Assessing the Value of Law in Transition Economies

Assessing the Value of Law in Transition Economies

Assessing the Value of Law in Transition Economies Edited by Peter Murrell Ann Arbor

Copyright by the University of Michigan 2000 All rights reserved Published in the United States of America by The University of Michigan Press Manufactured in the United States of America Printed on acid-free paper 2003 2002 2001 2000 4 3 2 1 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, or otherwise, without the written permission of the publisher. A CIP catalog record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Assessing the value of law in transition economies / edited by Peter Murrell. p. cm. Includes bibliographical references and index. ISBN 0-472-09763-6 (cloth : alk. paper) ISBN 0-472-06763-X (paper : alk. paper) 1. Law and economic development. 2. Law Economic aspects. 3. Post-communism Economic aspects. I. Murrell, Peter, 1950 K3820.A97 2000 330.947 dc21 00-011814

To Mancur Olson, destroyer of myths, creator of fundamental ideas, institution builder

Contents List of Figures ix List of Tables xi Acknowledgments xv 1. Assessing the Value of Law in Transition Economies: An Introduction 1 Cynthia Clement and Peter Murrell 2. Beyond the Tip of the Iceberg: Business Disputes in Russia 20 Kathryn Hendley 3. Law Works in Russia: The Role of Law in Interenterprise Transactions 56 Kathryn Hendley, Peter Murrell, and Randi Ryterman 4. The Experience of Foreign Litigants in Russia s Commercial Courts 94 Glenn P. Hendrix 5. Misgovernance or Misperception? Law and Finance in Central Asia 133 Young Lee and Patrick Meagher 6. Does Legal Reform Protect Economic Transactions? Commercial Disputes in China 180 Minxin Pei 7. Business Networks in Transition Economies: Norms, Contracts, and Legal Institutions 211 Raja Kali 8. Keeping Shop: The Value of the Rule of Law in Warsaw and Moscow 229 Timothy Frye 9. Law as a Determinant for Equity Market Development: The Experience of Transition Economies 249 Katharina Pistor 10. A Property Theory Perspective on Russian Enterprise Reform 288 Michael A. Heller

viii Contents 11. Does Russian Legal Reform Matter? Evidence from Crude Oil Export Allocations 314 Daniel Berkowitz 12. Legal Initiatives in Russian Regions: Determinants and Effects 330 Leonid Polishchuk Contributors 369 Index 371

Figures 5.1. Investment for new product by finance source 147 5.2. Different modality of borrowing by sources 148 5.3. Percentage of contract without each provision 155 5.4. Frequency of use of contract enforcement mechanism for customer nonpayment problem 158 5.5. Effectiveness of contract enforcement mechanism for customer nonpayment problem 160 5.6. Obstacles to using arbitrazh courts 161 7.1. Efficiency gain with network 217

Tables 3.1. Confidence in Institutions 60 3.2. Perceptions of Honesty and Ethical Standards in Various Professions 62 3.3. Perceptions of the Incidence of Violent Crime 63 3.4. Comparisons of the Seriousness of Problems from Litigation and Crime 64 3.5. Effectiveness of Dispute-Resolving Methods in Russia: Private Enforcement versus Arbitrazh Courts 65 3.6. How the Purchasing Department Deals with Problems with Suppliers 68 3.7. Analysis of Transactions: Variable Definitions and Summary Statistics 73 3.8. Factors Explaining the Degree of Success on Transactions: Ordered Probit Regressions 82 4.1. 1997 Foreign-Party Cases 103 4.2. Plaintiff Statistics by Region 104 4.3. Defendant Statistics by Region 106 4.4. Foreign-Party Cases in the Circuit Courts 109 4.5. SAC Foreign/Non-CIS Party Cases 112 A4.1. Supreme Arbitrazh Court Decisions in Cases with Non-CIS Foreign Parties, January 1997 September 1998 113 5.1. Summary Statistics and Construction of Variables, Kyrgyz Enterprise Data 138 5.2. Some Patterns of Financing Behavior, OLS 145 5.3. Some Patterns of Arrears Occurrence, OLS 156 5.4. Correlation among Contract Enforcement Mechanisms and Contract Formality 159 5.5. Some Patterns of Contract Enforcement Mechanisms 162 5.6. Some Patterns of Enterprise Perception of Legal Environment and Some Related Behavior, OLS 169

