Recharacterizing Restructuring:Law, Distribution, and Gender in Market Reform (The Erik Castren Institute Monographs on International Law and Human Rights, ... on International Law and Human Rights, V. 3)

RECHARACTERIZING RESTRUCTURING

The Erik Castrén Institute Monographs on International Law and Human Rights Volume 3 General Editor Martti Koskenniemi

The titles published in this series are listed at the end of this volume.

RECHARACTERIZING RESTRUCTURING Law, Distribution and Gender in Market Reform

by

Kerry Rittich University of Toronto, Canada

KLUWER LAW INTERNATIONAL THE HAGUE / LONDON / NEW YORK

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THE MONOGRAPH SERIES

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he Series of International Law Monographs by the Erik Castrén Institute of International Law and Human Rights seeks to bring to the reader highquality research in international law with particular emphasis on the theoretical and historical aspects of the topics dealt with. The Series encourages doctrinal and practical criticism, a multidisciplinary approach and broad syntheses. Manuscripts that seek to renew the field's intellectual energy and political commitment are welcome. The Series is based on a conviction that theoretical ambition and practical relevance cannot be dissociated from each other and that even as it looks for a rejuvenation of the field it insists on speaking to both academic and practising lawyers.

Martti Koskenniemi General Editor

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PREFACE BY THE SERIES EDITOR

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he distinction between economics and politics is one of the structuring principles of much prevailing institutional thinking - especially "neoliberal" thought - about the role of law in furthering social development at the international and domestic levels. On the one hand, there are the "natural" legal forms of the economic market - basically encapsulating property, contract and private rights. On the other hand, there are the "artificial" interventions produced by decision-making at the level of the State that reflect different equitable and distributional priorities. Economics is neutral and comes first, politics is partial, and secondary. In this view, the post-1989 transition in Eastern and Central Europe is about moving from an excessively State-centred, and thus "politicised" form of economic regulation towards the establishment of the structures of the market as the natural and non-political basis that provides the economic resources on the basis of which the State may then carry out structural adjustments so as to effect its political priorities. In this study, Kerry Rittich effectively demonstrates that this is a profoundly ideological view of the relationship of economics, politics and law. One of the principal arguments here is that there is no neutral realm of economic efficiency, for instance, in the form of a set of best practices, that could be implemented by a determined set of legal rules. Using both Realist and Post-Realist legal critiques, the author demonstrates that every notion of the market, and every assessment of its efficiency, is always akeady infected by

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Martti Koskenniemi political choices. There is no predetermined set of legal arrangements or institutions that would correspond to an original or authentic notion of the economic market. Every market is a historical creation and reflects political priorities and distributional choices. The ways in which property rights are grounded and delimited, contracts are enforced or balance is struck between conflicting private rights reflect broad equitable principles and developmental priorities. Even non-intervention by the State is intervention in favour of the stronger actors and there is nothing in the intensity or content of the normative framework supporting either the latter or the former that would suggest one to be more natural (i.e. non-political) than the other. But moreover, any legal framework that purports merely to regulate economic activity will bear wideranging social consequences outside the market itself, by empowering and disempowering particular social actors and realising some priorities at the cost of other priorities. In this study, the focus is on the effects of economic policies on the position of women in Eastern and Central European States in the course of the years of a "transition", often characterised by participant institutions, such as the World Bank, as a movement from the artificial and • politically loaded interventionism by the State towards the natural conditions of the market. The points made in this work by Dr Rittich are extremely important and timely: neoliberal reforms have been expanding in the non-Western world as well. When the World Bank or other international institutions engage in supporting "best practices" in Africa or the creation of a "level playing field" in Asian economies, they are making choices and setting priorities that may be accepted or contested but which cannot be reduced to the application of economic or legal techniques. It is a particular merit of the present study that the author has combined her analysis of the de facto distributive consequences of the transition "From Plan to Market" with the tools of critical legal analysis. For if the boundaries between economics, politics and law are not fixed, it follows that the reach of legal study is not limited to the interpretation of normative frameworks but may extend to elucidating the way particular legal regimes bring about particular social and distributive consequences. This is a highly welcome extension of the orientations of international law as well especially since the traditional boundary between "international" and "national" is vulnerable precisely to the kinds of critiques that this book makes of the economic and conceptual constructs. If VIII

Preface developments in domestic societies hinge upon policies carried out within international financial institutions, and those policies refer back to contestable assumptions about the force and meaning of legal institutions, then surely insisting on traditional textbook divisions of legal disciplines is part of the very problem that it often seems so difficult to get a grasp of why it is that orthodox policies seem to have adverse consequences. This book produces impressive evidence for the claim that the transition "from plan to market" in the states of Central and Eastern Europe affected the position of women in significantly adverse ways. As a result of the privatization and restructuring of enterprises, large numbers of women became unemployed and the wage gap between men and women widened. The reduction of childcare and other social benefits and services that were previously integrated into the production process resulted in the forced withdrawal of women from the labour market, accompanied sometimes with massive impoverishment. Overall, restructuring in the workplace as well as in the economy at large (reduction of subsidies, privatization of education and health etc.) produced a long-term gender disadvantage. Particularly important has been the externalisation of the costs of women's reproductive labour to private economies: child care elder care, food preparation and other social tasks are allocated to women on an unpaid basis. As the present study shows, such results would often be unacceptable in the older, developed mixed economies. They are thus not a natural consequence of the transition but a result of the preferences embedded in the particular neo-liberal theory that has been predominant in the process. Applying critical insights of post-Realist legal analysis, this book is a brilliant reminder that the fluidity and open-endedness of legal institutions is not a defect or a problem to overcome. It is, rather, an indissociable aspect of the possibility of democratic social transformation - a reminder that in economics, too, everything is open for political choice and critique and that legal analysis is a good ground for preparing both. It is also a welcome invitation for lawyers to leave the prison-house of conceptualism and grasp the link between legal analysis and political commitment. Consciousness of this link has always been at the heart of international law's emancipatory potential. Martti Koskenniemi Helsinki, 10 December 2001

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ACKNOWLEDGEMENTS

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his book was begun when much about its subject matter, the legal character of contemporary economic reform and restructuring, was still an open question. During this time, I benefited enormously from conversations and workshops with a remarkably vibrant and provocative community of scholars at the Graduate Program at Harvard Law School; this book is marked in countless ways by their presence. Among those from whom and with whom I learned much are Tony Anghie, Bojan Bugaric, James Gatthi, Aeyal Gross, Mala Htun, Outi Korhonen, Vasuki Nesiah, Celestine Nyamu, Balakrishnan Rajagopal and Robert Wai. I am indebted to David Kennedy for his vision of international scholarship, and for an environment which allowed so much collective learning and encouraged so much innovative work. Special thanks also to Seyla Benhabib for her involvement at the earliest stages. My greatest intellectual debt, however, remains to Duncan Kennedy who oversaw the endeavor from its most embryonic stage with characteristic acuity and engagement. His contribution in terms of time, support and knowledge is simply incalculable. Parts of this work were presented at workshops and conferences at the University of Cape Town, the University of Connecticut, the European Law Research Center at Harvard Law School, the Human Rights Program at Harvard Law School, the Institute des Haute Etude in Geneva, and the University of Michigan. I am grateful to Jean Marc Coicaud, Joanne Conaghan, Michael

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Kerry Rittich Fischl, Veijo Heiskanen, Robert Howse, David Kennedy, Karl Klare, Joel Paul, Balakrishnan Rajagopal and Henry Steiner for their kindness and support in providing the opportunity to do so, and to the participants at these events for their responses. For comments at various points on earlier drafts and sections of the manuscript, I would like to especially thank Gregory Alexander, Bill Bratton, Karen Engle, Gunter Frankenberg, Jan Klabbers, Outi Korhonen, Marti Koskenniemi, Robert Wai and Bruce Ziff. Although they will surely find much still to amend, it is immensely better for the time and care which they took. A number of students at the Faculty of Law at the University of Toronto provided valuable research assistance in the preparation of the manuscript: for this I thank Lea Waldorf, Joe Cheng, and Erin Stoik. I also relied t at crucial moments on my assistant at the Faculty of Law, Allyn Chudy, and on Shikha Sharma at the Bora Laskin Law Library. I am very grateful for the generous financial support received at various points during this project from the Social Sciences and Humanities Research Council of Canada, and the Connaught Research Fund at the University of Toronto. Finally, to Robert Wai, for all the things that made it possible. Kerry Rittich

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TABLE OF CONTENTS

INTRODUCTION

1

PARTI

27

1. ECONOMIC DEVELOPMENT IN THE NEOLIBERAL STYLE: THE CASE OF TRANSITION 1.1 An Outline of Neoliberal Theory and Practice 1.2 The Agenda for Transition 1.2.1 Compensation and social welfare in plan economies 1.2.2 Critique of the enterprise benefit model 1.2.2.1 Enterprise benefit provision 1.2.2.2 Employment regulation and entitlements 1.2.2.3 Subsidies and cash compensation 1.2.3 Strategies for change 1.2.3.1 Wage compensation and the elimination of benefits 1.2.3.2 Reductions in public provisioning

29 30 34 35 39 40 41 42 43 43 45

2. NEOLIBERAL IMAGES OF LEGAL REGULATION AND THE STATE 2.1 Positioning the State 2.1.1 Naturalization, neutralization and normalization of the market 2.1.2 The role of anti-state rhetoric 2.2 legal and Economic Integration

49 50 55 59 62

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Kerry Rittich

2.3 The Ro/e of Law 2.3.1 The use of rights 2.3.2 Law versus regulation

65 68 70

2.3.3 Market failure and state intervention 2.4 Best Practices

73 85

3. THEORETICAL ANTECEDENTS OF NEOLIBERALISM 3.1 Libertarian Concepts of Property, Regulation and the State: Hayek andRoepke 3.2 Public Choice Theory

99 101 115

4. LAW AND DISTRIBUTION IN THE MARKET: A POST-REALIST VIEW 127 4.1 Neo liberal Legalism 131 4.2 A Post-realist View of Law and the State 132 43 Institutional Economics 143 5. RECHARACTERIZING RESTRUCTURING 5.1 Rethinking Distribution 5.2 Re-evaluating the Role of the State 5.3 The Rise of the Private 5.4 The Elimination of Subsidies 5.5 Restructuring and Regulation

153 156 158 160 161 163

PART II

171

6. THE GENDER OF RESTRUCTURING 6.1 Restructuring the Enterprise and the State 6.2 Production and Reproduction 6.2.1 Analyzing the productive and reproductive economies 6.2.2 Restructuring and reproduction 63 The Gendered Effects of Enterprise Restructuring 6.3.1 Loss of reproductive benefits 6.3.2 Cash vs. in-kind compensation 6.3.3 Employer as an efficient commodity provider

173 178 182 182 196 200 204 205 206

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Table of Contents 6.3.4 Loss of cross-subsidies 6.3.5 Increasing wage differentials 6.3.6 Control of household resources 6.4 Gender and the Transformed Ro/e of the State 6.4.1 Loss of subsidies 6.4.2 Budget reductions 6.4.3 Reductions in social provision and transfer payments 6.4.4 Reductions in the size of the state sector 6.5 Wage Suppression in Transition 6.6 Gender Disadvantage Through the Lens of Post-realism

207 208 211 213 213 215 217 220 221 227

7. GENDER EQUITY IN THE WORLD BANK: THE CASE OF RESTRUCTURING 7.1 Gender Equity and Restructuring from Plan to Market 7.2 Gender Equity and Human Capital

235 249 257

8. POVERTY VERSUS EQUALITY

263

CONCLUSION

283

BIBLIOGRAPHY

293

INDEX.

311

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INTRODUCTION

I

n its 1996 World Development Report, From Plan to Market,1 the

World Bank set out its view of the route which the so-called "transitional" states, those moving from administrative or plan to market

allocation of goods and services, must follow in order to successfully transform themselves into market economies, move toward integration into the world economy and achieve economic growth. Although the analyses and recommendations contained in From Plan to Market are specifically directed at the process of transition, they did not simply emerge in that context and on that occasion. Nor were they unconnected to other projects and debates elsewhere on development and market reform. Rather, the policies were part and parcel of an emerging orthodoxy among development and financial institutions concerning proper economic policy among both developing and developed states. Indeed, the path of reform and the policies advocated in the report can be understood as an expression of dominant ideas about the appropriate structure of market societies and the institutional and legal requirements of participation in the global economy. From Plan to Market attempts to explain the demands of transition in a way that is compatible with the central tenets of the reigning economy orthodoxy.

1

World Bank, World Development Report 1996: From Plan to Market (New York: Oxford University Press, 1996). 1

Kerry Rittich Yet many of these institutional, policy and regulatory details of this orthodoxy did not exist in a well-elaborated form before the dilemma of transition arose. Rather, transition itself proved to be a crucial moment in the consolidation of a consensus around the demands of markets-centered growth and the site of a particularly intense effort to establish its institutional form. This is a study of the relationship between the ideology which animates this restructuring project and the legal rules and institutions through which it is carried out. It seeks to explore the role of the legal reforms and policy changes advocated in the name of growth and greater efficiency and the creation of advantage and disadvantage among different social groups. The focus of the distributional analysis is a set of reforms that might be expected to generate adverse effects for women in the emerging markets. In exploring the role of law in the allocation of economic power and resources, it examines the relationship between development and market design, matters conventionally placed within the domain of economics, and considerations of equity and social justice, concerns which are thought to be quintessentially political. The intuition that is pursued is that claims and ideas about legal rules and institutions now play a key role in mediating the domains of economics and politics and establishing the boundary between them. Originally identified as the "neoliberal agenda" or the "Washington consensus",2 current development orthodoxy places the pursuit of greater efficiency, an enhanced role for markets, and integration into the global economy at the center of efforts to secure economic growth. It rests on the view that the benefits of liberal trade and open markets are beyond dispute, and that alternatives to market-driven growth and participation in the global economy no longer represent viable routes to development. According to this view, the state's role in promoting growth has been conclusively trumped by that of the market. Indeed, the state must now be cabined and controlled if it is not to subvert the project of economic growth. The new commitments to market ordering, global economic integration and minimizing the role of the state have generated a profound and important

2

John Williamson, "What Washington Means by Policy Reform", John Williamson, ed, Latin American Adjustment: How Much Has Happened (Washington: Institute for International Economics, 1990), 5.

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Introduction transformation in the manner in which economic development is imagined. Development is no longer simply a matter of particular economic objectives, such as combating poverty or ensuring adequate infrastructure investment. Instead, the successful pursuit of economic development is now explicitly conceived as a matter of law, institutions and "good governance". A wide range of state practices, rules and institutions have come under the gaze of financial and development institutions and are now implicated in the success or failure of development. Comprehensive reforms to economic policies and state institutions are routinely prescribed to ensure growth. Indeed, it seems safe to say that the management of the economy has become the focal point of development policy, as the fate of development is increasingly attributed to the characteristics of domestic institutions, rules and practices.3 In this recasting of the development dilemma, development institutions have focused their efforts on articulating and normalizing a set of legal rules and institutions, a particular set of state practices, and a distinct culture concerning the responsibilities of different actors and institutions within market societies. Indeed, the entire enterprise of development has been legalized, and many of the central activities of the international institutions should be understood as law reform projects. There is a new importance placed on the relationship between the state and the market and the appropriate allocation of functions between them. Proper economic governance turns out to be proximity to an idealized set of practices and institutions that are thought to further efficiency, facilitate investments and ease transactions. These model rules and institutions derived from the "normal" markets of the industrialized world provide a template with which to design markets that will generate improved economic growth in a range of different contexts.4 Law and institutions have not always been central to the development efforts of the international financial institutions. It is only since the 1990s that the absence of adequate legal and regulatory institutions has been systematically identified as a barrier to the achievement of development targets. Transition 3

A classic example would be the attribution of failed growth to corruption on the part of ruling elites, particularly in Sub-Saharan Africa. See World Bank, World Development Report 1997: The State in a Changing World (New York: Oxford University Press, 1997). 4 James D. Wolfensohn, A Proposal for a Comprehensive Development Framework (A Discussion Draft) (Washington, D.C.: World Bank, 1999).

3

Kerry Rittich was one of the contexts in which this first occurred.5 Although the original view appeared to be that markets would spring up as if from nature once impediments to their operation were removed, it soon became clear the transition also involved the self-conscious construction of the infrastructure of market economies. The result was an intense focus on law and institutions; what emerged from the process was a greatly consolidated theory of governance and the role of the state in market societies. As a result, the successful pursuit of development is increasingly represented as a question of finding and adopting appropriate legal rules and regulations and legal institutions. Development literature is now replete with claims about the role of law and the place of the state in market societies. States are continually exhorted to respect the rule of law, as investment and hence growth can only be expected in law-based societies that protect private rights, resist special interests, and prevent the arbitrary interference of the state in the economy. The Bank's policy proposals emphasize the importance of a stable institutional environment for business and investment, "good laws", and the withdrawal of the state from administrative control.6 The presence of canonical legal rights such as property and contract rights is said to define the very existence of market societies. A multitude of law reform and legal education projects is now funded by the Bank. However, the discourse about law in development policy ranges far beyond the need to promote law-based market societies. There are myriad claims about the effects of particular legal rules and their compatibility with markets embedded in the discussions about market reform. A wide range of laws is evaluated in terms of their contribution to growth or their capacity to impair it. In the shift toward development as good governance, claims about law have taken on heightened significance, so much so that development in general can be usefully approached through the optic of legal analysis. In light of this

5

Joseph Stiglitz, "Whither Reform? Ten Years of Transition", World Bank, Keynote Address, Annual Bank Conference on Development Economics, Washington, D.C., April 2830, 1999. http: / / nmv.worldbank.org/research a/ abcde/wasbington_11/pdfs / stiglitz.pdf (last visited 11/08/2001). 6 See World Bank, From Plan to Market, supra note 1, at 87.

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Introduction turn, this study seeks to investigate how legal and institutional reforms function as vehicles for the management and legitimation of development. It is motivated by the intuition that, as law is now among the principal mechanisms of contemporary development and market reform efforts, legal analysis might be central to understanding its effects. The study engages in a number of linked tasks. First, it attempts to make explicit the image of law and the relationship between the state and economic activity that prevails among the international institutions. Second, it traces the manner in which abstract principles and commitments to concepts such as the rule of law, markets, freedom and private property become translated into prescriptions for specific legal rules, institutional arrangements and state and enterprise policies in the context of transition. Third, it attempts to discern the distributive dimension of these reform efforts, as well as the role of legal discourse in normalizing such effects. One of the collateral effects of the turn toward law is a new normalization and a new internationalization of development. Market reform and development have become internationalized in the following senses. First, conscious efforts to engage in market reform to spur economic growth are now ubiquitous across the so-called developed and developing worlds. Second, such efforts are increasingly transnational in their aspirations. Not only are market reforms to be found everywhere, they are designed to enable greater economic activity across jurisdictional boundaries and to render those boundaries less significant. Third, there is now what approaches a universal template for market reform and development. Rather than a series of discrete initiatives and projects tailored to the needs of particular states in specific contexts, market reform projects have increasingly taken the form of common or general prescriptions. Moreover, key decisions on the structure and pacing of reforms are influenced or determined by decision-makers outside national borders who will themselves typically not experience the effects of their recommendations. Finally, economic development has become increasingly the province of the international institutions. While reforms must still be implemented largely at the national level, the international economic institutions are among the principal proponents of neoliberal reforms. The International Monetary Fund and the World Bank in particular have played an important role in the development and legitimation of this market model. At the same time, market reform has given these institutions new visibility and heightened importance in the international 5

Kerry Rittich order. Developing the architecture for global economic integration and diffusing this vision of optimal market ordering have become central to their activities, while engagement in such projects has vastly extended the scope of their concerns. No longer obscure agencies and institutions of concern only to specialists and particular departments and ministries in developing countries, they are increasingly central players in the debates around global economic transformation. A reconceptualization of the role of the state in development is fundamental to this vision. Market reformers have actively promoted the view that the principal choice is between the market and the state as an instrument of development; furthermore, it is a battle that has now been won by the market. The role of the state has long been present, central to debates over development via liberalized trade versus development through import substitution, as well as to discussions about the possibilities of industrial policy. However, the collapse of the plan economies seemed to decisively shift the balance in favor of the market, at the same time leaving neoliberalism as the residual intellectual claimant in economic and development policy debates.7 The result is that the discussion has largely been organized around the merits of markets as contrasted to the defects of the state. In the wake of the mounting evidence of the problems caused by inadequate regulatory infrastructure, market reformers are increasingly likely to concede a role for the state.8 Yet because the state/market polarity is fundamental rather than marginal to neoliberal claims about the institutional requirements of market societies, there are deep challenges and perils to the neoliberal project in acknowledging a central role for the state. As a result, the central struggles of neoliberalism - the relationship of the state and the market and the role of politics in development - are displaced to the field of law, to be played out in debates over the proper role of law in a market society and the demands, limits and logic of regulation.

7 Ute Pieper and Lance Taylor, "The Revival of the Liberal Creed: the IMF, the World Bank, and inequality in a globalized economy", Dean Baker, et al, Globalization and Progressive Economic Policy (Cambridge, U.K.: Cambridge University Press, 1998). 8

For a discussion, see Joseph Stiglitz, "More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus", WIDER Annual Lectures 2, Helsinki, January 7, 1998 http://mm.wider.uuu.edu/ (last visited 11/08/2001).

6

Introduction Ideas about law and regulation consequently play a number of important roles. Throughout neoliberal discourse, a series of operative distinctions is invoked which is intended to provide the conceptual scaffolding to reforms as well as a mechanism by which the market can be distinguished from the state. Among the most important are the distinctions between public and private spheres of activity, regulation and non-regulation of the market, and intervention and non-intervention in economic affairs on the part of the state. These distinctions also provide a mode of determining good policy from bad, as the first refers to what is to be contained, discouraged or avoided, while the second of each pair is associated with a desirable state of affairs. Law also emerges as one of the fields in which the border between economics and politics is established, a matter of constant tension in neoliberal policy given the pervasiveness of reforms. Claims about law turn out to be central to managing this boundary, as distinctions between rights and regulation are some of the key ways in which neoliberal policies and institutional structures are defended yet politics is held in abeyance. For example, in neoliberal discourse, the rule of law and the protection of rights are positioned on the side of economics and efficiency, while many forms of regulation are characterized as political. Market design itself is approached as an exercise in comparative law, and the dominance and desirability of particular rules and institutions are explained through their functional superiority in generating economic growth. For a variety of reasons, the transition from plan to market has proved to be a particularly fruitful and illuminating context in which to examine the emerging role of law in global market reform and development projects. It provided an opportunity, which was unprecedented and is unlikely to be repeated, that was seized upon by market reformers to advance a general theory about the optimal structure of a market society in a globalized economy. As market societies had to be built as it were "from the ground up", transition provided the context for an explicit debate about the nature of normal markets. In addition, it provoked unusually radical and thoroughgoing proposals for institutional reform and an unprecedented effort to specify the economic and regulatory structure of a market economy. Indeed, it was an article of faith among market reformers that virtually all traces of pre-existing practices and institutions had to be eliminated in order for a successful transition to the market to be achieved. The project of wholesale regulatory and institutional 7

Kerry Rittich reform also provided the point of entry for far-reaching interventions by external experts and international institutions. The institutional dilemmas they encountered and the decisions they reached about how to respond to them in turn generated a significant amount of theorization about development and market economies in general. Thus, transition provided both the occasion and the terrain not simply to apply market principles but to articulate, contest and construct the attributes, structure and character of the "normal" market society and the appropriate roles and powers of the actors and institutions within it. Coming as it did in the wake of the abandonment of alternative economic strategies, the debate over transition also occurred in a political and ideological context that was highly receptive to arguments about the merits of markets. For these reasons, an analysis of the rationale and logic of transition helps explain not only the debates in those economies but many of the arguments surrounding ongoing policy and regulatory controversies in established market economies as well. A number of events have served to place distributive concerns at the forefront of debates over development. Development efforts, market reforms and global integration all provoke increasing anxiety, an important source of which is the evidence that the implementation of economic reforms often results in considerable social pain and dislocation. Among the results, at least in the short term, are greater poverty and rising inequality. Often the costs of greater efficiency and fiscal discipline appear to be disproportionately visited on groups that are already disadvantaged. In both developed and industrialized states there are marked disparities in the benefits and rewards of neoliberal reforms. Moreover, it now seems evident that economic growth is not necessarily co-extensive with greater human welfare. Attempts to induce greater economic growth through restructuring, even if they produce material progress for society in the aggregate, are not experienced as a single, homogeneous event nor do their benefits accrue evenly to different sectors of the population. Rather, they tend to produce different, often dramatically different, effects on different groups, gains and losses which cannot simply be described as transitional phenomena but appear to be structural features of the transformed economies. Transition is also an illuminating context in which to examine these phenomena, as the process has been marked by pronounced declines in social welfare and dramatic increases in poverty and inequality. Even on the most 8

Introduction generous reading, transition cannot be characterized as an unqualified success, and the associated human costs have been immense. The experience of economic restructuring in Central and Eastern Europe and the Commonwealth of Independent States (CIS) has been marked by high unemployment, sharp rises in prices and often even sharper declines in real wages. All of the states in the region experienced dramatic declines in productive output.9 Per capita incomes in the region as a whole have fallen on average by a third from their peaks in the mid-80s.10 By 1996, the region's average GDP had declined to about $2000, a decline of about $1000 from levels of about $3000 in 1989. While growth has resumed in most countries, in many states the losses suffered during transition have not yet been recouped.11 The decline in production has been accompanied by a sharp increase in poverty. While the number of people living on less than $4 per day was about 14 million out of a population of 360 million in the region in 1989, estimates are that more than 140 million people now live below the poverty line,12 a startling and disturbing increase by any measure. Income inequality, formerly quite low by world standards, is also markedly higher.13 The average Gini coefficient in the region has risen from 24 to 33, placing the region on par with the high income inequality OECD countries; in some countries, inequality is even higher. Moreover, the increase in the Gini coefficient was itself very rapid; over a period of only 6 years, it rose by 9 points.14 In short, high and growing inequality seems to be a well-entrenched feature of the region in its post-communist state.

