ARCHITECTS OF THE STATE: INTERNATIONAL ORGANIZATIONS AND THE RECONSTRUCTION OF STATES IN THE GLOBAL SOUTH

Terence C. Halliday American Bar Foundation Since the fall of the Berlin Wall, and even more, following the Asian Financial Crisis, international financial institutions have committed themselves to an enormous enterprise of legal institution-building (World Bank 2002). Their goal is nothing less than to create an international financial architecture that is firmly grounded on globally-authorized national legal systems (G-22 1998a; G-22 1998b). The arena of corporate bankruptcy law offers a narrow lens into this enterprise. Since the mid-1980s, a plethora of initiatives has emanated from sovereign states and multi-lateral transnational organizations, from private and public bodies, from professional organizations of lawyers and insolvency practitioners, to create, concomitantly, procedures to enable the orderly handling of cross-border bankruptcies and global norms for national bankruptcy systems (Clift 2002; Flaschen and Silverman. 1998; Fletcher 1997; Westbrook 2000). By 2005 this had resulted in UNCITRAL’s Model Law on Cross-Border Insolvency, UNCITRAL’s Legislative Guide on Insolvency Law, and a set of Principles for the construction of insolvency systems (Block-Lieb and Halliday 2007).While these global norms were being negotiated, international financial institutions (IFIs) pressed upon transitional and developing countries various options for reforming their bankruptcy systems (Halliday and Carruthers 2007b).1 These were pressed upon countries in the Global South with a vigor directly proportional to the financial significance of a country in the regional and global economy, to the degree of

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A fully-defined corporate bankruptcy system can include six elements: (1) substantive law, (2) procedural law, (3) courts, (4) a government agency to handle low-asset bankruptcies, (5) out-of-court mechanisms for restructuring corporate debt which may be private or state-based or both, and (6) a profession capable of handling corporate liquidation and rehabilitation. (Halliday, Terence C., and Bruce Carruthers. 2004. "Institutional Lessons from Insolvency Reforms in East Asia." in Forum on Asian Insolvency Law Reform (FAIR), Insolvency and Risk Management in Asia. Delhi, India: World Bank and Asian Development Bank.)

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financial distress in which a country found itself, and to the array of pressures IFIs could bring to bear (Carruthers and Halliday 2006). Ten years after the Asian Financial Crisis, and more than fifteen years after the collapse of former Soviet command economies, the IFIs concede that many of their efforts stimulated resistance, distortion and rejection. In a world of increasingly integrated financial markets, why is it not possible for the institutions of concentrated capital to impose legal change on vulnerable nations? Why should the legal construction of markets prove so fraught with difficulty? Using the case of corporate bankruptcy reforms, I argue that the institutionbuilding enterprise repeatedly fails because policy entrepreneurs in the Global North either do not admit, or fail to articulate fully, what it is really about—restructuring the state itself. Fully institutionalizing a corporate bankruptcy system involves massive shifts of power in unprecedented directions. It involves a redistribution of power towards institutions hitherto marginal in the power structures of society (e.g., courts) (Santos 2000). It imagines the empowerment of careers hitherto thought to be second- or thirdrate by national elites (e.g., judges) (Dezalay and Garth 2002). It requires that dominant actors and entrenched institutions agree to forgo powers in favor of derogated or nascent actors. Hence putatively legal reforms in fact present ruling classes, power elites, and one-party systems with high stakes. Not surprisingly, these threats trigger extraordinary resistance. This paper is a reconnaissance. It sketches out for future development some broad lines of argument. It will sketch briefly some global designs of the state that are codified in global norms and then describe ways in which bankruptcy reforms presuppose a restructuring of state institutions. On this basis we can then observe some limits to global designs and to legal convergence. The paper relies upon extensive empirical research on global norm-making institutions and three case studies in China, Indonesia and Korea in the aftermath of the Asian Financial Crisis (Halliday and Carruthers 2007b). Global Designs of the State When international financial organizations became implicated in the reconstruction of Central and Eastern Europe, they drew upon currents of opinion and practice to craft new

