Law As A Catalyst Of Economic Change

Economics Financial Growth Change Graph Concept

The notion and concept of `law and economic change’ ought to be understood in milieu of the coherent controls, the law applies on the fiscal/economic policies thereby steering its development. One need not forget that management of economy by law may be extensive or limited and passive but it has to have dual objectives and that is to attain certain social causes and economic development through the instrumentality of law, conducive to the situation. In other words, economic change and liberalization are intended to serve the purpose of efficiency.

In today’s civilized society life and law run side by side; none can live without law, without being affected by law. Any society’s ethical values, attitudes and future aspirations are reflected by its law and legal system. Greater the respect for social mannerism and civil culture and lesser would be the need for formal systems of law.

While most basic principles and ethical values are common across societies and nations, yet attitudes and practices do show differences amongst the nations. They may also be different in the same country at different points of time. A nation aspiring to bring in rapid re-distribution of existing wealth and income would tend to emphasize laws that would restrict the individual’s right to acquisition of property and hence, the individual initiatives. On the other hand, a nation aspiring for the rapid creation of wealth would tend to have fewer laws, so as to unleash individual and collective energies and remove any restrictive barrier that may arise in the process of growth.


Laws and Reforms: Siamese Twins –

Laws and reforms are inseparable, laws bring about reforms and reforms bring about newer laws. One cannot comprehend as to which of the two comes first. The process of liberalization entails creation of new ambience where some of our old laws get rendered either redundant or incompatible; and many more laws needing to be re-written. But, if the legal fabrication and handling processes are not geared up to the economic change that is sought to be brought about, the pace of economic change will get stifled; and consequently failing to achieve the preferred results. In a society governed by the rule of law, it is the law, which must ensure the proper framework in which the economic change can be brought about smoothly and without any abrasion. The law cannot survive in vacuum, it has to change, re-interpret and recast itself so as to meet the changing norms and values of the society. Law charged with basic values of life does play a vital and driving role in contribution towards social well being by bringing about social and economic change. All of us have to play an important role in bringing about socio-economic changes in our society by facilitating and creating new structures and institutions that help in the process of the said changes. Law has to move forward and keep pace with the changing times.


Law can be good or bad driver of nation’s Economy –

A prosperous society may be more concerned about piracy of the intellectual wealth. It may also show greater concern about environmental pollutions that affect the quality of life or about adherence to the highest standards of competence, which a professional is expected to observe. Laws and legal systems, in this manner, codify social values, attitudes and expectations of behaviour from members of the society. They have their own impact; good as well as adverse, on the economic activity of the nation, depending on how far they are consistent with actual conduct, habits and thinking of the majority of members comprising the society. Certain laws, like income tax rates, customs duties, prohibition, etc. are known more for creating certain values in society, which ultimately act as deterrent in the larger interest of the society itself. Similarly, laws relating to economic activity can have different impacts, depending on what their content are. The reason is that ultimately, a law is an expression consisting of the intent of the law-makers and strategies to achieve this intent. The laws could become coercive, restrictive or highly facilitatory, depending on what the ideals have been accepted and how the drafting has been done. If the intent of the law and the contents of law are to facilitate growth in an unmistakable manner, law has to be drafted accordingly in an unambiguous manner.

Dealing with foreign direct investment, first, basically it depends on real factors, interest rates, tax laws and Government’s other economic policies as well as their stability. Law and legal system can, at best, be one factor, but certainly not a major one (in determining the climate of investment). If laws relating to closure, transfer of management and labour appear to be “obstructive”, that obstructive character could be an act of design. If the very intention is to protect labour, then it is an act of design. There could be a wide gap between the intent of the law and the contents and the interpretation of the law. It is a proven fact that larger the ambiguity in law, and larger the scope for conflicts and litigation. There is a need to ensure that a law must be drafted in an unambiguous manner so that it is identically understood by legislators (who approve the law), by administrators (who have to administer the law), by administrators (who have to administer the law) and society (which lives with it and is affected by it) and the judiciary (who has to interpret the law). Then only can the intent of the law be fully carried out.