9

World Bank, From Plan to Market, supra note 1, at 173.

10

United Nations Development Programme, Human Development Report 1996 (New York: Oxford University Press, 1996), 2. 11

A. Amsden, J. Kochanowicz and L Taylor, The Market Meets its Match: Restructuring the Economies of Eastern Europe (Cambridge, MA: Harvard University Press, 1994); L. Sklair, Sociology of the Global System, 2d. ed., (Baltimore: Johns Hopkins, 1995); UNDP, Human Development Report 1996, supra note 10; Branko Milanovic, Income, Inequality, and Poverty during the Transition from Planned to Market Economy (Washington, D.C.: World Bank, 1998). 12

Milanovic, Income, Inequality, and Poverty during the Transition, supra note 11.

13

Id. See also World Bank, From Plan to Market, supra note 1, at 67-70; UNDP, Human Development Report 1996, supra note 10. 14

Milanovic, Income, Inequality, and Poverty during the Transition, supra note 11, at 40.

9

Kerry Rittich All of these changes have been accompanied by dramatic declines in health and mortality indicators, especially in Eastern Europe and the former CIS.15 Apart from declines in human welfare which they indicate, they suggest significant peril to productivity and hence to resumed growth.16 Yet despite the evidence of "winners" and "losers" in the restructuring process,17 as well as a history of declines in social indicators following the introduction of neoliberal policies in other contexts at earlier moments,18 there has been relatively little attention on the part of the proponents of neoliberal restructuring as to why this should be so. How such people were situated in the old economy, how they might be positioned in the new, and the degree to which disproportionate disadvantage to particular groups might be not only foreseeable but actually produced by restructuring itself has been a subject of much less analysis. Instead, hardships are typically characterized as inevitable but temporary, the "natural" effects of submitting to the discipline of the market, the costs of past errors and the necessary price that must be paid for long-term economic health in the future.

UNICEF, Central and Eastern Europe in Transition: Public Policy and Soda/ Conditions, Regional Monitoring Report no. 1 (Florence, Italy: UNICEF International Child Development Centre, 1993); UNICEF, Central and Eastern Europe in transition: Crisis in Mortality, Health and Nutrition, Regional Monitoring Report no. 2 (Florence, Italy: UNICEF International Child Development Centre, 1994); UNICEF, Children at Risk in Central and Eastern Europe: Perils and Promises, Regional Monitoring Report no. 4 (Florence, Italy: UNICEF International Child Development Centre, 1997). 16 A number of analysts suggest that many of these consequences, particularly high unemployment and the fall in real wages, were quite foreseeable and can be attributed to restructuring strategies such as the failure to protect and restructure even the most promising and productive industrial sectors prior to privatization and the dismantling of existing markets and trade networks. See P. Gowan, "Neo-liberal theory and Practice for Eastern Europe", 213 New Left Review (1995); A. Amsden, et al, The Market Meets its Match, supra note 11; UNICEF, Public Policy and Social Conditions, supra note 15. 17

See for example E. Brainerd, "Winners and Losers in Russia's Economic Transition", Harvard University, Department of Economics, 1996, paper on file with the author; Peter F. Orazem and Milan Vodopivec, "Winners and Losers in Transition: Returns to Education, experience, and Gender in Slovenia", Working Paper, World Bank, Policy Research Department, Transition Economics Division, August 1994; Bertram Silverman and Murray Yanowitch, New Rich, New Poor, New Russia: Winners and Losers on the Russian Road to Capitalism (Armonk, N.Y.: Sharpe, 1997). 18

G. Cornia, R. Jolly and F. Stewart, eds., Adjustment with a Human Face (Oxford [Oxfordshire]: Clarendon Press, 1987).

10

Introduction Equality and distributive concerns have held a distinctly subordinated place in the neoliberal world. Indeed, there is a powerful strand of thinking within the development institutions holding that inequality is necessary to economic growth.19 Whatever the status of the debate at the theoretical level, until recently market reformers have done little to allay concerns that policies and regulations promoted in the name of growth and efficiency might adversely affect or significantly undermine the pursuit of objectives such as equality or social solidarity. Instead, they have largely pre-empted debate over the wisdom of market centered reforms, neutralizing concerns with mantra-like assurances that the rising tide of economic growth will lift all boats, claims that conformity to the demands of the market is now the sine qua non to all other goals, and prophecies that the alternatives are either worse or unavailable. Arguments about the automatic benefits of neoliberal reforms are increasingly less persuasive, in part due to stalled reform and restructuring efforts in Eastern Europe and the CIS20 and disastrous results following classic neoliberal interventions in Asia during the financial crisis.21 However, it remains difficult to integrate the concerns over inequality into discussions about economic growth. There remain large chasms at both the conceptual and institutional levels in comprehending the links between market-centred policies and differential outcomes for particular groups. This analysis attempts to explore and evaluate the assumptions that permit the ongoing bifurcation of efficiency and distributive concerns. It suggests that the difficulty in integrating equality into the analysis and discussion of market reforms, and the displacement of the distributive that results, is not accidental. Instead, it is part of the structure of neoliberal reforms, something that can be traced to its most basic features and commitments. Part of the problem can be located in the separation of the economic and the political dimensions of reform, and a division of labor which places equality and justice issues beyond the concerns of economists in the domain of the social, cultural or political. Within the Bank, restructuring is characterized as an 19 G. Cornia, "Liberalization, Globalization and Income Distribution", United Nations University, World Institute for Development Economics Research, Working Paper no. 157, (March 1999), available at. www.wider.unu.eduI'publications'/'tvp157.pdf. 20 Stiglitz, "Whither Reform?", supra note 5. 21 Stiglitz, "More Instruments and Broader Goals", supra note 8.

11

Kerry Rittich economic project that is focused simply on the objectives of increasing efficiency and maximizing growth, one that, for reasons of institutional competence and legitimacy,22 leaves the political priorities and sovereignty of nation states untouched. To this end, institutional and policy reforms are routinely described and defended as simply intrinsic to promoting economic growth. Distributive concerns, on the other hand, are regarded as the province of politics. While questions about market design and efficiency are figured as technical or management concerns to be resolved with professional expertise, distributive concerns are relegated to the legislature and treated as second order issues to be dealt with after the path of economic growth has been secured. This division has served both to absolve economists of responsibility for distributive concerns, and to obscure the intimate connection between the pursuit of efficiency and the generation of distributive outcomes through basic decisions about market design. However, whether the drive for efficiency and the resulting distributive outcomes can be so separated is deeply contested. It is part of this project to demonstrate, through attention to the properties of neoliberal policies in the context of transition and analysis of the assumptions underlying neoliberal development ideology in general, how and why it has become untenable to imagine and unwise to treat efficiency and distribution as discrete issues. This analysis will argue that no separation of the economic and the political is possible. Rather, the transformation in legal and institutional forms that is envisioned in the states in transition has profound distributive implications, in effect if not by design. However, the result is not simply the displacement but also the demotion of equality vis-a-vis efficiency, as the separation of efficiency and equality has diverted attention from the distributive effects of the policies and mechanisms through which reform and restructuring are accomplished. What is most obscured through this division are the explicit political and distributional tradeoffs that are routinely involved in designing markets, as well as the alternative rules that might be available. A central goal of transition is to construct a zone of economic activity that is insulated from "political" considerations. Good economic policy, in the view 22

The articles of the World Bank Charter prohibit interference in the political affairs of any member. International Bank for Reconstruction and Development, Articles of Agreement, as am. February 16, 1989, Article IV, Section 10 http:/ / ww.worldbank.org/html/extdr/ backgrd/ibrdlart4.htm#I11 (last visited 11/08/2001).

12

Introduction of neoliberals, requires that states desist from engaging in broad-based redistributive projects that require extensive taxation and contributions from those who are economically productive. Rather, to avoid subverting the project of economic growth, states should provide enterprises with an environment largely free of regulatory impediments and other policies that impair the flexible and efficient deployment of resources. This analysis argues against the understanding that policy and regulatory choices driven by such beliefs result in neutral market institutions of uncontroversial economic benefit. Rather, the desire to insulate market rules and institutions from competing social and political demands results in markets that are replete with submerged political and distributional choices. While the legitimacy of promoting neoliberal policies as the universal route to development rests implicitly on the premise that no contentious political or distributional decisions are involved in doing so, such policies in fact rest on contestable norms and assumptions about the proper organization of social and economic life. In large part, this is because the rules and policies which structure the market function to allocate resources and income among the different parties involved. For this reason, considerations of relative advantage for some groups and disadvantage and disparate impact for others are embedded in the heart of the neoliberal project. While this does not, in itself, discredit the pursuit of neoliberal policies, it does suggest that the claim that we all stand to benefit from the commitment to global economic integration organized along the proposed regulatory and institutional lines is an argument to be interrogated, rather than a fact that can be simply asserted. As the analysis will describe, the legal rules and institutions which are the vehicle of market design and reform themselves not only further particular conceptions of efficiency but also entail distributive choices. Despite the attempt to preserve a boundary between economic and political matters, restructuring inevitably trenches on matters of social ordering and values, and engages questions of distribution and equity along with efficiency and growth. Thus, even if overt consideration of distribution and inequality are left to one side, restructuring is of necessity also a political project. Important aspects of the relationship between market reform and issues of equity and distribution can be usefully explored by looking at restructuring

13

Kerry Rittich explicitly as a legal reform project. Market reform occurs through a transformation in the legal structure in which economic activity takes place, through a series of quite specific institutional, rule and policy choices. By altering the existing configuration of rights and entitlements, reform and restructuring will reconfigure the allocation of resources and power among different groups, and create a changed set of conditions and incentives structuring economic activity. This transformation in turn can be expected to affect the resulting distribution of income along a number of axes, and reform is likely to have a differential impact upon particular social groups, classes, productive sectors or types of relationship. While this process may play out in a variety of ways, some of which are systemic and others quite localized, the thesis at its most general level is that the production of a particular configuration of advantages and disadvantages for different groups and individuals is internal and intrinsic to the process of restructuring. Rather than an external, accidental or contingent outcome, redistribution can be thought of as a necessary and inevitable consequence of changing the regulatory structure that governs economic activity. Neoliberals argue that reforms must be organized around the protection of private rights. They propose that in order to spur economic growth, states should recognize property and contract rights and adopt a canonical list of laws that enhance efficiency. The result, it is claimed, is a set of neutral rules that provides a level playing field in which the free market can best operate. States must be vigilant, however, not to intervene in the market and adopt other rules and regulations which are likely to impede growth. In the neoliberal account, good and bad laws can be evaluated in terms of their economic effects and are either justified or not in terms of their propensity to promote efficient economic transactions. These propositions rest on assumptions about law's neutrality and determinacy. They depend on distinctions such as the difference between protecting private rights and intervening in the market. They are justified by claims that such legal rights entail no controversial political or normative choices, indeed that they are distinct from politics. They reflect the view that market rules are both settled in their content and certain in their effects. Finally, they are focused primarily on the efficiency effects of rules.

14

Introduction However, this set of claims is highly contested. The controversial nature of neoliberal arguments can be illustrated by contrasting the legal claims contained in the policies of the international financial institutions with the analysis of market rules in the realist and post-realist tradition in American legal scholarship. Closely related analyses can be found within heterodox economic scholarship as well. There is a long history of work in American legal thought, beginning with the realists and continuing throughout the twentieth century in the work of various critical scholars, much of which is devoted to the relationship between legal rules and the exercise of economic power in the market place. This analysis both relies upon and extends these insights in order to analyze distinctions such as productive versus non-productive activities and expenditures and subsidized versus non-subsidized labor and services that are key to reforms and also central to the emerging disadvantage of women in the new market regimes. Realist and post-realist scholarship provides an unparalleled framework in which to critically examine the concept of law upon which neoliberal reforms are based for two reasons. First, it makes clear the connection between different configurations of rules and the allocation of resources and power among different groups. Thus, it allows an appreciation of the role of law in constituting social and economic relations, rather than in merely 'regulating' them. Second, it provides a way to explore and to deconstruct the arguments advanced to justify and naturalize reforms. Central to much realist and post-realist scholarship is an analysis of the concepts which structure the analysis of legal rights. These include: public versus private, intervention versus non-intervention, coercion versus freedom and rights versus regulation. As post-realist scholarship demonstrates, these constructs do not provide a coherent way of organizing or distinguishing among legal rules. Nor does a preference for one half of the binary over the other indicate which legal rule to promote in a given context. As constructs, they function not as opposites, but as polarities that on examination often collapse into each other. These concepts provide the terrain upon which battles over particular interests and values are fought. However, their use to justify and explain legal rules also serves to obscure the manner in which legal rule-making involves choices among competing interests and values and decisions over the structure of social power.

15

Kerry Rittich

Many of these same distinctions also organize current development and market reform discourse and are deployed by reformers to justify particular rule and policy proposals. Yet they also block inquiry into those reforms and normalize and naturalize their effects. Post-realist analysis opens up what is occluded by the neoliberal paradigm, which is that the turn to the market does not represent merely the promotion of the market over the state, but the promotion of a particular kind of market. Slogans such as the "rule of law" and the "protection of rights" turn out only to be starting point of the real debate, which is what forms of rights to recognize and for whom. Although the legal entitlements that form the bedrock of market reforms are proffered as a neutral baseline for economic activity, post-realist analysis provides important clues as to why this neutral baseline does not, indeed cannot, exist. Thus, it demonstrates the ways in which legal regulation is of deep significance for the issue of distribution. Counter to many neoliberal claims, legal rules and regulations, rather than mere enabling devices which facilitate economic transactions and structure incentives, delegate power to private actors in the market and function to allocate resources to various parties in market transactions. Because they help determine the resulting distribution of wealth and income, the enormous questions of distribution and equity that economic restructuring raises are directly linked to the regulatory framework in which economic activity takes place. This suggests why anyone concerned with the equity of neoliberal reforms needs to become engaged at the level of market design and structure, rather than merely immersed in the politics of redistribution after the fact. A realist and post-realist analysis of the operation of legal rules and the choices available under market regimes suggests that, ultimately, many of the arguments advanced by market reformers do not provide uncontroversial support for the specific legal or institutional reforms that they characteristically promote. What is missing from neoliberal legal discourse is a frank acknowledgement that markets are constructed through a series of choices regarding institutions and rules, and that many different choices can be housed within market regimes. Nor is the state a minor player in market societies. Rather, market design is a process in which the state is heavily implicated, something which is particularly evident in the context of transition. Because the choices concerning the rules that govern market transactions affect groups differently, the state, as well 16

Introduction

as those international institutions with leverage over state actions, are necessarily engaged in a process of constructing economic power and allocating resources among economic actors. This seriously compromises the effort to establish the distinction between public and private power; it also erodes any meaningful distinction between intervention and non-intervention in the economy on the part of the state. Perhaps most important is that this framework provides a means of bringing the properties of the "normal" market into view. From this vantage point, rather than merely an uncontroversial part of the foundation of markets, it is apparent that the rule choices involved in constructing such markets entail fundamental decisions about the promotion of different values and the resources and power to be allocated to different groups. Post-realist analysis thus provides a framework within which to assess the shifts and dislocations that attend development and market reform. If market rules do not operate in a neutral way with respect to different parties, then it might be important to trace how resources might be reallocated in the course of market reforms when new rules are implemented or existing ones modified. If they are not certain or determinate in their effects, then we should expect the effects of market reforms to be quite varied rather than uniform across different contexts. It is clear that law does more in this economic reform program than merely provide the background structure for market transactions. Law performs an intensely political function, justifying the economic reform project as a whole. Claims about law and the protection of private rights are pivotal both to the appeal of the reform proposals, particularly in the context of transition, and to the legitimacy and the universal applicability of the neoliberal economic paradigm. Where, as in reform projects, freedom and democracy are linked to the presence of markets,23 the invocation of the rule of law and the deployment of the language of rights helps cement the connection. At the same time, the operation also works in reverse: neoliberal policies and institutional proposals then become embedded in dominant ideas about the rule of law simplititer,

23

See for example, Janos Kornai, "What the Change of System From Socialism to Capitalism Does and Does Not Mean", 14:1 Journal of Economic Perspectives 27 (2000).

17

Kerry Rittich associated with the legal requirements of a market economy and thereby strengthened and normalized. This analysis provides the backdrop to explain a quite concrete issue, the production of disadvantage for women through neoliberal reforms in the context of transition. The second part of the book analyzes in a more detailed way the distributive consequences of reforms, focusing on the likely effects of proposals to change the role of the enterprise and the state in distributing resources and the ensuring the provision of goods and services. The discussion centers around the proposals that seem most salient to the group that is the subject of this distributive analysis, women with obligations of care to others who find themselves now largely reliant on the market to secure their fortunes. By looking at the reform model, the policies that are advanced in its name and the justifications that underpin them, the hope is to unveil the way that disadvantageous outcomes for women, unless compensated for in some way, can plausibly and predictably be attributed to it. The ideal neoliberal market is structured in a way that allocates significant resources and power to investors, entrepreneurs and other capital holders, while other parties, workers and consumers among them, enjoy considerably fewer rights and benefits. As a result, enterprises are permitted to externalize certain productive costs that they might otherwise absorb. Among the most visible of these costs in the context of transition, and indeed in global economic integration in general, are those connected to the support and maintenance of the labor force. The neoliberal model shifts more of the costs of productive activity, including human capital costs, to other parties, namely the state, communities, or households and individuals. In addition, neoliberal restructuring seeks to limit or eliminate many of the redistributive functions that states have characteristically performed or might potentially perform. For a variety of reasons, the burden of such strategies tends to fall disproportionately on women, not least because they increase the degree of unpaid work and reliance on the "reproductive" or non-market sphere.24 In consequence, the market society promoted as the norm to which states should aspire in the interests of economic development is rife with potential disadvantage for women.

24

This is discussed in the United Nations Development Programme, Human Development Report 1999 (New York: Oxford University Press, 1999).

18

Introduction All economies, both plan and market, rely exclusively on the unpaid work of women. However, transition is a particularly illuminating context in which to observe this reliance, because it provides an opportunity to observe the way that the burdens of unpaid work can be both ameliorated and increased through policy and regulatory decisions. However the intent is not merely to tell a story about how women have been neglected or exploited, although that is certainly a conclusion some might draw. Nor is it addressed solely to those interested in the status of women, although how the effects of reform and restructuring could be evaluated to the exclusion of their effects on women seems mysterious in the extreme. Nor is it to advance the position that markets are "bad" for women, while the state is "good". As the legal analysis in the first part suggests, reliance upon the statemarket dichotomy creates a discursive and analytic impasse that tends to obscure rather than illuminate the effects of specific reforms. Instead, the general aim is to begin to explore in a more structured way the connections between dominant economic development strategies, the specific political and institutional choices to which they are connected, and distributive outcomes. The objectives are to examine how the proposed economic changes might operate to advantage or disadvantage women, given the pre-existing structures of resources and entitlements, and to foresee how these policies might intersect with other pre-existing or relatively continuous social and cultural formations. The hope is to imagine ways of fusing and infusing the debates on the status of women and inequality with those on the subject of economic transformation, discussions that too often go on in discontinuous spheres and in different languages. Much of the systematic disadvantage to women arises from the way that different productive activities, both paid and unpaid, are organized and because of the ways that women are characteristically located within the productive and reproductive spheres. Of all of the transformations, one that poses perhaps the greatest threat to women is the collapse of arrangements enabling the performance of labor market work and childcare duties by the same person. Whether such arrangements were formally available to both parents or restricted to the mother, as is common in industrialized economies, they were almost invariably taken by women. This disadvantage is then exacerbated by "efficiency-enhancing" strategies that intensify the degree of self-reliance required of individuals and house19

Kerry Rittich holds and tend to increase the amount of unpaid labor, and often the paid labor, of women. Such gendered outcomes are a common feature of neoliberal reforms, as numerous feminist policy analysts have noted.25 However, in the process of transition, they are also exacerbated by a transformed legal and institutional environment that re-allocates resources and entitlements, effectively reducing the amount of cross-subsidization for reproductive labor. The analysis does not rest on any assumption that obligations of care are simply natural. Nor does it presuppose that they are inherently gendered or feminine, or that all women do, should or will continue to perform unpaid labor. Rather, the argument is that the spheres of production and reproduction are constructed, malleable and amenable to change. Furthermore, they may be deeply influenced by policy decisions, legal entitlements and regulatory structures, and can be directly and substantially altered by changes to the regulatory environment in which economic activity takes place, whether through the policy, legislative or adjudicative process. As a result, law plays an important role in the process of gendering economic activity, and in the distribution of benefits and burdens that results. Reforms will inevitably bear more heavily on some groups of women than others; moreover, men might be subject to at least some of the disadvantages that the women experience were they to have similar obligations or engage in similar activities. However, obligations of care and the performance of unpaid work remain so strongly gendered in the economies in transition, as they do in all others, that how they are managed and organized is an important signal of the relative advantage and disadvantage of women under different institutional regimes. Focusing on the position of women and non-market obligations of care is, in addition, a particularly efficient way to get at some important distributive aspects of current strategies of market reform. For it allows an exploration of two often neglected aspects of the phenomenon: first, the relationship between markets and other social institutions such as the family; and second, the inter25 See for example Isabella Bakker, "Introduction: Engendering Macro-economic Policy Reform in the Era of Global Restructuring and Adjustment", I. Bakker, ed., The Strategic Silence: Gender and Economic Polity (London: Zed Books in association with the North-South Institute, 1994).

