Is the Rule of Law an Endangered Species?

Why is a strict adherence to the law so important for a nation’s well-being?

January 13, 2004

Why is a strict adherence to the law so important for a nation's well-being?

More than 10 years ago, I was asked by the president of a large bank in Latin America what I would recommend — if I could change one thing about the prospect of Latin American countries.

Of course, there is no panacea or generalized rulebook by which to assure economic prosperity and greater social equity.

Yet, with little hesitation and almost like a reflex to his challenge, I responded with this prescription: "rule of law."

The term needs explaining, because it is vague and all-encompassing. In my mind, it suggests that a country is best positioned for political and economic stability if it creates a dependable national consensus on its legal framework.

That framework, moreover, needs to be of such quality that all people, foreigners included, who consider doing business in that country, view the legal environment as reliable — and conducive for commercial interaction.

To be sure, drafting good laws is an art form that is all too rare these days. In addition, consensus — by its very definition — implies compromise that is acceptable to all (or most).

This is a far cry from trying to be all things to all people. The verbose — and currently rejected — constitution of the European Union is a prime example of consensus misinterpreted.

Laws have to be clear. They need to minimize the number of loopholes and not create new ones to simply satisfy all real or perceived constituencies.

It is also important to find the right balance between being too specific — and being too general. Specificity is needed to agree on the intent of the law, while the net may be tossed wider in language.

In short, the code of laws (or precedents, as the case may be) has to be comprehensive — but focused.

Yet, equally important as designing a workable legal framework is the much more difficult task of assuring citizens of any nation that all laws will be applied with equality and swiftness.

There should also be a high predictability of outcome to any and all who may contemplate taking their chances.

To give one example, tax evasion is viewed as a white-collar crime in many countries around the globe. However, those countries that are adamant in enforcing the local tax code are also the ones most successful in collecting the optimal amount of taxes needed to support government activities.

This is crucial. Taxes are a central part of individual and corporate existence.

They are therefore also central to many nationals’ behavior when it comes to the rule of law. In contrast, lack of enforcement — because of nepotism or any other motive — creates a culture that facilitates common defiance of a nation's system of norms.

This is what I had in mind in the early 1990s when I made my above comment on the importance of the rule of law.

One should be aware that in recent years, contrary to outdated perceptions, Latin America has been blessed with soundly drafted laws and norms that should satisfy most citizens in those countries and beyond.

Yet, many countries in the region have failed desperately to enforce these new codes. This had a profoundly negative impact, as people saw that there was no penalty for non-compliance.

Worse, throughout the 1990s, a series of democratically elected leaders in Latin America wasted their scarce political capital pursuing constitutional changes that would allow them to be reelected.

The question to outside observers was not whether one favored term limits, but what signal these leaders were sending their people by directly benefiting from laws they helped design.

At the same time, these selfish rule changes came at the expense of more important institutional, economic and social reforms.

As a result, many Latin Americans today are disillusioned — and increasingly drawn to populist solutions and their proponents. This is most unfortunate, given the region's experience with leadership of such ilk.

But I must admit that my response to that question in the early 1990s was judgmental and pretentious.

I had had the privilege of living my entire life in countries with sound legal frameworks and affluent societies. My sense of superiority peaked at the end of the last decade.

The U.S. stock market bubble was accompanied by irrational exuberance on a personal level.

Privatization, deregulation — and the highly competent management techniques of U.S. enterprises — had lifted U.S. economic development and personal incomes to a new level.

Then, in the year 2000, the economic bubble began to deflate and — just like a balloon pricked by a needle — it fluttered in accelerating spastic motions before it settled on the ground.

As the U.S. economy slid into recession soon after, the search for the culprit had already begun. Soon we discovered corporate scandals in almost all sectors of the economy — from investment banks and mutual fund companies to auditing firms and the energy sector.

Not to mention the generous compensation packages to which many executives helped themselves. A complacent public — and lax official regulators — acted as enablers by closing their eyes and hoping for the best.

Europeans, too, were ambushed by apparent disregard for laws and the rules of conduct.

Most recently, the founding family of Parmalat was found to have siphoned off some $700 million in corporate assets to private accounts. In total, some $12 billion has been "lost" in the company's cooked books.

And so, our cocky self-confidence and our public trust are shattered. Yet, nothing has changed my view of the world.

The rule of law is fundamental to the well-being of any nation. What has changed is that my view today is based less on observing the failure of others, but more on our own shortcomings in meeting this high standard.

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