The interplay between trade liberalization and the rule of law in the development context

Towards the concept of EU value-promoting Regional Trade Agreements (RTAs)

In the present era, the relationship between the rule of law and economic development is characterized by a paradox. On the one hand, the rule of law is discussed as "a panacea for the ills of the countries in transition” (Carothers, 1998). On the other hand, despite the Western donors' almost missionary zeal to promote the rule of law as a means to induce economic development in third countries, the economies of BRICS countries and the Middle East exemplify economic growth under the lacking rule of law (Ramanujam et al., 2012). Moreover, while the second half of the 20th century was marked by an intense economic integration movement, the positive correlation between trade liberalization and domestic economic growth was hardly challenged by many states. Nowadays, however, protectionism and further anti-establishment movements represent a major threat to economic growth (Rodrik. 2017). Against this background, an insight into the theoretical perspectives regarding the rule of law-economic development nexus is required to understand the conceptual foundations behind the EU value-promoting RTAs.

Theoretical perspectives on the linkage between economic development/economic integration and the rule of law

1. Modernization theory’ and the Law and Development Movement, dependency’ and world-systems theories and the Washington Consensus (1950s-1980s)

According to law and development theorists, law has been embedded into the economic development agenda since the post-war attempts to define the relationship between the theories of economic development and major policy objectives of that time (e.g. promotion of savings, investment and industrialization; expansion of the local supply and demand) (e.g. Kennedy, 2013, pp. 23-24). Thus, law

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As an academic field of study, Law and Development emerged in the USA in the middle of the 1940s (as argued earlier, due to the demands of the post-war tmie), became highly prominent in the 1960s and, following the disillusionment of the 1970s and 1980s, re-emerged following the emphasis on the governance agenda by the World Bank.

was mainly viewed as a tool to "translate leading postwar economic theories into policy”, rather than an independent development driver (Ibid.).

The dominant perceptions about role of law in the development economics context changed with the rise of the modernization theory that fuelled the USA-driven "Law and Development Movement” (1960s and early 1970s). Pursuant to key modernization theorists (e.g. Rostow [1959], Organski [1965], and Parsons [1964]), the root cause of societies’ underdevelopment lies in its traditional economic, political, legal and cultural structures that require undergoing the evolutionary modernization process, already experienced by more developed societies. Hence, the key ambition of the LDM had been to promote the political, social and economic development of the "Third World” through legal reforms (Kro-ncke, 2012, p. 505). Importantly, the LDM understood law not only as a means of economic development, but developing states' multifaceted convergence with the West (Ibid.). Such an orientation without a due account to local contexts, class cleavages and customary rules, however, led to the failure of both the movement itself and the modernization theory:

The decline of the modernization ethos [was] a complex story that played out differently in different locations and in various academic fields, but one key area of dissatisfaction with the approach had to do with its tendency to trust in the Third World state as representing the public interest.

(Ohnesorge, 2014, p. 239)

Wide-spread criticism of the modernization theory resulted in the growing popularity of substantively new development economic theories: dependency (Singer, 1949; Prebisch, 1949) and the world-systems theory (Wallerstein, 1974). Both theories explain the differences in countries’ economic development by analyzing their roles in the international system. Notably, the shift towards considering economies’ dependencies and inequalities under the auspices of the present international markets systems changed the previously existing state-centric focus of development economics (Ohnesorge, 2014, p. 240). Such a change brought about controversial consequences. Its major negative effect deals with the sense of disillusionment. presupposing that developing countries are “victims” of the international system (Ibid.). On a positive side, the dependency and world-systems theories proved the impossibility of promoting development by simply transplanting new substantive rules to a state’s legal system without changing a country’s role in global value chains (Tmbeck and Galanter, 1974). Consequently, trade liberalization and economic integration started to be widely viewed as crucial factors of economic development.

The trend of linking development to market policies was also reflected in the Washington Consensus, a set of specific policy reforms employed by the development agencies to support economic growth in developing countries during the 1980s (Williamson, 1990). The basis for the Consensus had been represented by the World Bank's study "Accelerated Development in Sub-Saharan Africa”. The author of this study, Elliott Berg, mentioned three key areas vital for a country’s economic success, namely trade and exchange rate policies, efficient use of resources in the public sector and suitable agricultural policies (The World Bank, 1982). Alongside this, the original Washington Consensus has included the policy of small budgetary deficits, the broadening of the tax base, strict state aid and social policies financial liberalization, and the liberalization of trade and investment policies as a means to promote economic development. Hence, the Consensus led to a radical change in the perceptions of a state’s role in development, limiting it to private sector support.

