 It also shows the limitations of the law as an instrument of change.

One might also question the enthusiasm with which the Bank supported the introduction of “framework agreements” or “contract plans” as part of public enterprise reform. The concept originated in France in 1967. In developing countries, this technique was first used in Senegal, then in other countries in Africa, and then to a lesser extent in Asia and Latin America. The assumption was that, by clearly defining the rights and obligations of the enterprise vis-à-vis the government (and vice versa), public enterprise would escape the arbitrariness and capaciousness of government action or inaction. In one evaluation, however, it was concluded that

[t]he existence of a CP [contract plan] … will not, in and of itself, over-come the obstacles of poor policy, fiscal discipline, and incompetent management… CPs thus suffer from a problem common to many other reforms in developing countries: for them to have the anticipated beneficial impact, a complex host of other interrelated factors must be functioning to a modicum standard. If they are not, the impact is minimal.12

Knowledge of the Law

While the effectiveness of legal reforms depends, as stated above, on such fundamental and complex factors as their foundation in the cultural, social, and economic context of a particular society, it also hinges on reasons that are easily ascertainable, such as the awareness by the public that the laws have been changed.

To be known, legal norms need to be communicated to their addressees in an appropriate way. Precision and clarity of the norm content are crucial elements of such communication. Only if lawmakers communicate their expectations effectively can they expect these norms to have a behavioral impact. Rules need to be known in advance. In order to guide the conduct of individuals, the law must tell them what they should do after its enactment and not what they should have done before it went into effect.

In many developing countries, the obligation of governments to disseminate new laws was and still is limited to their publication in official gazettes. The law is available, but the citizens have the burden of acquainting themselves with the law. This burden has increased as a result of economic crises, which has caused the publication of official gazettes in many countries, and particularly in some African countries, to cease. The World Bank has assisted, or is in the process of assisting, several countries to restart publication of these gazettes. It is also helping to make the law more accessible and better known within the government itself. However, in many developing countries, large segments of the population are illiterate, the media is ineffective, and languages are diverse. Under these circumstances, there are obvious limitations to how much law can be known and learned by the average citizen.

To the extent that economic policies need to be reflected in rules, in order to be complied with, governments need to make these rules known through all possible means of communication at their disposal. Rules are understood here in a broad sense and need not be limited to legislation. Courts’ decisions would also be of interest to the public in assisting them to make investment decisions. Equally, governments could, for instance, when land needs to be expropriated for reasons of public utility, make available to the population at large the expropriation laws in explanatory, simple pamphlets outlining their rights and how they can exercise them.13 Similarly, banking legislation needs to be widely disseminated among the institutions responsible for its implementation, while access to banking regulations also needs to be facilitated. Furthermore, the contractual practices of government agencies and private sector operators need to be known by the public.

Legal Institutional Environment

Law is not only a set of rules to be communicated; it also encompasses procedures and institutions for implementing these rules. To the extent that these are lacking, the implementation of law will be highly circumscribed; it will not be effective or enforced. In many instances, legal sector work has identified inefficiencies in the judicial system as a constraint on banking activity. By and large, the inefficiencies are related to pay levels, manpower needs, and judicial procedures.

The training of judges, civil servants, and lawyers is part of an increasing number of World Bank operations. Simplification of the procedures for foreclosing on collateral pledged under loans has also been part of several projects. A project in Venezuela aims to improve the management of the judiciary and its infrastructure. It consists of the implementation of modern court administration and cash flow management through automation; the development of data bases on personnel and physical infrastructure and the design of information systems for the judiciary supervisory body; the rehabilitation and construction of court facilities; and the training of judges and judicial personnel. This project also includes a number of studies on the advantages and disadvantages of introducing alternative dispute resolution procedures and improving access by the poor to the court system.

Training is an important part of legal reform operations. In countries changing from a centrally planned to a market economy, training must address the lack of understanding of new legal concepts. One of the most pressing issues is how to develop attitudes of respect for the law among actors whose only previous association with the law was rigid control from above. When enterprise managers are confronted with economic decisions, few of them look to the law for guidance. If the decisions they adopt are at variance with the law, the extent to which they can be made accountable is uncertain, since there is yet no enforcement apparatus for economic law.14 A daunting task lies ahead.

Implementation Capacity

Usually, the World Bank’s preliminary work on a sector identifies numerous possible areas of improvement, producing a complicated set of recommendations that can bear heavily on a government’s capacity to coordinate and follow up. Capacity is already stretched in countries suffering economic crises or political change. Thus, it is essential that the packaging and sequencing of reforms reflect the capacity of the government to implement them. It is a balancing act between doing everything that is required for reforms to be effective and, at the same time, not unduly taxing that capacity.

International Implications

In certain circumstances, the effectiveness of local reforms may depend on reforms being carried out simultaneously in other countries. For instance, several World Bank-sponsored studies have pointed out similar problems regarding the legal frameworks and institutions in West African countries that are members of the West African Monetary Union. The studies have often suggested similar remedies, and the impact of many of the proposed remedies could be enhanced by economies of scale provided through a regional approach. Thus, in the specific case of creditor-debtor rights, an effective uniform system within the region would provide support to unified financial markets (for example, by facilitating intraregional secured financing) and to the development objectives of these countries’ economic integration efforts.15

The international aspects may include an external element, namely bilateral funding sources and multilateral lenders. The need to coordinate the legal activities supported by outside agencies cannot be emphasized enough. The World Bank has assisted such coordination through teams of experts in the field who ensure that the various donor-financed pieces of legislation dovetail.

Conclusion

As stated earlier, legal reform has been identified as part of the World Bank’s adjustment programs, and changes in legal texts have occasionally been part of the conditionality of policy-based operations. As the Bank’s sector work has expanded and members’ institutional needs have been identified, legal reform has gained a longer-term horizon than that of the structural adjustment operations with which it first had been associated. Thus, there is a new generation of legal projects that focus on legal institutional aspects. These projects are in preparation or at the early stages of execution. Their implementation will take longer than those reforms achieved by a stroke of the pen (such as setting the level of interest rates), as they are more attuned to the normal slow pace of legal reform in developing countries and elsewhere.

Taken together, the reform efforts of the past decade and those still in progress are hard to evaluate: determining which innovative techniques have been successful is difficult. Yet, the World Bank remains particularly well placed to carry out these evaluations and to share this comparative knowledge with its member countries.

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