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Mitchell, Arthur "The role and rule of law in Asia" [2004] ADBLPRes 8 (20 November 2004)

The role and rule of law in Asia

Remarks
of
Arthur M. Mitchell*
General Counsel
Asian Development Bank

Association of Harvard University Alumni Clubs of Asia

Manila, Philippines
November 20, 2004

The widening gap between the rich and the poor has come to be recognized as one of the greatest challenges of our time. Asia is one of the most dynamic regions in the world yet it is the home of nearly 2/3rds of the world’s poor. There are many reasons given for why some countries are rich and some are poor. I will not try to catalogue all of the reasons for poverty here.¹ Indeed, the precise reasons differ from country to country---but I do think that it is accurate to say that social interactions in developing countries are often plagued by widespread corruption, lack of transparency in decision-making and fundamental unfairness. ADB is making efforts to address this problem through our Poverty Reduction Strategy, which emphasizes pro-poor economic growth, social development and governance as its key pillars. The rule of law underpins each of the objectives of the Poverty Reduction Strategy² by creating a framework that will ensure equitable and efficient interactions among citizens and government institutions, the private sector and the government and citizens and the private sector.³

How much should a country pay for its justice system? Are developing countries too poor to give any priority to law as a development tool when other sectors of the economy have such dire needs? Is it really possible to change traditional attitudes that regard law as something akin to a suggested mode of behavior rather than an imperative? These will certainly sound like strange questions to those of you who live and work in developed economies but these are some of the real questions that developing countries confront on a daily basis.

There are studies that show that certain developed countries spend about 1%-2% of their GDP on courts, prisons and police departments.⁴ But I do not think that these statistics fully capture the costs or the benefits to society of a functioning legal system because they do not include an examination of how law contributes to the smooth operation of a market-based economy nor do they capture the benefits that arise from the absence of serious social conflicts. Although we may never be able to fully calculate the costs or the benefits that accrue from a well-developed legal system, a few anecdotes from the People’s Republic of China, Bangladesh and the Philippines will shed some light on this problem.

Prior to the economic and legal reforms instituted in China in 1978, production unit managers (i.e., factory chiefs) were required to settle disputes of all sorts between workers in their factories, among workers from other production units and their workers and between workers and their spouses. In some cases, this work left little time for the managers to focus on production. New courts were established to handle civil disputes of the type mentioned, thus allowing the managers to spend more time managing their businesses and contributing to China’s economic development. It is impossible to calculate the benefit to the economy with any accuracy but the effects are probably quite substantial.

The Law Minister of Bangladesh recently told me that about 1 million court cases arise each year. One half of the cases are civil and one half are criminal in nature but over 80% of the cases in both categories are related to land disputes. The time from initiation to resolution of these cases can take, on average, about twelve years. The Law Minister has already experimented with measures directed toward reducing the time it takes to resolve a case by changing internal procedures and giving incentives to judges who work quickly but the underlying problem has not been addressed. If the root cause of the land disputes can be eliminated or reduced, through land title regimes and alternative dispute resolution techniques, it is possible that the caseload at the courts can be substantially reduced and real sources of societal tension eliminated.

Last year, I was living at the hotel in Manila that was taken over by a group of junior Philippine military officers. Although the affair ended peacefully, that was not the inevitable outcome. Former Supreme Court Justice Feliciano was asked to head a commission to review the facts and the grievances of the soldiers. The Feliciano Commission found that there had been a real coup attempt and that the grievances were real as well.⁵ Two governance issues were at the heart of the problem: the fact that the self-managed military pension system is bankrupt and that some senior officers were skimming money off of needed supplies of bullets and medicine.

The lessons learned from these examples are straightforward:

• the lack of a functioning judiciary can cause those responsible for production to divert their attention away from economic activity,
• the courts alone cannot satisfactorily address fundamental social tensions without substantive law reform; and
• inadequate governance structures greatly contribute to political instability.

The urgency for this matter has been escalated and the stakes hugely increased by the phenomenal growth of democracy in the last two decades of the twentieth century. Never before in human history have so many countries of the world subscribed to the rule of government by the people. To sustain and deliver on the hope and the possibilities embedded in such democratic change, the institutions of government must come to serve the people. To the extent democratic change fails to bring about greater freedoms from poverty and injustice, democracy itself may become a casualty, further banishing the prospects for real change in the lives of people. The future of democracy therefore rests with the ability of democratic governments to make their institutions, laws, and policies more effective, more just, more accountable and more accessible by all.

Judicial Independence

Any economic system that uses the rule of law as its method of ordering societal interactions must have a highly trained judiciary that acts independently of the political system. While an independent and well-trained judiciary is a necessary condition for a well-functioning legal system, it alone is not sufficient to fully use law as a development tool. Similarly, better substantive laws on insolvency, secured transactions and competition rules are a necessary condition for the development of a market-based economy but they alone are not sufficient to allow the “wheels of commerce” turn in the absence of proper enforcement of the laws. It is for these reasons that we believe that law and policy reform (LPR) must be considered in the broader context of how the rules can be used to facilitate the interactions among citizens, the private sector and state institutions.

Let me give you a few concrete examples:

Interactions between citizens and government institutions

Justice is a public good that should be available to all citizens. The reality is that it is not and the most vulnerable, the poor, are the least able to make use of the legal system. In ADB’s Access to Justice program in Pakistan, we have discovered that vulnerability is a function of insecure access to key sets of material, social, political and environmental assets. Justice is a function of the relationship between institutions responsible for delivering public goods and services, predictably, affordably and accountably. The Access to Justice program assists the government’s efforts to transform the performance of the judiciary and the police so that the citizenry will regard these institutions as important for the assertion and protection of their rights. This is accomplished through measures which stress judicial independence, better institutional performance (by, for example, reducing political interference in police services) and budget management to allocate resources to the institutions that actually deliver the services at the federal, provincial and local government levels.

