A fourth threat – especially apparent in the United States – is the mounting cost of the law. By this I do not mean the $ 94.5 billion a year that the US federal government spends on law making, law interpretation and law enforcement.36 Nor do I mean the spiralling cost of lobbying by businesses seeking to protect themselves or hurt their competitors by skewing legislation in their favour. The $ 3.3 billion cost of paying nearly 13,000 lobbyists is in fact rather small in itself.37 It is the cost of the consequences of their work that is truly alarming: an estimated $ 1.75 trillion a year, according to a report commissioned by the US Small Business Administration, in additional business costs arising from compliance with regulations.38 On top of that are the $ 865 billion in costs arising from the US system of tort law, which gives litigants far greater opportunities than in England to seek damages for any ‘wrongful act, damage, or injury done wilfully, negligently, or in circumstances involving strict liability, but not involving breach of contract, for which a civil suit can be brought’. According to the Pacific Research Institute’s study Jackpot Justice, the tort system costs a sum ‘equivalent to an eight per cent tax on consumption [or] a thirteen per cent tax on wages’.39 The direct costs arising from a staggering 7,800 new cases a day were equivalent to more than 2.2 per cent of US GDP in 2003, double the equivalent figure for any other developed economy, with the exception of Italy.40 One may argue about such figures, and of course spokesmen for the legal interest reject them.41 But my own personal experience tells a similar story: merely setting up a new business in New England involved significantly more lawyers and much more in legal fees than doing so in England.
In a forthcoming book on the lessons for China of US legal experience, David Kennedy and Joseph Stiglitz cite three egregious defects of the rule of law in the United States today:
1 . Current ‘laws allowing financial firms to engage in predatory lending, combined with new bankruptcy laws, have created a new class of partially indentured servants – people who might have to give as much as 25 per cent of what they earn for the rest of their lives to the banks’.
2 . Intellectual property laws are excessively restrictive. For example, ‘the“owner”of the patent on the gene that indicates a strong likelihood of breast cancer [could] insist on a large payment for every test performed. The resulting..fifee puts the test out of the range of most without health insurance.’
3 . ‘Under current laws concerning toxic wastes..filitigation costs represent more than a quarter of the amount spent on cleanup.’42
For Stiglitz, these illustrate the inadequacy of a narrow approach to law that simply assigns property rights and leaves markets to do the rest. My view is that such examples need to be seen in the wider context of overcomplex or rigged legislation and rampant tort abuse.
Experts on economic competitiveness, like Michael Porter of Harvard Business School, define the term to include the ability of the government to pass effective laws; the protection of physical and intellectual property rights and lack of corruption; the efficiency of the legal framework, including modest costs and swift adjudication; the ease of setting up new businesses; and effective and predictable regulations.43 It is startling to find how poorly the United States now fares when judged by these criteria. In a 2011 survey, Porter and his colleagues asked HBS alumni about 607 instances of decisions on whether or not to off shore operations. The United States retained the business in just ninetysix cases (16 per cent) and lost it in all the rest. Asked why they favoured foreign locations, the respondents listed the areas where they saw the US falling further behind the rest of the world. The top ten reasons included:
1 the effectiveness of the political system;
2 the complexity of the tax code;
3 regulation;
4 the efficiency of the legal framework;
5 flexibility in hiring and firing.44
Evidence that the United States is suffering some kind of institutional loss of competitiveness can be found not only in Porter’s work but also in the World Economic Forum’s annual Global Competitiveness Index and, in particular, the Executive Opinion Survey on which it is partly based. The survey includes .fteen measures of the rule of law, ranging from the protection of private property rights to the policing of corruption and the control of organized crime. It is an astonishing yet scarcely acknowledged fact that on no fewer than fifteen out of fifteen counts, the United States now fares markedly worse than Hong Kong. Taiwan outranks the US in nine out of fifteen. Even mainland China does better in two dimensions. Indeed, the United States makes the global top twenty in only one area. On every other count, its reputation is shockingly bad.45 In the Heritage Foundation’s Freedom Index, too, the US ranks twenty- first in the world in terms of freedom from corruption, a considerable distance behind Hong Kong and Singapore.46