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scripts for guidance of national policy-makers. By the later 1990s new doctrines of law and finance, sometimes fortified with suspect data (La Porta et al. 1997), coupled with institutional economics (North 1990), animated the legal departments of IFIs to get into the game of institution-building. IFI lawyers insisted that legal reconstruction must exist alongside economic reconstruction. Indeed the latter was doomed without the former. The contours of this reconstruction can be seen in prescriptive norms for bankruptcy regimes developed by several international organizations between 1999 and 2005. The G-22 asserted in 1998 that “the international financial crisis that began in Asia . . . lend[s] urgency to efforts to strengthen the architecture of the international financial system.”2 Strong insolvency regimes were critical for “crisis prevention, crisis mitigation and crisis resolution.”3 In this the G-22 specified with respect to insolvency a basic premise of law and finance: “a comprehensive and effective legal and regulatory framework is a fundamental prerequisite for economic development.”4 The mantra repeatedly stated by all IFIs integrated this Asian Development Bank (ADB) premise into a theory of law and markets: good law increases investment which in turn stimulates economic growth (and, for some organizations, reduces poverty). What was “good law?” Good insolvency law, said the ADB, required “certainty and predictability,” “commercial stability and order,” “commercial efficiency,” “fair commercial or equitable treatment,” as well as “transparency.”5 These sentiments were echoed by the World Bank,6 IMF, and UNCITRAL.7 International organizations made clear that the realization of “good law,” “certainty and predictability,” and “fairness” connote a legal regime that includes three attributes. 1.

Competent, powerful and independent courts.

Repeatedly in the norms

developed by development banks for insolvency it is said that courts must be the

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G-22. 1998a. "Report of the Working Group on International Financial Crises." Washington D.C.: World Bank. [1] 3 Id., p5. 4 Asian Development Bank. 2000. "Report on Insolvency Law Reforms in the Asian and Pacific Region." Law and Policy Reform Bulletin I:10-86. [iii] 5 Id. 6 World Bank/UNCITRAL. 2005. "Creditors Rights and Insolvency Standard." Washington DC: World Bank. [3] 7 UNCITRAL. 2004. UNCITRAL Legislative Guide on Insolvency. New York: United Nations. [33]

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centerpiece of any insolvency regime (International Monetary Fund (IMF) 1999; World Bank 1999; World Bank 2001b). Judges must be competent and free from political influence and economic corruption (World Bank 2003). Courts must also have power sufficient to compel the breakup of family corporations, compel the transfer of assets worth hundreds of millions of dollars from one party to another, or compel a preference for an out-of-town or out-of-country creditor over a local creditor. 2.

Executive enforcement.

In corporate reorganizations assets must be found;

assets must be given up by one party in favor of another; contracts are undone; assets may be used only with restrictions. Disclosure must flow from debtors to creditors, often with loss of face and considerable shame. All these transactions require a backdrop of effective enforcement. A bankruptcy system requires that police and government inspectors both have the capacity to enforce court decisions, and as consequential, the willingness to defer to the authority of judges. 3.

Professional Services

Corporate failures require technical specialists,

usually lawyers, accountants or specialist insolvency practitioners. An effective insolvency system therefore requires the expansion of the private market for professional services, a market that can be stimulated and constrained by state actions, ranging from incentives to regulation (Asian Development Bank (ADB) 1999; International Monetary Fund (IMF) 1999; World Bank 2001c; World Bank 2005). State Reconstruction Bankruptcy law reform presupposes the redesign and restructuring of the state in five ways. Our case studies of China, Indonesia and Korea demonstrate what may also be apparent in other countries. 1.

