BRIC Justice

The rise of Brazil, Russia, India and China as global economic leaders has everyone buzzing. Billions of dollars in capital are unabatedly pouring in, as investors try to stake a toehold in the hottest markets on the planet. Indeed, these countries have young and dynamic consumers that are becoming important drivers of global growth. The governments in Brasilia, Moscow, New Delhi, and Beijing did well in modernizing their infrastructures and putting macroeconomic policies in place to assure that their countries will play dominant roles during the 21st century. Most investors fared very well during the initial phase of the BRIC boom, taking full advantage of depressed asset prices, exchange rates and wages. However, most of the bargains are gone, and the valuations across the BRICs are approaching developed world levels. Although the BRICs provide a great deal of promise, their judicial systems leave much to be desired. Unfortunately, a sophisticated and proven judicial system is the crux of a modern market-based society. Failure to fully revitalize their judicial systems will soon become a major impediment for their economic growth and development.

The private ownership of property is the key to a market-based economy. Individuals and companies optimize the resources at their disposal in order to maximize earnings and profits. However, they need a legal framework that establishes the rules for exchange. Not only does the legal system define ownership rights and obligations, it is also the venue to resolve conflicts and disputes. In 1993, Professor Douglass North was awarded the Nobel Prize in Economics for his work on institutionalism and the effects it had on development. Professor North argued that highly-developed legal systems were instrumental in defining property rights and accelerating investment and growth. The more developed a legal system was, the more economic agents could undertake complex financial transactions. Likewise, a well-regarded legal system allows investors to reduce risk premiums. They will be more likely to embark on longer-term projects with lower yields. However, the legal systems in Brazil, Russia, India and China are archaic, arbitrary and biased. The courts in Brazil, for example, are extremely slow. Cases can take years to proceed. Likewise, judges can be influenced, thus altering outcomes. The same goes with Russia. There are few legal precedents for Russian judges to make rulings. Russian judges are also heavily influenced by political pressures. Although the British left a lasting legal legacy in India, the courts are extremely bureaucratic and slow. Sadly enough, India boasts of having the longest ongoing legal proceeding in history. It is a property dispute that started 170 years ago. Last of all, China’s courts are an amalgamation of the communist tribunals that dominated the legal system for the last 60 years and the legacies of thousands of years of imperial tradition. They are known to be arbitrary, without the western use of precedence and procedure. This is not the first time that China faces problems with its legal system. One of the main reasons for the creation of the foreign concessions during the colonial period was the establishment of Western or mixed courts. However, this was a painful loss of sovereignty, and it is still a very sore point. Therefore, there does not seem to be much interest in taking steps to realign the Chinese legal system with western-based systems.

Although judicial reform can be politically controversial, some countries have successfully taken such measures. During the Meiji Restoration, Japan incorporated many features of Germany’s and France’s legal systems. It then took further steps during the American occupation, after the end of World War II, to further integrate itself with western legal traditions. This was an important catalyst during the post-war economic boom. Although nestled in Latin America, Colombia has a well-regarded legal system that allows the proliferation of complex business and financial transactions. Unfortunately, judicial reform does not seem to be high on the agenda for the BRICs. There have been some cosmetic changes; such as China’s recent decision to end capital punishment for some minor economic crimes. But, this does not constitute legal reform. The four countries must take steps to ensure the independence of their judiciary and establish a system based on precedence and cases that allows investors and economic agents to understand their property rights and analyze how different scenarios will affect the value of their financial assets.