Law, Development and Finance in Rising Powers

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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.