While neither the dependency and the world-systems theories nor the Washington Consensus contained any particular legal ideas, the mainstream post-LDM assumptions about law turned back to post-war pragmatism. Flourishing legal instrumentalism of the late 1970s and 1980s can be, on the one hand, addressed as a positive phenomenon that underlined the potential of using law for the purposes of promoting multifaceted vectors of economic development, including economic integration and trade liberalization. This positive effect was, nevertheless, levelled on the other hand by the theorists’ pre-eminence with public law and ignorance towards private law rules, vital for implementing the Washington-backed market-oriented agenda (e.g. guaranteeing the security of property rights) (Kennedy, 2013, p. 45).

Thus, over the period from the 1950s to the 1980s, the evolution of the development economics’ view on law and its role in economic progress and economic integration underwent a circular development. Following the post-war understanding of law as a functional tool of policy realization, substantive laws played the central role in the LDM paradigm and were again devalued to the solely instrumental status under the predominance of the dependency and world-systems theory. All the considered theories do not mention the idea of the rule of law per se, rather referring to substantive law and legal culture (the LDM), the instrumental value of law or addressing the rule of law problématique implicitly (“abolishing impediments to foreign direct investment’’ and "guaranteeing secure property rights” under the Washington Consensus) (The World Bank, 1982).

2. New institutionalism and governance

In the late 1980s and the beginning of 1990s, "two separate currents seem to have converged to bring law and legal institutions back into the development picture” (Ohnesorge, 2014, p. 244). According to Ohnesorge (2014), these currents were, first, an increase in the influence of the new institutional economics and, second, the challenge to support the economies of Eastern Europe and Central Asia following the collapse of the Soviet Union. Moreover, the neoliberal idea of a state’s minimalist market role was leveled by the macroeconomic successes of East and Southeast Asian countries, backed by strong state interventionism.

Sometimes considered to date back to the article "The Nature of the Firm” by Coase (1937), the "new institutional economics” (NIE) represents a reconsideration of the neoclassical model of economy with an emphasis on the quality of institutions’ functioning. Renowned institutional theorist Douglass North (1991)

Trade liberalization and the rule of law 47 defines institutions as “humanly devised constraints that structure political, economic and social interaction” (p. 97). In informal terms, institutions encompass sanctions, taboos, traditions and codes of conduct. In turn, the formal institutions are “constitutions, laws and property rights”. According to North (1991), the key context, where the society needs instimtions as a constraint in human interactions, deals with "capturing the gains from trade” that otherwise can be prevented by "personal ties, voluntaristic constraints and ostracism” (Ibid., p. 100). In turn, the centrepiece of preventing such voluntarism and high transaction costs is represented by the system of precisely defined and coherently enforced private property rights. The popularity of the NIE and previous implicit referrals to the rule of law components in the Washington Consensus were among the factors, conditioning the Washington institutions’ recognition of the significance of laws and institutions for the purpose of development economics.

As argued by Krever (2011) in relation to the World Bank, "the turn to the new institutional economics was incorporated into a broader discursive shift in Bank policy in the early 1990s”, i.e. a turn to the broader governance framework (p. 304). In 1992, the Bank defined governance as "the manner in which power is exercised in the management of a country’s economic and social resources for development” (The World Bank, 1992, p. 1). In turn, "good governance” encompasses “predictable, open and enlightened policymaking”, professional bureaucracy, an accountable executive branch of power and strong civil society, and the application of the rule of law principle (Ibid., p. vii). As a result, the Washington Consensus was supplemented with several new dimensions, such as corporate governance, labour standards, WTO agreements, financial and accounting rules and standards, and independent central banks. Moreover, the new focus on governance attracted international and national development agencies' attention to two major aspects of states’ legal system: (i) constitutional law, allowing for the observance of fundamental values (democracy, human rights and the rule of law) and (ii) private law.

