Labor Regulation, Corporate Governance, and Legal Origin: A Case of Institutional Complementarity?

By Ahlering, Beth; Deakin, Simon | Law & Society Review, December 2007 | Go to article overview

Labor Regulation, Corporate Governance, and Legal Origin: A Case of Institutional Complementarity?


Ahlering, Beth, Deakin, Simon, Law & Society Review


We explore the influential claim that "legal origin"-the historical origin of a given national legal system in the common law or civil law-accounts for a significant degree of cross-national diversity in economic regulation and development. We show that the claim is undermined by problems in index construction and by a misreading of the implications of the common law/civil law divide for the respective roles of courts and legislatures in law making. We argue that a critical factor, instead, was the timing of industrialization in relation to the emergence of legal institutions associated with the modern business enterprise (the employment relationship and the joint stock company). We also show how distinctive "legal cultures" of the common law and civil law have played a part in setting national systems on separate pathways to economic development.

The freedom of commerce is not a power granted to the merchants to do what they please: this would be more properly its slavery. The constraint of the merchant is not the constraint of commerce. It is in the freest countries that the merchant finds innumerable obstacles; and he is never less crossed by laws, than in a country of slaves.

(Montesquieu, De Vesprit des lois (1748), Book 20, Chapter 12, in me translation by Thomas Nugent (1751:373). See Supiot 1994:180-1 for discussion of this passage.)

The legal origin hypothesis claims that diversity across national systems of production can be explained by the influence of common law and civil law modes of regulation on economic development (La Porta et al. 1997, 1998, 2000). If this hypothesis were correct, "liberal market" systems such as the United States and Britain would owe their liquid capital markets and shareholder-oriented corporate governance, in part at least, to their common law heritage; in the "coordinated market" systems of mainland Europe or East Asia, by contrast, multistakeholder forms of governance would be underpinned by civil law practices and precepts (Pistor 2005). Thanks to the transplantation of Western legal systems as a result, for the most part, of colonization and conquest in the nineteenth and twentieth centuries, the influence of legal origin would extend to developing economies (Glaeser & Shleifer 2002; Djankov, Glaeser, et al. 2003). This claim has been highly influential, not least in informing the policy and working methods of the World Bank and other international financial institutions (see, for example, World Bank 2004).

The legal origin hypothesis has recently been applied to labor regulation: "the historical origin of a country's laws shapes its regulation of labor and other markets" (Botero et al. 2004:1340). This finding poses a major challenge in terms of understanding the relationship between law and economic development. It is claimed that legal origin influences the predominant regulatory style of a given country, which leads in turn to a greater or lesser propensity to adopt protective labor legislation (among other things), after taking into account the roles of politics and culture. The intensity of regulation, in turn, has consequences for long-run economic growth and development.

In this article we take a closer look at the methodological and theoretical underpinnings of the legal origin hypothesis. We argue below that the method of index construction, on which the legal origin literature rests, suffers from limitations that very substantially qualify the empirical findings that literature claims to have generated, as well as the normative conclusions that are generally taken to follow from them. However, it is not our aim simply to mount a critique of legal indexing methods. Those methods may well be capable of improvement.1 The wider significance of the legal origin approach lies in the claims it makes about the role of institutions, legal and otherwise, in promoting economic development. It is part of a broader revival of interest in evolutionary and institutional analysis in the social sciences, which has implications, as yet largely unrealized, for the study of comparative law. …

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