Weak Rule Of Law Research Articles

Can Informal Firms Hurt Registered SMEs’ Access to Credit?

Using firm-level survey responses from 2009 to 2012, we examine whether competitors from the informal sector affect the credit constraints of registered SMEs in 86 countries worldwide. We also investigate the role played by the quality of institutional environment in exacerbating or in alleviating such effect. A weak quality of institutional environment strengthens inter-linkages between the formal and the informal sectors, increases the costs and decreases the benefits assumed by formal firms, and reduces the costs attributed to informality. Moreover, it also results in a large informal economy, which influences perceptions about the substitutability between formal and informal goods, and law evasion. Our findings indicate that registered SMEs facing competition from informal firms are more likely to be credit-constrained than other formal SMEs that are not confronted with such competition. This result is consistent with the “parasite” view and the entrepreneurial perspective of informality, which assert that informal firms are capable of competing against registered SMEs and hurting the latter’s profits. Further, we find that such adverse impact manifests only in countries with weak rule of law and high degree of corruption and bureaucracy. Our results also show that registered micro and small firms are more likely to be affected by the presence of informal firm competitors than medium-sized firms. This is because the benefits of formality that include access to credit from financial institutions, increase with firm size. On the whole, our findings suggest that governments must enhance their role in increasing access to credit to smaller firms and in providing incentives for informal firms to be integrated in the formal economy. Moreover, in order to achieve inclusive growth, our results highlight the importance of improving the business environment, which affects all entrepreneurs.

Reinventing Administrative Leadership in Australian Taxation: Beware the Fine Balance of Social Psychological and Rule of Law Principles

The Australian Taxation Office’s goal of “reinventing” the way it goes about administering the Australian federal tax system raises fundamental questions about the role and implications of administrative “leadership”. This article considers administrative leadership from the general perspectives of rule of law principles and leadership theory, with a focus on the social psychology and public administration literature. The article questions whether a greater focus on administrative leadership might conceal potential problems when viewed through the lens of the interaction between the rule of law and leadership theory in building trust in tax administration. It is the second of two articles to do so. The first focused on China. This article uses Australia as an exemplar, so that the two articles allow for an examination of administrative leadership in a jurisdiction with weak rule of law and with strong rule of law. Ultimately, it is suggested that before pursuing administrative leadership to achieve change or influence regulatees, the Commissioner of Taxation must be careful to define precisely what that leadership will entail, to what context it is proposed to be employed and how it might interact with upholding the rule of law. Simply advocating leadership as a positive is too simplistic an approach.

Minimising corruption in Myanmar: an impossible dream?

Purpose– The purpose of this paper is to explain why corruption is a serious problem in Myanmar and why the anti-corruption measures initiated by its military government are ineffective.Design/methodology/approach– The paper describes Myanmar’s unfavourable policy context and analyses the perceived extent and causes of corruption in Myanmar before evaluating the effectiveness of its anti-corruption measures.Findings– Myanmar’s location in a bad neighbourhood surrounded by corrupt countries, its vulnerability to the natural resource curse and ethnic conflict, as well as more than five decades of ineffective military rule have hindered its anti-corruption efforts. Corruption remains a serious problem in Myanmar because of the military regime’s lack of political will and failure to address these causes: low salaries; red tape; weak rule of law; and cultural factors. The Anti-Corruption Commission (ACC)’s performance during its first two years cannot be assessed because of the lack of information on its budget, personnel and activities. As the ACC is led by two former military generals, it is not perceived to be independent, and has been criticised for focusing on investigating corruption cases and corruption prevention at the expense of corruption education.Originality/value– This paper will be of interest to those policy-makers, scholars and anti-corruption practitioners, who are interested in learning about the causes of rampant corruption in Myanmar and why the anti-corruption measures initiated have failed to curb it.

