Transplating Legal Systems

Efforts to mirror or transplant legal systems from other countries face a host of obstacles

By Katharina Pistor

Winter 2009

Over the past two decades legal reforms and legal standardization have become critical tools in economic development strategies. While law has always featured prominently in the minds of legal advisors to foreign governments, it took a discovery in economics that institutions are critical determinants of economic development—or that “institutions rule” as some have put it—to bring about the spread of highly standardized legal rules or the comprehensive commodification of law that we observe today.

Unfortunately, copying foreign law and transplanting it to different environments have not proved to be a very successful development strategy. The experience with legal transplantation over the past two hundred years has been rather dismal. Countries that transplanted legal systems wholesale by and large have less effective legal institutions today than countries that developed their formal law internally. There are several possible explanations for this result: initial economic conditions in the law-receiving country; a political regime not conducive to governance by law; cultural differences; and incompatibility
with pre-existing legal institutions.


Initial Conditions

Gerschenkron famously argued that “economically backwards” countries adopt different strategies for economic development and that these strategies have long-term implications for the institutions that govern economic life in those countries. The process of capital accumulation, for example, may require active intervention by the government, which influences the choice of institutions (big banks; state-owned financial intermediaries), and thereby shapes the institutional foundation of the economy. Legal institutions that were first created in an environment that favors individual entrepreneurship may be ill equipped for an environment characterized by greater centralization. At the very least, they are likely to play a different role in the host environment than in the home environment. A detailed study of the reception of European law in Colombia during the nineteenth century documents how law was enacted and changed without any impact on economic outcomes and without much apparent understanding by lawmakers as to what the introduction or change of a particular set of legal rules might entail. My own research on the evolution of corporate law in ten jurisdictions (about half of them transplant countries) suggests that in many cases laws once transplanted hardly change over time, indicating that local agents have different tools at their disposal to resolve the governance problems they face. Similarly, importing state-of-the-art shareholder and creditor protecting laws has had little measurable impact on the development of financial markets in the former socialist countries of Eastern Europe and the former Soviet Union. Interestingly, foreign banks have been more likely to respond to legal change in these countries than domestic institutions, suggesting that the perception of the importance of legal change varies significantly across players.


Political Regimes and Legal Governance

The distortion of formal law that on its face benefits entrepreneurs by political factors has been termed the “Kirby Puzzle,” based on Professor William Kirby’s analysis of the market for medium-sized companies in Shanghai in the 1920s. Under the newly introduced law on limited liability companies (LLC), a company had to register with the authorities to be legally recognized as an LLC. Only then could it benefit from limited liability and independent entity status. Interestingly, the majority of companies that called themselves limited liability companies and added the acronym to their names had, in fact, not registered and thus could not legally grant their owners limited liability protection. Kirby interpreted this phenomenon by pointing to the prevailing fear of the state: “It had become fashionable and modern to attach the term youxian gongsi (limited company) to almost any enterprise. But it was not in vogue to register with the government, even with the very weak central government of 1916–28.”

This phenomenon is not limited to China or to the question of incorporation. Many laws that might benefit investors, shareholders, creditors, and ultimately companies, such as disclosure requirements, can also reveal to the tax authorities the activities of the company in question. As a result, such laws are frequently ignored to avoid contact with and possible intervention by a predatory state. Recent developments in Russia suggest that in some countries the executive has become quite sophisticated in employing laws that were designed to resolve private disputes for his or her own ends. Most famously illustrated by the Yukos case, bankruptcy law became an important tool in the hands of the tax authorities to “toll the bells to firms”—to selectively force firms out of the market, and in extreme cases into state control.


Law and Culture

The fact that different societies are governed by different sets of norms and processes and that this may adversely affect the efficacy of legal transplantation has been most famously stated by Montesquieu in 1748. Because of cultural differences across societies, it would be a “grand hasard”—a matter of luck or chance—for norms that were developed in one society to hold in another. Empirical evidence supports this claim. In a recent study, Licht et al. show that available measures of the quality of “rule of law” are closely associated with cultural features. Thus, societies with a strong preference for individualism and egalitarianism as opposed to hierarchy and embeddedness score much higher on rule of law indices. This does not imply that culture is static and unchanging, but that cultural differences matter. Still, the direction of causality is little understood. The bulk of evidence suggests that the hope that transplanting law would alter cultural preference seems to be misplaced.


Legal Irritants

The transplant metaphor implies that the introduction of foreign law may result in either outright rejection, or reception. In fact, there are many intermediate solutions. Teubner uses the term “legal irritant” to describe such intermediate responses of a law-importing jurisdiction with a well-developed legal system of its own (in this case, the United Kingdom). The receiving legal system will not necessarily reject the transplanted law, but frictions between preexisting norms and regulations will be revealed. Over time these frictions will be smoothed out and the imported law will be assimilated to pre-existing local institutions. The imported law may change the legal system at the margin, but the imported law itself will also change its character.

In sum, the development of effective legal systems is a complex phenomenon, which is still little understood. Available data to date indicate that changing the law on the books in most cases is not an effective development policy. Future research will need to develop a better understanding of the conditions for alternative forms of governance, of when and how they change, and if and how they can be influenced to further the public good.

This essay was reprinted from the recently published Sesquicentennial Essays of the Faculty of Columbia Law School.