The Politics of Legal Reform

As a result of the emerging market crises of the last decade and a large body of academic research on the influence of investor protection in the development of capital markets and economic growth, there is a growing consensus that reforming the legal infrastructure supporting business should be an important component of reforms in many developing countries. But the consensus is unwieldy, as there are still many forces against reform and little agreement about what constitutes feasible legal reforms. This paper has two parts. In the first, we identify the forces for and against legal reform and review the role these forces play in episodes of reform. In the second, we seek to further our understanding of what constitutes good laws and regulatory mechanisms, and more importantly how to make them enforceable in different countries. If legal reform is to succeed, the commonly advocated principles of corporate governance in the international community must be brought down to the local political and judicial realities. Translating international corporate governance initiatives into clear and enforceable rights for creditors and shareholders that incorporate these constraints will be difficult but necessary. Bankruptcy law and corporate law reform need to be politically feasible and enforceable. Legal reforms should be complemented with carefully drafted judicial reforms, as well as market-based mechanisms that foster a culture of corporate governance.