Liberia's Gender-Sensitive Police Reform: Improving Representation and Responsiveness in a Post-Conflict Setting

This article presents a case study from Liberia that focuses on the relationship between police reform and women, peace and security. It explores the Liberia National Police's (LNP) innovative efforts between 2003 and 2013 to recruit more female officers and to train a specialized unit to address sexual- and gender-based violence (SGBV). The analysis focuses on two key goals of the LNP: representation, through the Education Support Programme, and responsiveness, through the Women and Children's Protection Section. Assessed by these two metrics, the Liberian police reform can be considered a qualified success, as the percentage of female officers rose from 2 to 17 per cent, and the LNP improved its response to SGBV reports. Success factors included the timing, context, local ownership and foreign development assistance. However, the sustainability and overall impact of the reforms was severely hindered by low technical capacity and weak rule of law.

Explaining varieties of corruption in the Afghan Justice Sector

Judicial reform in Afghanistan is seriously undermined by systemic corruption that has resulted in low legitimacy of the state and weak rule of law. This article reviews the main shortcomings in the Afghan justice system with reference to 70 interviews conducted in Kabul. Building on legal pluralism and a political economic approach, the shortcomings and causes and consequences of corruption in the Afghan justice sector are highlighted. These range from low pay, resulting in bribery; criminal and political intrusion into the judiciary; non-adherence to meritocracy, with poorly educated judges and prosecutors; and low funding in the judicial sector resulting in weak case tracking and human rights abuses in the countryside. This is followed by sociological approaches: understanding corruption from a non-Western approach and emphasis on religion, morality and ethics in order to curb it.

Risk, risk management practices, and the success of supply chain integration

Companies have reacted to the apparent opportunities and threats of globalization through various global production practices that have increased supply chain complexity and various forms of risk. Through increasing supply chain integration, companies have attempted to manage this increased level of complexity. Supply chain integration has been identified as a key practice to manage supply chains and achieve superior performance. The intent of this paper is to explore the role of risk and risk management practices in the success of supply chain integration in terms of their impact on cost and innovation performance. By applying the relational view and through cross-country survey and secondary country data we explore differences in supply chain integration efficacy based on the risk of conducting business (measured in terms of the strength of a country׳s rule of law) and the mitigating effect of supply chain risk management practices. One of the main conclusions suggests that supplier integration is also effective in weak rule of law (i.e., high risk) environments. Furthermore, companies can complement and strengthen the performance impact of their supplier integration practices through supply chain risk management practices in risky environments.

Do global banks facilitate foreign direct investment?

The wave of globalization in finance during the last decades led to the rise of global banks. Are these merely costly liabilities to the countries that supervise them, or is their global reach also beneficial for the real economy and for FDI in particular? Recent literature has focused on the risks, emphasizing transmission of shocks from one country to many countries. On the positive side, this paper hypothesizes that global banks have made investing abroad easier and more successful for their home-market customers. Using a new detailed data set of outward FDI, this paper finds that banks׳ direct investment abroad is positively associated with the volume of non-financial FDI from the same home market. The result is robust to various robustness exercises which show that the main results are not likely to be driven by reverse causality. The effect is stronger in countries where investing is more hazardous, those with worse corruption and weaker rule of law. Conversely, this paper does not find evidence that host-market domestic or third-country foreign banks facilitate FDI.

Does trust contribute to stock market development?

In view of the increasing contributions of social capital in financial development, we examine the relevance of social capital in stock market development by applying Bayesian model averaging on 37 variables across 60 countries from 2000 to 2006. The results demonstrate that trust is a robust and positive determinant of stock market depth and liquidity, and that trust is the most relevant component of social capital in market development. Macroeconomic instability in the form of inflationary changes has a dampening effect on trust in the trading of stock. Further, social capital and its components, particularly trust, are more relevant to stock market development in countries with weak rule of law, non-Organization for Economic Co-operation and Development (non-OECD) and Organization of Islamic Co-operation (OIC) countries that are generally characterized by lower formal institutional quality. Our results seek to reinforce the relevance of social capital in complementing the much needed reform of stock markets globally.

Proving the Tax Law of China in a Foreign Court

In this article, the author examines the difficult area of proving a foreign law by reference to China and taxation. In doing this, he identifies a major tension between the interaction of China’s legal system with those of foreign countries given China’s weak rule of law and major economic significance. The article also challenges the idea that tax law cannot generally be presumed upon in proving law.

Does the Market Punish the Many for the Sins of the Few? The Contagion Effect of Accounting Restatement for Foreign Firms Listed in the U.S.