xii Tables 6.1. Pieces of Legislation (laws and resolutions issued by the Central Government of the PRC, 1949 78) 181 6.2. NCP Legislative Output, 1978 98 183 6.3. Growth of Litigation, 1978 97 (accepted cases in courts of first instance) 185 6.4. Number of Commercial Disputes Resolved through Domestic Arbitration Committees, 1982 97 186 6.5. The Monetary Value of Claims of Commercial Disputes, 1989 97 187 6.6. Number of Commercial Disputes Accepted for Trial in Courts of First Instance by Region, 1996 188 6.7. Breakdown of Contract-Related Lawsuits (accepted cases in courts of first instances) 189 6.8. Rate of Enforcement, 1992 96 190 6.9. Disposition of Appeals in Commercial Disputes, 1988 97 (by percentage) 195 6.10. Outcome of Supervised Trials in Economic Cases, 1988 96 197 6.11. Disposition of Economic Cases in Courts of First Instance, 1988 97 (by percentage) 198 6.12. Types of Cases in the Sample 200 6.13. Regional Distribution of the Sample 201 6.14. Types of Litigants in the Sample 202 6.15. Outcome of Litigation in the Sample 204 6.16. Home-Court Advantage? 204 6.17. Effective Relief Rate in Adjudicated Cases in the Sample 205 6.18. Effective Relief Rate in Settled Cases in the Sample 205 8.1. Descriptive Statistics of the Shops 236 8.2. The Regulatory Environment 237 8.3. The Legal Environment 238 8.4. Enforcement of Property Rights: The Police 239 8.5. Investment and the Police 240 8.6. Reinvestment Decisions 242 8.7. Investment and Private Protection Rackets 243 9.1. Interaction between Ownership Structure and Legal Rules 257 9.2. Chronology of Legal Reform, Privatization, and Opening of Stock Exchange 263 9.3. ECM Shareholder Property Rights in Transition Economies 267

Tables xiii 9.4. Investor Protection Rules in Transition Economies 271 9.5. Comparing Shareholder Property Rights, Investor Protection, and Trading Rules in Transition Economies 273 9.6. Stock Market Perception Data 275 A9.1. Stock Market Indicators for Transition Economies, 1991 98 279 A9.2. East European Companies on Local and Foreign Stock Exchanges (nominal values) 280 A9.3. East European Companies on Local and Foreign (German) Stock Exchanges (foreign exchange as share of local exchange) 281 11.1. Russian Crude Oil Prices 316 11.2. Export Routes and Capacity Utilization 317 11.3. Correlation Coefficients for Instrumental Variables 322 11.4. Export Equation 323 11.5. Export Share Equation 326 12.1. Price Controls 349 12.2. Subsidies 350 12.3. Centralization of Regional Budgets 350 12.4. Privatization 351 12.5. Newly Introduced Regional Sales Taxes 356

Acknowledgments Mancur Olson had a great influence on me, not only during the 1990s in my involvement with the University of Maryland s IRIS Center, but throughout my career as a professional economist. He was a master teacher, humor-filled navigational aid through organizational mazes, and mentor on matters of research. But most of all, he was a model intellectual, always choosing the most important problems, whatever their difficulty, and never being content with easy solutions. My hope is that, in some modest way, this book, which Mancur helped to bring into being, lives up to Mancur s criteria for a worthwhile intellectual endeavor. Chas Cadwell, director of the IRIS Center, has offered encouragement and support in innumerable ways. With his constant insistence that aid projects cannot be successful unless they are supported by the insights that come from rigorous research, Chas has fostered a climate that has helped to build IRIS s unique reputation and to make IRIS an integral element of a research university. My hope is that the contributions in this book repay Chas s enormous efforts. Many people at the IRIS Center contributed to this book, but most important was Cindy Clement who, with great aplomb and humor, dealt with scholars who cannot read e-mails and bureaucrats who write too many. Without Cindy, the ideas that led to this book would have been poorer and the organization necessary to produce it would have been absent. Heather Cameron worked with skill and energy to make sure the project got under way and the conference happened; Sarah Bell provided the same qualities in ensuring that the project was completed and that the book appeared. Within IRIS, the following people also provided helpful assistance at crucial times: Omar Azfar, Kimberly Brickell, Amy Denkenberger, Tony Lanyi, Jeff Livingston, Michael Metcalf, Diana Rutherford, and Dennis Wood. At the conference where the papers were first presented, commentators provided extremely insightful advice to the contributors. The essays appearing here are that much better for the efforts of Cliff Gaddy, Marcel Fafchamps, Jim Feinerman, Kenneth Koford, William Kovacic, Rick Messick, Vedat Milor, Francesca Recanatini, and Malcolm Russell-Einhorn. This publication was made possible through support provided by the U.S.

xvi Acknowledgments Agency for International Development, under Cooperative Agreement No. DHR-0015-A-00-0031-00 to the Center for Institutional Reform and the Informal Sector (IRIS) and administered by the Office of Economic and Institutional Reform, Center for Economic Growth, Bureau for Global Programs, Field Support and Research. The views and analyses in the report do not necessarily reflect the official position of the IRIS Center or USAID.