20

Introduction dependence between so called "productive" activity in the market and uncompensated, "reproductive" or "non-productive" forms of labor outside it. The articulation of unpaid labor and the "productive economy" tends to have widespread ramifications for women, including women's labor market prospects. While such an exploration is useful in many contexts, it is particularly important in the context of neoliberal reforms. Given the centrality of efficiency-enhancement through such strategies as privatization and "deregulation", important aspects of the redistribution that occurs in the process simply cannot be explained without looking at the general impact of reforms outside the market and considering who performs unpaid work. Focusing on women in the context of the transition to markets modelled along neoliberal ideals thus allows an angle on two key aspects of the emerging labor market picture: 1) the distributive properties of particular market rules and institutions and 2) the disadvantage which arises from the performance of unpaid work instead of, or in addition to, work in the market. The proposals which have been advanced to effect the transition from the plan to the market economy also provide a concrete illustration of the shifting, malleable nature of the boundaries between the market and other social space. Even though they are designed to separate the provision of social services from the domain of production, the state from the market, and the public from the private sphere, neoliberal policies serve to demonstrate something quite different. Instead, they illustrate the dependence of market-based economic activity on activities and inputs provided by other institutions such as the family, the imbrication of the market in the state, and the varied ways in which market and non-market productive activities are inter-connected. The ineluctable contingency, variability, fragility, porousness and flexibility of all of these boundaries becomes highly visible in the context of transition, paradoxically through the very efforts to solidify and stabilize them. These shifting boundaries also disclose myriad possibilities for organizing productive spaces and activities in different ways. Finally, because individuals and groups are not simply randomly positioned in the different domains of production, the public and the private spheres, and the state and the market, debate about the location and nature of these boundaries often functions as a proxy for debate on other social and political questions. Tracing the likely effects of these policy shifts thus helps

21

Kerry Rittich establish the connection between large questions of market design and the fortunes of particular groups. This book is in two parts. The first part is devoted to an analysis of market reform and restructuring in the context of transition, the image and concept of law that informs it, and the distributional decisions that are implicit in these legal reforms yet masked in the project as a whole. The second part is a distributional analysis of some of those reforms in terms of their foreseeable impact on women. However, it is actually the subject matter of the second part - the reports of gender disparities in the context of transition and the desire to trace how they might be structurally linked to reforms - that came first and motivated the analysis of neoliberal legalism as a general project. The subject matter of the first part is deeply informed by the issues explored in detail the second. If it reads as an analysis "in the air", a theoretical inquiry rather than one rooted in a concrete set of political and economic shifts, it may be useful to keep those issues and concerns in mind. However, at the end of the day, it seemed important to have an inquiry into the general ideas which animated the reform project as a whole from the outset. Moreover, it has become more and more evident that the set of ideas and policy prescriptions that were articulated in the context of transition and that form the subject matter of the distributional analysis were not isolated events. Instead, they have recurred in other contexts, coalescing into something that approaches a general theory of law and institutional reform in development. It has also become clear that the very enterprise of promoting thoroughgoing market reforms such as occurred during transition has had a transformative effect on the international institutions themselves. The structure of the analysis is as follows. Part I traces the legal and political underpinnings of the restructuring model, both as a way of unearthing some of the analytic assumptions in neoliberal thought and as a way of understanding how economic and political ideals become connected to specific positions on law and regulation. Chapter 1 outlines the basic neoliberal program for market reform and key programmatic and policy recommendations for the states in transition. Chapter 2 attempts to identify the ideas about legal regulation and the state, including the role of property and "best practice", that organize neoliberal thought. Chapter 3 draws out some of the submerged antecedents and influences in neoliberal policy rationales. First, it considers the writings of Hayek and Roepke, two libertarian theorists to whom the neoliberal position on market 22

Introduction regulation seems deeply indebted. Second, it examines public choice theory and the interest-based, economic analysis of the state on which it rests. Both sources shed light on the alternating yet interconnected political and economic rationales in the discourse of market reform, and suggest how different normative and ideological elements of the neoliberal agenda might operate to support each other. Chapter 4 draws on post-realist analysis in American legal thought in order to tell a counter-narrative about the role of law in economic reform. Focusing on the coercive and distributive properties of legal rules, it illustrates how and why a reallocation of resources and power and alterations to the distribution of income and wealth should be expected to occur in the course of the institutional reform of economic restructuring. The second part of the chapter describes the realist insights about the distributive effects of legal rules that are replicated and supported in the work of institutional economists. Chapter 5 attempts to recharacteriaaze neoliberal restructuring in light of this analysis. Part II explores the distributive impact of some of the key transition reforms for women and the concept of gender equality that inform such proposals. Chapter 6 identifies a number of policies and strategies for transition that are particularly relevant to women. These include: enterprise disinvestment in reproductive services, the elimination of mandated benefits and income support, and the removal of consumer subsidies and cross-subsidies for reproductive work. It then explores the interconnection between the productive and reproductive economies, an aspect of economic organization that is almost totally neglected in the Bank's restructuring plan. The analysis then considers the likely distributional effects of the restructuring plan for women, given such factors as the performance of unpaid work by women and intra-household disparities in decision-making and resource allocation. It then briefly reviews the implications of income policies such as wage control in exacerbating the negative effects of restructuring for both women and workers in general. Moving both backward and outward from these quite concrete policy discussions, chapter 7 considers the concepts of gender equality that can be discerned in the Bank's gender research and its reforms policies, focusing in particular on the contradictory ideological and programmatic positions that the simultaneous pursuit of gender equality and market-centered development entails. Chapter 8 considers the effects of the displacement of equality by a concern for poverty in the neoliberal approach to redistribution and social welfare. The conclusion 23

Kerry Rittich ventures some comments about the points of tension in neoliberal theory and practice and the possibilities for future shifts in development orthodoxy. The eventual outcome of economic restructuring in the states in transition remains unclear. Indeed, even the term transition is problematic, as it suggests passage from one fixed and predetermined state to another. It is akeady clear that this does not describe the process, and that a diversity of outcomes is to be expected. How and when to measure the effects of reform are contested; whether and in what ways different strategies might have produced different results are tantalizing yet unanswerable questions. Yet, while the outcomes are akeady quite varied in different states, current indicators suggest significant problems and adverse effects that extend well beyond what can be explained simply in terms of the short-term costs of transition. In light of these contingencies, this analysis attempts to look at the likely effects of a highly idealized market model through the operation of its constitutive rules, regulations and policies. The hope is that it will both add to sociological and empirical analyses of transition and shed light on the potential impact of the defining features and commitments of neoliberalism in other contexts as well. The analysis focuses on the content of the reform model and the nature of the prescriptions for economic growth, rather than particular case studies of economic restructuring. The claim is not that the model has been or could be implemented in any pure form, or that specific economic and social outcomes could be attributed to it in any simple way even if it were. To reiterate, there are myriad forces at work. Restructuring strategies may well generate unexpected as well as intended effects. Many forms of resistance to drastic change are to be expected; they will surely affect the course of reform. Other institutions are now involved in the dialogue over market restructuring; their analyses and prescriptions may provide countervailing forces to the neoliberal model in the future.26 The varied histories and contexts into which any reforms are introduced are sure to cast a long shadow on the outcomes in every case. Yet notwithstanding all such contingencies, it seems important to investigate the structure and to try to foresee some of the possible effects of a model

26

Bob Deacon with Michelle Hulse and Paul Stubbs, Global Soda/ Policy: international organi^ations and thefuture of welfare (London and Thousand Oaks, CA: Sage, 1997).

24

Introduction for economic development for which claims of universal applicability have been made, one which now functions as the baseline or standard against which all other strategies, in the states in transition and elsewhere, are measured. Despite vigorous critique,27 it shows few signs of being displaced by another paradigm, and so can be expected to exercise a significant degree of influence on economic reform and development, at least in the immediate future.

27

Critiques of this development paradigm have come from a number of sources. The so-called "East Asian" economic development trajectory stands as a powerful challenge if not direct counterexample, despite attempts to assimilate it to the World Bank model. See: World Bank, The East Asian Miracle: Economic Growth and Public Pokey (New York, NY: Oxford University Press, 1993); R. Wade, "Japan, the World Bank, and the Art of Paradigm maintenance: The East Asian Miracle in Political Perspective", 217 New Left Review (1996). "New trade" and "new growth" theories as well as analyses of production, the institutional requirements of lateindustrializing economies, and the role of information deficiencies all cast various aspects of these reform proposals into question. See for example: A. Amsden, et al, The Market Meets its Match, supra note 11; Stiglitz, "Whither Reform?", supra note 5; P. Krugman, Rethinking International Trade (Cambridge, MA: MIT Press, 1990).

25

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PARTI

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1. ECONOMIC DEVELOPMENT IN THE NEOLIBERAL STYLE: THE CASE OF TRANSITION

I

n order to effect the transition from plan to market, the World Bank helped devise and endorse an agenda for institutional, policy and regulatory reform in the states in Central and Eastern Europe and the former

Soviet Union, the Commonwealth of Independent States (CIS). Not only were these reforms necessary to constitute market economies, in the view of the Bank they were also consonant with prevailing wisdom concerning the promotion of economic growth in a globally integrated economy. While this reform agenda is strongly marked by policy and regulatory proposals that had been developed and implemented in other contexts, transition was unprecedented and threw up new challenges. Inevitably, transition became an occasion not simply for the implementation of a well-developed reform model, but also an occasion in which neoliberal reformers gave substance and institutional form to a variety of abstract concepts and commitments. What follows is an outline of the basic neoliberal tenets concerning markets and economic reform as they stood at the time of transition. This is followed by a description of one important part of the reform agenda for the countries in transition, the effort to separate economic life and production from the provision of

29

Kerry Rittich social services, the fulfilment of social welfare goals and the achievement of distributive equality. As this chapter describes, productive activity in the states in transition was organized so as to serve a variety of social and political as well as economic objectives. The agenda for transition calls for the dismantling of this system and its replacement with a set of institutions and practices that, in the view of reformers, is more consonant with the demands of market economies. Those reforms touch on the manner in which benefits are provided by enterprises, subsidies to goods and services, employment regulations and entitlements and the shift to wage compensation.

1.1 An Outline ofNeoliberal Theory and Practice At the center of neoliberal development theory stands an identifiable set of "best practices," consisting of laws, institutions, policies and strategies. In the view of market reformers, the adoption of these laws, institutions, policies and strategies constitutes the optimal route to economic development and prosperity. There is a variety of inherited circumstances that might affect reforms; history and culture, for example, may shape the way that legal systems function.1 States may also encounter political difficulties in their implementation. However, these variables pertain more to the expected outcomes than to the desirability of the reforms themselves. The implementation of optimal market institutions, along with the sustained application of "sound" economic policies, remains the overarching prescription for economic growth. "Best practices" and "good laws" are those which provide an enabling environment for private entrepreneurial activity and investment. They rest on the assumption that private activity is the engine of economic growth and that state intervention and interference in this process must be sharply contained if growth is not to be impeded. For transition economies, in addition to macroeconomic stabilization, the objectives consist in "getting prices right" and eliminating policies and institutions which are likely to cause distortions in the operation of the market. The funda-

1

World Bank, World Development Report 1996: FromPlan to Market (Oxford; New York: Oxford University Press, 1996), 87. 30

Economic Development in the Neoliberal Style mental if not definitional aspect of the transformation from plan to market economy is the move to market determination of all prices and factors of production. Key elements in this process include: the privatization of state enterprises, the liberalization of prices through the elimination of all forms of price controls and the administrative setting of wages, the removal of state subsidies to both consumption and production goods and services, and the structuring of an open, "deregulated" economy to foster the entry of foreign goods, services and investment Transition in addition requires the adoption of a set of "market-friendly" rules, policies and institutions. Market-friendly reforms are those that encourage foreign investment, empower owners, entrepreneurs and managers and limit the constraints such actors face in the deployment of resources and assets, including the use of labor.2 The laws and regulations thought to be fundamental, to literally define a market economy, are those which secure property rights and investments, limit investor risk, facilitate commercial transactions both within and across national or other jurisdictional boundaries, and render costs predictable.3 However, other rules, policies and institutions may be impediments to the efficient market allocation of factors of production. To the extent that they impose additional costs on employers, they are likely to impair competitiveness and growth; they may also restrain needed enterprise restructuring and interfere with privatization. Examples include various forms of labor laws and employment regulations, environmental standards which are too rigid or stringent,4 or required employer payroll contributions to fund social benefits.5 In sum, regulations which threaten to impose an excessive financial burden on enterprises and the emerging private sector are suspect and must be removed or altered.6 2

The World Bank, World Development Report 1991: The Challenge of Development (New York: Oxford University Press, 1991), 1. 3 See for example, the discussion in Prom Plan to Market, supra note 1, at 88-93. See also The Challenge of Development, id., at 70; Ibrahim Shihata, Complementary Reform: Essays on Legal, Judicial and Other Institutional Reforms Supported by the World Bank (The Hague: Kluwer Law International, 1997). 4 From Plan to Market, supra note 1, at 54. 5 World Bank, Poland: Income Support and the Social Safety Net During Transition, (Washington, D.C.: World Bank, 1993), 60. 6 See The World Bank, World Development Report 1995: Workers in an Integrating World (New York: Oxford University Press, 1995), 109-110. 31

Kerry Rittich The major role of the state is to support and complement private economic activity. In neoliberalism, there is a presumption against state "intervention" in the market; for this reason, the burden of proof lies on those proposing the intervention.7 Beyond the provision of infrastructure and basic health and education, the presumption is that public spending is non-productive and likely to impair economic performance, as it tends to be both inefficient and inflationary.8 The agenda for transition as a whole reflects a deep preoccupation with the proper role and limits of the state in a market economy9 and the normalization of a particular set of rules and structures governing economic transactions. It is a recurring theme that there are distinct functions for different institutions and actors in market societies. A major focus of activity throughout is to define the institutional structure and configuration of roles and powers among market actors that conforms to this idea of functional differentiation.10 One major objective is the definition and protection of a domain of economic activity, organized around the pursuit of efficiency and the maximization of profits, that remains largely independent of competing social and political values and interests. Above all, the regulatory structure of the market is to be determined by what maximizes economic growth. According to neoliberal theory, concerns such as alleviating poverty or inequality are to be dealt with not by altering these preferred market structures, as such efforts have proven both ineffective and inefficient where they have not lead to complete economic disaster. Instead, the proper solution is to provide limited forms of redistribution by the state that are targeted and carefully confined to the most needy. In the main, personal welfare and income security are to be ensured through personal efforts and by the assumption of individual responsibility. Market societies can promote these goals by implementing the appropriate structure of

7

From Plan to Market, supra note 1, at 111.

8

Wat 113-115. This issue is explored at length both in The Challenge of Development, supra note 2 and World Bank, World Development Report 1997: The State in a Changing World (New York: Oxford University Press, 1997). 9

10

A clear statement of this is found in World Bank, Poland: Income Support and the Social Safety Net during the Transition, supra note 6, at xiii: "Possibly the most fundamental aspect of the move towards a market economy is the change in the division of responsibilities it implies [between enterprises, the individual and the state]."

32

Economic Development in the Neoliberal Style incentives to individual initiative and productivity. Dependence on the state is pathologized and largely foreclosed. The re-organization of the state and restructuring of the market to maximize wealth rests on the premise that the quality of life is dependent on economic growth,11 and that the primary objective of states therefore lies in improving the conditions for material progress. Economic growth in turn is now thought to be linked to successful integration into the global economy and the ability to attract capital and foreign investment. Consequently, the general interest has become in important ways co-extensive with the needs of entrepreneurs and international capital and states are encouraged to pursue policies which harmonize conflicting interests and objectives among different groups to promote growth and productiv-

ity. On the one hand, the argument goes, everyone stands to benefit from economic growth, as increased economic growth is both the panacea and only solution to poverty. On the other, all stand to be seriously harmed from the lack of it. But in any event, all states are in the grip of a process of global economic integration which has a logic of its own and which will continue with or without the participation or acquiescence of particular states. The result is a fusion of the desirable and the inevitable, which is expressed clearly in the statement that "sound economic policies" are "richly rewarded," while "unsound" policies are "punished harshly" by international capital.12 While one objective is the creation of barriers around the economic domain, another is the application of market logic to other social institutions. This is particularly evident in the analysis of the role of the state and the operation of the public sector. The state is directed to provide a positive, supportive role for the market, and consequently to shrink in the areas in which it might be regarded as its competitor. The public sector is encouraged to emulate the behavior of the market and to govern and structure itself according to market-like incentives. In neoliberal theory, the behavior of the state itself is analyzed in terms of economic logic. Legislators, bureaucrats, constituents and other actors engaged with state agencies are all subject to the presumption that they are

This is explicitly set out in The Challenge of Development, supra note 2, at 4. See Workers in an Integrating World, supra note 4, at 5.

33

Kerry Rittich likely to engage in interest or rent-seeking in ways that undercut the efficient and effective operation of the state. 1.2 The Agenda for Transition "Greater disparity of wages, income and wealth is - up to a point - a necessary part of transition, because allowing wages to be determined by the market creates incentives for efficiency that are essential for successful reform. More efficient workers must be rewarded for their contribution to growth."13 "Market-determined wages and employment are vital to achieving deep restructuring, but initial conditions in transition economies make increased income inequality an inevitable consequence of reform. Until this impact is offset by renewed growth — the indispensable element in any antipoverty policy - an increase in poverty is unavoidable."14 "The aim is to make the composition of expenditures consistent with the tasks of government in a market economy and conducive to long-run growth...[R]obust empirical evidence supports the view that government spending tends to be productive and to promote economic growth where it corrects proven market failures and truly complements private activity - as do some infrastructure investments, preventive health care, and basic education - but rarely otherwise.15 From Plan to Market contains several distinct and severable recommendations which, though linked to this economic logic and theory of growth, do not follow inevitably from them; nor are they explicable simply in terms of commitments to the merits of privatization or the superior allocative efficiency of a market economy. Rather, they are attempts at the translation of a particular mode of economic analysis and development theory into state policy, legal regulation and enterprise strategies. As such, they can be regarded as a set of mid-level policy decisions about such questions as the proper concerns and optimal structuring of enterprises and the preferred degree of state redistribution.

13 14 15

34

From Plan to Market, supra note 1, at 66. Id., at 144 W, at 11 5.

Economic Development in the Neoliberal Style There are a number of key policies at this level. One is that enterprises divest themselves of "non-productive" activities and cease to compensate employees in the form of benefits and services, particularly in-kind services. A second is that particular forms of regulation, many of which govern terms, conditions and entitlements in the employment context or mandate employer contributions for benefits, be dismantled. A third is that states desist from providing subsidies or engaging in broad-based programs of redistribution and limit transfer payments to those most disadvantaged by the transition process. The end goal is a market society in which there is a distinct sphere of economic activity which remains separate from entitlements to welfare and social services, minimal public funding and provision of benefits and services, a confined redistributional role for the state, heightened personal responsibility for welfare and the provision and allocation of goods and services largely through the market. The proposed transition represents a profound transformation in the conduct of economic affairs. In order to comprehend the impact of the transformation envisioned in the course of the transition to markets, it is necessary to look at how production was organized under the plan economies. While there was significant inter-country variation within the region, the broad contours of the system remain intelligible as a particular mode of economic organization.

1.2.1 COMPENSATION AND SOCIAL WELFARE IN PLAN ECONOMIES One of the most distinctive aspects of the organization of production in the plan economies was the integration of production with the provision of a range of social and economic goals and services. In much of Central and Eastern Europe and the Soviet Union, under the regime of state ownership of enterprises, the state and the enterprise formed part of an interlocking structure for allocating resources to and ensuring the material needs of workers and other citizens. Enterprises were the major conduit for the provision of social services and carried out many of the redistributive and welfare functions commonly associated with the state in market economies.16 Enterprises often performed local administrative functions as well, 16

General description and discussion of the characteristic features of social provision and enterprise structure in centralized economies can be found in the following sources: J. Kornai, The Socialist System: The Political Economy of Communism (Princeton, N.J.: Princeton University Press, 1992); M. Boycko and A. Shleifer, "Russian Restructuring and Social Benefits," in A. Aslund, ed., Russian Economic Reform at Risk (London: Pinter, 1995); L. Specht, "The Politics of

35

Kerry Rittich maintaining schools and hospitals and even engaging in street cleaning and refuse collection.17 Unlike in market economies, the fulfilment of these reproductive functions ranked along with production targets as an important enterprise objective, as it was important that the system reproduce itself as well. The property of enterprises allocated by the planning authorities of the state included goods and capital designed for spending on the reproductive needs of labor.18 Such assets were allocated to separate social funds and were intended to be used for those purposes alone.19 For example, the principle of "operative management" which governed the use and disposition of property in the Soviet Union placed limits on the use of property allocated by the state to enterprises. Workers were entitled to access to the social fund, although access might be linked to fulfilment of the productive objectives of the enterprise.20 In toto, these entitlements and benefits represented an elaborate structure of administrative and regulatory provision.21 Although this system is commonly characterized as one in which citizens received free or subsidized goods and services, it is important to emphasize that lowor no-cost provision of goods and services was an integral part of the employment bargain.22 Wages in general were extremely low and employment compensation took the form of a mixture of wages and benefits. Benefit entitlements as well as the receipt of specific goods were in general conditional upon employment, although beneficiaries often included "outsiders" in the surrounding community as well.23

Property: Soviet Property as a Bundle of Rights", S.J.D. dissertation, Harvard Law School, April, 1994, on file with the author; G. Standing, Russian Unemployment and Enterprise Restructuring: Reviving Dead Souls (Geneva: ILO, 1996). 17 L. Specht, "The Politics of Property", supra note 16, at 105. 18 J. Kornai, The Socialist System, supra note 16, at 132; L. Specht, supra note 16, at 103. 19 J. Kornai, id. 20 L. Specht, "The Politics of Property", supra note 16, at 103; J. Kornai, id. 21 Id. 22 International Monetary Fund, World Bank, Organisation for Economic CoOperation and Development and European Bank for Reconstruction and Development, A Study of the Soviet Economy, vol. 2, (Paris: OECD, 1991). 23 See L. Specht, "The Politics of Property", supra note 16, at 108; M. Boycko and A. Schleifer, "Russian Restructuring and Social Benefits", supra note 16, at 110. 36

Economic Development in the Neoliberal Style The structure of benefit and service provision in the plan economies might be typologized in the following way. First, in-kind goods and services were provided as part of employment compensation instead of wages; these came either as benefits attached to employment or were directly integrated into the activities of enterprises. Second, benefits such as pensions and entitlements to paid leave on various grounds were provided, some of which were centrally mandated or regulated by the state and others of which were specific to particular sectors or negotiated at the enterprise level. Third, the state subsidized a variety of consumer goods, thus enabling their purchase on low wages.24 A large number of goods and services, ranging from subsidized food, housing, vacations, medical, health and childcare to sports and cultural facilities and consumer goods were provided free or at low cost as part of employment compensation. Specific benefits were typically controlled and allocated by trade unions. They varied from sector to sector and country to country, sometimes depending on the privileges extended to different sectors by the state. For example, in the Soviet Union, housing and childcare ranked among the most important benefits. In general, compensation was tilted toward benefits and services and wages were relatively low, as the wage levels set by the state or negotiated at the enterprise level reflected the fact that compensation included these goods and services.25 Among the benefits provided were those expressly designed to compensate women for reproductive labor. A characteristic feature of these economies was the high labor force participation by women relative to other economies.26 However, there was nothing natural about this state of affairs, nor was it an automatic consequence of the presence of a plan economy. Instead, various market-like incentives were implemented to induce women to engage in paid work and to enable women

24

There is considerable ambiguity as to what "subsidy" might mean in the context of the plan system in which prices and wages are administratively determined and prices expressly set to influence demand and redistribute income (see J. Kornai, The Socialist System, supra note 16, at 153). Subsidies to enterprises might refer to the absence of hard budget constraints (see J. Kornai, supra note 16, at chapter 8, "Money and Price") and continual bargaining even within the established wage and price levels, or to the ability of enterprises to sell their products at below the actual costs of their production. 25 J. Kornai, The Socialist System, supra note 16, at 225. 26 International Labour Office, Yearbook of Labour Statistics (Geneva: International Labour Office, various years).