In this paper, we hypothesize and find that accounting restatements issued by foreign firms traded in the U.S. induce a negative market reaction to non-restating foreign firms that are from the same home country as the restating firms (restatement-induced home-country contagion effect). Moreover, the magnitude of the contagion effect varies with the strength of the home market institutions of the restating firms. Non-restating firms from countries with a weak rule of law underwent an average stock price decline of about -1.11% while peer firms from strong rule of law countries experience an average negative return of only -0.18% over a three-day announcement window. Our results suggest that restatements filed by weak rule of law country-firms appear to be more “contagious” than those issued by strong rule of law country-firms. This is consistent with the notion that U.S. investors take into account the strength of home market institutions of foreign firms when evaluating the information disclosed by restatements.

Smuggler’s Blues: Examining Why Countries Become Narcotics Transit States Using the New International Narcotics Production and Transit (INAPT) Data Set

We examine the global determinants of the illicit international narcotics trade and the specific roles that states play in it, a topic understudied by international relations scholars. We develop the first comprehensive global data set of state involvement in international narcotics trafficking and then use the data set to empirically test hypotheses concerning the likelihood of countries to serve as transit states for the transshipment of illicit drugs. We find that more-globalized countries are more likely to act as transit states and that the size of the economy, as well as state corruption and a weak rule of law, are positively related to the probability of acting as a transit state. States with a more stable political environment are also more likely to be transit states.

Pre-adoption market reaction to IFRS 9: A cross-country event-study

We are the first to examine the market reaction to 13 announcement dates related to IFRS 9 for over 5400 European listed firms. We find an overall positive reaction to the introduction of IFRS 9. The regulation is particularly beneficial to shareholders of firms in countries with weaker rule of law and a smaller divergence between local GAAP and IAS 39. Bootstrap simulations rule out the possibility that sampling error or data mining are driving our findings. Our main findings are also robust to confounding events and the extent of the media coverage for each event. These results suggest that investors perceive the new regulation as shareholder-wealth enhancing and support the view that stronger comparability across accounting standards of European firms is beneficial to international investors and outweighs the costs of poorer firm-specific information.

Political connections and preferential lending at local level: Some evidence from the Italian credit market

We investigate the effect of political connections in Italy, for each level of government, on the credit markets and we find robust evidence that politically connected firms benefit from lower interest rates when the political link is at a local level. Our results show that this preferential treatment is stronger when connected firms borrow from banks with politicians on their boards and when the degree of autonomy granted to local loan officers is higher. The latter result provides a novel addition to the literature on the effects of the delegation of lending decisions within the bank. We also show that the effect is stronger in geographical areas where the incidence of corruption is higher. Overall, our results show that on aggregate the impact of political connections on interest rates is limited but it may rise significantly in specific (local) situations due to a combination of factors such as the delegation of lending decisions, a weaker rule of law and some governance characteristics of banks.

Comment on “Changing China, Changing Africa: Future Contours of an Emerging Relationship”

Davies et al. (2014) is an excellent paper that argues that outsourcing, changes in the composition of Chinese demand, and the decline of state-owned enterprises (SOEs) may be changing the economic relationship between China and Africa in a largely positive way. The validity and magnitude of each of these trends can be questioned: hundreds of millions of workers in the Chinese agricultural sector remain to be absorbed in the modern sector; the reorientation of demand toward domestic consumption may occur slowly; and while the relative importance of SOEs is declining, the management of most large Chinese firms, regardless of legal status, remain subject to party guidance. Nevertheless, it may be worthwhile to accept these assumptions and examine the implications for Africa. The paper focuses on the behavior of the state and SOEs; it mentions that there is another component of China’s engagement with Africa, traders, and microenterprises, and speculates that a middle tier of medium-sized enterprises may become more important in the future. This process is already underway, but the picture is not always pretty: in 2013, for example, Ghana deported more than 1000 Chinese engaged in illegal mining operations, many who had entered the country unlawfully. The action was widely supported by the Ghanaian public that resented the brazen behavior of the Chinese as well as the deleterious environmental impact the illegal mining had on local communities. More broadly, China’s rise occurs against the backdrop of the West – broadly encompassing Western nongovernmental organizations, Western governments, and the multilateral institutions that they dominate, such as the World Bank – attempting to formulate new ways of addressing the resource curse. These initiatives – for example, the Extractive Industries Transparency Initiative – can be regarded as a way to assuage troubled consciences, act as a precommitment mechanism to forestall more damaging forms of intervention, and promote more humane and rational uses of these resources. Whether they can be effective, and, crucially, what role China will play with respect to these efforts, remain open questions. At present, China’s outward foreign direct investment (OFDI) is overwhelmingly targeted toward extractives, particularly in countries that combine large natural resource endowments and weak rule of law. China lacks the same domestic constraints on engaging

