Why Developing Countries Prove So Resistant to the Rule of Law

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Why Developing Countries Resist the Rule of Law


Why Developing Countries Prove So

Resistant to the Rule of Law
Barry R. Weingast*
May 2008

1. Introduction
Why do developing countries prove so resistant to the rule of law? The problem is all the more paradoxical because the institutional technologies for providing the rule of law – systems of property rights, civil rights, and personal liberties, general incorporation laws, corporate governance structures, contract law, and judicial systems – is relatively well-known. To address these questions, I draw on the new approach developed by North, Wallis, and Weingast (2008) – NWW – to suggest how the rule of law emerged in the West and then use this framework to show why the rule of law cannot readily be transplanted into developing countries.
The traditional approach to development in economics, political science, and law sees developing societies as incomplete version of developed ones; that is, as lacking essential ingredients of mature developed societies. Economists, democrats, and legal scholars all recommend that new institutions and policies be transplanted from developed societies into developing ones – typically capital, technology and competitive markets; parties and elections; and rights, constitutions, and judicial institutions. And yet these reforms rarely succeed in producing long-term economic growth, stable democracy that polices public officials, and rule of law institutions with efficient justice.

The NWW approach provides a new explanation for why it is so difficult to transplant these institutions from developed societies into developing ones. This framework divides today’s societies into two different types of social orders, arguing that developing countries differ dramatically in their social organization from those of developed ones. Missing from traditional approaches is how societies reduce or control the problem of violence. The most common social order throughout history, the limited access order or natural state, solves the problem of violence through rent-creation, granting powerful individuals and groups valuable rights and privileges so that they have incentives to cooperate rather than fight. Rents, limits on competition, and limited access to organizations hinder long-term economic development of these societies. In contrast, open access orders use competition and open access to organizations to control violence and are characterized by rent-erosion and long-term economic growth.

I focus on two aspects of the rule of law in this paper: first, the ideas of certainty, equality before the law, and the absence of arbitrary abuse by authority; and second, a dynamic component missing from most treatments that requires that the rule of law hold today, but also tomorrow. The dynamic issue raises the problem of turnover in the ruler or dominant coalition of a state: what binds the one to today’s rules? This issue is especially problematic in authoritarian regimes but is relevant in all natural states: the inability to bind successor regimes to today’s rules and institutions is a fundamental barrier to establishing the rule of law in natural states. No matter how attractive are today’s institutions or the rights, they are no good in the long-term if tomorrow’s regime can alter them at will. As I emphasize below, this question intimately tied to the issue of creating a perpetually lived state, a state where not only are today’s officials bound by the rules but so too are tomorrow’s.

Too often, students of the rule of law focus on the form of rights – for example, the nature and specification of the law – or the form of institutions – for example, the nature and specification of judicial institutions – that should implement and oversee those rights. They fail to study how to sustain these institutions and protect them from abuse by political overseers. Natural state leaders typically have the power to undo these institutions when they prove inconvenient, as witnessed by Nazi Germany’s Adolf Hitler, Russia’s Vladimir Putin, or Venezuela’s Hugo Chavez. Similarly, many natural states have leaders who taken power by force, and these leaders often directly compromise existing institutions; examples include Chile’s Augustin Pinochet and Spain’s Francisco Franco. Finally, many natural states fall into Civil War, which also ends continuity of institutions, as illustrated by the former Yugoslavia in the early 1990s or Rwanda in 1994.

The main lesson for this paper’s question is that creating the rule of law requires more than that natural states adopt the institutions and governance structures possessed by open access orders. It instead involves the far more difficult task of the transition from the natural state to an open access order. Just as we cannot transplant open access, competitive markets into natural states, we cannot transplant rule of law institutions into them. To gain the rule of law, natural states must begin to transition into open access orders. Rule of law emerges as part of this transition when the society evolves from a basis in personal relations and exchange to one based on impersonal relations and exchange. Part of the transition is institutional. Indeed, creating the rule of law requires two separate institutional changes: Institutions to provide for the law; and a set of credible commitments that protect those institutions and ensure that they survive.
This paper proceeds as follows. Section 2 sketches the North, Wallis and Weingast framework. Section 3 defines the aspects of the rule of law used in this study. Section 4 applies this framework to the emergence of rule of law in a historical perspective, showing its intimate connection to the transition and how the societies of the West grappled with these issues as they made the transition from natural states to open access orders. Section 5 explains why the procedures, rights, and institutions of the rule of law cannot simply be transplanted into developing countries. My conclusions follow.