37

Kerry Rittich to shoulder both work and family responsibilities.27 While the structure and extent of the services and benefits varied significantly from country to country,28 common benefits were extensive maternity and childcare leave provisions, days off to fulfil household or domestic obligations, and earlier retirement for women.29 Moreover, despite bureaucratic rigidities and control, actual wage and compensation levels were a combined result of administrative wage setting and market pressures arising from variations in the supply and demand of workers and the relative bargaining positions of the parties.30 For a variety of systemic reasons, labor shortages were chronic in such economies.31 Workers were strongly influenced by the attractions of various workplaces and, as a consequence, bargaining over wages between workers and immediate employers took place, sometimes on a "massive scale."32 There was considerable inter-enterprise job-hopping in pursuit 27

However, it was not neither the intent nor apparently a consequence of such regulations and entitlements to alter the gender composition of domestic or reproductive responsibilities. Hence, the oft-noted double or triple workload of women which appears to have been a general feature of these economies, as it is of others. See for example, B. Einhorn, Cinderella Goes to Market: Citizenship, Gender and Women's Movements in East Central Europe (London; New York: Verso, 1993); A. Posadskaya, ed., Women in 'Russia: A New Era in Russian Feminism, Kate Clark trans. (London; New York: Verso, 1994); Marilyn Rueschemeyer, ed., Women in the Politics of Postcommunist Eastern Europe (Armonk, N.Y.: M.E. Sharpe, Inc., 1994). 28 There were and remain significant differences among the various states as to the extent of benefit and service provision. In the German Democratic Republic, for example, childcare services were widely available; in Poland, by contrast, there were never enough services to meet even a fraction of the demand. See B. Einhorn, Cinderella Goes to Market, supra note 27, at 12-13. Hungary had the most extensive maternity leave provisions, entitling women to years at a time while still remaining employed; this often functioned in lieu of childcare services. In the republics of the CIS, even privatized firms now still provide extensive benefits to their workers, both to retain skilled workers and because it has not proved feasible in many cases to either privatize the services or transfer the administration of crucial services to municipalities without a resulting collapse of the supply. See M. Boycko and A. Shleifer, "Russian Restructuring and Social Benefits", supra note 16, at 112. 29 Monica S. Fong, "Gender Barriers in the Transition to a Market Economy", PSP Discussion Paper Series (World Bank, January, 1996), 10; Sandor Sipos, "Income Transfers: Family Support and Poverty Relief, N. Barr, ed., Labor Markets and Soda/ Policy in Central and Eastern Europe: The Transition and Beyond, World Bank (New York: Oxford, 1994), 226. 30 J. Kornai, The Socialist System, supra note 16, at 226. 31 J. Kornai, id., at 221. Guy Standing observes that such shortages were contrived, a consequence of the financial incentives to enterprises to employ large numbers of workers, whether they were needed or not, in order to expand the wage fund. See G. Standing, Russian Unemployment and Enterprise Restructuring, supra note 16, at 3. 32 J. Kornai, The Socialist System, supra note 16, at 226. 38

Economic Development in the Neoliberal Style of higher fringe benefits.33 At the same time, managers tended to lobby their superiors for larger wage funds with which to satisfy, and hence retain, desired workers. And despite the presence of administrative tariffs for wages and benefits, the bureaucracies were obliged to react to these signals by workers to some degree.34 In other words, market co-ordination had at least a minor role within the system, governing the relative wages and influencing the occupational, workplace and regional distribution of the labor supply.35 As in a market economy, this system contained a structure of incentives around which expectations developed and through which both enterprise managers and workers pursued particular objectives and attempted to maximize their respective interests.

1.2.2 CRITIQUE OF THE ENTERPRISE BENEFIT MODEL "|T]he labor markets inherited from central planning, at least for movement between different skills, effectively sacrificed labor mobility for greater individual security.... In a market system employees move between employers, between types of work, and between places - and they may experience unemployment. Income transfers ... need reform, not only to reduce poverty and contain costs but also to assist mobility. This means, in particular, supporting the unemployed and getting enterprises out of the business of delivering social benefits. Otherwise labor will remain immobile, raising the costs of transition by creating pockets of poverty in declining regions, and by pressuring enterprises and governments to defer necessary restructuring."36 "Decoupling delivery of a wide range of services from enterprises - housing and day care are particular problems - will be vital to allow workers to move readily.... In the short run... municipalities have an important role in ensuring continued provision of key services, perhaps through underwriting part of enterprises' cost of provision. A longer-term approach has three steps. First, require enterprises to separate their general accounts from those for social services. Second, for tax purposes allow enterprises to offset the costs of social services against the income those services generate, but not against income earned from the enterprises' main activities. This gives enterprises strong incentives to charge for services and might encourage the spinoff of 33 34 35

36

G. Standing, Russian Unemployment and Enterprise Restructuring, supra note 16, at 3. J. Kornai, The Socialist System, supra note 16, at 226. Id. World Bank, From Plan to Market, supra note 1, at 66.

39

Kerry Rittich new services firms. Third, help families meet those charges through higher wages and through targeted income transfers such as family allowances."37 "[P]ayroll contributions that finance income transfers (including unemployment benefits) are high, hindering new employment, encouraging workers and employers to collude in fraud, and creating incentives for unofficial employment."38

1.2.2.1 Enterprise benefit provision A number of interlocking concerns and beliefs drive the reform model with respect to enterprise restructuring and alterations to the role and size of the state. Foremost is the belief that the operation of the market should be kept separate from distributive or other political concerns. In particular, production should be separated from entitlements to welfare and social services, as these are essentially non-productive expenditures and activities. There are various rationales advanced: one is that the move to the market itself makes it necessary to reduce the degree of economic security provided to workers and to increase self-reliance for individual welfare. Another concern is that the extensive provision of benefits creates work disincentives. A third is that benefits and services are "too expensive", both for firms, because it makes them uncompetitive, and for the state, because it places a heavy tax burden on the emerging private sector. Finally, enterprise provision of benefits is thought to impair the reallocation necessary of labor from the public to the emerging private sector and from less to more productive enterprises. A host of deleterious effects are said to be associated with enterprise provision of benefits and in-kind services.39 One is that enterprise involvement in the provision of social benefits is a barrier to the process of economic restructuring in general; for example, enterprise provision of the social safety net

37

Id, at 76. Id, at 75-76. 39 These are set out in detail in M. Boycko and A. Schleifer, "Russian Restructuring and Social Benefits", supra note 16, at 108-115. 38

40

Economic Development in the Neoliberal Style has been identified as "perhaps the single most important deterrent to effective enterprise restructuring" in Russia.40 The argument is that the provision of benefits and services through enterprises operates as a source of pressure on both states and management, restraining necessary enterprise closures and bankruptcies, and making enterprises unattractive to prospective investors, particularly foreign investors. Social commitments give enterprises continued leverage over the central government for cheap credits and subsidies, generating inflation and leading to the "politicization" of even privatized firms.41 The provision of benefits also exacts financial costs which are detrimental to the primary functions of the enterprise. Benefits take up valuable resources, including management time, which could be better devoted to productive tasks,42 are extended to outsiders to the firms, and place burdens unrelated to productivity on enterprises. Enterprise financing of benefits is also inefficient because only some of the funds intended for them actually go to provide the services; some funds inevitably get diverted to the production of goods or to managers' pockets. Finally, there is serious concern that enterprise provision of services inhibits labor mobility, hindering the formation of the private sector. As discussed below, severing the ties which bind workers to particular enterprises is regarded as necessary in order to free labor for more productive uses. 1.2.2.2 Employment regulation and entitlements "Adaptable labor markets are essential if workers are to benefit quickly from economic recovery. Increasing labor market flexibility - despite the bad name it has acquired as a euphemism for pushing wages down and workers out - is essential in all regions of the world undergoing major reforms."43 Labor market regulations should in the first instance be designed to encourage positive contributions to growth.44 It is a recurring theme that, however apparently desirable or beneficial, many labor and employment regulations do more harm than good, even to those they are intended to benefit, because they reduce 40 41

42 43 44

World Bank, From Plan to Market, supra note 1, at 108. Id. Id.,at61. World Bank, Workers in an Integrating World, supra note 4, at 109-110. World Bank, From Plan to Market, supra note 1, at 77.

41

Kerry Rittich investment, wages or the number of jobs.45 Consequently, it is important to avoid over-regulating.46 For example, high payroll contributions on the part of employers are said to hinder employment creation and interfere with the competitiveness of enterprises.47 Moreover, labor market policies often create favored sectors resulting in differential benefits for protected groups at the expense of the less well off.48 For example, unions can have negative economic effects by protecting minority groups of workers at the expense of the unemployed and those in rural and informal markets, as well as consumers and capital holders;49 they also sometimes use their political power to resist structural adjustment efforts.50 Because of the importance placed on the role of the market in determining prices and re-allocating labor, labor market regulations such as job security provisions or minimum wage rates are regarded as particularly problematic for transition economies.51 Extensive maternity and other leave provisions are characterized as "generous" and identified as factors which render women more expensive to employ and generate relatively high levels of unemployment among women.52 1.2.2.3 Subsidies and cash compensation "[S]ubsidies are inefficient and should be replaced with direct income transfers, which can provide targeted, more effective transitional relief to vulnerable workers and households and do not delay necessary enterprise restructuring....Where subsidies have already come down, the main challenges are to reduce any remaining subsidies... and recover a greater share of the costs of some education, health and local transport services.53

45 46 47

World Bank, Workers in an Integrating World, supra note 4. World Bank, From Plan to Market, supra note 1, at 43, 63. World Bank, Poland: Income Support and the Social Safety Net During Transition, supra note

6, at 60. 48

World Bank, from Plan to Market, supra note 1, at 77; World Bank, Workers in an Integrating World, supra note 4, at 34-35. 49 World Bank, Workers in an Integrating World, supra note 4, at 80-81. 50 Id,at81. 51 World Bank, From Plan to Market, supra note 1, at 77. 52 Id, at 73. 53 Id, at 115.

42

Economic Development in the Neoliberal Style "There is a strong presumption that, where transfers are paid, they should be in cash wherever possible: cash payments leave buying decisions to the recipient, they are more transparent in budgeting, and they do not interfere with market prices."54 Apart from the role of enterprise benefit and service provision in obstructing the course of reform and impeding labor mobility, there is a strong preference in favor of cash compensation and income transfers, as subsidies and inkind payments are thought to "distort" prices and consumption choices and obscure the true costs of goods and services. Compensation through services and benefits imposes a cost on those who might have other spending priorities, at the same time subsidizing those who would have independently chosen to pay for the services and benefits. Cash compensation removes such distortions, ensuring that the "true costs" of all goods and services become visible and that resources are allocated to their best uses. Benefits and in-kind services also "distort" incentives for employee performance by reducing the connection between pay and effort. Cash compensation, by contrast, particularly flexible and merit-based compensation, functions as an incentive to increase productivity55 and is for that reason preferred.

1.2.3 STRA TEGIES FOR CHANGE 1.2.3.1 Wage compensation and the elimination of benefits A crucial element of the restructuring process is the move to "market patterns" of compensation, defined as "a shift from basic wages plus benefits (often in-kind) to wages plus bonuses related to productivity or profitability."56 Increased wage differentials are explicitly encouraged to reward and encourage the most productive workers. In the main, individuals and households are expected to meet needs through higher wages and, for the least well off where this proves to be inadequate, through targeted benefits. However, it is clear that a reduction in total employer expenditures and downward pressure on benefit demands, rather than a mere change in the mode

54 55 56

Id., at 80. Id., at 113. Id., at 73.

43

Kerry Rittich of compensation for reasons of efficiency and productivity, is also contemplated. For example, it is suggested that: "The employer contribution can be reduced in three ways: by reducing benefits, by financing through general taxation benefits that do not relate to any insurable risk (such as benefits for children), and by dividing the contribution between worker and employer (under the old system the employer paid the entire contribution, a fact regarded as one of the victories of socialism). "Sharing" contributions between worker and employer may make little difference to who actually ends up paying it. But it has the great advantage that workers immediately see a larger deduction on their pay slip if benefits increase; this helps reduce pressure for higher benefits."57

Hence, a number of strategies other than wage replacement of benefits, goods and services are suggested, including: simple divestment or elimination of benefits and services; user fees and increased or complete "cost recovery" for services; dividing contributions between employer and employee to suppress the demand for services; shifting either the administration or the funding of benefits and services such as housing and childcare on a temporary basis to local authorities;58 state or municipal funding of severance pay for redundant workers59 and financing, in cash rather than in-kind, benefits that do not relate to an "insurable risk" of the enterprise, such as those for children, through general taxation.60 It is central to the appeal of efficiency arguments that these changes are not intended, at least ultimately, to result in a net reduction in available services or a decline in general welfare. Instead, allowing for a period of transition, the claim is that wages will rise to enable people to purchase through the market the services previously supplied through the enterprise or by the state to the extent that they still remain in demand. For example, if there is sufficient demand, private childcare will spring up via market forces to meet it. Moreover, the quality will be higher and goods and services will be more efficiently provided and responsive to people's needs.

57

58

Id, at 76. M. Boycko and A. Schleifer, "Russian Restructuring and Social Benefits", supra note

16, at 113. 59 60

44

World Bank, From Plan to Market, supra note 1, at 47. Id, at 75-76.

Economic Development in the Neoliberal Style 1.2.3.2 Reductions in public provisioning In the course of restructuring, the state may have a temporary role to play in taking over the administration of social assets such as schools, clinics, housing, and day care centers,61 especially if it is necessary to enable enterprises to restructure, as reducing the expenditures of enterprises is a priority. However, there are strict limits to the benefits that should be continued through this route. Any proposed reliance on the state or municipal authorities for services needs to be placed against the background assumption that public provision of most social services is inefficient and should be supplanted by private provision. The reasons are as follows: "Public spending is inefficient for several reasons... [M]ost large governments in transition economies spend a disproportionate share of public funds on programs with little if any impact on productivity and economic growth, such as subsidies and social transfers ... Since these programs create entitlements or vested interests, there are strong pressures for them to expand. Second, government saving ... and public investment tend to be unusually low.... Third, the efficiency of government services such as health and education in many transition economies is undermined by entrenched spending allocations within sectors, weak implementation capacity and high staffing ratios... Increased private participation and cost recovery are urgent priorities."62 In any event, there are inherent limits to the degree of public provision arising from the fact that high spending and taxation rates place a burden on the private sector. State expenditures are explicitly defensible in terms of their capacity to contribute to productivity and growth; otherwise, extensive public spending is presumptively undesirable.63 State expenditures which directly increase productivity are more acceptable than those with only indirect effects; there is a preference for state investments in infrastructure rather than human capital, as the relation to economic growth, according to the Bank, is stronger with the former than the

61

62 63

Id, at 47. Id, at 114-115. U.

45

Kerry Rittich latter.64 While the gains from investments in basic health and education are acknowledged, subsidies and social transfers are thought to be net losses. The heart of the transformation in the redistributive role of the state is set out in the following statement: "(Tjnstead of providing generous guarantees to secure adequate living standards for all, governments need to foster greater personal responsibility for income and welfare. Providing social protection is a key function of government in all economies, but in a market economy it should ... be mainly targeted at those vulnerable groups who need it most."65 Governments should limit their role to the provision of key services; reducing the redistributive role of the state is seen to be a fundamental aspect of economic restructuring. To this end, extensive state provision of transfer payments is actively discouraged under the agenda.66 Broadly based social programs and income transfers are thought to be inefficient, create vested interests, provide disincentives to work and slow productivity. Systems of income transfers should be reduced and directed only at the poor; programs that deliver roughly equal benefits to the populace are deemed paternalistic and "poorly targeted" and not in accord with the needs of a market economy.67 A major source of concern is the relatively high percentage of state funds that are now devoted to pensions. Regulations permitting early retirement, that is earlier than the norm in market societies, and provisions for earlier retirement for women than men are a source of high state spending; pensionable ages therefore must be raised.68 Public sector reform based on a separation of state policy from actual state provision of social services is increasingly promoted, through the devolution of service provision to local authorities and greater commercial service provision through contracting out and competition. These strategies are part of an effort to

64

World Bank, Workers in an Integrating World, supra note 4, at 21; World Bank, From Plan to Market, supra note 1, at 115. 65 World Bank, from Plan to Market, supra note 1, at 110. 66 W, at 114. 67 Id., at 78. 68 /<£, at 78. 46

Economic Development in the Neoliberal Style institute market-like incentives and structures within the public service itself and to encourage the public sector to become more efficient.69 Rather than a new system to ensure the delivery of particular benefits or services, what is envisioned in the economies of transition is wage replacement of non-monetary forms of compensation and market provision of most services. It is not proposed, for example, that delivery of all services simply be transferred from enterprises to local authorities or other state entities. And whether the service is provided through the market or administered by local authorities, subsidies should decline and be eliminated except for the poorest members of society.

69 This is discussed further in Maureen Mackintosh, "Competition and Contracting in Selective Social Provisioning", J. Vivian, ed., Adjustment and Social Sector Restructuring (Geneva: Geneva and the United Nations Research Institute for Social Development (UNRISD), 1995).

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2. NEOLIBERAL IMAGES OF LEGAL REGULATION AND THE STATE

"The transition from plan to market calls for a whole-sale reinvention of government. The state has to move from doing many things badly to doing its fewer core tasks well. This means government must at once shrink and change its nature. No longer the prime economic agent in most areas, it must instead facilitate private activity."1 Market reform in the neoliberal style requires the adherence to a set of rules and practices that facilitate the investment and transactional activity necessary to economic growth. Reform proposals proceed on the basis that there is an optimal division of labor between different institutions, that there are relatively clear distinctions between economic and political issues, and that the market must be organized around the pursuit of efficiency and protected from non-economic values and concerns. The resulting markets are imagined as discrete transactional spaces that are insulated from political interests and social values. This chapter aims to examine how these reforms are advanced and defended in their own terms, and to explore the place of law within the neoliberal reform 1

World Bank, World Development Report 1996: From Plan to Market (Oxford; New York: Oxford University Press, 1996), 110.

49

Kerry Rittich project as a whole. The purpose of the exercise is to probe the relationship between market reforms and the production of disadvantage, especially gender disadvantage within the market. First, how might redistribution occur in the process of instituting market regulations and policies? How are such effects sidelined, if not entirely blocked from view, in discussions of economic transformation? Finally, given the extensive institutional change which economic restructuring entails, how is economic reform organized and managed so as to contain the specter of interference in the domain of politics? The intuition pursued here is that, independently and collectively, the divisions and boundaries described above do much of the work of producing yet obscuring advantage and disadvantage for particular groups. Attention to the legal dimension of the exercise is crucial to understanding this process, as images of law and regulation, as well as claims about the nature of legal rights in market societies, play an important role in explaining and legitimating reforms. By providing the boundaries and divisions through which neoliberal reforms operate, law helps construct and mediate the division between economic and political concerns. The technocratic image of law projected in neoliberal policy discussions and the managerial, functionalist approach to questions of regulation all support the idea that there is a relatively clear division between legal or regulatory considerations and distributional or political considerations. Thus, particular conceptions of law are central to how neoliberal markets and institutional structures are both constructed and legitimated.

2.1 Positioning the State In the neoliberal vision, the state is positioned largely as the handmaid or servant of the market; the activities of the state must be subordinated to the demands of economic growth.2 This fundamental shift from the state to the market is justified as contributing to the overall public good; it is a reduction of the public for the sake of the public. Yet although it signals, at least on the surface, a displacement of public institutions by private actors and entities, this priority of the private over the public turns out to be simultaneously revealing and misleading in important ways. It is common to characterize this reconfigured relationship be2

50

Id.

Neoliberal Images tween the state and the market as a reduction in the presence of the state, the result of which is a "deregulated" economy. However, rather than simply a downsized state and a deregulated market, what is actually envisioned is a transformation in the role of the state in the direction described above, to the support and facilitation of private economic activity.3 "Deregulation" thus refers not only to the elimination of regulations, but also to reregulation: it means the implementation of a new and different configuration of rules, policies and institutions governing economic activities and relations. One of the most basic elements of neoliberal reforms is a heavy investment in the establishment of the correct division of labor between the state and the market. It is a recurring theme throughout reform proposals that there are distinct functions for different institutions and actors in market societies. While the state must provide the basic framework in which economic activity can occur, the responsible state will cede most other functions to the market. This commitment to a division of labor is expressed through the idea of the market as a bounded space that must be protected from illegitimate interventions on the part of the state, as well as from distortions or inefficiencies introduced because of "politics" or the claims of "special interests". This autonomous market can be created and protected by ensuring that economic activity is configured around a particular set of rules and practices. This requires two things: first, attention to the internal laws, regulations, policies and institutions which bear on economic activity; and second, a cabining of domestic "political" concerns and priorities which might prevent their implementation and disrupt the optimal functioning of the market. These dimensions of the neoliberal project are particularly evident in the policies developed for the states in transition to market economies; in this context above all, reforms are designed to institute a radical separation of the state from the market. For institutions such as the Bank, the prime deficiencies of the plan system can be located in the intermingling of public and private functions and the incursion of the state into what is quintessential^ private space - the market. The 3

Biersteker describes the aims of the World Bank's structural adjustment programs in very similar terms. See Thomas J. Biersteker, "The 'Triumph" of Neoclassical Economics in the Developing World: Policy Convergence and Bases of Governance in the International Economic Order", James N. Rosenau and Ernst-Otto Czempiel, eds., Governance Without Government: Order and Change in World Politics (Cambridge; New York: Cambridge University Press, 1992), 102,108.

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Kerry Rittich non-market allocation of resources gave rise to massive inefficiencies and permitted continual political interference on the part of bureaucrats and party members. The envisioned solution is a total restructuring of the economy in order to institute a sharp separation between two domains which had previously been closely interconnected, if not inseparable. This new relationship between the state and the market is expressed in a number of ways and rationalized on a number of different bases. States are encouraged to devolve the responsibility for the funding and provision of a broad number of goods and services to the private sector, on the theory that "states are overproviding a wide variety of goods and services that private markets could supply in their stead".4 Underlying the concept of "overprovision" by the state is the assumption that private provision is inherently superior, because market allocation of resources is more efficient than that which occurs through other means. There is a strong core/periphery model operating about proper, less proper and improper state activities. In the context of transition "core public goods and services" include "a foundation of lawfulness, a stable macroeconomy, the rudiments of public health, universal primary education, adequate transport infrastructure, and a minimal safety net".5 Other activities are peripheral and discretionary, while still others are clearly beyond the pale and outside the bounds of acceptable state activity. Prescriptions about the appropriate scope of state activities may also be tempered by institutional and pragmatic concerns. For example, there are increasing references to the variety of institutional capabilities and limitations that states might face;6 these too may affect the way that tasks are assigned to either the state or the market. However, specifying the ideal role for the state is not easy, nor is that role fixed and determined. Despite the insistence that there are proper and less or improper state functions, the Bank's position on what these functions are has shifted over time. For example, higher education, curative health services and pensions and insurance are characterized in 1997 as "private goods and services 4

World Bank, World Development Report 1997: The State in a Changing World (Oxford; New York: Oxford University Press, 1997), 59. 5 World Bank, From Plan to Market, supra note 1, at 110. 6

This is a major theme in the World Bank's World Development Report 1997: The State in a Changing World, supra note 4. 52

Neoliberal Images that in many countries have somehow wandered into the domain of public provision".7 This reflects the Bank's position that the role of the state in social provisioning should be sharply contained, with the market playing the predominant role in providing all but basic educational, health and social services. Yet only a short time later, in its 1998-99 report the Bank makes a sharp reversal, identifying expenditures on higher education as one of the best investments in productivity that can be made.8 Notwithstanding such variations in the role that is posited for the state, the idea that there are identifiably proper and improper functions for different actors and institutions in market economies remains a linchpin of neoliberal policy. Indeed, it seems to be the fact of the state-market divide and its centrality to organizing economic relations, as much as the specific division of labor, which is central to understanding the direction of neoliberal reforms. Although primarily articulated in economic terms, establishing the correct allocation of functions between the state and the market is sometimes described in normative terms as well, a matter that goes to the very legitimacy of the state action. For example, the Bank holds that "[sjorting out where state power is legitimate and where it is not is a constant task of governments everywhere. But whereas established market economies argue about questions at the margin, transition governments are completely refiguring the enforcement functions of public institutions".9 For developing and transitioning countries, the legitimacy of state action is measured in terms of its proximity to neoliberal market norms. Such choices take on heightened significance in the context of transition, as reformers are intent upon making a sharp break with the past to prevent any reversion to the former system of state control. Indeed, institutional arrangements associated with the old regime remain tainted, bearing the stigma of failure.10 7

Id.