But poverty is not always simply the result of the lack of resources. It can also be the result of the lack of effective access to existing resources, services and opportunities or result from a lack of protection against harmful or illegal practices. Lack of proof of identity or age can often pose a barrier in a citizen’s attempt to access his or her entitlements or in seeking due protection from the state. UNICEF has estimated that 50 million births go unregistered each year. In the South-Asia region, an estimated 63% of births are not registered. In the East Asia and Pacific region, 22% of births are not registered. Registration of births is lower in rural areas than in urban areas, lower for girls than for boys and lower for some minority (outcast) groups.

Legally-speaking, these people do not exist. ADB has recently embarked upon a regional technical assistance project to determine how the lack of legal identity is used to prevent certain people from gaining access to the services that are normally provided by government and how formal recognition of identity can be used to protect the right to services, resources, opportunities and the protection that the state offers to its citizens.

Interactions between the private sector and government institutions

It is now generally understood that only government can create the proper environment for the private sector to flourish and create employment. Rules which allow individuals and organizations to create, transfer and protect property (both tangible and intangible) are necessary. The government must regulate business behaviour in a way which protects the public interest but does not unnecessarily stifle innovation and entrepreneurship. Finding the right balance is a difficult task in both developed and developing countries.

Since its founding, ADB has recognized the importance of trade. Now 20 of our 38 developing member countries are members of the WTO. Over the last couple of years, we have assisted the People’s Republic of China in connection with their efforts to accede to the WTO and with compliance measures thereafter. Of particular importance has been the way in which the PRC has incorporated judicial review of governmental actions affecting trade into their regulatory framework.

Another good example of how government can create an enabling environment is the area of insolvency law. In the absence of a proper insolvency regime, lenders and investors are less likely to advance funds. Although insolvency demarcates the limits of extending credit and engages all sectors of the economy, it ranks low on most governments’ reform policy agendas. Insolvency has been a focus of ADB’s law and policy reform work since the early 90’s. Before it ever became trendy, and much before the Asian financial crisis, ADB has been contributing to reform in this area. Between 1997 and 1999, ADB designed and implemented a Regional Technical Assistance to assess the laws and legal systems of 11 Asian economies. The assessment led to the development of a set of core principles of a well-functioning corporate insolvency regime. The core principles have since been used as a tool to build effective insolvency systems throughout Asia and contributed to the work of the United Nations Commission for International Trade Law (UNCITRAL) Working Group on Developing a Legislative Guide to Insolvency Law.

Interactions between citizens and the private sector

All too often, the interactions between the private sector and the poor have been asymmetric and unfair in developing countries. For example, in certain rural areas of Pakistan, a form of bonded labor still exists. Tenant farmers have no way of knowing how much they owe to their landlords. ADB's Sindh Rural Development Project has sought to remedy this situation by working to amend the Tenancy Act to require proper accounting, train local government officials in methods by which they can enforce the laws and raising the level of awareness of the tenant farmers about their rights. In Cambodia, on the other hand, title to agricultural land is unclear and unsettled. In fact, the great majority of the land is unregistered. We are currently working on a project that has established "cadastral commissions" or administrative bodies that are responsible for hearing and deciding disputes about unregistered land. As Hernando de Soto has noted, the poor are unable to capture the value of the assets that they already possess because the legal system does not give them adequate protection. The next step is to perfect land registration systems in Asia, then find creative ways to use those assets productively.

The way forward

In my view, a meaningful strategy for law reform in Asia must rest on two pillars:

The first pillar is the strengthening of access to justice, broadly defined. This means increasing the capacity of the judiciary to handle complex legal issues and ensuring that it is independent of political control. But emphasis must also be placed on methods to make other government institutions more responsive to citizens’ needs, including suitable methods for holding government officials accountable to the public.

The second pillar must focus on ways to dramatically increase the size of the economic pie, through enhanced employment opportunities. History demonstrates that there have been no significant redistributions of wealth in the absence of war, revolution or economic collapse. While these calamities are not out of the question in some countries, development institutions, such as the ADB, can make use of their comparative advantage in finance and law to support pro-poor economic growth by focusing on the conditions that are necessary and sufficient to create more employment in our region. From a law reform perspective, that would entail an examination of the rules related to trade, investment and finance and how these impact upon the interactions among citizens, the private sector and state institutions, as illustrated by the following table.

With respect to citizens, reform might focus on measures to further promote micro-finance and support the creation of new small and medium-sized enterprises (especially those owned by women). Policies making investments in new start-up easier and the further development of public equity markets in some countries might be considered. Expansion of social safety nets, such as pensions and unemployment insurance, and methods to assure that the poor can begin to accumulate assets, is an imperative.

Private sector activities might focus on assisting developing countries to further improve their capacity to participate in inter-regional and world trade, to develop private equity markets that would nurture new businesses and create new centers of innovation around Asia. Long-term financing in the form of viable bond markets is necessary for sustainability and the proposed Asian Bond Market Initiative can play a role.

The governmental sector can do much to create the right environment by formulating a competition policy that breaks down sub-regional barriers to trade, fostering foreign direct investment and privatizations (under appropriate conditions) and establishing a regulatory framework that will make government officials accountable to the needs of the public while promoting entrepreneurship.

I have proposed a very large reform agenda. As the conditions on the ground in each country are different, not all of these interventions will be possible or appropriate to every country at any given time. But further research into the experiences of various countries around the world and pilot-testing in our region, will give us the basis on which to make specific recommendations.

Conclusions

The rule of law is one of the most important factors contributing to the creation of an enabling environment for sustainable development. In other words, when law performs this critical role, it can become the language of well functioning interactions.

Thank you.