Common Law in Asia

Common Law Countries and Civil Law Countries

Malaysia was a British colony and its legal system is based on the common law: the set of rules, norms, and procedures that has guided the legal system of England and the British Empire for about nine centuries. Indonesia was a Dutch colony and its legal system derives from French civil law, a set of statutes and principles written under Napoleon in the early 19th century and imposed upon the lands he conquered, including the Netherlands.

According to research published by a group of scholars beginning in 1998, countries that come from a French civil law tradition struggle to create effective financial markets, while countries with a British common law tradition succeed far more frequently. While the scholars conducting the research are economists rather than lawyers, their theory has jolted the legal academy, leading to the creation of a new academic specialty called “law and finance” and turning the authors of the theory into the most cited economists in the world over the past decade.

The evidence supporting their theory is hardly absolute. For starters, some civil law countries handily outperform common law ones. Although it may not stack up well against Malaysia, Indonesia looks positively affluent when compared with common law countries like Ghana or Sierra Leone. The logic underlying the theory isn’t universally accepted either. Legal and economic scholars alike have attacked nearly every premise and conclusion, though the frequency and fury of the attacks seem to be evidence as much of its importance as of its flaws. If true, the theory provides more than just a new way of looking at legal history—it also gives Indonesians gazing across the South China Sea at their far richer neighbor insight into how they might catch up.

THE IDEA THAT LEGAL ORIGIN CAN EXPLAIN NATIONAL MARKET DIFFERENCES comes from four economists who are referred to in their field by the acronym LLSV: Rafael La Porta of Dartmouth’s Tuck School of Business, Florencio Lopez-de-Silanes of the Yale School of Management, Andrei Shleifer of Harvard’s economics department, and Robert Vishny of the University of Chicago’s business school. Though the law is at the heart of their theory, none of the scholars has a J.D. “We’re all lawyer wannabes,” Lopez-de-Silanes said recently.

Shleifer organized the group, and he’s the best known of the four. In 1975, at age 15, he immigrated to the United States from Russia and soon entered Harvard, claiming to have learned English by watching Charlie’s Angels on television. He earned tenure at Harvard before turning 30. In 1999, Shleifer won the John Bates Clark medal as the most accomplished economist under 40, an award second in prestige only to the Nobel Prize in the profession. He’s also recently gained notoriety for a scandal over whether it was illegal for him to personally invest money into the same Russian markets that he was helping to design in the mid-1990s, while funded by a government grant. (Lopez-de-SIlanes also ran into trouble after this article went to press. He recently lost tenure at Yale University because of alleged double billing.)

Shleifer and Vishny were graduate students together at the University of Chicago, and in 1994 they founded an investment firm that now manages about $25 billion. Shleifer later met Lopez-de-Silanes and La Porta when they were his students at Harvard. Asked how much the group knew about common law and civil law when the project commenced, Shleifer said, “Nothing, literally.” But the scholars did have an instinct that the nature of laws could explain important national differences. Three of the group’s four members grew up in countries whose economies collapsed in their adult lives in large part due to corruption that legal systems failed to stop: La Porta is from Argentina, Lopez-de-Silanes is from Mexico, and Shleifer is from Russia.

LLSV’s initial work examined why some government regulations of markets succeed in creating and maintaining an environment where people want to invest, and others don’t. Intrigued by what seemed like patterns related to legal history, LLSV built a database that included every country with a stock market in the world and then classified each country’s legal origins. The group then ran mathematical tests to determine correlations between legal origin and other variables like measures of corruption and indices of shareholder rights. In 1998, their first major paper, “Law and Finance,” set off a firestorm.

THOUGH THERE ARE OTHER SYSTEMS WITH INTERNATIONAL SCOPE—Islamic theocratic law, for example—most countries’ legal systems derive from either French civil law or English common law. Legal scholars had of course already cataloged the differences between the two, but until “Law and Finance,” no one had tried to link these differences to the success or failure of financial markets. Nor had anyone ever mathematically examined the differences between the two systems.