Shifting the boundary between the market and the state The most fundamental move is a shift from the state to the market. This

fundamental move lies at the core of the Washington Consensus, valorized by Britain and the U.S., and propagated earnestly by international financial institutions, most notably the IMF and World Bank. This shift of boundary can be dramatically observed in both transitional economies and transitions from state development models of economic growth.

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Command economies: China

The fall of command economies in the former

Soviet Union, and the diminution of command economies in East Asia (e.g., Vietnam, China), involved simultaneously the growth of the private market and the retraction of the state-owned sector. In China, this proceeded along two tracks. On one track, since the mid-1990s China’s agencies responsible for SOEs have been merging, recombining, and liquidating SOEs in order to reduce drastically the number of SOEs, to increase the viability of those that remain under state control (i.e., sensitive industries), and to decrease substantially the proportion of SOEs (World Bank 2000; World Bank 2001a). As a result, the power of state agencies to intervene directly in firm management has been diminished (Naughton 2003). State regulatory interventions are shifting from “rowing” to “steering” (Parker and Braithwaite 2003). On the other track, the National People’s Congress drafted a new comprehensive bankruptcy law, enacted in 2006, which again purported to remove direct state intervention away from interference in the everyday decisions of enterprises when then became financially distressed. It is intended to send a signal to foreign investors that administrative and political intrusions into markets are being attenuated, or at least systematized. Developing Economies: Korea

Korea exemplifies a similar move in developmental

state economies. Although Korea’s Ministry of Finance brilliantly guided Korea’s economic development for thirty years, at the very moment of its admission into the rich club of nations in 1996 (ie., the Organisation for Economic Cooperation and Development (OECD)), international consultants pressed the government to recognize that its state-directed market could no longer be sustained (Booz-Allen and Hamilton 1997). The shock of the Asian Financial Crisis, which compelled Korea to seek a bailout from international financial institutions, gave IFIs an opening to press strongly for a retraction of the state from direct market intervention. The most critical philosophical shift was to permit bankers to use banking principles, not policy directives, as a basis for lending, and to allow creditors and debtors to resolve directly between them whether firms should be reorganized or liquidated and not rely on administrative guidance (Nam, Kim and Oh 1999; Oh 1999; Oh 2002a; Oh 2002b). In both cases this required retraction of the state from the market—and in both cases it has proved not easy to do so. In effect, the IFIs demanded that the economic mandarins who had brought Korea from the third

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world to the first world yield direct power to the amorphousness of the market and to unproved institutions and professions.. From market to the state

Since global norms ostensibly press exactly against

movements in this direction, it is less readily observed. But it has occurred in East Asia bankruptcy reforms in two respects. First, in the national emergencies precipitated by the Asian Financial Crisis states set up powerful state agencies, such as the Jakarta Initiative Task Force in Indonesia (Indonesia 2000; Jakarta Initiative 2001), to compel or induce private corporations with major debt burdens to restructure their financial relationships with creditors, to grant tax relief, to alter terms of loans, to convert debt into equity, among other incentives, in order to lift the debt load. Second, international organizations have pressed vigorously for strong courts. For most countries of East Asia this inserts an entity of the state into commercial relationships where it previously did not exist. In contrast to the resolution of business disputes privately, the potential benefits of binding decisions handed down by courts are balanced against the distaste of public proceedings, adversarial legalism, demands of disclosure and the rigidities of dispute settlement that come with the law. In a word, it requires a fundamental shift in business practice and legal consciousness. 2.

Moving Power among Agencies of the State

Law and development protocols of IOs demand what may also be a more fundamental shift—of shifts in power among branches of government, most importantly from executive agencies to legislatures and courts. a.

Executive to Courts

The most important transfer of power urged by IOs is from the executive to courts. In Asia this is a radical move. Except perhaps for Japan, Singapore, and Hong Kong, courts in East Asia have been a distinctively subservient and derogated branch of government. In the bankruptcy field a significant shift in power from the executive to courts can have awkward ramifications for (i) executive agencies, which would now be treated as just another creditor, for (ii) creditors, who would be ranked according to commercial and legal criteria, not by their proximity to power, and for (iii) politicians, who may have had concealed financial interests in debtor-corporations.