Alexeev, Michael and Weber, Shlomo (eds). The Oxford Handbook of the Russian Economy (review)

REVIEWS 583 sistema is just one, a particular manifestation of a widespread phenomenon, that exists within a particular institutional space that give it a set of resources that are not available to others. At times Ledeneva acknowledges this. For example, she notes that control over formal institutions such as courts enables Putin to punish the informality of others to the advantage of his sistema. At other times, the difference between sistema and systemic is blurred and they are treated as equivalents. When this happens sistema becomes ‘everything’ and a very loose analytical concept. This is problematic on all sorts of levels. One consequence is that it is not always clear that the evidence that Ledeneva cites is using ‘system’ or ‘systematic’ in the same way that she is. A lot of the time it looks as if she is inferring the existence of sistema where others are talking about ‘system’ or ‘systematic’ and referring to something else entirely: the Soviet party-state, totalitarianism, corruption, injustice and weak rule of law and property rights, etc. Another consequence is that where formal institutions constrain informality (and vice versa) slips in and out of focus. This makes it hard to see how we can explain Russian political development using the idea of sistema, or compare Russia to other polities that have similar problems operating formal and informal institutions. Sistema is an attractive idea but it is unlikely to replace other means of describing Russian politics that allow for such comparisons and that have sharper analytical edges with which to try to say something about how Russian politics is going to develop. Department of Politics and Public Administration Neil Robinson University of Limerick Alexeev, Michael and Weber, Shlomo (eds). The Oxford Handbook of the Russian Economy. Oxford University Press, Oxford and New York, 2013. xiv + 849 pp. Figures. Tables. Notes. References. Index. £110.00. The objective of the editors is to assemble ‘up-to-date papers on a broad range of topics’ (p. 2) on Russian economic developments in the context of transformation from the Soviet system. The various contributions are intended to assess the effects of historical legacies as well as the current state of the Russian economy and its future prospects. There are thirty-three chapters, written by Russian and Western authors, including some well-known figures in the field (such as Vladimir Popov, Vladimir Mau, Valeriy Kryukov, Arild Moe, Stephen Fortesque, Steven Rosefielde, Pekka Sutela, Judith Thornton, Leonid Polischuk, Vladimir Gimpelson, Judith Shapiro and others). The papers are gathered into six sections: the past — covering the Soviet period, dismantling the command economy, transformation and privatization; institutions and governance — outlining corporate governance, the tax system, the unofficial SEER, 92, 3, JULY 2014 584 economy and corruption; resources and environment, with chapters on oil, gas, electricity, mineral resources and environmental regulation; financial and non-financial sectors — the military industrial complex, high-tech industries, agriculture, banking and finance and trade; a section on regions; and finally a concluding set of chapters on policy and social challenges, with papers on the labour market, higher education, health care, inequality and demographic developments. Collectively, the chapters cover effectively the major trends and developments of the post-Soviet Russian economy. Most of the chapters are research based, well referenced and illustrated, and contain useful citations to other works. The authors provide good detailed overviews of their topics, often with relevant comparisons to the preceding Soviet period and some make contrasts with other post-socialist countries. Most of the authors accept the assumptions of the Washington consensus (privatization, free market systems, limited state involvement, financialization and openness to the world market) as a framework against which to discuss the transformation of Russia and possible futuredevelopments.Henceformostofthecontributors,themanyinadequacies and distortions in the Russian economy are explained as consequences of the Soviet heritage and are to be alleviated by more efficient marketization, more effective privatization and appropriate institutions. Contributors highlight the post-socialist Russian experience by making comparisons with, and contrasts to, the Soviet period and Western practices. Many authors provide useful conceptual tools such as ‘state capture’ and ‘business capture’. The latter is a form of corruption where government officials obtain rent from profit earned by companies. Widespread corruption is...