LLSV’s main tool was regression analysis, a mathematical technique in which many variables are plugged into a program that sorts out which ones are correlated and which ones are not. Using regression analysis, for example, you could plug in the heights, weights, and eye colors of 100 people. The results would show that height and weight are correlated (the taller you are, the more you’re likely to weigh) but that weight and eye color are not.

Using this tool, “Law and Finance” showed that common law countries protect both shareholders and creditors better than civil law countries do, and they also tend to be less corrupt. LLSV took dozens of specific financial indicators—ranging from key gauges, like the odds that a company’s assets will be confiscated by the state, to smaller measures, like whether shareholders can vote at company meetings—and regressed them all against legal origin. The regressions showed that the measures that indicate high investor and creditor protection or low corruption connect to common law origin, just as height connects to weight. The measures that represent low protection and high corruption connect to civil law origin.

The regression didn’t show that common law necessarily makes people richer, but it did represent a crucial link in a chain of logic that could connect legal origin to prosperity. When shareholders have more rights, people are more likely to invest in markets, because they have more protections against dishonest executives. When creditors have more rights, they are more likely to lend money, which spurs markets to grow. And when countries are free from corruption, investors put more money into them. The LLSV scholars weren’t the first to recognize that shareholder and creditor rights spur economic growth, or that corruption stunts it, but they were the first to connect these conditions to a country’s legal system and to do so using cold, hard numbers.

THERE’S NOTHING IN THE COMMON LAW PER SE that significantly protects shareholders—common law doesn’t come with a shareholder’s bill of rights. Nor is there a mandate for corruption embedded in civil law. “Law and Finance,” then, raised as big a question as the one it claimed to answer: Why is a country’s legal system so powerful a factor in determining its economic development?

In subsequent papers, LLSV has set out to solve that mystery. The most compelling theory they’ve developed has to do with the power both systems afford their judiciaries. Common law judges are, on balance, far more powerful than their counterparts in civil law countries. Since judges tend to be a country’s most reliable check on the other parts of its government, common law countries grant less power to their executives than civil law countries do. And in developing nations, corruption is generally perpetuated from the top.

The difference in the power that the two systems grant their judges is rooted in their respective histories. French civil law derives from the Napoleonic code, published in 1804 by scholars eager to wrest power from the judiciary. Before the country’s revolution, France’s courts had earned reputations for elitism and corruption. Influenced by popular discontent with much of the judiciary, Napoleon attempted to write a statutory code that was essentially judge-proof. Judges draw their influence from their power to interpret laws. Napoleon’s code stripped them of this prerogative; his code favored the writing of a new law over a judge’s interpretation of an old one. Consequently, compared to common law countries, civil law countries have weak judiciaries—and long statute books.

Common law was similarly influenced by a violent revolution that pitted the people against the crown. But in the years leading up to England’s Glorious Revolution in the late 17th century, the judiciary tended to side with the people and against the Stuarts, who had tried to eliminate an independent judiciary. When the revolution came, the new government gave the judiciary far more power than France did a century later. Courts could interpret laws and even overrule the executive branch.

Legal historians didn’t need LLSV to tell them all this. They knew that common and civil law countries differ fundamentally in the roles that judiciaries play. But LLSV was hardly content just to recite the old histories and anecdotes. They went back to their calculators and, in a 2003 paper titled “Judicial Checks and Balances,” they demonstrated mathematically that common law countries give judges more independence, which in turn correlates with the sound economic policies they had examined in “Law and Finance.” The paper compared factors like whether judges in a country’s highest court system have life tenure against measures of what LLSV called economic freedom, such as whether people have secure property rights. The numbers showed that judicial independence closely correlates with common law legal origins. It also correlates strongly with economic freedom and investor protection.

Again, the idea that judicial independence was related to economic freedom wasn’t revolutionary. You can find arguments for judicial independence in The Federalist Papers. But James Madison didn’t back up his theories with regression analysis.

LLSV GAINED NOTORIETY AND PRESTIGE WITH “LAW AND FINANCE,” and they’ve built on it, as co-authors publishing close to a dozen papers since. According to Essential Science Indicators, a research service that tracks publications, over the past 10 years, Shleifer’s papers have been cited more frequently than any other academic writing about business or economics topics. Vishny is a close second, with Lopez-de-Silanes in seventh place, and La Porta in eighth.