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This elevation of the power of the courts further rests on presumptions of an emergent professionalism, most especially of judges, but also of lawyers. Large bankruptcy cases, especially of multinational corporations, require a sophisticated understanding of commercial law and its bankruptcy sub-specialty, knowledge of business practice, a comprehension of finance and frequently of international law. It presumes an ethos among judges that is not tolerant of political interference or corruption and support from a legal profession that reinforces these values ultimately by allying with courts when they are under political threat. In China, Indonesia and Korea, this transfer of power has been difficult. Indonesia

So weak were courts in Indonesia after decades of depredation by Sukarno

and Suharto that World Bank and USAID officials recommended courts be avoided altogether in a new bankruptcy system in favor of a tribunal situated within the executive. When the IMF decided to invest in a Commercial Court it had to build from the ground up: recruit and train new judges, improve court facilities, create a specialist bankruptcy profession, and revise substantive and procedural laws that vested courts with adequate powers. The Government of Indonesia agreed to these as a condition of the massive loan package stitched together by IFIs. But resistance came from all quarters. The Minister of Justice did not throw his support behind the courts. Many politicians are alleged to have corrupted processes of discovery and court proceedings because they did not want to reveal their financial interests in companies. Owners and managers of major firms, long accustomed to dealing with high level officials, had little respect for the competency of judges or the procedures and powers of the court. As a result, one after another corrective cycle of reform has not managed to vest the courts with the power and legitimacy that global architects imagined (Halliday and Carruthers 2003). China

The corollary of withdrawing state agencies from day-to-day interventions

in SOEs and of allowing SOEs to act as commercial actors is that rule-governed markets may take over. But this involves giving courts much greater powers than they have had (Lubman 1999). As it is, Chinese courts are deeply embedded in local politics and business interests. Most judges are poorly trained. Large numbers are former military officers. Courts are financed locally. Local Party officials can be closely involved in decisions. These attributes immediately put parties to cases from outside the local area at

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a disadvantage, not to mention foreign investors. Yet top leaders are trying to build a “rule of law” system of sorts which shifts former administrative powers to the judiciary (Peerenboom 2002). That said, the judiciary itself is hedged about with administrative entry-points to the courts and in some respects the courts, too, continue to be treated as a barely-independent arm of the administrative state. b.

Executive to Legislatures

In the bankruptcy field, IFIs have not been satisfied with purely executive solutions to weak bankruptcy systems. The IMF and World Bank have advocated substantive and procedural law that has legislative mandate. In Indonesia, the IMF insisted on changes to the law that required legislative amendments (Hoff 1999). In Korea, the IMF and World Bank got an agreement from the government that it would consolidate its three bankruptcy laws into one, updated, comprehensive law (Oh 2003). And in China the World Bank, Asian Development Bank and aid agencies have maintained pressure for a comprehensive bankruptcy bill (Asian Development Bank (ADB) 1996; World Bank 2001a). The results of these pressures are not inconsequential. Whatever the impact of the law, and a large implementation gap can be anticipated, they push lawmaking in sensitive areas into a more open political arena where interests can percolate to the surface and all parties to commercial transactions in principle can mobilize. The result in each of the three countries has been a strengthening of the legislative branch as a source of law and a forum for the articulation of interests. 3.

Shifting powers within branches of the State The IFIs come to developing and transitional nations with general designs and

particular adaptations for reforms within state agencies. Two stand out. We have already seen that from experiences in handling the 1990s debt crises in Ecuador and Mexico, the IMF and World Bank decided that there should be new agencies within the executive to restructure large numbers of major corporations in financial distress (Meyerman 2000); Mako 2002; Mako 2003). The IMF and World Bank have also advocated the setting up of specialist bankruptcy courts for complex and large bankruptcies. However, these designs appear to be first-world plans for third-world nations that cannot easily heed them. Indonesia set up a Commercial Court with jurisdiction for bankruptcy and intellectual property in the first instance. Only the latter has worked. Korea rejected the

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idea of a specialized court in favor of a specialized chamber of the court in major centers. China has not yet decided what to do but it is quite unlikely that it will set up a specialized court. 4.