2. The Conceptual Framework for Interpreting Recorded Human History

To understand how societies are organized and function, I rely the conceptual framework developed by North, Wallis, and Weingast (2008).1 The NWW framework distinguishes among social orders, distinct patterns of organizing society. The social order represents the pattern of human relationships structured in a way to constrain violence. The method by which a society constrains violence affects the entire society. The concept of a social order provides a framework within which we can understand how the political, economic, and other systems relate to one another. As we will see, the framework integrates fundamental concepts: violence, institutions, organizations, and beliefs. Central to the framework are the questions of how and whether violence is controlled or contained; how are societies organized and what institutions support them; in particular, how they support organizations and who gets to form organizations; and finally, are interactions based on personal or impersonal relationships?

Human history has witnessed three social orders. In the foraging order, which reaches back long before recorded human history, people existed in small bands, typically of 25 to 100. We will rarely be concerned with this social order. The limited access order, also called the natural state, emerged with recorded human history about 10,000 years ago. In this social order, the political system manipulates the economic system to create rents so as to control violence and sustain order. By allocating the rents to those with violence potential, these societies significantly reduce the problem of violence. Finally, the open access order relies on competition in the political and economic systems to sustain order.

Persons and Personhood
Relationships in natural states are personal relations; specifically, relationships among members of the dominant coalition are personal: they depend on the identities of the individuals. How the state treats an individual – his rights, privileges, rents, and duties – depend on his individual identity, and these rights, privileges, rents, and duties differ across individuals. Similarly, relationships along patronage hierarchies are personal. These states build on repeat play interaction among individuals to help build personal knowledge and trust and to enforce exchange. Because everyone and every relationship is different, repeated interaction is necessary to enforce exchange. Cooperation and exchange break down when these relationships are infrequent.

A person has two parts. First, there is the physical embodiment of the person. Every human, for example, possesses a unique corporeal body, including size, appearance, and intelligence. Second, every person has a set of socially ascribed characteristics based on their position, power, privileges, rights, and duties. Moreover, the law may endow non-corporeal persons, such as organizations, with personhood so that they have legal standing under the law. A legal person is an entity capable of bearing rights and duties. Western law since the Romans has recognized legal persons as combinations of both sets of attributes.

A society is dominated by personal relationships when each individual’s social persona is unique. In contrast, a society is dominated by impersonal relationships when the social persona of large classes of individuals are the same.

The Natural State
All states must control the fundamental problem of violence. Natural states do so by creating a dominant coalition of the powerful. The coalition grants members privileges, creates rents through limited access to valuable resources and organizations, and then uses the rents to sustain order. Because fighting reduces their rents, coalition members have incentives not to fight so as to maintain their rents. Natural states necessarily limit access to organizations and to restrict competition in all systems. Failing to do so dissipates rents and therefore the incentives not to fight.
We call this order the natural state because for nearly all of the last 10,000 years of history – indeed, until just the last two centuries – the natural state was the only solution to the problem of violence that produced a hierarchical society with significant wealth. In comparison with the previous foraging order, natural states produced impressive economic growth, and even today we can see the impressive wealth amassed by many of the early civilizations. In contrast to open access orders, however, natural states have significant, negative consequences for economic growth.

Personal relationships characterize both politics and economics in natural states. Within the dominant coalition, all relationships are personal. More powerful members, for example, gain more valuable privileges. Natural states that fail to distribute benefits in this way risk violence. When the power relationships are out of balance with the distribution of benefits, those with more power than benefits are tempted to demand a larger share; and, if it is not forthcoming, they are then tempted to fight for it. Patronage networks typically connect those with less power to those with the most power: anyone without power must be connected to an organization with power in the event that violence breaks out. Personal relationships also characterize most economic relationships. The principal mode of enforcing economic exchange is repeat play. Rule of law institutions, such as courts, only begin to emerge in mature natural state, and these are largely for organizations rather than individuals.

Natural states are stable, but not static. They regularly adjust as circumstances change. Dramatic weather events, changes in demographics, changes in relative prices, technological change, military events, and so on all have implications for the fortunes of coalition members. As some members become more powerful and others weaker, the coalition must adjust the distribution of benefits and rents. Failing to do so risks violence as those members whose rents, privileges, and rights do not match their power threaten violence to gain what they believe is their fair share. Natural states therefore regularly have dramatic adjustments in rights and privileges, often expropriating the assets and privileges of some elites and granting them to others.

A Typology of Natural States
The NWW framework distinguishes among three types of natural states, depending on how they treat organizations and, in parallel, their institutional sophistication. In fragile natural states, the only organization is the state itself, the dominant coalition. These states have little differentiation and hence little economic specialization and exchange. Fragile natural states are poor and prone to violence, and they have a limited range of institutions and credible commitments. Examples include Chad, Iraq, Mozambique, the Sudan, and most recently, Kenya.