8

See World Bank, World Development Report 1998/99: Knowledge for Development (Oxford; New York: Oxford University Press, 1999). 9

Id., at 88.

10

Joseph Stiglitz, "Whither Reform? Ten Years of Transition", World Bank, Keynote Address, Annual Bank Conference on Development Economics, Washington, D.C., April 2830, 1999 http://'www.worldbank.org/'researchi' abcde/washington_11fpdfs/stiglit%.pdf (last visited 11/08/2001). 53

Kerry Rittich The other prong of the transformation is the shift in the relationship between the state and the individual; the commitment to a primary role for the market is reflected here as well. In the neoliberal vision, the state's role in provision of services and income transfers should be minimized, and individuals are to become increasingly responsible for securing their own welfare and income. The result is that the state's role in mitigating risk and inequality among the population at large is sharply demoted, and welfare becomes largely a function of individual ability to successfully compete in the market. Over time, the Bank has modified its orientation towards the state: now, it concedes that "reducing or diluting the state's role cannot be the end of the reform story".11 Rather than the "minimal" state, the watchword has become the "effective" state. This shift in terminology is accompanied by evidence of increasing attention to laws, regulations and institutions; the Bank now takes the position that institutions are crucial to successful reform and economic growth.12 And in response to external criticism about both the process and effects of market reform and restructuring, there is a new inclusive rhetoric concerning the need for greater grassroots, "bottom-up" rather than "top-down" reform, and greater participation in decision-making by the affected groups.13 Yet despite the semantic shifts which are discernible in the discourse around the state and a new consciousness of the need for proper institutional infrastructure, it is unclear that they signal a transformed understanding of the relationship between the state and the market. The basic objectives of market governance remain the same: the state remains in the service of the market, playing a "catalytic, facilitating role, encouraging and complementing the activities of private businesses and individuals".14 It would also be a mistake to imagine that the Bank is of the view that basic decisions about the rules and institutions of economic governance are now to be determined through processes of democratic deliberation. Arguably, the turn to governance and institutions merely reinforces the need for a

1

'

12 13

14

World Bank, The State in A Changing Rote, supra note 4, at 3. World Bank, The State in a Changing World, supra note 4. Id., at 3.

Foreword, World Bank, The State in A Changing World, supra note 4. The commitment to private economic activity as the engine of development is reiterated in James D. Wolfensohn, A Proposal for a Comprehensive Development Framework (A Discussion Draft) (Washington, D.C.: World Bank, 1999). 54

Neoliberal Images thoroughgoing set of prescriptions about proper state functions, policies and regulations. This vision represents a radical departure from the pre-existing relationships between the state, the market and the individual in the states in transition; however it also represents a sharp departure from the status quo in many existing market societies. What follows is an attempt to identify and examine the arguments and assumptions within neoliberal discourse that make this vision seem compelling.

2.1.1 NATURALIZATION, NEUTRALIZATION AND NORMALIZATION OF THE MARKET

To begin to unravel the issues of distribution and disadvantage, it is instructive to begin with the idea of the economic domain that is contained within the proposals for reform. There is a number of images, propositions and assumptions about the market and the economy which co-exist within neoliberal discourse. Among the most fundamental is simply that the market has a natural form; another is that there is a discrete domain of economic activity which remains identifiable and separate from the rest of social life. These two assumptions underwrite the claim that there simply is some pre-existing division of labor between the enterprise and the market on one hand and institutions such as the family and the state on the other. The idea of the natural of "free" market also makes it meaningful to talk of "productive" and "non-productive" tasks. For if there is a natural, already defined economic sphere, there is also a natural allocation of activities and responsibilities to one sphere or another. Involvement in activities classed as "nonproductive" becomes simply a distraction and a definitionalry bad use of enterprise time and resources. However, neoliberal discourse also reflects another view, which is that the market has an optimal form. In spite of the room which might exist for variation in enterprise structure and activities, and whatever the fluidity in the boundaries between the market and other social institutions, there ought to be a particular division of labor and costs among enterprises, the state, civil society and individuals or households. Another assumption is that this natural or optimal market is essentially neutral as between the interests of different groups, and that neoliberal reforms are therefore compatible with a range of different political objectives. However, a competing strand of thought is also present on this point in neoliberal discourse. It is also argued that entrepreneurs should be empowered, that impediments to transactions 55

Kerry Rittich and investment dismantled, and that the interests of investors be given paramountcy over those of other social claimants in order that society as a whole benefit from the resulting growth. This might be described as an argument that the neoliberal market is necessary, if not altogether neutral. Arguments in this vein are advanced instrumentally, typically on the ground that certain institutions and incentive structures are conducive to growth, productivity and efficiency gains, while deviations constitute a threat to those objectives. All of these images and strands of argumentation are to be found throughout the reform agenda for the states in transition. Through the strategic combination and deployment of claims that the neoliberal model is natural, optimal, neutral and/or necessary, the proponents of reforms are able to construct an institutional structure that allocates specific roles and powers to different market actors. These images and arguments not only help build the market, they serve to secure and normalize a set of legal and institutional rules. The resulting market structure is then cemented with the claim that it represents "best practice" in states which are models of economic success. However, this claim is backed up by a disciplinary note as well. Reformers argue that the proper functioning of the market and the degree of prosperity which can be expected to flow from it are closely linked to the adoption of a canonical set of legal and political institutions and appropriate behavior on the part of states. As the Bank has seen fit to repeat on numerous occasions, in the market, "good" policies are rewarded while bad ones are punished harshly.15 This normalized, naturalized conception of the market generates a number of effects. First, it creates a boundary around the economy and the market, demarcating the terrain of economic or workplace concerns from other social or political concerns. Once established, this boundary operates to place certain issues outside the purview of enterprise responsibility, if not the domain of the market as a whole, and to legitimate the externalization of certain costs from production. Because of the close interconnection between the productive and reproductive spheres, the restructuring of economic activity can be expected to have deep effects on the concerns and activities of other social institutions.16 For example, it

15

See for example, World Bank, World Development Report 1995: Workers in an Integrating World (Oxford; New York: Oxford University Press, 1995). 16 See discussion in Part II. 56

Neoliberal Images may shift the nature and intensity of the activities which take place within households and communities, or increase the costs borne by the individual or the state. However, the normalization of a particular market structure helps obscure such effects, legitimating the transformations and encouraging a discounting or acceptance of such effects where they result. In the process of normalization and naturalization, restructuring is figured as a large scale project which is of benefit and necessity to all. The Bank's policy discussions emphasize the need for a harmonization of interests and objectives among different groups,17 and there is a concomitant attempt to downplay the conflicts of interest among different groups and tradeoffs which might be involved. The narrative of market reconstruction is that it is possible to devise institutional arrangements which, vested or "special" interests aside, all would agree constitute the optimal market. Furthermore, such institutional arrangements are in fact ultimately good for everyone, if not always equally beneficial at the outset. The desired state of affairs can be reached by organizing the market around the pursuit of wealth maximization and efficiency, understood as a condition in which any losses are outstripped and can at least theoretically be compensated by the gains which accrue to the winners.18 In the process, the interests of enterprise owners and managers, entrepreneurs and foreign investors, those who are expected to be the engines of economic growth, become co-extensive with the interests of the public in general. One consequence of the priority given to efficiency enhancement and wealth maximization is a demotion of the distributive dimension of reforms. At the stage of market design, little attention is devoted to the matter of how the gains of economic growth are dispersed and what the effects of reforms might be on particular segments of the population. However, the issue of income distribution

17

For example, in Workers in an Integrating World, supra note 15, the Bank encourages workers and labor groups to adopt a "unitary" rather than adversarial view of the employment relationship and their interests vis-a-vis the employer. The same view is arricvdated in the context of transition: "Successful labor policies are those that work in harmony with the market and avoid providing special protection and privileges to some labor groups at the expense of the poorest". World Bank, From Plan to Market, supra note 1, at 77. 18

Thus, the Bank's model of efficiency is based on Kaldor-Hicks rather than Pareto effi-

ciency.

57

Kerry Rittich does arise in one of the complementary themes of restructuring. The Bank has concluded that rising income inequality is necessary in the economies in transition, that some poverty is inevitable, and that it is both necessary and desirable for optimal productivity that there be a disparity in the rewards of the market.19 Acceptance of this greater inequality is invited by the claim that excessive attempts at interfering with the distribution of income are likely to be both futile and costly.20 Because the basic goal of economic reform, maximizing efficiency and growth, is assumed from the outset in neoliberal discourse and the method, the adoption of the best practices of normal markets, is determined, market reform and reconstruction can be figured as primarily a technical task. Reform proposals sound in a functional register; state performance becomes a question of managerial effectiveness, to be evaluated in terms of the degree to which economic activity is facilitated. However, while much of the conversation around reform is conducted in instrumental or pragmatic terms, discussion of the proper role of the state has a normative dimension as well: as noted above, distinguishing the appropriate from inappropriate concerns and activities of the state is also sometimes described as determining the tasks for which it is legitimate for a state to be involved.21 The discourse of "good governance" in particular productively blurs the distinction between what is instrumentally desirable and what is proper per se. Thus, rather than a matter of policy in which the various roles of the state might be derived from the specific goals which are to be pursued, the question is reversed and certain types of state action are ruled out of bounds ex ante. A spectrum of concerns can be discerned within the ideas of legitimacy and good governance. At one end are concerns about the presence of the rule of law, effective enforcement of legal rules, and knowledge on the part of market participants about the current state of the law.22 However, claims about the legitimate

19

World Bank, From Plan to Market, supra note 1, at 66. "Hungary made strenuous - and costly - efforts to offset rising inequality and has seen little change in income shares by population quintile..." World Bank, From Plan to Market, supra note I,at69. 21 World Bank, From Plan to Market, supra note 1, at 87-88. 22 See "Legal Institutions and the Rule of Law", World Bank, From Plan to Market, supra note 1. This is also one of the most commonly expressed concerns of entrepreneurs throughout the 20

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Neoliberal Images domain of the state in a market economy are also used to discredit legislative and executive actions that are regarded as arbitrary, impractical, improvident or otherwise undesirable. Thus, assertions of legitimacy and the demands of good governance provide normative support to neoliberal claims about the appropriate forms of state "intervention" and the permissible degree of variation among market economies. 2.1.2

THE ROLE OF ANTI-STATE RHETORIC

A number of positive roles are specified for the state in a market economy within neoliberal theory, in particular those which are necessary for the support of private economic activity.23 However, throughout the restructuring agenda, as in the discourse of privatization and "deregulation" in general, the state is invoked as the principal threat to prosperity and the source and location of waste and inefficiency. These themes have been articulated with particular force in the context of transition. It is a tenet of neoliberalism that the presence of the state in economic affairs beyond a limited supporting role inevitably raises the specter of rent-seeking and corruption on the part of officials and capture by special interests, all of which result in the impairment of economic progress.24 In addition, state interventions to enhance welfare tend to be paternalistic and lead to dependency. By contrast, the market is figured as the locus of freedom, democracy, opportunity and selfactualization. While the international institutions such as the Bank have in most instances retreated from the extreme anti-state position that they advocated in the

Central and Eastern European region. See M. Selowsky, "Improving the Environment for Business and Investment in the CIS and Baltic Countries: Views from entrepreneurs and World Bank country economists", Background paper prepared for the Seminar on Enhancing Prospects for Growth in the CIS and the Baltics sponsored by the EBRD, IMF and the World Bank, held at the 1997 Meetings of the EBRD (London, April 13, 1997) http://wbln0018.mrldbank.org/eca/eca.nsf/66d6/5004ed085ca852567dW011a8b8/fc68ea86b7bd79258 525692a0069d9f2 (last visited 11/08/01). 23 The recent positions that the Bank has advanced on this issue can be found in World Bank, The State in a Changing World, supra note 4 and James D. Wolfensohn, Comprehensive Development Framework, supra note 14. 24 This theme is well-developed in: World Bank, World Development Report 1991: The Challenge of Development (Oxford; New York: Oxford University Press, 1991).

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Kerry Rittich

1980s and early 1990s, the critique of the state remains an important strand of neoliberal discourse. Indeed, the prevalence of warnings about the threat to economic prosperity by the state has if anything increased, as concern about government failure and a preoccupation with corruption, non-transparency and lack of accountability have taken center stage on the development agenda.25 This negative characterization of state institutions and state power performs a number of operations. First, the either/or approach to the state/market relationship has the effect of narrowing the perception of the available options and generating consensus around the neoliberal agenda. Second, the emphasis on the dangers which state action presents tends to divert attention from concern over the problems generated by a weak state, such as absent institutions, inadequate regulation and lack of enforcement. By positioning the state as the principal threat or problem, whether to freedom or prosperity, and relentlessly focusing on the dangers of state coercion and abuse of power, attention is also diverted from the well-known problems associated with "private" power. Most significant yet most obscured by the sharp binary division between the state and the market is the state's role in constructing and supporting specific configurations of private power. This is particularly relevant in the economies in transition, given the radical expansion of private power which is central to the reform project as a whole. The use of anti-state rhetoric also helps to depict the state as an entity that is fundamentally external to the market and to society, superstructure to the preexisting domains of the economy and the community.26 When imagined as an

25

World Bank, The State in A Changing World, supra note 4. For a powerful articulation of this view in the context of transition, see Andrei Shleifer and Robert Vishny, The Grabbing Hand: Government Pathologies and Their Cures (Cambridge, MA: Harvard University Press, 1998). For a criticism, see Joseph Satiglit2, "Whither Reform?", supra note 10. 26 This image is characteristic of both liberal and Marxist understandings of politics and the state. As Berger and Piore describe, in both "society is conceived of as prior to politics and as deriving its central features from social and economic factors, not from political ones. The state is necessary only in the sense that it is required to carry out certain functions that society cannot autonomously perform. The state steps in to meet social needs, settle conflicts, and otherwise respond to problems generated in society. It has, according to the theory in hand, more or less autonomy in how it does so. But in none of the theories does the state itself have a primary impact on social and economic development. The state may facilitate and speed up modernization, but it does not thereby alter in any significant way the end results of the process". S. Berger and M. Piore, Dualism and Discontinuity in Industrial Societies (Cambridge, [U.K.]; New York: Cambridge University Press, 1980), 137. 60

Neoliberal Images external entity rather than as a set of institutions and practices which are inseparable from and constitutive of social and economic life, the state is relegated to a technical or instrumental role in economic affairs. From this position, the state can only respond appropriately or inappropriately to external forces and processes that are largely beyond its control. The use of anti-state rhetoric and its corollary, the sanctification of private economic activity, tends to encourage a monolithic and misleadingly simplistic view of both the state and the market. The result is that, on the one hand, the deeply layered and varied nature of state institutions and the multiplicity of roles which the state performs even in the realm of the economy tends to be obscured. Rather than a detailed consideration of the merits or demerits of particular actions in specific circumstances, disparate if not unrelated state functions which are in no way entailed by each other are conflated or confused and thereby discredited.27 On the other hand, the varied, often conflicting nature of private interests and diversity of possible ways of structuring private rights and recognizing these conflicting interests is also obscured. The construction of the state as both a common threat and fundamentally external entity to community, economy and society plays a normative rather than merely descriptive function. This operates in a particularly powerful way in the context of transition. First, it helps to set up a situation in which such policies as the privatization of state owned assets and enterprises, the deregulation of markets and transactions and the containment of the state power become the obvious or necessary solutions. Second, it derails controversy and softens objections that might surface with more force over changes to state powers and institutions and their connection to contestable social priorities. One effect of the attempt to maintain a firewall between the state and society is the denial or occlusion of the ways in which the state functions as an important site of distributional struggle among different social groups. The institutional structures of the state are key in all market economies to the coordination and cooperation necessary to the functioning of social and economic life; this is why they must be so central to market reform projects. However, these institutions also

27

An exploration of the different concepts of state intervention in the economy can be found in Thomas J. Biersteker, "Reducing the Role of the State in the Economy: A Conceptual Exploration of IMF and World Bank Prescriptions", 34 Int'l Studies Q. 477 (1990).

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Kerry Rittich mediate between different social interests and groups, embodying, generating and reflecting a particular distribution of resources and power. Indeed, it is these distributional effects which are arguably the key distinguishing feature among various state arrangements.28 Because institutional arrangements can be regarded as a sedimentation of past decisions about the allocation of power and resources to different social actors and groups, institutional reform and reconstruction inevitably opens up and frequently transforms these allocative and distributional decisions. Even where institutional change might be desired for efficiency or other reasons, any reconfiguration of state institutions or alteration of the scope of state power inevitably engages distributional issues. As a result, restructuring is likely to be controversial. While this feature is not an argument either for or against any particular change, it does suggest the ways in which the neoliberal position that market reforms are universally beneficial is likely to be misleading.

2.2 Legal and Economic Integration One of the major forces that drives neoliberalism is a deep belief in both the desirability and inevitability of global economic integration. Indeed, neoliberals are among the main authors of the current globalization thesis in both its descriptive and normative forms. Ever-closer transnational economic interdependence is posited as both an accurate account of the direction of the world economy and as the appropriate goal for developing and transitional states, given the benefits that can be expected to accrue from adopting a pro-integration strategy and the risks of pursuing an independent path. The nature, extent, effects and limits of global economic integration are among the most contested contemporary public issues.29 There is no agreement about the degree to which integration has been achieved; in the view of some analysts, the process remains partial, incomplete and highly uneven.30 Nor is there 28

Jack Knight, Institutions and Soda/ Conflict (Cambridge [England]; New York, NY: Cambridge University Press, 1992). 29 There are numerous examination of these debates. See for example, R. Boyer and D.Drache, States Against Markets: The Limits of Globalisation (London; New York: Routledge, 1996); P. Hirst and G. Thompson, Globalisation in Question? The International Economy and the Possibilities of Governance (Cambridge, UK: Polity Press; Oxford, UK; Cambridge, MA: Blackwell Publishers, 1996). 30 Id.

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Neoliberal Images any agreement concerning the extent to which it represents an unprecedented state in global economic relations.31 However, the importance of the globalization narrative lies only partly in any descriptive accuracy to which it might be able to lay claim. The thesis about the inevitability and desirability of globalization performs an equally important disciplinary and regulatory function in economic affairs. Indeed, emanating from the international financial institutions, the globalization thesis helps produce the very effects it purports to describe as these institutions possess considerable power to define the demands of global economic integration, through their role in establishing the criteria for market-worthiness on the part of states.32 A major effect of the success of the progress-through-globalization narrative is that those who jump on the bandwagon to facilitate the process of economic integration come to seem reasonable and pragmatic, while those who either resist or pose alternative interpretations of events seem alternatively hopelessly idealistic and old-fashioned or simply wrong.33 For example, within the Bank, nonacceptance of the globalization narrative tends to be interpreted as self-interested, ill-informed or illegitimate "political" resistance to reform efforts and economic progress, rather than legitimate doubt or disagreement about the path of economic development or resistance to its effects. Hence, the thesis of global economic integration is crucial to legitimating neoliberal proposals; in important ways, it defines the community of those who are to be taken seriously in the discussion and design of the new economic order. Once the inevitability of global economic integration is established as the basic framework in which all states now operate, a number of facts and propositions appear to follow simply as a matter of course. First, individual states have increasingly limited room to manoeuvre and to pursue regulatory and policy options that diverge significantly from those adopted by other states, as they are in competition

31

See for example, Jeffrey G. Williamson, "Globalization and Inequality Then and Now: The Late 19th and late 20th Centuries Compared, paper presented to the American Economic Association, San Francisco, January 5-7,1995, on file with the author. 32 Dani Rodrik, "Governing the Global Economy: Does One Architectural Style Fit All?", Paper prepared for the Brookings Institutions Trade Policy Forum conference on Governing in a Global Economy, April 15-16,1999, on file with the author. 33 David Kennedy, "Receiving the International", 10 Connecticut Journal of International Law 1(1994)

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Kerry Rittich with each other for resources and investment. Indeed, because of regulatory competition, states are at risk of losing the resources and investment they already have if the legal and economic climate for business turns out to be more favorable elsewhere. Thus, the thesis about global economic integration pushes states in the direction of "normal" markets. It provides an impetus for harmonization, simultaneously inducing states to institute "attractive" laws and to eliminate or reduce burdensome regulations and fiscal policies. It also operates to discredit divergent or heterodox economic and legal arrangements. Among the discredited arrangements are many of the labor regulations and the extensive social welfare programs typical of many western European market economies. The argument is that, because of the competitive pressures resulting from the globalization of production and capital flows, they are no longer sustainable in their more robust form. Certainly, no developing or transitional state can safely aspire to follow the New Deal or Keynesian policies of the industrialized states in the post-war years. In market reform discourse, law is the entry card to global markets in two senses. Fkst, the advancing process of economic integration is used by the international financial institutions to argue for policy and regulatory harmonization. In their view, the principal means by which states can favorably position themselves to attract capital and investment is through the adoption of policies and institutions that are compatible with the demands of global markets. While it is not maintained that states must have exactly the same laws or do exactly the same things, there are a number of forces at work which tend to push in the direction of harmonization and convergence. In the words of the Bank, "a strong commitment to international integration can also stimulate demand for law and provide market-friendly models of legislation....The point here is not that integration will push transition countries into precisely replicating foreign laws, but that it will fuel demand for certain types of law and help policymakers design laws that foster links with the outside world".34 However, these institutions also actively promote particular legal reforms, through policy and regulatory interventions in the states to which they lend. These activities in turn intensify the integration which the institutions continually remind states is the condition in which they must now operate. Even apart from the 34

64

World Bank, From Plan to Market, supra note 1, at 88.

Neoliberal Images leverage which these institutions exert through lending activities, there may be powerful external inducements to legal and regulatory harmonization and institutional conformity. The desire to participate in regional and global trade agreements and economic organizations may induce states to change laws and policies, creating a degree of regulatory harmonization and enhancing the push toward convergence.35 For example, in Central and Eastern Europe, the pressure toward some degree of policy and regulatory convergence is significantly enhanced because membership in the European Community is predicated upon conformity with its policies in such areas as budget deficits, taxation, competition and trade laws.36

2.3 The Role of Law Detailed prescriptions about law have not always been central to the neoliberal development agenda. At the early stages of transition, market reformers paid relatively little attention to the institutional requirements of markets, acting on the belief that markets would spring up naturally as long as the impediments to their operation were removed. What mattered was to get the state out of the economy and to privatize property; all else was secondary to simply getting assets into the hands of those who had incentives to put them to productive use.37 Concern about failing or stalled development, as well as the crises that have routinely beset developing states, have given rise to an enhanced focus on questions of governance, legal regulation and state institutions. Law has now been embraced as the solution to a vast array of economic problems, and the successful operation of private markets is increasingly linked to adherence to the rule of law and the presence of the right institutions. Yet while the turn to law is represented as the way forward, especially for states whose economic development is strangled

35 36

Id. Id.