Changing Sovereignty vis-à-vis the Constellation of States Firms in a globalizing market develop economic relationships that spill over

national frontiers. In bankruptcy these include financing from outside the country, contracts with overseas suppliers and buyers, and incorporation within multi-national groups. International organizations engaged in global norm-making for cross-border bankruptcies seek to develop procedures that unify or coordinate bankruptcies across jurisdiction (United Nations Commission on International Trade Law (UNCITRAL) 1999). On the one hand, this means that national courts, usually in a developing country, would give up some powers over control of the affairs of companies within their jurisdiction. On the other hand, national courts would find themselves enforcing orders on behalf of creditors, for instance, who lie outside the jurisdiction, at the expense of creditors who reside within the jurisdiction. Both of these are politically sensitive. For countries which are seeking to bolster courts, and thus must find ways to legitimate them, any deference to foreign courts, and especially those in the Global North, potentially exposes them to strong criticism on nationalistic grounds. This is a subtext of the backlash to IFI-led reforms in Indonesia. It is reflected in heavy protectionism of the banking industry in Korea. Loss of executive control over courts may thereby also lead to the transfer of control over national flagship companies to foreign creditors. It is for this reason, among others, that supposedly neutral bankruptcy proceedings became so politically sensitive in Indonesia. 5.

States and Civil Society, Families and Ethnic Groups The structure and composition of the state is in part a reflection of the structure

and composition of society. Sharp class distinctions, deep ethnic and linguistic cleavages, confrontational religious communities all put their imprints on states which must, in turn, manage potential for social disorder and political dislocation in society. Our findings show that even in bankruptcy law, a branch of commercial law conventionally confined to small numbers of specialists, the behavior and structure of the state became engaged with societal issues in three ways.

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a.

Ethnic Issues

In Indonesia before the Crisis, the distribution of power in

the state reflected a tacit concordat between the ethnic Chinese, whose conglomerates controlled the heights of industry, and indigenous Indonesians, who controlled the heights of politics (Schwarz 2000). So long as the Chinese stayed out of politics, they could flourish economically; and so long as indigenous Indonesians protected the Chinese, then Indonesia’s leaders and the nation would benefit financially. When the Crisis unraveled the power of the state in favor of international private and public institutions of capital, the new corporate restructuring system imposed from outside threatened to shred the ethnic concordat. It appeared that the Chinese could no longer be protected domestically and that new state structures might wrest control of Chinese companies and vest it in state agencies or move it to foreign creditors. While this looks like a story of ethnicity and the market being influenced by the state, there is a contrary implication. If the Chinese became convinced that the old contract was gone, or that their economic viability in Indonesia was in question, their responses could take two forms, both deleterious to the Indonesian state. First, to defend their ethnic/financial interests that were threatened by several new potentially powerful state institutions, they had strong incentives to resist or destabilize them. Second, much Chinese money, it is alleged, fled Indonesia in and around the Crisis. The confidence of the Chinese in their futures in Indonesia directly affected the probability that this money would flow back in. Without it the Indonesian state would grow more slowly, its revenues and tax base would be diminished, and state capacities themselves, therefore, would suffer. b.

Family Issues

In East Asia much economic activity has been regulated by

a relational capitalism founded on family control and fortified by ethnic ties. For East Asian states to adopt designs from global architects requires them also to assert a state regulatory role alongside and often in tension with relational and family ties. The result can be rising conflict between the prospect of new state institutions and those institutions that have powered the growth of the domestic economy. c.

