Law and Economic Development

It is widely understood that relationship between economic or market development is a major trend in the global era. In such relationship, the role of law in regulating the dynamics and impacts of developmental processes is indispensable.

Essentially, the main purposes of economic development are accelerating economic growth and reducing poverty. It is undisputable that during the “Post Welfare State” in 21^st century, market development constitutes an inevitable phenomenon. As a part of whole development, and in order to be able to achieve those purposes, market development need to be promoted and supported through effective institution and appropriate regulation (law). Therefore, outstanding institution and fairness of law are fundamental precondition to make the market development work successfully. In this sense, we could judge that law and institution have positive contribution to economic aspect when the opportunities for poor people expand, competition can spur the market actors’ innovation, and there is an equal distribution of assets among societies. At the same time, some obstacles such as transaction cost and barrier to entry the market for new participant ought to be minimized.

Regarding with the institutional aspect, there are at least two types of market- supporting institutions, those are, public and private institution. From another perspective, we can also categorize institution as either formal or informal institution. Public institution is reflected by governmental agencies, which usually has formal principle and mechanism. Meanwhile, private institution composes of business or community actors, and players in international markets. In the case of MITI of Japan, although it is a public institution, it does not employ formal or command principle. In arranging and energizing the market processes, MITI combine the command principle and the community principle based on social norms. It means that MITI never implement ‘top-down’ approaches, and arrange an administrative guideline (gyoseishidou) by persuading and facilitating economic actors instead.

The other important aspect is law. To comprehend more easily the role of law in arranging economic or market, we can classify it into two categories; internally and externally. Internal role means that law gives an unambiguous regulation to a certain company and all activities conducting in that company. The aim of this legal guideline is to promote good corporate governance. Basically, there are four types of business organizations or companies: sole proprietorship, partnership, corporation, and associated enterprise. Among those, corporation can be stated as a special type for its limited liability and complex management. That’s why, in order to run the corporation well, “internal rules” is absolutely needed. These rules should cover some aspects such as the rights and equitable treatment of shareholders, role of stakeholders, disclosure and transparency, types and responsibilities of the board, capital structures, accounting systems, reorganization clausules, and ownership structure and business group.

On the other hand, “external regulation” embodies the relationship between one corporations / economic actors and other corporations / economic actors. In that sense, “the rule of games” should be addressed to avoid the emergence of monopolistic practices and unfair business competition. In Japanese case after the World War II, Anti Monopoly Act (1947) was enacted to limit, not to say to prohibit, the zaibatsu or conglomeration. The basic goal of such law is to stimulate the creative initiative of entrepreneur, to encourage business activities of enterprises, to heighten the level of employment and people’s real income, and thereby to promote the democratic and wholesome development of the nation economy as well as to assure the interest of consumers in general. However, competition law is not deliberately created to exclude competition within business practices itself. Rather, it is concentrated on the way for maintaining the degree of competition, so that companies can produce high quality product with faster and more efficient methods.

From those two roles of law in economic development, both internally and externally, we can conclude that two benefits come together: productive and efficient process of economic / market development on the one hand, and social advantages such as consumer and environment protection, labor satisfaction, and even political stability on the other hand.

June 26^th, 2002