Risky Business: The Political Economy of Chinese Investment in Kazakhstan

Kazakhstan lacks the democratic institutions that have been shown to protect foreign investors (Jensen, 2008; Li & Resnick, 2003). Nevertheless, as latecomers to globalization, China's resource-seeking state-owned enterprises (SOEs) must go, not only where resources are, but also where they are available. These are often less than ideal investment environments, such as Kazakhstan, where they are confronted by high corruption, weak rule of law, and political risk. Focusing on investments by the China National Petroleum Corporation (CNPC), this study analyzes how Chinese foreign economic policies, such as aid and loans, assist Chinese SOEs in securing protection for their investments. They do so by making key members of the Kazakh government stakeholders in the success of the investments. In addition, the study details how Chinese government strategy has evolved from one of simply buying off key members of the Kazakh government in order to gain approval for investments to one of making institutions in the Kazakh state, such as KazMunaiGas, stakeholders in the long-term success of the investment in order to secure protection for investments in a climate of political uncertainty.

Ledeneva, Alena V. Can Russia Modernise? ‘Sistema, Power Networks and Informal Governance (review)

SEER, 92, 3, JULY 2014 582 Ledeneva, Alena V. Can Russia Modernise? ‘Sistema’, Power Networks and Informal Governance. Cambridge University Press, Cambridge and New York, 2013. xv + 314 pp. Figures. Tables. Boxes. Notes. Appendices. Glossary. Bibliography. Index. £19.99: $32.99 (paperback). Can Russia Modernise? completes a trilogy of books by Alena Ledeneva on howinformalinstitutionsandpracticeshaveshapedmodernRussia.Thetrilogy mirrors the development of modern Russia. The first book, Russia’s Economy of Favours (Cambridge, 1998), focussed on blat´ (influence and influence peddling), how it was used to cope with the dysfunctions of the Soviet system and how it shaped early post-Soviet society and economy by subverting the market rationality that reformers hoped would transform Russia. The second book, How Russia Really Works (Ithaca, NY, 2006), moved things on, looking at how blat´ was married to new practices such as kompromat (compromising materials) to subvert formal political and market institutions in post-Soviet Russia. The first two books were about systems in flux. The blat´ system that Ledeneva described was evolving. The informal practices described in the second book were chaotic, and it was hard to see how they could be sustainable. Although the second book was written whilst Putin was consolidating power the practices that How Russia Really Works describes were very much of the El´tsin period and reflected the instabilities of that time. Ledeneva’s new book moves things on again. Can Russia Modernise? is an analysis of the informal institutions of the Putin era. Although some of the practices described in the previous books still exist, they are now part of what Ledeneva calls ‘sistema’, a system of governance that she identifies as being ‘Putin’s’ (p. 25). This sistema is not just a set of survival strategies or means to access power and resources in an environment that is formally underinstitutionalized . It reproduces itself and poses an obstacle to change. Unlike the chaos of the El´tsin period, sistema is more durable. Although there might be a desire to modernize the Russian polity and economy the networks and relationships that sistema consists of are effective both as substitutes for formal state bureaucracy and as means of co-opting political and economic forces and leaders. As a result, there is a ‘modernisation trap’: efforts at modernization use the informal methods and networks of sistema that they aim to replace so that the results of modernization are sub-optimal and sistema is reproduced. Even the effects of exogenous forces for change such as global economic integration are distorted by sistema so that they have a different form in Russia. The research that Ledeneva has done is revealing of elite attitudes and the relationship between wealth and power in contemporary Russia. The concept of sistema is not without its problems, however. Informal relations and their use are systemic in Russia but are they actually a ‘system’? It is possible to read Ledeneva’s research as pointing to multiple ‘systems’ of which the Putin REVIEWS 583 sistema is just one, a particular manifestation of a widespread phenomenon, that exists within a particular institutional space that give it a set of resources that are not available to others. At times Ledeneva acknowledges this. For example, she notes that control over formal institutions such as courts enables Putin to punish the informality of others to the advantage of his sistema. At other times, the difference between sistema and systemic is blurred and they are treated as equivalents. When this happens sistema becomes ‘everything’ and a very loose analytical concept. This is problematic on all sorts of levels. One consequence is that it is not always clear that the evidence that Ledeneva cites is using ‘system’ or ‘systematic’ in the same way that she is. A lot of the time it looks as if she is inferring the existence of sistema where others are talking about ‘system’ or ‘systematic’ and referring to something else entirely: the Soviet party-state, totalitarianism, corruption, injustice and weak rule of law and property rights, etc. Another consequence is that where formal institutions constrain informality (and vice versa) slips in and out of focus. This makes it hard to see how we can explain Russian political development using the idea...