37

Dani Rodrik, "Development Strategies for the Next Century", World Bank, Annual Bank Conference on Development Economics, Washington, DC, April 2000 http://orion.forumne.com/ABCDE/ftles.ftg/145jvdrikJapan.pdf fast visited 11/08/01); Gerard Roland, "Corporate Governance Systems and Restructuring: The Lessons from the Transition Experience - Preliminary Draft", paper prepared for World Bank Annual Bank Conference on Development Economics, Washington, D.C., April 2000 http://orion.forumone.com/ABCDE/ ftles.fcgif 140_roland.pdffa^ visited 11 /08/01).

65

Kerry Rittich by the grip of politics and corruption, when invoking the benefits of law, it is important to realize that market reformers are not referring to all forms of law, nor even to the rule of law simpliciter. Rather, reformers have in mind particular types of laws. Some forms of law and legislation might be bad or wrong. They may represent the "interventionist" or "arbitrary" state actions which are subversive of good economic order. Laws may be "ideological" or redistributive, deviations from the basic laws which represent the neutral ground rules of economic activity. They may interfere with private rights. Consequently, neoliberal policy involves not simply support for law but continuous determinations about the distinction between good and bad laws. The arguments about the properties, good and bad, of different laws are one of the major mechanisms by which neoliberals build not simply markets, but particular types of markets. Central to neoliberal legal discourse is the belief that there is a closed set of appropriate laws which provide the basic framework for economic transactions in market economies.38 A canonical list of legal rules and regulations is regarded as either foundational to the very existence of market economies or the best way to manage a market economy. Property rights are the bedrock to the regime, providing the foundation for the system as a whole. Implementing these laws, moreover, is described as the way to depoliticize markets and to institute a neutral framework within which market actors will transact and generate economic growth. In the neoliberal narrative, law is central, the sine qua non of economic development. Throughout the policy analyses of the Bank, there are countless references to the need for "good laws", support for the rule of law and the withdrawal of the state from administrative control.39 The clear definition and enforcement of rights is represented as a precondition to successful economic development. Conversely, the absence of a rule of law is thought to pose a threat to growth, as it generates uncertainty as to whether the agreements into which parties have voluntarily entered will be honored and enforced and investments thereby protected.

38 For a discussion, see Roberto Unger, Democracy Realised: The Progressive Alternative (London: Verso, 1998). 39 See for example World Bank, From Plan to Market, supra note 1, at 87.

66

Neoliberal Images In the context of transition, the rule of law is distinguished from regimes of administrative command and control in which "arbitrary" state action prevails. Law is the instrument that gives the individual power to resist the state: "Where the rule of law is in force, laws are applied fairly, transparently, and evenhandedly to all; individuals can assert and defend their rights; and the state's powers are defined and limited by law".40

Limits to state power, certainty of rights and entitlements, and predictability of enforcement are regarded as especially important where the intent is to attract foreign investment. Arbitrary state policies and changes to the law, by contrast, undermine the stability required for economic development. However, the relationship between the market and law also runs in the other direction. According to the Bank, not only does law underpin the market, but law itself is an object of supply and demand: "the rule of law can take hold only if good laws and competent institutions are supplemented by demand for them".41 As it turns out, the market is also the instrument to restrain the state from arbitrary actions and induce respect for law, for "when managers require a law-abiding reputation to purchase supplies or raise capital, they will think twice about violating the sanctity of contract or abusing minority shareholders".42 Economic investors and actors thus are pivotal: they are the very persons who both rely on the law and can be expected to exert the demand for law. The markets which result from the implementation of the canonical neoliberal rights are marked, at least on the surface, by the exclusion of distributive concerns and the privileging of flexibility over security. However, while this description captures part of the character of neoliberal markets, it is also misleading in important ways. Certain parties are the beneficiaries of greater entitlements under this regime, while others see their entidements weakened. For example, when markets are "deregulated", they typically produce less security and greater risk for workers. However, the resulting or residual legal framework provides a wide range of protection and security for the holders of capital. Consequently, it is simply missing something significant to say that neoliberal markets are deregulated or riskier. It all depends on where you stand. 40

Id

41

World Bank, From Plan to Market, supra note 1, at 88 Id

42

67

Kerry Rittich As the following discussion will outline, what is missing from the list of rules and institutions may be just as important as what is present. For example, the absence of labor, financial or environmental regulations does not mean that there are no rules governing labor, financial or environmental concerns; rather it means that other legal entitlements, such as property and contract rights, effectively govern these issues. Prioritizing some entitlements while sequencing or delaying the implementation of others, for example on the belief that some are less fundamental to the operation of the market than others, has similar effects; the entitlements that are recognized effectively structure the field in which economic transactions take place. 2.3.1

THE USE OF RIGHTS

Market reforms are often described in terms of protecting or enhancing private rights. Part of their appeal lies in the framework in which they are presented, the language of rights. The use of rights discourse is particularly important in the context of transition, as it allies the project of market reform with a number of powerful goals and objectives beyond the economic, while the moral currency provided by the language of rights gives reforms themselves an aura of authority and legitimacy. For example, casting market reforms as the enhancement of rights appears to place reformers on the side of the individual and suggests that reforms will provide protection against the abuse of the powerful. It associates the project of market reform with freedom and democracy. The symbolic capital43 of rights in the contemporary popular imagination and the semantic linkage of a variety of disparate values and objectives through the language of rights gives reformers a powerful vehicle by which to harness the appeal of human rights to market reforms. This opportunity is not lost on reformers, as human rights and property rights are increasingly allied in the discourse of markets.44 In short, the value of the discourse of rights is that it associates reforms with the merits of liberalism, the Enlightenment and modernism as against feudalism, totalitarianism and back-

43

P. Bourdieu, Outline of a Theory of Practice, Richard Nice, trans. (Cambridge ; New York: Cambridge University Press, 1977). 44 See for example, James D. Wolfensohn, Comprehensive Development Framework, supra note 14. 68

Neoliberal Images wardness, while greater liberty and dignity, as well as improvement in material wellbeing, themselves become linked to a particular set of market entitlements. Much is elided and confused in the process. However pervasive the assumption about the benefits that automatically flow from the institution of a regime of rights, the benefits may be overestimated for at least two reasons.45 First, missing from the picture is the issue of conflicts of claims and interests between different groups or classes of rights holders. Although these claims and interests may be recharacterized and transformed through the institution of a regime of private rights, they are not automatically harmonized, nor are the fundamental conflicts and choices embedded within them automatically resolved. No configuration of private rights is neutral as between all parties; the type and nature of rights which are recognized and the way in which initial entitlements are allocated will unavoidably empower individuals and groups in different ways. Nowhere do these observations have more force than in the context of the transition from plan to market economy, when the creation of an entire regime of private entitlements is envisioned. Second, restructuring entails inevitable interference with pre-existing institutions and practices. The implementation of reforms will disrupt established modes of delivering goods and services, whether or not access to those goods and services was formally enshrined in terms of legal rights. However, as it is rarely acknowledged by reformers that the regimes which are to be replaced or restructured were not simply entitlement vacuums, but different regimes for allocating economic resources,46 the shift in entitlements may be easily missed, mystified in the language of rights. What is significant here is that any resulting advantage and disadvantage is not merely a "transitional" or short term effect. Legal rights generate material endowments that will better enable some rather than others to prosper in the new market-centered regimes. While the recognition of new rights, for example private property rights, will strengthen the position of some, the loss of these other forms of entitlements is very likely to make others worse off. Indeed, the likelihood of persistent disadvantage from reforms is increased by the denial that any redistribu-

45

This issue is explored in more detail in chapter 4. L. Specht, "The Politics of Property: Soviety Property as a Bundle of Rights", S.J.D. dissertation, Harvard Law School, April, 1994, on file with the author. 46

69

Kerry Rittich tion or repositioning of different groups is part of the process of legal reforms. The reason is this: when questions of disadvantage are delinked from the basic structure of market entitlements, the importance of those entitlements recedes into the background, and solutions are sought elsewhere, for example through the state or in civil society. This is precisely what is reflected in neoliberal policies in the states in transition. 2.3.2

LAW VERSUS REG ULA TION

Neoliberal legal discourse is heavily invested in the idea of "core" set of legal rights that promote efficiency and place spheres of private control beyond the reach of politics and the state. The priority given to these rights has the effect of displacing numerous other laws from the reform agenda. The argument for particular types of laws is typically made in one of two ways. The first argument is simply that particular legal rules such as property and contract are intrinsic to the nature of a market economy. The other is that legal rules are essential for more instrumental reasons, such as ensuring maximum economic growth or foreign investment. However, because continual determinations about desirable or undesirable legal rules must be made, it is helpful to have a means of distinguishing among different rules that will also justify these decisions. The solution is a distinction among legal rules within neoliberal discourse which is often articulated as the recognition and enforcement of rights on one hand and regulation by the state on the other. This distinction between rights and regulation involves a normative evaluation which can be broadly described as follows: while "law" in general is a good idea, many forms of legal regulation are not. Laws are the protection of private rights; however, regulations constitute intervention on the part of the state. Laws are beneficial because they create incentives and promote growth, while many regulations impair growth and efficiency. Legal regulation accordingly falls on a spectrum ranging from the absolutely essential, to the desirable, optional, extraneous, less desirable, and finally positively dangerous and dysfunctional. In general, good legal rules are differentiated from bad according to their contribution to efficiency and growth, their capacity to unleash entrepreneurial energy and support the efforts of the private sector. In short, they are measured in terms of their efficiency effects. Consistent with the

70

Neoliberal Images focus on promoting private economic activity and containing the growth of the state, foremost among the basic laws are those which enable economic transactions and provide the framework for private sector investment. These include rules for the definition, protection and transfer of assets; the organization of corporate entities; the relations between market actors; and the promotion of competition and compensation for market failure.47 Also required are rules and regulations governing corporations, foreign investment, bankruptcy, credit and securities regulation and competition law,48 as well as protection of intellectual property. Labor rights and human rights have recently been added to the list.49 However, they remain latecomers to the regulatory agenda whose status and content remains uncertain; the status of labor rights in particular remains precarious,50 for reasons to be described below. Among the canonical ideas is that economic development requires, above all, defined property rights. It is reiterated over and over again that ownership rights provide the necessary control and incentives to boost productivity and induce the proper monitoring of investments. The following statement is a representative summary of the governing rationale: "Property rights are at the heart of the incentive structure of market economies. They determine who bears risk and who gains or loses from transactions. In so doing they spur worthwhile investment, encourage careful monitoring and supervision, promote work effort, and create a constituency for enforceable contracts. In short, fully specified property rights reward effort and good judgment, thereby assisting economic growth and wealth creation. In addition, a wide distribution of property rights can counteract any concentration of power in the political system and contribute to social stability."51 While there are occasional references to the complexity and variety of property rights in successful market economies,52 concepts of property and private 47

See World Bank, From Plan to Market, supra note 1, at 88. See "Legal Institutions and the Rule of Law", World Bank, From Plan to Market, supra note 1, at 87-97. 49 See James D. Wolfensohn, Comprehensive Development Framework, supra note 14. 50 See for example, World Bank, World Development Report 2000/2001: Attacking Poverty (Oxford; New York: Oxford University Press, 2001). 51 World Bank, From Plan to Market, supra note ,1 at 48-49. 52 Id, at 88. 48

71

Kerry Rittich rights are invoked in reform proposals in ways that suggest that the nature and content of a regime of private rights is self-evident and non-contestable as well as widely understood and accepted.53 In the context of transition, the discussion of property and rights proceeds largely in terms of the contrast between collective and private ownership and administered or plan versus market economies. Each system is represented in a highly stylized form; collective ownership is associated with plan economies, while private ownership with the market. The dominant image and understanding of property that pervades the Bank's policy discussions, the type of property right that is promoted as the cornerstone of economic development, is a right that comprises the power to use, alienate, exclude and appropriate any income generated.54 It is a sphere of absolute control, in which regulatory constraints and other fetters on these powers are largely absent.55 The emblematic problem to be solved or avoided through the institution of private property rights is the legendary "tragedy of the commons". In this property fable, common property or multiple use rights contain an inherent drawback: they are inefficient as compared to a regime in which rights are vested in a single owner, where the cost of any behavior which is not maximally efficient is imposed directly and exclusively on one owner who also has complete control over the property in question.56 According to this logic, where there are multiple interests and users, there are inadequate incentives

53

The neoliberal assumptions with respect to property rights and economic growth in states in transition to market economies has been challenged or qualified in a number of pkces. See Gil Eyal, et al, "The Theory of Post-Communist Managerialism", 222 New Left Review 60 (March/April 1997) (effective control of enterprises in the CIS is vested in managers, unrelated to property rights; ownership may actually be detrimental). See also J. Stiglitz, Whither Socialism? (Cambridge, MA: MIT Press, 1994) and J. Stiglitz, "Whither Reform?", supra note 10 (noting the degree of economic development which is occurring in China despite the lack of defined property rights). A review of the emerging diversity and complexity of property rights in the economies in transition can be found in David Stark and Laszlo Bruszt, Postsocialist Pathways: Transforming Politics and Property in East Central Europe (Cambridge, UK; New York: Cambridge University Press, 1998). 54 World Bank, From Plan to Market, supra note 1, at 48. The role of the "unified" property right in neoliberalism and the possibilities for alternative configurations is discussed in Roberto Unger, What Should Legal Analysis Become? (London: Verso, 1996). 55 World Bank, From Plan to Market, supra note 1, at 88. 56 See for example James M. Buchanan, Property as a Guarantor of Liberty (Aldershot, Hants, UK; Brookfield, VT: E. Elgar, 1993).

72

Neoliberal Images for anyone to put property to its best use, with the result that there are inevitably losses in wealth maximization. The other linchpin of the system is the enforcement of private agreements. Not only must private property entitlements be recognized and protected, the state must use its authority to guarantee that private agreements will be enforced as well.

2.3.3 MARKET FAILURE AND STA TE INTERVENTION Departures from basic contractual and property rights or additions to the basic regulatory regime are, however, entertained in a number of scenarios in neoliberal theory. The logic governing such "interventions" can best be understood from the disciplinary standpoint of those who make decisions about market design: law is approached primarily as a set of incentive structures to promote efficient economic activity. The major rationale for intervention then is the failure of the market to allocate resources efficiently.57 Potential sources of market failure include the presence of substantial transaction costs, incomplete markets, nonprovision of public goods, monopolies, information gaps and asymmetries and negative externalities. Intervention may also be warranted in some instances for "equity" reasons; however, such interventions are clearly exceptional.58 However, even in the case of market failure, the presumption lies against regulatory intervention, for at least three reasons. First, the identification of market failure alone does not establish the case for intervention, because in the view of neoliberals, government failure is as common as market failure.59 Consequently, the cure may be worse than the disease. The general problem with regulatory inventions is described in the following terms: "interventions may be guided by political objectives, be poorly implemented, create vested interests, or give rise to rents and corruption. Well-intentioned government intervention to correct market failures may prove even worse than suboptimal private provision. In a market economy the burden of proof regarding public intervention lies with the government."60

57

World Bank, The State in a Changing World, supra note 4, at 26.

58

Id. Id.

59

60

World Bank, From Plan to Market, supra note 1, at 111. 73

Kerry Rittich A second set of constraints on regulatory initiatives arises out of pragmatic considerations. Institutions such as the Bank increasingly stress the need to match regulations to institutional capability,61 cautioning states to desist from intervening where they lack sufficient and effective administrative capacity. Because of such limitations, transitioning and developing states are encouraged to remain focused on the "basic" laws described above. Third, growing emphasis is placed on non-state solutions rather than state intervention in response to market failures. Proposed solutions may take the form of the introduction of competition, voice and self-regulation to achieve particular social objectives. Public-private collaboration and citizen initiatives in particular are encouraged.62 Alternatively, "direct public action" to improve health or environmental concerns may be preferable to attempts to regulate working conditions.63 This reflects the belief that social concerns are best addressed outside the market, rather than through the market. In general, the move is toward flexibility in regulation and away from reliance on top-down, rule based regulation.64 Other than property entitlements, there is a concern about recognizing a broad number of substantive entitlements. Despite the general presumption against regulatory "interventions", there are a number of scenarios in which regulation is actively encouraged. Nonetheless, one of the conceptual puzzles in the neoliberal theory of regulation is this: when should market failures be compensated or corrected and when they should not? The issue is the following. In numerous situations, it is clear that an economic argument could be advanced for "regulation", understood as a change to the existing legal regime, due to the presence of some market failure or transaction cost. Indeed, it is not unusual to encounter competing efficiency-based rationales regarding the optimal regulatory bases of productivity and economic growth. This is the heart of the unresolved disputes over such issues as the role of employment standards and collective bargaining legislation in enhancing productivity and

61

This is a major theme in the 1997 World Development report, The State in a Changing World, supra note 4. 62 World Bank, The State in a Changng World, supra note 4, at 75. 63 World Bank, Workers in an Integrating World, supra note 15, at 5. 64 World Bank, The State in a Changing World, supra note 4, at 71. 74

Neoliberal Images economic growth.65 Because such circumstances are routine rather than exceptional, there is typically a range of arguments for regulation available that might be consistent with the logic of wealth maximization and efficiency. However, it seems equally clear that in many if not most cases, these available arguments are not deployed by neoliberal policy and regulatory analysts. So the question ultimately becomes, under what ckcumstances does the presumption against regulation hold and when is it relaxed? There is no comprehensive rationale or set of guidelines to be found in neoliberal policy recommendations other than first, regulations should enhance efficiency and second, in a market economy, the burden of proof lies against those seeking regulation.66 There is also no clear answer as to how far or in what direction to regulate once intervention is indicated by the presence of some market failure, inefficiency or externality. Some clues to the logic of regulation are to be found in the overarching concern for "a commitment to competitive markets and an accompanying willingness to eliminate obstacles to their operation"67 and the often-expressed need to "unleash" a competitive market economy.68 The guiding idea is that all regulations should be designed to further efficiency and make positive contributions to growth.69 Yet because what actually contributes to growth over the long term is often the very question to be answered, in the end, efficiency-enhancement often proves to be an unsatisfactory explanation. Moreover, many existing market economies clearly diverge from this model, going beyond the objective of simply minimizing constraints on capital. However, another answer to the regulation/intervention conundrum is simply that, even though all governments regulate, some regulations go beyond what is "normal" in market societies.70 In other

65

See for example, S. Deakin and K.D. Evving, "Inflation, Economic Performance and Employment Rights",]. Michie and J. Grieve-Smith, eds., Managing the Global Economy (Oxford ; New York : Oxford University Press, 1995). 66 World Bank, From Plan to Market, supra note 1, at 111. 67 World Bank, The State in a Changing World, supra note 4, at 64. 68 The Challenge of Development, supra note 24; World Bank, The State in a Changing World, supra note 4, at 62. 69 World Bank, From Plan to Market, supra note 1, at 77. 70

Id, at 89.

75

Kerry Rittich words, regulation has its limits, and proper regulation conforms to best practice in the dominant market societies. Where regulation is indicated for reasons of efficiency, regulatory disputes become matters of misinformation or ignorance, to be remedied by finding the "right" answer. Where arguments are made about normal regulation, they end up being arguments in favor of particular practices simply because they are dominant. However, in both cases, regulation ends up being primarily a technical matter best left in the hands of experts, rather than something connected to larger normative or political debates. It is sometimes recognized that equity may prompt state intervention even in the absence of market failure.71 There are also occasional concessions to the need for regulation on political grounds, such as "public acceptance of the fairness and legitimacy of market outcomes".72 Both are intriguing suggestions, as they signal the presence of the distributive dimensions and the political elements which are ignored or denied in reform or restructuring as a whole. However, these are minor, almost forgotten, themes in restructuring. The general rule is that equity and distributional concerns should be dealt with through safety nets and income transfers rather than through the regulation of the market.73 This is because regulatory solutions, unless designed to correct a proven market failure, are likely to introduce inefficiencies into the system and distort incentives, thus subverting the goals of market reform and reconstruction. The exclusion of equity and distributional concerns from the debate about market design and their consignment to the legislative and political realm, too, permits regulation to remain largely the domain of experts. However, at best, such arguments and propositions are highly general; in and of themselves they do not give rise to any "regulatory logic" or mechanism by which to determine when interventions are indicated. The reasons and policies advanced for and against particular types of regulation range in many different directions. This is unsurprising, and arguably entirely desirable. More significant perhaps than the presence of competing regulatory rationales is that the choices 71

World Bank, The State in a Changng World, supra note 4, at 26. W.,at65. 73 For a discussion of the merits of redistribution outside of the legal system, see Louis Kaplow and Steven Shavell, "Why the Legal System is Less Efficient than the Income Tax in Redistributing Income", 23 J. of Legal Studies 667 (1995). 72

76

Neoliberal Images among alternative modes of rationalizing or explaining regulatory interventions are themselves typically unexplained. "Liberalization" means deregulation in some cases but not in others; the presence of negative externalities might indicate regulation in some instances but not others. The failure to address the question of how determinations are to be made at this level makes the arguments often seem arbitrarily and opportunistically deployed; policy explanations ultimately raise as many questions as they answer. Nonetheless, it turns out that some insight can be gleaned by looking at the contexts in which regulatory debates take place. The following three examples, financial regulation, environmental regulation, and labor regulation give some sense of the varied and contradictory ways that regulatory arguments are deployed. The case for financial regulation is expressed in the following terms: "With economic liberalization, many areas of regulation have been recognized as counterproductive, and wisely abandoned. Yet in some areas the traditional rationales for regulation remain, and market liberalization and privatization have themselves brought new regulatory issues to the fore... [L]iberalization in the financial sector is not the same as deregulation. The case for regulating banking is as compelling as ever...[emphasis added]"74 Banking regulation is defended primarily on the grounds that it is essential in order to correct information asymmetries. The reason given is that without regulation, outsiders would be unable to judge the health of financial institutions. Banks may appear to be healthy, even if they lack the resources to repay loan principals and are only able to keep up interest payments by taking up new loans. Failing banks typically engage in reckless gambles, driving up losses before the inevitable crash. Furthermore, because of the development of derivatives and other new financial instruments, the balance sheets of financial institutions are difficult for outsiders to understand and to monitor.75 Beyond this, market failure in the financial sector is regarded as particularly serious. Bank failures tend to be contagious; liquidity may drain out of the system as a whole with severe macroeconomic

74

World Bank, The State in a Changing World, supra note 4, at 65.

75

Id.

77

Kerry Rittich consequences. Given the economic implications of a lack of confidence in the integrity of the banking system, the case for regulation is compelling.76 Presented in this light, the case for banking regulation does seem compelling. However, what is significant is not the conclusion but rather how it is explained. Although the burden of proof as a general rule lies on those advocating regulation because of the economic costs it is said to exact, in this case the inevitable regulatory tradeoffs are not mentioned, nor are the winners and losers identified. These tradeoffs might include lower interest rates for depositors in return for greater security, or less capital available for small business loans. Moreover, the claims about information asymmetries and the consequences of failure in this instance seem less unique once the arguments are placed in a broader context; the question is why the same arguments might not apply elsewhere. The market is rife with examples of information asymmetries that have potentially serious consequences; the financial sector is not entirely exceptional in this regard. Corporations, for example, routinely have more information on the safety of their products than do consumers and, because of the division of labor within the workplace, not infrequently possess more knowledge than do workers about the actual health and safety risks of particular manufacturing processes,77 as the costs of alternatives are normally a crucial determinant in the adoption of particular modes of production. Inability to follow the complex financial operations of corporations is probably the rule rather than the exception for many outsiders. And the failure of large scale corporations, particularly in communities that are heavily dependent on them, may have devastating effects which rival those of bank failures.78 However, given the presumption against intervention, many of these potential effects pass without scrutiny, presumably to remain uncorrected in the model market. The general question which is raised, how to determine which information asymmetries ought to be corrected and which ought to lie as they fall, remains unaddressed and indeed mysterious.