From their first publication, the quartet had clearly uncovered something deeply original and surprising, and the legal academy reacted with a combination of fascination and disdain. Lawyers are generally trained to answer narrow questions with detailed intellectual or historical analysis. LLSV had ventured to answer a far-reaching question with sweeping mathematical analysis, and they had done so in a decidedly pro-market framework. (“We use the term ‘good’ in this paper to stand for good-for-capitalist-development,” they wrote in one paper.) Their approach pricked up the ears of the legal academy—and raised its hackles. Soon after the first drafts of “Law and Finance” began circulating, LLSV was presenting the paper at conferences around the world and, according to La Porta, receiving “a lot of hate mail.”

“The first time that I saw LLSV’s work I had two thoughts. The first was, Why didn’t I think of this? It’s such a simple, brilliant thing to do,” said Mark West, a professor of law at the University of Michigan. “The second thought was: This is just way too simple. . . . I can’t run regressions [analyzing] the houses in my subdivision. They are running regressions on countries.”

West has published a widely read paper mocking LLSV’s work. “LLSV controlled for GDP growth and the logarithm of real GNP,” he notes dryly. “In this model, I control for a potentially more relevant development-related factor in this context: the number of professional soccer players per capita.” With bravado no doubt inspired by LLSV’s work, West then takes the parody a step further, attempting to prove that civil law countries fare better than common law ones in international soccer tournaments. The paper is the most widely read comment on LLSV’s work on the Social Science Research Network.

But West has launched substantive attacks on LLSV’s actual findings as well, believing that they have relied heavily on oversimplification in order to make their analyses work. He points to Japan, which LLSV codes simply as a German civil law country. But the foundation of Japan’s legal code comes from China. Some of it did come from Germany during the late 19th century, but still other sections came from elsewhere. The laws covering corporate conduct, for example, were imported from Illinois state law by professors from the University of Chicago during Japan’s postwar reconstruction. “You can’t code an entire legal system with all of its societal baggage into one entry on a spreadsheet,” said West. “That’s just wrong.”

Other scholars don’t question the data so much as the hypotheses LLSV draws from it. They point out the thinness of the quartet’s explanation that common law correlates with judicial independence, which in turn correlates with economic liberalism. “The puzzle was less the econometric results than their explanation for the differences. I think it’s fair to say that most lawyers, whether trained in common or civil law countries, thought the explanation was naïve,” said Ronald Gilson, a law professor at Stanford.

The LLSV scholars admit that this latter point is a weakness that they have yet to fully resolve. Not all the links in their chain of logic are steel. Though they’ve shown that having a strong tradition of judicial review does correlate with sound economic regulations, for instance, it’s a weak enough correlation that the authors know other factors are in play. Think again of height and weight: The two are related, but there are other variables—a fondness for exercise, a taste for chocolate crullers—that can determine how much you weigh.

THE LLSV SCHOLARS ACKNOWLEDGE THESE WEAKNESSES in their research. They have little patience, however, for most of their critics in the legal academy, who they believe look through microscopes, not telescopes. According to Lopez-de-Silanes, you can’t come up with a theory about the way the world works if you’re fretting over whether Canada has been miscategorized as a common law country because Quebec uses civil law. Lawyers worry about such issues, Lopez-de-Silanes said, so they don’t have to come up with grand theories. “Lawyers don’t do empirical work,” said Shleifer. “They just argue with each other.”

Yet strong criticisms of LLSV’s work have also been leveled by members of their own discipline. One of the most compelling critiques of their theory comes from economists Luigi Zingales of the University of Chicago and Raghuram G. Rajan of the International Monetary Fund. They argue that even if you accept that there are distinctions between countries with common law and civil law origins, that doesn’t necessarily mean that legal origins are the cause of those distinctions. According to a paper Zingales and Rajan published in 2003, France had a much more developed stock market than Britain or the U.S. in the early 20th century. It lagged for much of the remainder of the century, but is now catching up. If civil law is fundamentally flawed, you would expect that France would have continued to lag at about the same rate.

