A Roadmap to Economic Development Through Law: Third Parties and Comparative Legal Culture

Abstract

Since the inception of Law in Economic Development as a field of study in the nineteen seventies, the causes of underdevelopment have been attributed mostly (other than in Marxist writings) to cultural factors. This attribution was challenged in the last decade or so by Hernando de Soto, a former World Bank economist. He argues that economic development does not take place where land titles and other property documents, including contracts, are unavailable or uncertain. Although these uncertainties can be easily traced to legal-cultural factors, de Soto prefers, on the whole, a non-cultural explanation that attributes inherent developmental powers to the proper documentation or representational systems of rights and duties. This article shows why his point of view, despite its contribution to a renewed and healthy interest in the role of law in economic development, misunderstands the causes of underdevelopment. It does this by drawing attention to the different types of legal uncertainty and to their legal-cultural causes and cures. For example, one of the most common manifestations of business and legal uncertainty occurs in cultures where only those who are family or friends of traders or investors are protected by the legal system. In these cultures, the unprotected others turn out to be the bona fide purchasers, lenders, investors and providers of market services, or more generically, the third parties of economically developed market economies who lack the appropriate familial, friendly or political connection. Not surprisingly, then, cultures which do not protect such third parties lack the necessary investment and credit indispensable to compete in the highly competitive contemporary trading and investment world. These tribe, clan and family oriented cultures are typical of agricultural-survival economies or pre-commercial societies and their rudimentary commerce is governed by legal principles that discourage the marketability of any asset deemed essential for the survival of the family, clan or tribe. In contrast, the commerce of societies with thriving market economies is governed by legal principles whose primary purpose is to encourage the marketability of any asset deemed valuable by the participants in the marketplace and the protection of third party buyers, lenders and suppliers of valuable services. This article illustrates how lawmakers and especially judges in developed and developing nations have attempted to identify these third parties and how they have succeeded or failed in providing them with the protection necessary to make economic development possible.

Keywords: economic development, comparative law, culture, market economies