76

Id.

11

G. Calabresi, The Cost of Accidents: A Legal and Economic Analysis (New Haven: Yale University Press, 1970), 90-92. 78

78

J. Singer, "The Reliance Interest in Property", 40 Stanford Law Rev. 611 (1988).

Neoliberal Images

The logic of the regulation/non-regulation conundrum becomes even more complex in the case of the environment. The presence of externalities is a classic instance in which regulation is often justified, as negative externalities from pollution have long been identified as a source of economic inefficiency. Notwithstanding, the neoliberal solution to environmental externalities turns out to be something other than regulation; moreover, "technocratic approaches" to regulation are eschewed, even though elsewhere they are the rule. Here is how the reasoning goes: "even countries with strong institutions find environmental regulation immensely challenging....the costs of many ... forms of damage are diffuse, and may be invisible even to those closest to the source of the pollution...Pollution emissions can also be tricky to measure. And the environmental consequences may depend heavily on the demographic and ecological features of the surrounding area. A further complication is that the political incentives of community, business, and political stakeholders can foster ambiguity and negotiated outcomes rather than predictable and consistent implementation. Poor communities daily confront a dismal bargain, borrowing immediate survival against long-term environmental degradation. Private firms weigh the predictable costs and the benefits of complying with well-defined environmental regulations against the prospect of cutting costs by avoiding regulations altogether. Consequendy, politicians may often conclude that environmental inaction is the politically expedient course. In this climate of ambiguity...purely technocratic approaches to environmental regulation have little hope of success."79

In this situation, states are counselled that what is needed are approaches that "rely at least as much on public information and citizen participation as on formal rules".80 The following factors, then, are said to weigh against environmental regulation in many contexts. The costs of damage are dispersed and difficult to measure and the impact of regulatory interventions may vary across contexts. Environmental regulations provoke ambivalent reactions in the community because they exact costs in addition to providing benefits. To complicate things further, differ79 80

World Bank, The State in a Changing World, supra note 4, at 66. Id.

79

Kerry Rittich ent groups have different opinions as to their value and consequently may be prepared to bargain over and ultimately trade off the benefits of regulation. Alternatively, for the same reasons, they may simply fail to comply with those that do exist. Private firms may be tempted to circumvent regulations to cut costs; politicians may collude with them because it is politically expedient to do so. This might be read simply as a rueful description of the political fate of regulatory initiatives, along with an admonition not to expect too much of law and to be pragmatic about institutional limitations. Yet however appealing this explanation, it runs directly into conflict with the main neoliberal thesis about regulation, which is that clear rules and defined incentives are essential to spur economic development. Arguments about the political exigencies surrounding regulation and the inevitability of "negotiated compliance" could be met, as they are elsewhere in neoliberal policy discussions, with exhortations to the state to crack down on corruption, strengthen administrative capacity and respect the rule of law if economic development is not to be subverted. Moreover, the drawbacks which are identified in the context of environmental regulation could easily be applied to numerous other regulatory situations. Determining both the aggregate costs and the distributive effects of regulatory interventions is a notoriously difficult exercise. The effects of regulation are routinely, rather than exceptionally, far-reaching, diffuse and variable; at some point, the feedback effects and intersection with other rules makes the determination of cost quite incalculable. Regulations almost always exact costs at the same time as they provide benefits, both within and among different social groups. Conflicts among interests are at the heart of regulatory initiatives; it is more common to have struggle than agreement over their form and content. Moreover, even assuming agreement could be reached on these matters, there is no agreed upon formula for determining the level or stringency of regulation; the same conflicts of interests often simply surface again at this point. Resistance to regulation is commonplace. Indeed, regulatory shortcuts and non-compliance are time-honored ways to increase profits: for example, there are routine failures of compliance in landlord and tenant situations and occupational health and safety matters. Finally, it is wellknown and accepted within the neoliberal paradigm that regulatory initiatives are typically subject to political factors which are external to any efficiency calculus. The ultimate structure of regulations commonly results from the pull and demands of various constituencies, rather than from the operation of the general or public 80

Neoliberal Images interest in the abstract, whether determined on the grounds of efficiency or anything else. With respect to environmental regulation, there is a frank admission that regulation is as much a political as a technical exercise. Furthermore, political considerations not only affect the outcome of regulatory efforts, but enter into the calculus at the implementation stage. The larger questions that begin to surface here, yet remain largely unaddressed in neoliberal policy discussions, are why and when such complications come to weigh against regulatory interventions in the first place, and why they are dispositive in some contexts but not others. Labor and employment regulation directly raises the question of distribution of resources and allocation of power through the market. One of the hallmarks of neoliberal approaches to economic policy and regulation is a marked hostility to labor and employment regulations. Employment standards, affirmative action programs and collective bargaining all attract criticism on the ground that while they may protect vulnerable groups, they also "introduce rigidities and hinder the deployment of labor".81 The classic rationale for both employment standards and collective bargaining regulation is to redress the persistent, structural disparities in bargaining power between workers and employers that otherwise obtain under regimes of contract law modelled on commercial relationships.82 They are primarily directed at distributive concerns and ensuring industrial democracy, rather than efficiency concerns. This distributive dimension is acknowledged by the Bank.83 Yet it is also regarded as a fault that unionization does change the balance of power between workers and capital, and that at the same time it creates dualism within the labor force and disparities among workers through the creation of a favored, protected sector of the workforce. In the view of the Bank, the problem with unions is this: "Unions do often act as monopolists, improving wages and working conditions for their members at the expense of capital holders, consumers, and nonunion (unorganized) labor. The higher wages unions win for their members either reduce business profits or get passed on to consumers in the

81

World Bank, Workers in an Integrating World, supra note 15, at 70.

82

Freeman and Medoff, What do Unions Do? (New York: Basic Books, 1984). W,at79.

83

81

Kerry Rittich form of higher prices. Either result leads unionized firms to hire fewer workers, increasing the supply of labor to the unorganized sector and depressing wages there Where wages for the relatively few workers who are unionized are pushed up, the actions of unions can adversely affect the distribution of income."84 Labor and employment regulations may be similarly counterproductive, even for workers: "many governments ...regulate wages and job security - and these policies, although well-intentioned, often have the perverse effect of reducing incomes and employment. Minimum-wages rules and wage indexation increase the cost of hiring workers. This leads firms to adopt an input mix that employs fewer people and more capital. This can result in unemployed or underemployed labor... Employment regulations, such as job-security laws, can undermine the link between pay and performance and also lead employers to hire fewer permanent workers..."85 The concerns expressed by the Bank with respect to labor market regulation have as much to do with the redistribution of income between different market actors as with the effects of collective bargaining on efficiency and wealth maximization. Yet the concern over adverse distributional effects on consumers, nonunionized workers and capital in this context is striking, given the persistent subordination of distributional considerations to efficiency and aggregate wealth maximization in the market reform project as a whole. The underlying assumption seems to be that redistribution, whether between labor and capital or simply among workers, is either an insufficient reason to regulate labor markets or per se undesirable. There is a host of questions that might be raised by the argument that labor market regulation is per se undesirable. For example, what are the background conditions against which such regulation is to be implemented? Is it clear that regulation will automatically reduce growth and productivity? Yet the question which seems to demand attention first is why features such as redistribution and shifts in power are singled out for particular scrutiny and concern in the context of 84

W,at81. World Bank, The Challenge of Development, supra note 24, at 79. This rationale is repeated again in Workers in an Integrating World, supra note 15. 85

82

Neoliberal Images labor and employment rules and regulations. On one level, the answer is obvious; everyone knows that that is what they do. However all regulations change the balance of power between different parties; that is inevitably an effect and, as in the case of labor regulation, sometimes directly intended. Given that the purpose of union rules is to change the balance of power between employers and workers, it is unclear why it is a drawback that it succeeds in doing so. Too, nearly all regulations produce negative as well as positive effects, including negative effects for the parties they are intended to benefit. Since, again, this is the norm rather than the exception, it is not unreasonable to presume that groups such as workers when advocating particular regulations are conscious of the risks and, having weighed them, still think the benefits outweigh the costs. Regulations also routinely affect the distribution of income. The question is why so much attention is devoted to the possibility of negative distributional effects for some workers which are generated through collective bargaining rules when they are a pervasive effect of many other regulatory and deregulatory proposals. Similarly, why the presence of distributional effects among workers does not militate in favor of extending collective bargaining and employment protections to further categories of workers rather than reducing or eliminating them for all is unexplained.86 The answer seems to be that, with the exception of labor and employment regulations, the redistributional effects of regulation, particularly those which are implemented for reasons of efficiency, are often simply not acknowledged. Nor is regulation for the purpose of redistribution accepted as legitimate. The real concern lies not with the particular distributional disparities that labor market regulations are said to introduce - empirical evidence suggests that labor markets without labor and employment regulations and governed by property and contract rules alone in general produce greater, not lower, wage disparities among workers87 but simply with the use of regulations to alter the income distribution of market processes. In other words, despite the arguments about how inadequately they achieve their purposes, the underlying anxiety seems to be that legal regulation is 86

There are arguments that substantive labor standards such as minimum wages are a better route than entidements to collective bargaining for some classes of workers, particularly those diat lack bargaining power. However, under neoliberalism, both the cartelkation effects of unions and the interference with the market valuation of labor diat minimum wages produce are suspect. 87 R. Freeman and J. Medoff, What Do Unions Do?, supra note 82.

83

Kerry Rittich used not to further efficiency and growth but to address equity or distributional concerns. Whatever the motivation, the effect of the Bank's regulatory analysis is to displace or demote rights and regulations motivated by values, interests and concerns other than efficiency. These include those which are directed at distributional concerns, such as labor rights. This effect is not necessarily mitigated by the increasing inclusion of references to human rights and even labor rights in discussions about market design.88 Such rights are typically distinguished from standards,89 and rules which aim to secure substantive conditions under which people work are still regarded as impediments to efficiency. It would be difficult to overstate the significance of the argument that regulation should be primarily, or even only, about efficiency. First, this claim reinforces the view that only overtly distributive regulations actually redistribute wealth, income and power when, as will be discussed in chapter 4, redistribution is a ubiquitous feature of the recognition and operation of all legal rights. Second, it extrudes such concerns from the market to the political realm. Third, it does so when the room for the state to respond to distributional inequities produced by market forces is sharply contracting, not simply as a "fact" about an increasingly globally integrated world, but also because of the normative power of neoliberal argumentation about the regulatory and policy demands of globally integrated markets. It would be a mistake to take the efficiency arguments at face value, or to imagine that they are purely descriptive claims unattached to other assumptions. It also remains unclear that the aggregate gains from a relatively "deregulated" market, one which creates benefits for capital holders at the expense of other parties, in fact exceed what might be achieved under alternatives. This is the heart of the debate over the high skill, high-wage vs. low skill, low-wage growth trajectories.90 Similar concerns over the ultimate costs of production also animate debates

88

See for example, James D. Wolfensohn, Comprehensive Development Framework, supra

note 14. 89

See for example International Labour Organization, Declaration on Fundamental Principles and Rights at Work, 86th session, June 1998, http://www.ilo.org/public/english/ standards/decl/declaration/text findex.htm (last visited 11/08/2001). 90 For a discussion, see S. Deakin and F. Wilkinson, "Rights Versus Efficiency? The Economic Case for Transnational Labour Standards", 23 Ind. Law J. 289 (1994). 84

Neoliberal Images over environmental regulation. However, it is clear that the calculus by which "efficient regulation" is measured in market reform proposals excludes many distributive consequences. Without even entering into the non-economic concerns which are raised, the ideal legal regime envisioned by neoliberals permits its beneficiaries to externalize significant economic costs, costs which typically turn up elsewhere. They might represent increased costs to the state or reduced capacity of workers to engage in productive activity, to the detriment of aggregate economic efficiency. For example, missing regulations might enable owners to avoid the costs of unsafe or unhealthy working environments, the costs of illness, childbirth and childcare. 2.4 Best Practices As mentioned above, one way around such inconsistencies and a common answer to such regulatory conundrums is simply that they represent normal or market "best practices". In neoliberalism, best practices refer to the institutions, laws, strategies and policies that are dominant and established in the model, developed market economies. Having either stood the test of time or evolved as required to meet the changing needs of market societies, best practices are said to have "proved themselves". It is assumed that they are at least compatible with and at best directly responsible for successful economic growth; on the basis of this track record, opponents are challenged to prove that any other course of action would be better. Best practices represent both the recipe for success and the model, norm or standard which alternatives must overcome. Best practice arguments appear in both weak and strong forms in neoliberal policy prescriptions. The strong form contains both descriptive and normative claims about the "one way" to economic development and the growing worldwide convergence toward a single set of institutions and practices.91 There are now persuasive critiques directed at the rigid adherence to "one way" for economic development,92 and best practice arguments advanced this strongly are becoming more rare. 91

This argument is discussed in Roberto Unger, What Should Legal Analysis Become?, supra

note 54. 92 Joseph E. Stiglitz, "More Instruments and Broader Goals: Moving Toward the PostWashington Consensus", WIDER Annual Lectures 2, Helsinki, January 7, 1998

85

Kerry Rittich Yet, the idea of the adoption of normal market institutions and practices as the route to economic development remains embedded at the methodological level within the neoliberal project. Despite the fact that there is considerable diversity among existing market institutions and a spectrum of laws and institutions compatible with the markets organized around rule of law, the protection of property, and the facilitation of investment and private economic activity, the commitment to discerning an optimal path or model remains a central objective. Much of the analysis is devoted to the options facing states, ranged from the most to the least desirable, and the dangers of alternatives and risks of substantial deviation from the optimal path. In part simply because of the gains from harmonization and forces which push toward convergence, the room for strategic, deliberate variation turns out to be sharply circumscribed. As a result, even if best practices were not explicitly invoked throughout neoliberal policy analyses, neoliberalism itself would seem to imply their existence. Indeed the entire project of elaborating a general development paradigm is hard to understand without the assumption of best practices. For if there is a theory about the existence of a global, universally applicable economic development model or framework, then it must rest on a set of strategies and institutions which have been evaluated for their contribution to economic growth. The specter of best practices is omnipresent in neoliberal policy behind the myriad generalizations about economic development that pervade neoliberal policy recommendations. Best practices encompass everything from specific policy recommendations based on detailed empirical analyses to broad generalities and received conventional wisdom about the attributes and requirements of a market economy. The concept of best practice functions as a point of linkage and transfer among different aspects of the reform agenda which may otherwise be only contingently related, reinforcing arguments which on their own may be unpersuasive. In one sense best practice arguments simply are neoliberalism, in that they typically contain an amalgam of the different claims and arguments, theoretical, empirical, normative, institutional and practical, that make up the fabric of neoliberal analysis.

bttp:/liiww.ivider.ttnu.edu/ (last visited 11/08/2001); Joseph Sriglitz, "Whither Reform?", supra note 10.

86

Neoliberal Images The concept of best practices rests on the assumption that it is possible to make judgments on a comparative basis about the institutional features that generate economic development among states that otherwise vary in innumerable ways. It might be thought that such complexities render it difficult to tell which institutions and policies are in fact responsible for success and which are not. Or, the presence of different histories, cultures and starting points might suggest that different policies are in order in different places, thus rendering the entire concept of best practices dependent on a series of prior events and contingencies. However, best practice arguments do not in fact function this way. While it is acknowledged that economic development may be affected by historical, cultural or political factors, such factors bear only marginally on the design of neoliberal development policies themselves. For example, the Bank does not deny the complexity of economic development and the myriad contingencies which might impede or advance its success. Yet these factors are not regarded as fatal, or even seriously damaging, to the idea of best practices; instead, they operate in the direction of more comprehensive and thoroughgoing adherence to the neoliberal development program. They militate in favor of linkages between market policies and the bundling of reforms. States are advised to implement reform policies as a package, because the absence of one might put the efficacy of others in danger. And, precisely because of what is not yet known about successful economic development, states are advised to emulate existing economic success stories, mimicking their institutions and practices as closely as possible.93 Undergirding the idea of best practice is the idea that there is a rational, functional basis for the emergence and persistence of certain rules and institutional forms. Beyond this, neoliberals claim to be agnostic about, even uninterested in, the causes of institutional convergence and regulatory harmonization. It is this assumption of the rationality and functionality of dominant market rules and practices that makes it possible to imagine that economic development is in the first instance a technical problem.

93 This may pose problems, one of which is accounting for the economic successes which do not result from adherence to best practice. For example, the experience of the so-called "East Asian tigers" has been confronted and explained by the World Bank in a number of different ways. See World Bank, The East Asian Miracle: Economic Growth and Public Policy (New York, NY: Oxford University Press, 1993) and World Bank, The State in a Changing World, supra note 4.

87

Kerry Rittich Because economic development is regarded as a state toward which nations can move by adhering to a well-delineated formula, development becomes a dilemma to be solved by specialists with empirical tools. Best practices both emerge from and serve this functionalist approach to economic development, insofar as such arguments suggest that the optimal institutions can be empirically and scientifically derived through observation and analysis of markets and economic structures on a comparative basis. A central part of the work of the Bank involves research into the role that particular types of investments or institutional factors play in economic growth. In this process, political, historical and cultural factors may be held in abeyance as researchers engage in a comparative study of different economies in an attempt to locate, isolate and identify the importance of variables ranging from infrastructure investments, to education levels, to health care expenditures. Increasingly, this research extends to the elements of good governance as well, understood as the absence of corruption and arbitrary state action and the presence of a "rule-based" culture.94 Inter-country comparisons performed in the same mode may also operate in the other direction; they may be used to discredit links between particular policies and economic growth or to refute alternative contentions about the best route to economic growth. However, reformers largely assume rather than interrogate the superiority of dominant market practices, both by ignoring the legal and institutional histories of "successful" market societies and by situating optimal market institutions at the culmination of a narrative of progress and development. Alternatives are either ignored,95 located off the map or at some earlier point on the same trajectory, or assimilated to the neoliberal model, however uncomfortable the fit.96 Thus, best practices place the burden of proof on those with alternative views. References to "what works" provide the ultimate support for neoliberal proposals, backstopping warnings about the dangers of deviation from established and successful paths to development. Continual references to established practices in successful market

94

This elements of good governance and their relation to economic development are the subject of the World Bank, 1997 World Development Report, The State in a Changng World, supra note 4. 95 See the discussion of township-village enterprises in China, infra, for example. 96 R. Wade, "Japan, the World Bank, and the Art of Paradigm maintenance: The East Asian Miracle in Political Perspective", 217 New Left Review (1996). 88

Neoliberal Images economies add a worldly, pragmatic element to neoliberal policy proposals, at the same time deflecting charges that best practices contain ideological elements. The functionalist approach to growth which best practices embodies helps establish the relative autonomy of the market and effect a separation between questions of market design and questions of politics. It focuses attention on the enabling, coordinating and wealth-maximizing functions of market rules, institutions and policies, to the exclusion of their distributive, ideological and normative dimensions. However, there are also jurisdictional limits and considerations of institutional legitimacy which compel the Bank to adopt such a stance. For example, the Bank's constitutive articles require it to refrain from interference in the internal political affairs of states.97 Adopting a technical, functional approach to the question of development aids the Bank in maintaining the appearance of appropriate distance from controversial political disputes. In addition, the functional approach to questions of market design surely also emanates from the fact that the architects of market reform are overwhelmingly economic technocrats with relatively homogeneous professional and disciplinary formations and similar methodological commitments. As a result, both the public face and self-understanding of neoliberals is that they are pragmatic development technocrats who are simply interested in analyzing and promoting what works and avoiding what does not. Beyond ideology and the outside service of particular factions or interest groups, they represent the aggregate public interest in economic development.98 Apart from a commitment to democratic values in the broadest sense,99 they are non-ideological and nonpolitical. Their economic and institutional prescriptions are available and applicable to all, as long as economic development is the goal. 97

International Bank for Reconstruction and Development, "Articles of Agreement", as am. February 16, 1989, Article IV, Section 10 http:/ / ww.wrldbank.org/html/extdr/backgrd/ ibrd/art4.htm#I11 (last visited 11/08/2001). 98 For critiques of this position, see J. Stiglitz, "Development Thinking at the Millenium", Keynote Address, World Bank, ABCDE, Aprii 2000; P. Gowan, "Neo-liberal theory and practice for Eastern Europe", 213 New Left Review 3 (September, 1995). In different ways, both authors suggest that institutions involved in reform are often furthering interests of their own. 99 Reforms in Central and Eastern Europe, for example, are often described as the pursuit of twin goals: the market economy and political liberalization. See the comprehensive overview by the World Bank on reforms to social policy in N. Barr, ed., Labor Markets and Social Policy in Central and Eastern Europe: The Transition and Beyond (New York, NY: Oxford University Press, 1994).

89

Kerry Rittich Yet even if best practice claims are often framed in terms of factual observations or inferences which can be safely taken as self-evident, best practices are inevitably infused with ideological investments and political commitments as well. These elements surface repeatedly, and are particularly evident in the claims about the state and the role of law. One of the places in which the multiple and shifting bases of best practices arguments can be seen is in claims about the nature and function of property rights in a market economy. A key neoliberal policy and institutional claim is that strengthening property rights is crucial to the promotion of economic growth. However, typically no particular evidence is adduced in support this claim, beyond the assertion that regimes of private property are associated with successful economic development, while property rights are absent or weak in economies which are less successful or failing. In such arguments, empirical arguments are weak if not entirely absent, and the functioning of legal rules is reduced to relatively simple economic models. The claim is that defined property rights are the key to maximizing wealth and efficiency, as no one except private owners is motivated to put resources to their highest possible use. However, what makes the assertion seem unproblematic and plausible is the prior acceptance of a set of economic arguments about the linkage between property ownership, self-interest and incentives to productivity. Similar commitments underlie the slippage from arguments in favor of defined incentives to arguments for particular forms of property rights. Despite the slippage, however, the explanatory power of the economic incentive argument is insufficient to either determine the rule choices to be made or explain those which are preferred after the fact.100 The degree to which those assumptions are both ideological and dependent on myriad other institutional and practical considerations can be suggested by the following examples. At least since the appearance of The Modern Corporation and Private Property,101 it has been clear that simple assertions about the relationship between property ownership and control over the allocation of resources, and thus wealth maximization, are no longer available. Instead, this relationship has been called into question by the very legal/economic institutions which form part of the

100

See chapter 4 for a discussion. Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (New York: Macmillan, 1933). 101

90

Neoliberal Images neoliberal route to development. For example, the corporate form on its own does not automatically maximize the self-interest of diffuse groups of property owners; this has generated a huge literature on agency problems. Contemporary counterexamples to the simple form of the property myth are emerging in the very context of development and industrial modernization. On the one hand, in China, township-village enterprises appear to be thriving sites of economic growth, despite diffuse, uncertain and shifting property entitlements and the intimate involvement of public authorities in economic life.102 On the other, in parts of Eastern Europe, it appears that the property owners of newly privatized enterprises might be actually disadvantaged relative to managers; property holding in this instance seems only tenuously if at all related to the exercise of economic control.103 Similarly, whether the level of intellectual property protection that states must provide in order to participate in the World Trade Organization can be defended in terms of what is needed to promote scientific or intellectual production is largely unsubstantiated. These brief illustrations indicate not so much that neoliberal analysts are wrong in their assertions about the basis of growth, although they are often highly selective in their choice of examples. Rather, they indicate that the empirical data on productivity "speak" in a particular way because an underlying set of assumptions about what contributes to economic growth has already been accepted and integrated into the research methods. This becomes problematic where the question is what actually contributes to economic growth; in such cases, prior commitments to best practices risk foreclosing the very analysis which needs to be undertaken. However, because of the commitment to what has demonstrably worked in the past, experimentation with alternative institutional arrangements is not encouraged. To the extent that it might interfere with established business or market practice or is perceived as challenging the balance of power among economic 102

Zhiyuan Cui, "China's Rural Industrialization: Outline of the Basic Arguments of a Research Paper" (1993), paper on file with the author. 103 David Stark, "Recombinant Property in East European Capitalism", 101(4) American Journal of Sociology 993 (1996); Gil Eyal, et al, "The Theory of Post-Communist Managerialism", supra note 53. Eyal et al claim that East Central European economies while capitalist, are subject to the control of the managerial, not the propertied class. This new technocracy has used privatization as a vehicle to appropriate control of economic institutions; their power is based on "cultural" and "social" capital rather than ownership.