In basic natural states, a set of organizations exists, all closely associated with the state. These organizations create considerable specialization, such as tax collection, religious activity, and specialized economic functions, including mineral extraction or long distance trade. Basic natural states have a wider range of institutions to support state organizations, and they are more resilient to shocks than fragile natural states. These states may also have a range of public institutions, such as succession rules for new leaders, rules that regularize taxation rates or the division of spoils from conquest. To the extent that these states have enterprises, they are state run enterprises. All of these issues hold the potential for violent disputes, and rules that institutionalize decisions about them reduce the chances of violence. Examples of basic natural states include the Medieval Carolingian empire, the Aztec Empire, and the former Soviet Union.

Finally, mature natural states develop sophisticated private organizations that exist apart from the state. Merchant organizations and other private firms may exist independently of the state rather than being state run enterprises. In parallel with private organizations is a system of private law and contract enforcement that supports these organizations. Nonetheless, mature natural states limit access to private firms as part of the rent-creation process. Only elite members of the dominant coalition have access to private organizations, and this access remains a valuable privilege. Mature natural states are more resilient to changing circumstances than are basic natural states; as with all natural states, however, they too have crises and periodic coalition adjustments of rights and privileges. Examples include 17th century England and modern day Argentina, Brazil, Mexico, and India.
Moving across the progression of natural states, from fragile to basic to mature, states become wealthier. These natural states become wealthier for several reasons. First, the range of organizations and the degree of specialization and exchange is richer across this progression. Second, the degree of violence diminishes across the progression. Lower levels of violence has a direct effect and an indirect effect on wealth. Directly, less violence destroys less wealth. Indirectly, lower levels of violence mean that greater numbers of potentially profitable exchanges take place because parties that would lose if violence broke out become willing to make the exchange when the risk of violence diminishes.

Nonetheless, the need of all natural states to use limited access to control violence necessary limits access to rights, to organizations, and hence to competition in the economy. This is why they are also called limited access orders. It also limits competition in the polity, limiting competition for ideas and means of solving various political and other dilemmas that all societies inevitably face.

Open Access Orders
Open access orders sustain open entry to political and economic organizations. As a result, they exhibit political and economic competition, and this competition supports order and prevents violence. In contrast to the natural state, all citizens have the ability to form contractual organizations and to use the state’s courts to enforce the organization’s contracts. Open access also creates and sustains a rich civil society. Competition and open access in each system reinforces competition and open access in the other.
Standard views in both economics and political science fail to understand the open access order because they typically focus on one system alone. Economists attempt to understand economic stability by focusing on the equilibrium properties of markets without reference to the political system, ignoring the problem that property rights, the legal system and contract enforcement, and macroeconomic stability are all products of political and democratic choices. Political scientists study the properties of a democratic systems in open access orders taking them as given, failing to explain both how democracy sustains competitive markets and how democracy is sustained when it fails in most countries.2

Open access orders are sustained in part by a belief system that emphasizes equality and incorporation. In the 19th century, these beliefs were embodied by incorporating citizens within the law, markets, and democracy where elites had previously excluded them. In the 20th century, these beliefs encompass more and now include impersonal equality before the law so that the rule of law is enforced impartially for all citizens. Further, these beliefs have actualizations in wide range of policies and public goods that create explicit sharing: public goods (such as education), social insurance (such as health, unemployment, old age, and workers’ accident insurance), and the provision of infrastructure (such as access to a wide range of local public goods). Although not all people living within the society’s borders need be citizens for open access to be sustained, a large portion must be. Nonetheless, to be an open access order, all citizens must be equal; that is, the state must treat them impersonally.

Equality, incorporation of citizenship, and policies for sharing all lower the demand for crippling redistribution that might destroy an open access order. This observation parallels the argument that all successful constitutions limit the stakes of power (Weingast 2006). Because powerful groups are less likely to be threatened by incumbent regimes, constitutions that limit the stakes are subject to fewer coups as these groups support coups to protect themselves.
Open access orders sustain political competition in the form of competitive party systems. The success of this competition depends on open access not only to parties but to organizations more generally. Open access to organizations, in turn, fosters the civil society, allowing citizens to mobilize and defend their interests when threatened. Organizations of all types – benevolence societies, churches, soccer leagues, firms – are potential political tools for mobilizing interests in the face of political threats. Political parties not only organize the electorate, they police one another. The political opposition is central to a successful democracy. Not only does the opposition formulate alternative plans, but the threat of the opposition forces incumbents to adapt their own policies in the face of new circumstances. This dynamic competition of ideas and policies affords open access orders a degree of adaptive efficiency (North 2005) not possessed by natural states.