Admittedly, these studies are based in large measure on survey data. They are subjective. Yet similar conclusions may be reached from other research based on more objective criteria, like the International Finance Corporation’s data on the ease of doing business. In terms of the ease of paying taxes, for example, the United States ranks seventysecond in the world. In terms of dealing with construction permits, it ranks seventeenth; registering a property sixteenth; resolving insolvency fifteenth, and starting a business thirteenth.47 The World Justice Project’s Rule of Law 2011 index ranks the United States twenty-first out of sixty- first in terms of access to civil justice; twentieth for the effectiveness of criminal justice; nineteenth for fundamental rights; seventeenth for absence of corruption; sixteenth for the limiting of government powers; fifteenth for regulatory enforcement; thirteenth for order and security; and twelfth for the openness of government.48
Perhaps the most compelling evidence of all comes from the World Bank’s indicators on World Governance, which suggest that since 1996 the United States has suffered a decline in the quality of its governance in three different dimensions: government effectiveness, regulatory quality and control of corruption (see Figure 3.1).49 Compared with Germany and Hong Kong, the US is manifestly slipping behind. This is a remarkable phenomenon in itself. Even more remarkable is that it is happening almost unnoticed by Americans. One small consolation is that the United Kingdom does not appear to have suffered a comparable decline in institutional quality.
Figure 3.1
Source: www.govindicators.org
Legal Reform around the World
If the rule of law, broadly defined, is deteriorating in the United States, where is it getting better? I have already mentioned the marked improvement in institutional quality in Hong Kong. This is by no means a solitary case. All over the developing world, countries are seizing the opportunity to improve their chances of attracting foreign and domestic investment and raising the growth rate by reforming their legal and administrative systems. The World Bank now does a very good job of keeping tabs on the progress of such reforms. I recently delved into the Bank’s treasure trove, the World Development Indicators database, to see which countries in Africa are ranked highly in terms of:
1 the quality of public administration;
2 the business regulatory environment;
3 property rights and rulebased governance;
4 public sector management and institutions; and
5fitransparency, accountability and corruption in the public sector.
The countries that appear in the top twenty developing economies in four or more of these categories are Burkino Faso, Ghana, Malawi and Rwanda.
Another approach I have taken is to look at the IFC’s Doing Business reports since 2006 to see which developing countries have seen the biggest reduction in the number of days it takes to complete six procedures: starting a business, getting a construction permit, registering a property, paying taxes, importing goods and enforcing contracts.50 The African winners are, in order of achievement, Nigeria, the Gambia, Mauritius, Botswana and Burundi. Other emerging markets apparently on the right track are Croatia, Malaysia, Iran, Azerbaijan and Peru (see Figure 3.2).[1]
Figure 3.2
Source: International Finance Corporation, Ease of Doing Businessreports.
Development economists like Paul Collier see the establishment of the rule of law in a poor country as occurring in four distinct stages. The first and indispensable step is to reduce violence. The second is to protect property rights. The third is to impose institutional checks on government. The fourth is to prevent corruption in the public sector.51 Interestingly, this sounds very much like a potted version of the history of England from the end of the Civil War, through the Glorious Revolution to the nineteenth century Northcote – Trevelyan reforms of the civil service.
By contrast, the People’s Republic of China has achieved astonishing growth without good legal institutions and without much improvement in them. Followers of the new institutional economics have struggled to explain this seeming exception to their rule. Is it because the Communist Party somehow makes ‘credible commitments’ now that growth is the sole basis of its legitimacy? Is it because there are in fact ‘de facto property rights’? Is it because competition between the provinces has resulted in a kind of ‘marketpreserving federalism’? Or is it because contracts in China are relational, not legal: in other words, contract enforcement is informal, via guanxi (connections or influence), rather than formal, through the law?52 Whatever the explanation, many scholars – notably Daron Acemoglu and James Robinson – argue that if China does not now transition to the rule of law, there will be a low institutional ceiling limiting its future growth.53 This is also the view of many Chinese legal activists, including (as we have already seen) Chen Guangcheng. And they are right.