The "pro-judiciary” "new constitutionalism” doctrine and an emphasis on the fundamental values in development cooperation receive ambiguous judgements in scholarship. For instance, Farber (2002) views constitutional reforms mostly as “costly commitments that political elites undertake in order to signal the investors the strength of their commitment to the rule of law and economic liberalization” (p. 83). George and Sabelli (1994) argue that the governance provides "the opportunity both to instil Western political values in borrowing countries and blame them if things go wrong” (p. 194). On the other hand, modern scholarship tends to recognize the link between development and fundamental constitutional values and principles. There are studies illustrating that democratic regimes are overall more conducive to economic growth than the undemocratic ones, inter alia, due to the fact that democracies tend not to engage in conflicts among each other. Rodrik (2017) points to the fact that democratic deliberative processes help to aggregate local knowledge necessary for creating development-friendly laws and regulations, as well as to facilitate compromises. The separation of powers, emphasized under the auspices of both democracy and the rule of law, is alsoessential for ensuring high-quality laws, conducive to development. The reasons for that deal with creating obstacles to interest groups' capturing power, dropping commitments and the inter-institutional competition.

Viewed both in general terms and specifically from the governance angle, the rule of law is considered to favour economic growth. The Worldwide Governance Indicators (WGI), introduced by the World Bank, link the rule of law to

capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

(The World Bank Group, n.d.)

Such a stance towards the rule of law is also reflected in modern theorists' perspectives on the role of the rule of law in the external trade and investment domains. For instance. De Cara (2006/2007) discusses three functions of the rule of law in international trade. First, it regulates the behaviour of economic actors in order to protect property rights, maintain fair competitive environment and enforce contracts. Second, the rule of law tends to regulate and limit states’ interventionism into economic and commercial activities. Third, in line with the 1994 Marrakesh Declaration, it also serves as a foundation for the multilateral trading system. Subsequently, according to Shihata (1996), the key substantive law aspects that impact international trade liberalization include:

  • • Developed contract law and ensuring respect for contractual obligations.
  • • Effective regulation and protection of property rights.
  • • Functioning competition legislation.
  • • Functioning banking system and the prevention of criminal offences in economic sphere.

They are, in turn, close to the rule of law properties, distinguished by the World Bank Doing Business Index, such as regulatory conditions for starting the business; ease of obtaining necessary permits and licences; enforcement of contracts, and the environment for cross-border trade and investor protection (The World Bank Group, 2020).

In a nutshell, the World Bank's shift from the neoliberal Washington Consensus to the NIE and governance agenda significantly changed the development economics' perceptions of the role law and the rule of law standard play with regard to economic development. While the post-war period was marked by the instrumental approach to law (except for the LDM), the emergence of the NIE and the governance paradigm led to the diversification of such understandings. First, law

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WTO, 1994. Marrakesh Declaration of 15 April 1994. [pdf] WTO. Available at: www.wto.org/ english/docs_e/legal_e/marrakesh_decl_e.pdf

Trade liberalization and the rule of law 49 continued to be understood as an instalment of macroeconomic policy implementation. Second, due to the strengthened focus on laws and institutions in NIE and governance paradigms, law started to be regarded as essential of the environment, conducive to economic activities. Third, given donors' increased interest to developing countries' constitutional law, law and the rule of law regained independent value in the development economics context. Hence, the nile of law regained momentum as a crucial prerequisite for a state’s success in the world trade and attracting investors.

3. Promoting the rule of law through free trade

and functional cooperation

The historical analysis of the role of law in development economics shows that law (and the nile of law) can be conceptualized as both an instalment and an objective of the development policy. It is, however, questionable, whether the reverse effect exists, and trade liberalization represents a pathway to promoting fundamental values, and the aile of law in particular. So far, there have been highly limited theoretical insights and empirical evidence regarding both the mechanisms through which trade liberalization can affect the state of the rule of law and the aile of law effects of RTAs (e.g. Ewing-Chow, Losari and Slade, 2014; Frensch, Horvath and Huber, 2018). This statement applies not only to European studies, but the studies of the multilateral trade liberalization and regional trade relations (e.g. the ASEAN Free Trade Area, MERCOSUR). In this vein, the conceptualization of the EU value-promoting RTAs requires insights into several blocks of literature.

