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Financial Crisis as a Catalyst of Legal Reforms : The Case of Asia

  • Masahiro Kawai

    (Asian Development Bank Institute (ADBI))

  • Henrik Schmiegelow

This paper discusses how financial crises in emerging Asia and Japan worked as catalysts for legal reforms. The responses of six Asian countries with different legal histories to financial crises that posed similar challenges are of both legal and economic interest. We first provide a theoretical framework that focuses on law and economics. We then review the basic approaches adopted by the Asian countries affected by financial crises in 1997–1998 to bank and corporate restructuring and to legal and other reforms. Finally we examine indicators that measure the quality of legal institutions (regulatory quality, rule of law, and control of corruption) for the six countries to determine whether these indicators show improvement over time. We find that all six countries pursued significant legal and judicial reforms, but the indicators exhibit mixed results : the Republic of Korea shows clear improvements in all aspects, while the Philippines exhibits clear deterioration and Indonesia indicates a steep decline followed by remarkable improvement. We argue that reforms of the economic laws alone cannot improve the quality of entire legal and judicial systems of countries. What matters is the enforcement of substantive law by procedural law, the efficiency of the justice system, and other political and social factors. In the case of Indonesia, Malaysia, and the Philippines, the colonial “transplant effect†of Western legal systems may have made the implementation of laws a significant challenge. In Thailand, implementation was affected by the “yellow shirts†(anti-Thaksin) versus “red shirts†(pro-Thaksin) conflict. Long time lags, perhaps of several decades, may be needed to observe how de jure changes to substantive laws lead to de facto improvements of legal institutions.

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File URL: http://www.eaber.org/node/23852
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Paper provided by East Asian Bureau of Economic Research in its series Governance Working Papers with number 23852.

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Date of creation: Nov 2013
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Handle: RePEc:eab:govern:23852
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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  1. John Armour & Simon Deakin & Prabirjit Sarkar & Mathias Siems & Ajit Singh, 2007. "Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis," ESRC Centre for Business Research - Working Papers wp358, ESRC Centre for Business Research.
  2. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 222-79, April.
  3. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  4. Sato, Yuri, 2005. "Bank restructuring and financial institution reform in Indonesia," The Developing Economies, Institute of Developing Economies, Japan External Trade Organization(JETRO), vol. 43(1), pages 91-120, March.
  5. Masahiro Kawai, 2005. "Reform of the Japanese banking system," International Economics and Economic Policy, Springer, vol. 2(4), pages 307-335, December.
  6. Deakin, S. & Sarkar, P., 2011. "Indian Labour Law and its Impact on Unemployment, 1970-2006: A leximetric study," ESRC Centre for Business Research - Working Papers wp428, ESRC Centre for Business Research.
  7. Gerardo P. Sicat, 2007. "Legal and Constitutional Disputes and the Philippine Economy," UP School of Economics Discussion Papers 200703, University of the Philippines School of Economics.
  8. Andrei Shleifer & Robert W. Vishny, 1995. "The Limits of Arbitrage," NBER Working Papers 5167, National Bureau of Economic Research, Inc.
  9. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
  10. Coase, R. H., 1990. "The Firm, the Market, and the Law," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226111018, March.
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