Presenter: Professor Frank Upham, New York University Law School

Commentator: Rick Messick, Senior Public Sector Specialist, The World Bank

Moderator: Thomas Carothers, Vice President for Studies, Carnegie Endowment

On September 5, 2001, Tom Carothers convened the first meeting of the Carnegie Endowment Rule of Law Roundtable. The Roundtable brings together a diverse group of rule-of-law aid practitioners on a regular basis to discuss the lessons of experience and future challenges in this rapidly growing area of foreign aid.

Professor Upham's Presentation

Professor Upham attacked what he identified as a new conventional wisdom in development circles, the belief that formalist rule of law, which stresses institutionalized legal mechanisms and absolute autonomy from politics, is a necessity for economic development. Attempts to transplant formalist rule of law to developing and/or democratizing countries could actually be counterproductive for economic, institutional, and political development, especially when informal mechanisms would be more effective and efficient.

Upham began with what former World Bank General Counsel Ibrahim Shihata set out in 1991 as requisites for functioning rule of law: 1) a set of rules known in advance, 2) rules that are actually in force, 3) mechanisms to ensure proper application of rules but allow controlled departure when deemed necessary, 4) existence of an independent judicial or arbitral body to make binding decisions when conflicts in application of rules arise, and 5) procedures for amending rules. Upham challenged Shihata's views, noting that they ignore the potential benefits of informal mechanisms for maintaining social order and fostering economic development. He also took particular issue with the mantra of "the rule of law, not men," arguing that separating law from politics is not only impossible, as the United States demonstrates, but dangerously demonizes politics.

Upham also challenged others' precepts that the rule of law is unequivocally necessary for economic growth. In a 1996 public lecture before the International Labour Organization, Jeffrey Sachs included the rule of law as a necessary precondition for economic growth and noted that the effective establishment of the rule of law could help reduce corruption in developing countries. Upham noted, however, that establishing the rule of law and fighting corruption do not necessarily go hand in hand, since institutions of law can themselves be quite corrupt. Upham also challenged the "dangerous platitudes" in a September 2000 speech by World Bank President James Wolfensohn, in which he declared that a government must ensure rule of law and that no equitable development is possible without it.

With this introduction, Upham presented five main points:

1) Rule of law is complex and nuanced. It cannot simply be transplanted from country to country using a particular template.

2) Since politics and rule of law are inseparable, these inherent connections should be made explicit and not glossed over by platitudes about autonomy or unwavering impartiality.

3) Rule of law works best in stable, homogeneous societies. Implanting formalistic rule of law in developing countries could impede economic, political, and social development.

4) Rule of law is not a path to development. It is instead a highly desirable result of development.

5) Rule-of-law assistance often ignores informal methods of social control and attempts to replace them with more expensive, often less effective formalistic laws.

Upham focused on two cases-the United States and Japan-to substantiate his points.

According to Upham, the United States does not itself possess the non-politicized rule of law it often tries to export to other countries. Though George W. Bush and Al Gore campaigned on maintaining the rule of law in the United States, they also each promised to appoint judges who would support certain positions on abortion, affirmative action, and other highly politicized issues. Although misleading rhetoric about the separation of law and politics works well in the United States, suggesting to other countries that politicization of law equals corruption is dangerous, since "politics is the only means of governing society."

The United States has developed a strong economy and stable political institutions without the formalist rule of law espoused by Shihata and others. Federal judges are nominated and confirmed by elected officials, state judges stand for election on party tickets, and examples of "structured irrationality" (juries, federalism, attorney loyalty to client over truth/law, etc.) are rampant. Upham stressed that his observations were not meant to criticize the United States system in any way; they are instead intended to demonstrate that formalist rule of law is not necessary for democracy or economic development.

Next, Upham focused on Japan, which saw tremendous economic growth in the last century despite a lack of formalist rule of law. The number of lawyers per capita and amount of litigation in Japan have decreased markedly since the 1930s; economic growth has exploded in roughly the same period, suggesting that "formal legal rules" have very little to do with economic growth. The Japanese have largely kept the formal legal system away from the economic sphere, instead allowing interaction between bureaucrats in the powerful Ministry of International Trade and Industry, politicians, and private business to guide economic policy. The Japanese also rely on a system of informal mechanisms to handle most individual disputes. At rare times, courts have been used as a "political safety valve," such as the Big Four Pollution Cases of the 1970s. Because of its extensive reliance on informal mechanisms, the Japanese legal system could serve as a better model for developing countries than the United States', according to Upham.