Talking about liberalization, we are creating for ourselves new environments where some of our old laws have been rendered obsolete and many more laws need to be re-written. Liberalization is intended to serve the purpose of efficiency, namely, that whatever resources, are made available to us must be made most productive. Laws need to be under constant revision so that they meet the challenges of today’s environments, today’s thinking and today’s involvement in the global economy. Foreign investors need to be invited to participate under such environments in the spirit of efficiency-oriented growth that all these countries want to pursue. Such a participation pre-supposes the creation of environments which are more or less identical with the best available anywhere in the world. Then only can we attract more resources in quantity and more qualitative resources, to our countries. As to competitiveness, efficiency flowers best in competitive environment, for it impels all of them to make the best use of resources. An investor who comes from abroad would like to feel secure that this approach to liberalization and abiding commitment are administered in the form of legal framework in the country. He would also like to feel secure that there was an adequate statutorily backed regulatory framework for ensuring fairness and observance of all rules of competition.

An investor, domestic or international, basically looks for returns on his investment. The logic of investment is identical across all the countries. Hence, domestic as well as foreign investors have to be provided identical opportunities. A level playing ground is needed for all investors in the country in order to bring out the best efforts from both of them. Any discriminatory treatment to anyone can ultimately hurt the overall interest of investment in the economy. An economy, which is largely dependent on domestic savings for investments, cannot afford to discriminate in favour of foreign investors, or (to put it differently), against the interest do domestic investors. At the same time, knowing the need for foreign resources and having decided to invite foreign investment, the laws just cannot discriminate against foreign investment, in order merely to reflect patriotic sentiments. However, the legal system is essentially a domestic one, as there is no universally applicable commercial code for various countries. The philosophy of law may be universal, at least among similar political systems. But the language of legal systems across the countries are distinctly not so. This aspect required attention. Concentrating on the approach to be adopted by the legal system in regard to foreign investment, an environment of mutual trust between domestic investor and foreign investor is to be created. The legal system has to be such as created such a mutual trust among all the investors. An investor needs freedom of both entry and exits. He needs freedom to decide where to locate the industry, how much to produce, how much and where to purchase, how many persons he should employ, and at what prices to sell. He needs freedom to allocate and appropriate high profits after tax. He needs protection from unfair play and restrictive practices from other competitors, suppliers, utilities and tax collectors. He needs inexpensive access to a speedy system of justice and arbitration. He needs laws that reflect a new philosophy, a new business environment, new business requirements-laws that encourage initiative, speedy response, clearances and single-minded pursuit of efficiency, where there cannot be more barriers.

Labour laws continue to remain highly contentious areas in many highly populated developing economies. The issues of exit policy transferability of resources to more productive, business and implementation of productivity-linked incentive structure have become highly essential issues in order to create investors’ friendliness about labour. Similarly, a free market for corporate control, that is, takeover and mergers, may be perceived by some as investment-friendly and some as hindrance. Corporate laws need to be re-worked to make them more investor friendly. The ultimate aim is to achieve free mobility of managerial resources and financial resources, with a view to the optimization of country’s resources in the long run and making them as productive as possible. And, all this should be in the interest of shareholders and consumers. Laws can be made simpler and complemented by transparent regulations, designed to facilitate a competitive market for corporate control. These can contribute significantly to the productivity of resources. It is only when a transparent regulatory regime could be established that it would become highly comfortable and attractive to the foreign investors.

Despite richness of any language and precision of its grammar, language has a tremendous potential for vagueness, ambiguity, imprecision and even nonsense. And, along with visuals, it has high potential for creating appalling degrees of misleading information and impressions. Hence, it is necessary that the laws that we draft should be very precise for the people, who in bad faith are always intending to abuse the intent of the law. Our courts are known to be courts of law, but we would like that they become increasingly courts of justice.


Author: Hemant Batra

Twitter: @hemant_batra

vice president @saarclaw I founder @kaden_boriss I writer speaker I corp lawyer faculty I musician lyricist I awarded mahatma gandhi seva medal | advisor UN Bodies & ADB

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