First, the problématique of the EU externalization of its policies and its external trade are linked in the context of the power Europe debate. The foundational concept for understanding the essence and avenues of the EU aile transfer is the normative power Europe (NPE), coined by Manners (2002). The NPE emphasizes a value-driven nature of the EU identity and behaviour, determined by the peculiarities of the EU’s history, and the interplay of the supranational and intergovernmental components in the EU as a polity and the legal system. In Manners’ view, such an identity distinguishes the EU from other international actors and determines its ability "to shape the conceptions of ‘normal' internationally” (Maimers, 2002, p. 239). Maimers (2002) describes six major ways of the diffusion of the EU’s norms, namely: contagion (unintentional diffusion of norms), informational, procedural (through institutionalizing relations with non-Member States and international organizations), transference (through trade, aid and technical assistance, including conditionality), overt diffusion (EU’s presence in third states) and cultural filter. Importantly, the NPE was repeatedly criticized in view of the concept being too close to the Union’s own descriptions of its identity, multiple manifestations of self-interest in the EU development cooperation policies and emphases on economic power and incentives (e.g. Sjursen, 2006; Hyde-Price, 2006). Nonetheless, the NPE is widely applicable in scholarship, including rather recent contributions on EU normative power through trade (Poletti and Sicurelli. 2018) and. hence, offers a useful lens to understand EU external value-promotion.

Second, also based on the nexus between the EU identity and power, Damro (2012) emphasized the material existence of the EU's Single Market for the purposes of the debate relating to EU power. Subsequently, Damro’s market power Europe (MPE) concept takes recourse to Majone’s (1994) idea of the EU as a "regulatory state” that promotes others’ convergence with its standards through regulatory expertise, regulatory coherence and sanctioning powers. Another foundational component of understanding the MPE deals with viewing the EU as an "arena of interest contestation”, wherein the important role belongs to the noninstitutionalized interest groups (Damro, 2012, p. 687). Hence, the EU exercises its market power through "the externalization of its market-related policies and regulations”, employing both persuasive and coercive means (.Ibid., p. 692). As opposed to the NPE, the MPE is, thus, to a significant extent based on coercive power and material incentives. Nonetheless, as argued by Parker and Rosamond (2013), the NPE shall not be completely delimited from the economic liberalism ideas due to the latter's constitutive importance to the Union's post-Westphalian aspirations and the rich normative basis of market cosmopolitanism.

Another relevant concept is the EU trade power, presupposing that "the EU could become an important foreign policy actor through the back door, by using trade instead of more traditional diplomatic or military means” (Meunier and Nicola'idis, 2017, p. 231). Noteworthy, the concept distinguishes between the EU power in trade (export of goods, services and capital) and the EU power through trade (exporting standards and norms). The size of the EU market and elaborateness of the respective acquis conununautaire allow the EU to bear power in trade within the bilateral, inter-regional and global settings. EU power through trade signifies its ability to use trade to achieve NTPOs. Thus, not elaborating on the mechanisms of policies’ externalization and rule transfer, Meunier and Nicola'idis (2017) illustrate that trade represents a crucial pathway for the EU’s influence on the domestic developments in third states.

Moving from the power Europe debate to the scholarship on the mechanisms and institutional set-up of the EU's external rule transfer, it is worth emphasizing the theory of democracy promotion through functional cooperation. This theory is of particular value for conceptualizing EU value-promoting RTAs, since it is the only EU-centred theory that zooms in on the interplay of functional cooperation (e.g. competition, state aid, environmental standards) and the EU valuepromotion. Based on empirical analysis on the EU's rule transfer in the Eastern and Southern Neighbourhoods, Freyburg et al. (2011) proved that the adoption of the transparency, accountability and participation principles in sectoral terms may be "one step in the mobilization of a more vivid civil society and a stronger societal control of state power, both of which would constitute important preconditions for democracy promotion” (p. 1017). Since EU RTAs encompass numerous functional cooperation domains, the findings of research on democracy promotion through functional cooperation can be extrapolated to the rule of law domain to an extent that the democracy and the rule of law principles intersect.

Ultimately, we found the NPE. MPE, trade power Europe concepts and the theory of democracy promotion through functional cooperation useful for exploring the rule of law dimension of the EU RTAs. Since neither of these approaches immediately addressed the externalization of the rule of law, it is especially relevant to discuss the political and legal aspects of the EU value-promotion through RTAs.

 
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