According to one study, the average rate for enforcing civil and economic judgments in China in the mid 1990s was 60 per cent at the basiclevel court, 50 per cent at the intermediatelevel court, and 40 per cent at the provincial higherlevel court, meaning that roughly half of Chinese court rulings at that time existed only on paper. The sort of contractual dispute that is most likely to involve signi. -cant amounts of unpaid debt – disputes involving banks and stateowned enterprises – had an average enforcement rate of just 12 per cent, even according to official estimates.54 The case of Bo Xilai’s anticorruption campaign in Chongqing illustrates how far China still is from the rule of law. As He Weifang has pointed out, the Chongqing judges essentially acted as an arm of Bo’s regime, accepting extorted confessions and omitting crossexamination. For years, He Weifang has campaigned for judicial independence, the accountability of the National People’s Congress, especially with regard to taxation, the freedom of the press and the conversion of the Communist Party into a ‘properly registered legal entity’, subject to the law – including the currently meaningless individual rights in Article 35 of the Constitution of the People’s Republic, which include freedom of association, of procession and demonstration, and of religious belief. He also favours the privatization of stateowned enterprises because, as he puts it, ‘private ownership is the foundation of the civil law’. Like Chen Guangcheng, he believes that the rule of law is the only way for China to escape from its historical oscillation between order and dong luan – turmoil.55
For those of us who live in the West, where lawyers often seem to have become their own vested interest, it is strange to encounter lawyers who aim at this kind of radical change. Today, however, Chinese lawyers – who numbered just 150,000 in 2007 – are a crucial force in China’s rapidly evolving public sphere. Surveys suggest that they are ‘strongly inclined towards political reform ... and are profoundly discontented with the political status quo’ – though this reflects not only the government interference they regularly have to endure but also the economic insecurity they suffer. Still, to read statements like the following, from a lawyer in Henan province, is to be reminded forcibly of a time when lawyers were in the vanguard of change in the Englishspeaking world (including in South Asian anticolonial movements): ‘The rule of law is premised on democracy; rights are premised on the rule of law; rights defence is premised on rights; and lawyers are premised on rights defence.’56
The fall of Bo Xilai in 2012 is one of a number of signs that elements within the Communist Party hear these arguments. In a speech in Shenzhen in June that year, Zhang Yansheng, secretary general of the academic committee for National Development and Reform, argued that ‘we should shift towards reform based on rules and law,’ adding: ‘If such reform does not take off, China will run into big trouble, big problems.’57 What we do not know is whether China’s next experiment with importing the essentially Western notion of the rule of law will be more successful than past attempts. With good reason, He Weifang warns against naive imitation of the English (or American) legal systems. ‘In Shakespeare’s A Midsummer Night’s Dream,’ he writes in an engaging aside, ‘a person was changed into a donkey, and the other person cried, “Bless thee! Thou art translated!” The introduction of a Western system to China is just like this.’ Common law translated into Chinese might well turn out to be like Bottom: a donkey, if not an ass.58
The Rule of Lawyers
Like the human hive of politics or the hunting grounds of the market economy, the legal landscape is an integral part of the institutional setting in which we live our lives. Like a true landscape, it is organic, the product of slowmoving historical processes – a kind of judicial geology. But it is also a landscape in the sense of ‘Capability’ Brown: it can be improved upon. And it can also be made hideous – even rendered a desert – by the rash imposition of utopian designs. Oriental gardens flourish in England and English gardens in the Orient. But there are limits to what transplantation can achieve.
Once-verdant landscapes can become desiccated through natural processes, too. Mancur Olson used to argue that, over time, all political systems are likely to succumb to sclerosis, mainly because of rentseeking activities by organized interest groups.59 Perhaps that is what we see at work in the United States today. Americans could once boast proudly that their system set the benchmark for the world; the United States was the rule of law. But now what we see is the rule of lawyers, which is something different. It is surely no coincidence that lawyers are so overrepresented in the US Congress. The share of senators who are lawyers is admittedly below its peak of 51 per cent in the early 1970s but it is still 37 per cent. Similarly, lawyers no longer account for 43 per cent of representatives in the House, as in the early 1960s, but at 24 per cent their share is still much larger than the equivalent figure for the House of Commons (14 per cent).60