A New Cold War? Cold Peace. Russia, Ukraine, and NATO...

Compares USSR to Vladimir Putin's Russia. As many divergences as similarities between USSR and Russia. Russia and West unlikely to enter into new war, most likely will enter new era of cold peace. Russian ideology, domestically popular and internally consistent, lacks global appeal. An authoritarian democracy with weak rule of law, Russia will be increasingly isolated and unable to attract foreign investment or trade or lead its putative peripheral allies due to involuted ideology and failure to form the rule of law. U.S. did not win the war: Russia lost it. Russia could win the peace, but must instill rule of law and a truly global ideology. Putin intelligent enough to do exactly that. Proxy wars and state sponsored terrorism avoidable, but possible. NATO Member States must understand the exact challenges to react promptly and appropriately, not excessively nor inadequately.Updated: Now with more sanctions! Specifically, empirical data about the economic effects of the sanctions already in place. Although the sanction regime will not force Russia to abandon its illegal annexation of Crimea, nor lead to an ouster of President Putin the sanctions may have deterred Russia from further illegal annexation of Ukrainian territory. If they do not, they will be followed by sectoral sanctions of entire swaths of the Russian economy, and possibly also illegal countermeasures, with the aim of ruining Russia's economy, even at the risk of another global recession. Includes section on Syria.

How to Promote Order and Property Rights Under Weak Rule of Law? An Experiment in Changing Dispute Resolution Behavior Through Community Education

Dispute resolution institutions help reach agreements and preserve the peace whenever property rights are imperfect. In weak states, strengthening formal institutions can take decades, and so state and aid interventions also try to shape informal practices and norms governing disputes. Their goal is to improve bargaining and commitment, thus limiting disputes and violence. Mass education campaigns that promote alternative dispute resolution (ADR) are common examples. We study short-term impacts of one such campaign in Liberia, where property disputes are endemic. From 246 towns, 86 randomly received training in ADR practices and norms, training 15% of adults. One year later, treated towns have higher resolution of land disputes and lower violence. Impacts spill over to untrained residents. We also see unintended consequences: more extrajudicial punishment and (weakly) more non-violent disagreements. Results imply mass education can change high-stakes behaviors, and improving informal bargaining and en-forcement behavior can promote order in weak states.

How to Promote Order and Property Rights under Weak Rule of Law? An Experiment in Changing Dispute Resolution Behavior through Community Education

Dispute resolution institutions facilitate agreements and preserve the peace whenever property rights are imperfect. In weak states, strengthening formal institutions can take decades, and so state and aid interventions also try to shape informal practices and norms governing disputes. Their goal is to improve bargaining and commitment, thus limiting disputes and violence. Mass education campaigns that promote alternative dispute resolution (ADR) are common examples of these interventions. We studied the short-term impacts of one such campaign in Liberia, where property disputes are endemic. Residents of 86 of 246 towns randomly received training in ADR practices and norms; this training reached 15% of adults. One year later, treated towns had higher resolution of land disputes and lower violence. Impacts spilled over to untrained residents. We also saw unintended consequences: more extrajudicial punishment and (weakly) more nonviolent disagreements. Results imply that mass education can change high-stakes behaviors, and improving informal bargaining and enforcement behavior can promote order in weak states.