Economic Inequality and Social Unrest

Global architects also face

difficulties when domestic unrest compels policy-makers to discard global designs. In China, the restructuring of SOEs has led to widespread unemployment, especially in the

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NorthEast, China’s so-called Rust Belt, and the west, which have benefited much less from China’s economic rise. This unemployment, and the loss of related benefits, continues to be one of the most volatile issues in Chinese politics. The fears of social unrest have compelled China’s policy-makers to design the bankruptcy system so that it has multiple points of administrative control: (i) control over the ability of SOEs, financial institutions and some other business types to use courts; and (ii) Party and administrative controls over the volume of cases or even particular decisions (Halliday 2007). Limits on Global Designers: Recursivity and Resistance Domestic law reform in a global context is a recursive process (Halliday and Carruthers 2007b). Law-making in any situation takes a cyclical form as law is placed on the books by legislators, judges and regulators, and law is variably implemented in practice by parties to commercial transactions. Since there is invariably an implementation gap between law-on-the-books and law-in-action, further cycles of reform are likely to follow until the legal change settles at a new equilibrium. These recursive cycles are driven by four mechanisms: (1) ideological and structural contradictions that get built into formal law without being adequately resolved; (2) the usual indeterminacy of law and the inconsistencies and conflicts that new law often invokes; (3) mismatches between those who made the law and those who practice it, such that the latter may work to frustrate or adapt the intent of framers; and (4) diagnostic struggles between interest groups over what is wrong with the law as it is practiced and therefore how it should be remedied. If the structure of the state is stake, then rounds of reforms may be inevitable and protracted as global designers insist on one model and national policy-makers resist. Our research on bankruptcy law shows that nation-states, even in the most dire of circumstances, have much greater power than may be supposed to keep state structures in forms that satisfy current elites (Halliday and Carruthers 2007a). As a result, global actors are forced to negotiate the shape of globalization in each nation anew (Carruthers and Halliday 2006), what Santos (Santos and Rodríguez-Garavito 2005) might call

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“localizing globalisms.” In the process of negotiating commercial law regimes, therefore, the structure of the state also becomes an implicit object of negotiation. Dezalay and Garth (Dezalay and Garth 2002) have felicitously complicated this story in their analysis of the internationalization of palace wars. As they rightly argue, it is much too simple-minded to imagine globalization as a struggle between a monolithic international “other” and a homogenous national “subject.” Instead, the global arena can be a place to play for domestic insurgents whose political voice is otherwise unheard or unheeded. The structure of the state is a fundamental point of contest. In a global context, IFIs deal principally with vested national elites for that is where political power currently lies. To get change means at least to negotiate with those who currently hold the power to effect it. Yet the intervention of global institutions opens a wedge for peripheral or insurgent domestic constituencies to obtain a powerful international ally. Indeed, a consonance of interests may develop between domestic reformers and IFIs. If domestic reformers are currently kept at arms-length from state power, then they have two avenues for the pursuit of power: either displace the office-holders in the state as it is presently structured; or restructure the state to create openings for them and their cause. In short, international financial architecture and its domestic foundations extend far beyond finance. The design of technical bankruptcy systems by IFIs involves a great deal more than modernization of commercial law. Whether consciously or not, IFIs have become architects of the state. Their grand designs require state reconstruction. It is not surprising, then, the global-local encounter becomes fraught with conflict and noncompliance. REFERENCES Asian Development Bank. 2000. "Report on Insolvency Law Reforms in the Asian and Pacific Region." Law and Policy Reform Bulletin I:10-86. Asian Development Bank (ADB). 1996. "Final Report, State Enterprise Insolvency Reform." People's Republic of China: Asian Development Bank. —. 1999. Law and Development at the Asian Development Bank. Manila: Asian Development Bank. Block-Lieb, Susan, and Terence Halliday. 2007. "Harmonization and Modernization in UNCITRAL’s Legislative Guide on Insolvency Law." Texas International Law Journal In Press. 12

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