Professor Upham reached four conclusions at the end of his remarks:

1) Political stability, not formalist legal institutions, is the key to development. Despite frequent party turnover, there is a relatively narrow range of political discourse in the United States, and the Liberal Democratic Party has ruled Japan almost exclusively since the end of World War II. Legal institutions contribute to this stability, but formalist mechanisms are not necessary components.

2) Models and "big truths" about development are largely futile. The cases of the United States and Japan disprove the Wolfensohn and Sachs precepts that formalist structures are absolutely necessary for economic and democratic growth. Also, no legal system can serve as a panacea and be transplanted from country to country without major or minor alterations.

3) The predictability and regularity of formalist rule of law might not be what developing countries need. Institutions, whether judicial, legislative, or private, need to be able to adapt to technological, social, and political change. Formalist rule of law impedes such change.

4) Despite widespread pronouncements to the contrary, formalist rule of law could actually inhibit foreign investment in developing countries, since doing business through courts could be more expensive than using effective, informal systems of dispute resolution.



Mr. Messick agreed with the bulk of Professor Upham's arguments that formalist applications of the rule of law are not always necessary and are sometimes even counterproductive. Messick strongly cautioned providers of rule-of-law assistance and governments to consider the costs of replacing well-functioning informal institutions-ethnic trading networks, community mediation groups, etc.-with formal ones.

Messick used the example of reputation-based systems, which allow merchants to trade without court-sanctioned contracts, to demonstrate the efficacy of informal systems. Such systems work because the benefits of repeat dealings outweigh gains that could be made by breaking a deal and risking ostracism. Messick cited work by Paul Milgrom, Douglas North, and Barry Weingast to show how national court systems with legal contracts gradually supplanted informal networks. As economies grew, businessmen could no longer afford to make all the queries necessary to determine a potential trading partner's reliability; therefore, a formal judicial system eventually became a more cost-effective option.

Next, Messick gave the example of contemporary Philippine law, which obligates prosecution for bounced checks. Although this system assists landlords who lack means to conduct detailed evaluations of potential tenants, check cases clog Manila courts. In the Philippine example, a deformalization of the current system, such as through the promotion of credit bureaus, would be desirable.

Finally, Messick noted that formalization can sometimes be a proper avenue, and that the dichotomy between formal and informal mechanisms might not be as clear in practice as it is in theory. In the case of squatters living on government land ringing Lima, Hernando de Soto's Institute for Liberty worked to provide the poor with formal land titles in order to facilitate access to credit. Lenders often required borrowers to hand over computer-generated copies of land titles, even though such documents had no real legal value. Since foreclosure on a mortgage can take years in Peru, many lenders use possession of titles as "informal" leverage in case a borrower considers defaulting.



In the subsequent discussion, one participant suggested that using the term "rule of law" to only include formalist structures was limiting, since rule of law can encompass both formal and informal mechanisms. Another participant responded by noting that most assistance programs make recommendations for reform by studying formal mechanisms exclusively and ignoring informal ones.

Another participant questioned the merits of informal systems, especially in traditionally misogynic societies or areas where colonial laws irrevocably displaced or distorted indigenous ones. Rather than debating the theoretical predominance of formal or informal mechanisms, another participant suggested, aid providers should focus on strengthening whatever systems local peoples perceive to be more legitimate.

One participant challenged as hyperbolic Professor Upham's portrayal of the politicization of the United States' judicial system, noting that outright politicization and corruption are much greater in Latin America. The participant noted that judges do not determine a claimant's party affiliation or political connections before issuing a ruling, as is often the case in Latin America. Upham responded that party turnover and procedural regularity certainly decrease politicization and corruption in the United States' judiciary.

The link between economics and the rule of law is crucial, one participant noted. In Russia, many foreigners invested in the country before the rule of law was adequately established because of the huge potential market. Only after financial crises, skyrocketing crime, and other problems did investors finally begin demanding rule-of-law reforms. The participant also suggested that, although academic careers are made by advocating for grand theories of change, incremental reforms in relatively minor details of law and procedure would probably be better for countries trying to develop the rule of law and attract investment, such as Russia and Ukraine.

One participant challenged Professor Upham's assertion that the inherent connections between law and politics need to be explicit. The participant questioned whether "sophisticated denial" actually makes such systems function, since those who lose in court are less likely to question the value of the entire system or make accusations about corruption if they view the system as based in time-tested, unbiased procedural regularity rather than politics.

Finally, a participant noted that, since law only has derivative, not intrinsic, value, it is more important for aid practitioners and government reformers to focus on systemic problems, especially in countries with particularly pressing economic, political, and social instability.

Synopsis prepared by Jeffrey Krutz, Junior Fellow with the Democracy and Rule of Law Project at the Carnegie Endowment.