Open access orders also sustain competitive markets. These societies therefore produce long-term economic growth. Competitive markets have strong feedback mechanisms that limit the ability of political systems in open access orders to create too many rents. Market competition erodes many rents. Fiscal interests imposes costs on governments that impose too many rents: a massive program to create rents that imposes significant harms on the economy has immediate feedback: a shrinking economy means lower tax revenues to support redistribution; and a shrinking economy directly harms voters. Both of these effects have historically turned voters against incumbents in stable democracies. Mobile resources and international competition reinforce these effects.

A final aspect to observe about open access orders has been the growth of government. Following beliefs in equality and inclusion, policies for social insurance have meant substantial increases in government spending to finance these programs. Underlying these programs is the ability of open access orders to provide benefits to impersonal categories of citizens. Because natural states lack the ability to treat citizens impersonally, they face great difficulties in providing public goods. Similarly, inclusion in open access orders leads to the provision infrastructure in the form of wide range local public goods and services (roads, electricity, telephones, water, sewage, garbage), and public education, all of which require significant expenditures. Open access orders have bigger governments than do natural states in large part because they provide more public goods and services to their citizens.

Natural states vs Open Access Orders
Natural states have many of the same institutions as open access orders, such as parties, elections, markets, and judiciaries. Why do they work differently in open access orders? The answer is that natural states have limited access to organizations, lack competition, and lack a perpetual state.

Limited access to organizations and the creation of privilege hinders markets. While natural states may have some markets, these markets hare hindered by cumbersome restrictions, far more so than in open access orders. Legal systems in these states typically fail to enforce contracts or mediate disputes among individuals and organizations based on rule of law principles. Indeed, most natural state judiciaries are just another form of corrupt rent-generating organizations. Finally, the absence of a perpetual state means that the state itself hinders markets with arbitrary action. As Haber et al (2008) illustrates for Mexico, the government regularly grants extensive privileges and monopoly privileges in banking, only to expropriate the banks during times of crises and then repeat the cycle anew. The inability of the state to commitment to honor a stable system of property rights greatly compromises markets in natural states.

Similarly, many mature natural states hold elections, some for decades (as in Mexico since 1930 or Chile prior to 1973). But here too, elections differ systematically from those in open access orders. As mentioned, the incumbents may compromise the opposition’s ability to compete in various ways. Limited access to organizations hinders the civil society, compromising the ability of citizens to express their views. The absence of a judicial system that operates under rule of law fundamentally transforms the legislature in these countries. This absence makes it difficult for the legislature to pass laws controlling the bureaucracy, for there is no way to enforce the laws. This allows executive dominance of the government, greatly diminishing the separation of powers and the ability of the legislative branch to act as a check on executive power.
Another problem with natural states is the inability to provide benefits on an impersonal basis. This hinders their ability to provide public goods, making it much more difficult to provide the most common policies of open access orders that complement markets: the public goods of social insurance, education, and infrastructure noted above.
Finally consider dynamic stability, how natural states differ from open access orders in their response to shocks. All states face problems and crises. How do they respond? First, because open access orders have better means of controlling violence, violence is far less likely to break out when a crisis occurs. Citizens are therefore much less likely to respond by protecting themselves. In contrast, where violence is likely or a possibility, citizens or groups may well respond quickly to violence to protect themselves so as not be vulnerable if the other side initiatives violence. This dynamic means the potential for violence makes these societies volatile.

Second, open access orders exhibit competition for ideas. Parties compete for solutions to crises, and the open access to organizations within the civil society means that many new ideas will be produced and debated throughout the society. Opposition parties and interest groups in particular have strong incentives to monitor, criticize, and provide alternatives to the solutions proposed by incumbents. Open access orders therefore make it far easier than natural states to discard bad or failed ideas.

Third, by virtue of being able to make credible commitments more readily, open access orders are more likely to create new pacts in the face of crises. Indeed, the history of all open access orders is replete with pacts that solve crises; to name a few: the creation of the French Fifth Republic in 1959, the Compromises of 1820, 1833, 1850, and 1877 in 19th century United States, the Glorious Revolution of 1688 and the various 19th century Reform Acts in Great Britain.
The force of this subsection is twofold. First, natural states possess many of the same institutions as open access orders, such as markets, elections, and judiciaries. But these institutions work very different in natural states because they limit access, lack a perpetual state, and cannot deliver benefits to citizens on an impersonal basis. Second, open access systems are not perfect, and in practice all open access produce significant rents. But – in comparison to natural states – open access orders competitive mechanisms work relatively well and provide a far better means for long-term economic growth and resiliency to various problems and crises faced by the society.

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