Economic Aspects Of Enforcing The Rule Of Law Bodin

Economic aspectsof Enforcing the Rule of Law

International ConferencePerspective of sustainable growth

in the countries of SEEBudapest

6th November

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Ollivier BodinEuropean CommissionDG Enlargement

The Rule of LawA top priority on the EU accession agenda

• To protect human and civil rights, to guarantee implementation of the EU and EU related legislation, and as cornerstone of a functioning market economy.

• Substantial gap between the country reality and the high standard required from a Member State

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Conditionsfor a functioning market economy

• Secured property rights• Contracts effectively enforced• Fair competition and free market entry and

exit; • Fair, predictable and accountable public

administration, equal treatment/access in relation to public services and taxation.

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Where do the candidate countries stand?

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EBRD TRANSITION INDICATORSSEE6 (Western Balkans only)

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Obstacles to do businessObstacles related to RoL among top ten

Three questions

• How is the economy regulated, if not by the Law? And how does this impact on economic activities, trade, investment?

• Does the alternative regulation affect the way we can formulate economic policy recommendations and how?

• Reciprocally, how can economic policy and reforms contribute to establish the rule of law?

Weak justice leads to informal network regulation

• People do not cease activities in case of weak justice, but restrict transactions to people they know.

• Repetition of transactions among limited number of same persons augments trust inside the network

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Robust network,…

..but inward oriented

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Stable, but inefficient

• Fragmentation of business activities in networks disconnected one from each other result in poor division of labour

CONCLUSION: As a result of weak Rule of Law, a twin market failure

• Less than optimal level of transaction (« trade crunch »),

• and underinvestment

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A regulatory trap?

Low productivity

and weak

international integration

Greater relianceon informal

network regulation

Low credibility

of the judicial system

and weak public sector

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Variante toreputational networks

• Religious or ethnic demarcation criteria can in some cases help to expand, but is far to be so efficient as impartial judicial and can be easily abused.

• Open « functional » networks, either informal, or business associations, cooperatives, increase overall efficiency, but need, exactly as market transactions, the umbrella of the Law to avoid that openness be abused

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Evidence is being accumulated

“(Inter-enterprise) trust is higher where courts are perceived by business to be fair and honest, but the relation does not extend to other dimensions of the judicial system, such as speed or affordability” (Raiser, Rousso, Steves, 2004)

The belief in strength and impartiality is important,..

.,not the affordability of dispute

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Rule of Law andIntegration into the World Economy

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Rule of Law and Integration into the World Economy

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The need for sequencing reforms

• Reform capacity is limited at a given time by political, financial and administrative constraints;

• To be popular and sustainable, policies and reforms need to bring results;

• Need to sequence and prioritize according to effectiveness, and under constraint.

Which bottleneck(s) should be widenedas a priority?

«Overall» investment return depends upon:• Infrastructures and other public goods; Input prices (energy,

material, aso.)• Direct and indirect unit labour costs Effective owner’s return depends upon• Financing cost (for a good part, RoL)• Direct taxes• Fairness of competition (RoL)• Predation by private (weak contract enforcement, weak

debt collection, mafia) (RoL)• Predation by public officials (corruption) (RoL)

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Are internal forces sufficientto escape the regulatory trap?

Low productivity

and weak

international integration

Greater relianceon informal

network regulation

Low credibility

of the judicial system

and weak public sector

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Reinforcing the Rule of Law Three main obstacles

Two first relate to the willingness and ability of the political system to « supply » the Rule of Law

• Political and administrative elite want to preserve rents and opposition to redistribution exists

• Complexity due to an output, being unspecific and difficult to monitor, and to intensity of input (several actors, rules and transactions)

The third relates to the « demand » for the Rule of Law, the robustness of networks and lack of trust

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Supply of the Rule of LawCondition accession

• EU accession conditional upon significant progress

• Provides a long term vision• Legitimacy of elite depends upon progress

made towards accession• Strong conditionality required

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Supply of the Rule of LawPromote reforms

• Insist on reforms reducing the opportunities to extract rents at all levels of administration

• Improve public expenditure management, obviously

• Conceive policies which are rule based at the implementation level to reduce discretionary power of the administration

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Supply of the Rule of LawTechnical assistance

• Provide broad based technical assistance in coordination with other donors

• Address gradually all key aspects in a strategic frame

• Assess regularly progress (trial and error)

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The demand for the Rule of LawSupport SME

• Increase benefits for enterprises to work « legally »

• Organise the provision of public goods, such as vocational training, access to information, seller/buyer network

• Support functional organisations, business associations, cooperatives to provide those goods

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The demand for the Rule of Law Loosening the socio-economic network

dependency

• Invest in education• If you need to trust somebody for a regime

change, it goes even better with a safety net

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END

PS…

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PS: What economists, beingpolicy makers or theorists,

do not know• “But mature markets rely on deep institutional

underpinnings, institutions ….However, we do not know in detail how these institutions can be engineered, and policy makers cannot always know how a market will function without them.”

The Growth Commission, 2007

• “…neither empirical nor theoretical research has yet advanced to the point of offering clear or confident policy recommendations for the process of institution-building or reform.”

Avinash K. Dixit, on p. 150 of his 153 pages book on this topic, 2004

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In other words,the stone of wisdom is not yet found

Economist know

• where countries have to go, but

they do not know

• how exactly countries can go there;• how exactly to assess the consequences of the

countries not being there.