To Zingales, the differences that LLSV has shown may not come from something intrinsic to common law or civil law, but rather from some other correlated factor. Correlation is not the same thing as causation, especially when you are looking at complicated global trends. It is said that in the decades between the two world wars, German intelligence agencies divided the world into countries where people tucked in their shirts and countries where they didn’t. That classification made some sense because people in industrialized countries feared that loose shirttails could get stuck in machinery. But it didn’t mean that a country could mandate that its citizens tuck in their shirts and vault its way into the league of industrialized nations.

Similarly, common law may be linked to strong markets without causing them. Common law countries tend to speak English (a big advantage in the latter half of the 20th century, given American economic dominance) and tend to be Protestant (scholars dating back to Max Weber have connected Protestantism with hard work). Many historians also believe that the British did a much better job than the French of finding economically viable locations to set up colonies. “What LLSV has done is a very clever relabeling of things,” said Zingales. “We all know that Anglo-American countries are different. You can call it the English language, the English tradition, and you can code it in all sorts of ways.”

The LLSV scholars counter that they have built their regression models to try to take all of these variables into account. In one paper, they compared religious affiliation with legal origin and found that civil law origin has much more of an impact on markets than Catholicism does, just as height has more of an impact on weight than bone density does. It’s not possible, however, to control a regression for every factor. Until they can come up with a clear and convincing explanation for what precisely it is about common law that causes the differences they’ve found, scholars will continue to assail their theory.

THE POLICY IMPLICATIONS OF THE DEBATE over what factors spur economic success make it more than a shouting match echoing inside the ivory tower; they are what lured LLSV into the scrum. “I am from Mexico, and the first goal I have in my life is to make it look nice,” said Lopez-de-Silanes. La Porta added that the quartet deliberately chose to look at variables that could lead to solutions. They wanted to avoid focusing on religion, for example, because converting a country from Catholicism to Protestantism isn’t possible, at least not for a group of economists. Altering shareholder regulations, on the other hand, isn’t out of the question. “[We] look at things that the policy maker can change,” said La Porta.

It’s not clear, however, that LLSV’s work can translate into practical policy change—in part because their work is so sweeping. Their contention is that civil law leads to profoundly flawed outcomes—that’s not something a policy maker can easily fix. LLSV hasn’t discovered a disease in the soil that, once identified, can be eradicated. They’ve discovered a more fundamental problem: There’s something wrong with the region’s climate. Consequently, LLSV can’t offer an easy prescription. Civil law countries can’t just switch over to common law, asking all their judges to throw out their code books. “If you fly into the Côte d’Ivoire, where the new government is just holding on by its fingertips, is the first thing out of your mouth going to be, ‘Junk your legal system and adopt the British’s’? Not even close,” said Roger Noll, an economics professor at Stanford.

Though they may wish otherwise, LLSV has not produced a recipe for success that government ministers in developing countries can follow. What they have done is provide a giant statistical brief in support of the ideas of John Locke and James Madison, and they’ve updated those ideas for a world that’s as interested in economic success as liberty. Creating a judicial branch that can check the executive and the legislature doesn’t just protect individual rights and prevent the persecution of the government’s political opponents. It improves your stock market.

If 18th-century reasoning can’t convince modern constitution writers and lawmakers of the utility of protecting private property and putting judicial checks on other government branches, maybe 21st-century statistics—and economic enticements—can. Indonesia’s market won’t improve if the new finance minister comes into office this winter with a list of regulations culled from LLSV papers. But Indonesia’s stock market might improve over time if the minister has read LLSV’s papers and thought about the larger principles of judicial independence and judicial review they espouse.

This, at least, is the path being taken by the French government, for obvious reasons the most elegant and persistent defender of civil law. Initially, the French government ignored LLSV’s findings. Then it dismissed them. Starting last summer, it began funding research through its Ministry of Rights and Justice into what the country can learn from LLSV.

By Nicholas Thompson

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See Also

• Abuse of Process
• International Judicial Assistance in Civil Matters
• International Judicial Assistance in Criminal Matters
• International Judicial Assistance in Administrative Matters
• Cross-Border Discovery
• Abroad Evidence