91

Kerry Rittich interest groups, institutional change is unwelcome. In the view of neoliberals, deliberate experimentation with as yet untried forms is a path which is fraught with danger and by now self-evidently littered with disasters.104 However, while best practice arguments may appear to promote economic conservatism, they are not incompatible with the idea that market norms could and should be adapted to external events. For example, best practices might be responsive to changes in the structure of the global economy due to informational and technological advances. Moreover, the underlying imperative, the pursuit of growth through the empowerment of private actors, might also be a source of change to established institutions and practices. In some contexts, best practices may be transformative; for example, they clearly function as instruments of profound change in economies whose practices and institutions deviate from the norm. Because both the forces of stasis and change are always present, best practice arguments can operate in the service of a shifting consensus centered around the evolving needs of capital in a globally integrated economy. Because best practice is an inherently open and indeterminate concept, the actual content of current best practices could undergo significant change, even reversal, without disrupting the demand for submission and conformity to a dominant development model or displacing the idea that what development requires is a "technical" fix. Thus, challenges to particular aspects of current development orthodoxy do not necessarily pose a threat to the overall project of articulating a global development project. Indeed, the continual evolution of best practices may permit the project to be renewed and legitimated; the fact that they resist any stable definition may be precisely what enables them to survive as a discourse and structure of analysis. Best practice arguments are routinely sustained on a shifting set of institutional, pragmatic, normative, empirical and even occasionally political claims.105 Through a process of cycling and rotation among the available strands of reason-

104

This is a recurring theme in World Bank, From Plan to Market, supra note 1. For example, concessions to interest group pressure or distributional concerns can be accommodated within neoliberal policy, if they are thought necessary to secure political support for the larger reform project. For example, the original impetus to the development of social safety nets was to quell the resistance to the economic restructuring programs implemented by the Bank in the wake of the debt crises. See]. Vivian, z&., Adjustment and Social Sector 'Restructuring (Geneva: Geneva and the United Nations Research Institute for Social Development (UNRISD), 1995). 105

92

Neoliberal Images ing, the various grounds are displaced or supplemented, only to be recovered again and deployed as elements of future arguments. At the point at which the explanatory power of one argument runs out or seems unpersuasive, another is always ready to be pressed into service. This permits best practice as a way of conceptually organizing development policy to survive and retain a certain plausibility, especially if one does not look too closely at the shifts and displacements which are continuously going on.106 However, to the extent that best practices express the idea of normal mar107

kets

and remain invested in resistance to legal, policy or institutional innovation,

they will tend to support two quite opposing tendencies. The first is the status quo in developed market economies. The second is that status quo as a model or goal to which states that have not yet reached the most advanced stages of development should aspire. In the first case, best practices may promote quiescence; in the second, reform and deep transformation. Although the assumption underlying best practices is that dominant institutional forms emerge and persist out of functional superiority, attention to the history of legal rules and economic practices calls such assumptions into question. Rather than a product of Darwinian superiority, rules and practices become dominant under a variety of pressures and circumstances. They are often the result

106 In this argument, I adopt and adapt the exemplary analysis of the structure and dynamics of international legal argumentation by David Kennedy. See David Kennedy, International Legal Structures (Baden-Baden: Nomos, 1987); David Kennedy, "A New Stream of International Law Scholarship", 7 Wisconsin International Law Journal 1 (1988). A related discussion is Biersteker's identification of the different possible explanations, sys temic, interest-based, institutional and ideational, for the current hegemony of neoclassical economics. See Thomas J. Biersteker, "The Triumph' of Neoclassical Economics in the Developing World: Policy Convergence and Bases of Governance in the International Economic Order", supra note 3, at 102. Biersteker's claim is that while none alone is sufficient, combined they account for the timin and content of the change in economy policy (122). However Biersteker's account suggests a more determinate relation between these components than I would argue exists for particular best practices. And, while he seems to suggest through the form of his argument how the exhaustion of one explanation leads inexorably to the next, he does not have a meta-structure which would account for a process of rotation among them, nor does he investigate the inadequacies in the individual explanations or the ways in which they may function to supplement each other. 107 The role of "normali2ation" in the legitimation of particular market structures and practices received its classic treatment in Daniel K. Tarullo, "Beyond Normalcy in the Regulation of International Trade", 100 Harvard Law Rev. 547 (1987).

93

Kerry Rittich of political struggles. Alternatively, dominant institutional forms and practices may be the consequence of various hegemonies, national, professional, ideological and disciplinary.108 They may also be directly adopted or imposed as conditions of financial or other forms of assistance or entry into political and economic associations.109 Such pressures tend to make a concept such as best practices selfreinforcing, and suggest that the very present-minded orientation of the discourse is an element of its success. Given these contingencies, the existing rules or institutions seem inadequately captured by the idea that they constitute either the 'only' or the 'best' available structure through which market coordination might occur. Nor is the process by which best practices come to prevail insignificant. Notwithstanding the dominant role of economic technocrats in current development policy, the rules and institutions which now constitute best practices were not the product of economic theory, nor were they implemented with cool deliberation at remove from political calculation. Rather, many were the product of now-forgotten battles waged in the name of particular interests and projects. In the process, alternative rules and institutions, at least some of which may have been equally plausible and functional, if different in their social or distributive impacts, were necessarily displaced or defeated. This is an important dimension which is largely absent in the discourse of best practice.110 The genius of best practice arguments is that, through the suppression of alternative practices and amnesia about the history of existing practices, local successes and particular interests are construed as the general interest and the inevitable outcome of the process of market evolution. 108

The worldwide influence and proliferation of American models and styles of legal practice is a case in point. See D. Trubek, Y. Dezelay, R. Buchanan,]. Davis, "Global Restructuring and the Law: studies of the internationalization of legal fields and die creation of transnational arenas", 44 Case Western Law Rev. 407 (1994). Dezelay and Garth account for the development of the field of international commercial arbitration through the preeminence of a relatively small body of influential and interconnected practitioners. See Yves Dezelay and Bryant Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (Chicago, IL: The University of Chicago Press, 1996). 109 For example, entry into the European Union, which is considered highly desirable by many of the nations in Central and Eastern Europe, is contingent upon conformity with certain institutional and fiscal standards. 110 A classic exploration of the evolution of legal norms and institutions and their relation to shifting yet identifiable economic interests is contained in M. Horwitz, The Transformation of American Law, 1780-1860 (Cambridge, MA: Harvard University Press, 1977).

94

Neoliberal Images An alternative view would represent best practices as the contingent settlement of political interests crystallized in particular rules and regulations and sedimented in institutional forms. Through struggle over time, their content has been modified; they in turn have modified the practices and interests of those who may have pressed for their adoption in the first place. Subsequent and ongoing modifications to rules and institutions, in other words, current best practices, are likewise the interactive product of this interplay of culture, practice, institutional structures and material interests. The idea of best practice functions to specify an ideal set of market structures, roles and powers for states aspiring to develop economically. However, because of the distributive properties of these institutional and regulatory structures, a matter to be explored below, best practices also operate to justify a particular allocation of risks, resources, powers, costs, burdens and benefits among different market actors. In other words, best practices at least partly determine the distribution of economic gains among firms, households and individuals. As a result, despite the innocuous, even attractive, moniker and notwithstanding the argument that best practices are simply about efficiency, technical matters which are administrative rather are than political, best practices are a vehicle with potential for profound social consequences and distributional upheaval. The commitment to best practices expresses the idea that economic governance is essentially a management exercise. In the best practice narrative, good governance and effective management of the economy become equated with the implementation of particular legal rules and institutions. In practical terms, this has tended to lead to an institutional fetishism concerning Western, in particular Anglo-American, legal rules and practices.111 On the surface, best practice seems likely to reinforce tendencies toward regulatory convergence and harmonization. However, for a variety of reasons, the promotion of best practice is unlikely to result in the simple replication of model rules and institutions. Instead, the main effects are likely to be disciplinary; indeed that may be their purpose. Best practices may be important not because neoliberal

111

Rodrik reports that the international financial institutions have used the Washington consensus as a wedge to further a particular set of policy and institutional preferences. See Dani Rodrik, "Development Strategies for the Next Century", supra note 27.

95

Kerry Rittich policy makers will actually succeed in propagating a single set of standard rules and policies. Instead, their most important effect may be to discredit local deviations and alternatives, including pre-existing institutional systems and structures. In short, best practices cabin the available responses to social and economic dilemmas and place constraints on alternative ways of organizing economic and social life. The attempt to replicate successful institutions and practices through best practice was first popularized in the context of industrial organization and microeconomic management. At this point, it has undergone significant chastening and revision;112 indeed, the fate of best practices in the industrial realm should serve as a cautionary tale for its adherents in the economic development project. Boyer describes the limits of best practice in industrial organization as follows: "[ejven when they try to copy strictly a supposed superior model, managers, workers, and governments finally produce a hybrid local management style and coordinating mechanisms. After a long period of trial and error, the end product usually differs widely from original intentions".113 Actual replication proves impossible; the results of the exercise seem to generate results that are considerably different from what was originally intended. The extension of a best practice approach to questions of governance, law, regulation and market design seems likely to produce yet more divergence. There are myriad reasons why best practices in these areas may fail to function as intended quite apart from the usual reasons advanced to explain failing reforms, which are that, despite good advice, they were not properly implemented, or that it is "too soon" to ascertain if they are successful. The following list suggests but a few sources of potential divergence. First, there is the problem of identifying the practice in question and determining its scope. Best practices in the realm of governance, law and regulation do not come pre-packaged and self-identified, nor are they easily separated from the institutions and culture in which they are embedded. Defining a best practice, then, is inevitably arbitrary and contentious in ways that are related to the second point.

112

Robert Boyer, "The Convergence Hypothesis Revisited: Globalization but Still the Century of Nations?", Suzanne Berger and Ronald Dore, eds., National Diversity and Global Capitalism (Ithaca, NY: Cornell University Press, 1996), 29. 113

96

W,at30.

Neoliberal Images This is that all legal practices operate in conjunction with numerous other laws, policies and institutions and non-legal practices, at least some of which are crucial to their success, coherence and desirability as strategies worth pursuing. Consequently, it may be a mistake to imagine that replicating a particular law amounts to replicating even a coherent and severable part of another system; out of context, it may do nothing like it does in its original setting. This presents a very live problem, particularly with respect to the economies in transition, for the following reasons. Despite the fact that the Bank often advocates that developing or transitional economies imitate the institutions of model market economies, their policy prescriptions are inevitably selective. Some rules and institutions are prioritized over others while others which are common or even ubiquitous in market economies are ignored and excluded. Third, once implemented, rules and institutions may be understood, developed or used in radically different ways. Adjudication is not merely a technical exercise. The inculcation of a particular professional culture among legal practitioners and the development of standard legal procedures and fora may go some distance to standardizing the approach to the adjudication of legal disputes.114 This suggests why the Bank might be interested in judicial education and reform projects. However, in developed market economies, even members of the same profession, with the same disciplinary formation, routinely come to very different conclusions about the content, scope and application of legal rules. Even if these contingencies could be reduced, they are all exponentially increased by the interaction of formal laws with the varied systems of informal norms also in play. None of this necessarily delegitimates the discussion about institutional reform as an important aspect of development. However, market design emerges as a strikingly more complex and multi-faceted process than the policy discourse of the Bank would suggest. Moreover, rather than a mode of depoliticizing the economic sphere, the choices about law and regulation turn out to be deeply political. This in turn casts into question the rationale for ceding decision-making power over such issues to experts from afar. There is every reason to expect the process to fail more often than it succeeds, even on its own terms, if these dimensions are repressed rather than acknowledged. But they also cast light on the

114

The standardization of dispute resolution in the field of international commercial arbitration is discussed in Y. Dezelay and B. Garth, Dealing in Virtue, supra note 127.

97

Kerry Rittich inevitable extra-efficiency effects of market reform and deeply problematize the pervasive effort to sanitize economic development of such complications.

98

3. THEORETICAL ANTECEDENTS OF NEOLIBERALISM

T

he discourse of best practice appears to place empirical and func-

tional considerations at the heart of development policy. However, as the previous chapter discussed, technical and practical concerns

alone do not account for the myriad strands of reasoning nor the particular contours of the arguments in neoliberalism. One of the most striking elements of neoliberalism is the degree to which political and economic arguments for particular policies and institutions appear in tandem or seriatum or are used interchangeably within policy and regulatory discourse. For example, the defence of private property rights in the context of transition often includes arguments about the positive role of property rights in the maintenance of political stability as well as their contribution to economic growth. In the words of the Bank, "a wide distribution of property rights can counteract any concentration of power in the political system and contribute to social stability".1 Throughout neoliberal discourse, the connection between markets and democracy is continually suggested in both overt and hidden ways. Often, arguments about law and rights serve as the point of connection, the mechanism for ensuring the coherence and integration of the two goals. The idea that neoliberalism might be built through a congeries of diverse political and economic theories or methodologies runs counter to an understanding 1

World Bank, World Development Report 1996: From Plan to Market (Oxford; New York: Oxford University Press, 1996), 49.

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Kerry Rittich of best practice as economic pragmatism. Nonetheless, a number of different methodologies as well as distinct schools of economic and political thought seem clearly discernible and influential within neoliberal claims. The deployment of efficiency analysis and the reliance on principles of neoclassical economics is both obvious and acknowledged throughout neoliberal development policy. However neoliberal policy discourse also discloses the influence of libertarian or laisse^faire concepts of property, liberty and contract in the mode of theorists such as Friedrich von Hayek and Milton Friedman.2 The influence of public choice theory in the discourse around the state, especially in arguments about rent-seeking, government failure and the state as a nexus of interest seekers, is also pervasive. Both libertarian thought and public choice theory are revealing sources of neoliberal ideas on distribution, market values, and the role of the state. Each embodies or embraces a particular view of the relationship between law and the state on the one hand and society and the market on the other. Each is also associated with particular approaches to legal and policy analysis, as well as substantive positions on institutional design and economic distribution. Libertarian and public choice theories are also replete with political as well as economic arguments, both explicit and implicit, about the connections between markets, economic growth, freedom, democracy and legal rights. This chapter discusses several representative theorists and writings from these schools with a view to uncovering these links. The idea is not to undertake a comprehensive exploration of libertarian thought, laisse^faire economics, or public choice theory, nor is it to map all of the positions that adherents of these school might stake out on the various elements which make up neoliberal policy and institutional design. Rather, the idea is to move in the reverse direction, and starting from neoliberal claims, to make more explicit some of the theoretical antecedents of neoliberal thinking and the relationships, functional, historic and contingent, which make up neoliberal best practices. Following this, I will suggest an alternative way to imagine the relationship between law, the state and the market employing legal analysis derived from legal realism, institutional economics and some of its successor movements such as critical legal studies.

2

The influence of these theorists on neoliberalism is also observed in Paul H. Brietzke, "Law, Democratization, and Markets", Robin Paul Malloy and Christopher K. Braun, eds., Law and Economics: New and Critical Perspectives (New York: P. Lang, 1995), 31.

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Theoretical Antecedents of Neoliberalism

3.1 Libertarian Concepts of Property, Regulation and the State: Hayek and Roepke The writings of Friedrich von Hayek and Wilhelm Roepke are a useful place to begin to explore the connection between economic and political arguments in neoliberal thought. In both, there are political and economic rationales, tightly integrated and interwoven and powerfully expressed, for many of the market structures, political institutions and state policies which make an appearance in neoliberal discourse around development and transition. Both Hayek and Roepke were members of the Mont Pelerin Society, a postwar society organized to facilitate discussion among prominent adherents of libertarian and loisse^faire ideals within the liberal social order. As well as Hayek and Roepke, it included many theorists and economists who were to be influential in the development of the economic paradigms and methodological approaches which have dominated contemporary economic theory and practice in post-war United States.3 The existence of the society itself seems to have been the catalyst for certain theoretical explorations. For Hayek, for example, the meetings of this society provided the occasion on which the relationship between the political and economic elements of liberalism were synthesi2ed.4 For both Hayek and Roepke, economic and political freedom are intimately and inseparably connected. In their view, a certain type of economic and political structure is not only desirable, it is absolutely essential if freedom is not to be eroded. As Roepke explains it, "there always exists a definite, more or less fixed relationship between a political and an economic system which makes it impossible to combine just any political system with just any economic system, and vice versa.5 In brief, their position is that the market is the economic guarantor of freedom, while socialism necessarily implies totalitarianism.6

3

Among those influenced are Milton Friedman, Aaron Director, George Stigler, and Karl Popper. 4

For example, "The Principles of a Liberal Social Order" was first delivered by Hayek to this society in 1966; F.A. Hayek, Studies in Philosophy, Politics and Economics (London: Roudedge & K. Paul, 1967), 160. 5 W. Roepke, The Social Crisis of Our Time, A. and P. Schiffer Jacobson trans. (Glasgow: William Hodge, 1950), 87. 6

Id., at 90.

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Kerry Rittich

This union if not elision of markets and democracy is memorably described by Roepke in the following passage: "The process of the market economy is, so to speak, a "plebiscite de tous les jours," where every monetary unit spent by the consumer represents a ballot, and where the producers are endeavoring by their advertising to give "election publicity" to an infinite number of parties (i.e., goods). This democracy of consumers has the drawback of a very unequal distribution of ballots which could, however, be extensively corrected - but it also has the great advantage of a perfect proportional system: there is no nullifying of the minorities' will by the majority, and every ballot carries its full weight. The result is a market democracy, which in its silent precision surpasses the most perfect political democracy."7

For Hayek, liberalism and democracy, while compatible, are not the same.8 Moreover, it is liberalism or freedom rather than democracy which is the principal value to be protected. Liberalism, in Hayek's view, is distinguished by one fundamental concern, which is limiting the coercive powers of the state. Hayek contrasts two conceptions of liberalism, one associated with the English, the other with the French.9 These two conceptions, and Hayek's preference for the English over the French, turn out to be illuminating as regards his position on the regulatory and institutional possibilities of a market economy. The good version of liberalism is the English version, inductive in method and empiricist in orientation, which emerged from the spontaneous order which Hayek styles the "catallaxy" of the market. It is "based on an evolutionary interpretation of all phenomena of culture and mind and on an insight into the limits of the powers of the human reason".10 This liberalism is the recognition rather than the creation of an order; justice is discovered, not determined.11 It is a modest creed, exhibiting reverence for tradition, in particular the economic and social 7

W. Roepke, The Soda! Crisis of Our Time, supra note 5, at 103. F.A. Hayek, "The Principles of a Liberal Social Order", supra note 4, at 160,161. 9 However, some French theorists are placed within the "good" liberal camp. Hayek identifies the prototypical good liberals as: David Hume, Adam Smith, Edmund Burke, T.B. Macaulay and Lord Acton in England; B. Constant, A. de Tocqueville, Kant, Schiller and von Humboldt on the Continent; and James Madison, John Marshall and Daniel Webster in America. See "The Principles of a Liberal Social Order", id., at 160. 10 W., at 161. 11 W, at 166. 8

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Theoretical Antecedents of Neoliberalism order which has evolved in England and the United States and which is associated with the great drive toward industrial expansion and accumulation of wealth. Bad liberalism, by contrast, is "constructivist". It is the liberalism of theory, in which rationalism prevails over practice, "contemptuous of tradition because it regards an independendy existing reason as capable of designing civilization".12 Hayek writes against all attempts to engage in institutional innovation or design, rejecting the idea that mere knowledge that culture or society is man-made implies that it can be deliberately changed. In his view, we are ignorant of all of the things which account for the success of Western civilization: "the case for individual freedom rests chiefly on the recognition of the inevitable ignorance of all of us concerning a great many of the factors on which the achievement of our ends and welfare depends."13

And, "from the countless number of humble steps taken by anonymous persons in the course of doing familiar things in changed circumstances spring the examples that prevail. They are as important as the major intellectual innovations which are explicitly recognized and communicated as such".14 In an early precursor to the idea of best practice, Hayek argues that the spontaneous order which prevails should be treasured as an instance of the evolutionary survival of the most well-adapted and functional economic practices.15 Consequently, Hayek is deeply invested in protecting the status quo regarding the prevailing institutional order. The liberal social order is predicated on a strong public/private distinction and the principle of a limited state. Law in a free society is derived from common law and natural law; these are the sources of the rule of law, and are to be sharply distinguished from administrative or public law, those rules issued from authorities for the purpose of social organization. Indeed, the progressive displacement of

12

Here Hayek cites Voltaire. Id., at 161.

13

F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960),

14

/
15

See also F.A. Hayek, "The Principles of Liberal Social Order", supra note 4, at 161.

29.

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Kerry Rittich private by public law is the destruction of the liberal social order and the path to totalitarianism.16 Key to comprehending Hayek's view of law is this strong distinction between the spontaneous order based on abstract rules and an organization based on commands.17 Laws in the liberal social order should be prospective, general and universally applicable.18 "It is because the lawgiver does not know the particular cases to which his rules will apply, and it is because the judge who applies them has no choice in drawing the conclusions that follow from the existing body of rules of the case, that it can be said that laws and not men rule."19 The virtue of the rule of law understood in this way is that, by following abstract rules, individuals pursue their own purposes and achieve a much more complex society than ever could be achieved by the deliberate pursuit of particular results. Invoking Hume, Hayek claims that all advanced legal orders, while differing somewhat over the precise structure of rights, are committed to the "three fundamental laws of nature, that of the stability of possession, of transference by consent, and of the performance of promises".20 Hayek also subscribes to a strong distinction between law and legislation or regulation. Moreover, while law is associated with generality and abstraction, legislation is the realm of specificity. Hayek's conception of law is expressly antipositivist and anti-realist; he believes that such trends in legal theory, whether of American, German or Russian origin, run counter to the ideal of the rule of law.21 And while law which is grounded in common and natural law instantiates freedom, "legislation is the chief instrument of oppression".22 Law is concerned with actions rather than purposes or end states; justice is negative and prohibitory rather than enabling, directed at remedying infringements 16

17

W., at 169. F.A. Hayek, "Law, Commands and Order", The Constitution of Liberty, supra note 13,

at 148. 18

Id.

20

Id., at 154, citing David Hume, Treatise, Part II. s.6 (Works, II, 293). F.A. Hayek, The Constitution of Liberty, supra note 13, at 156,235-239. Id.

21

22

104

Id,, at 153.

19

Theoretical Antecedents of Neoliberalism of the protected domains of others.23 For this reason, the concept of welfare or the public good can never be defined in terms of common goals or objectives. "A state of affairs as such...cannot be just or unjust...".24 It follows that "the aim of economic policy of a free society can therefore never be to assure particular results to particular people".25 Material equality and equality before the law are incompatible, a situation which follows from "factual" differences between people. In Hayek's view there is a direct conflict between the ideal of freedom and distributive justice.26 In Hayek's theory, the links between arguments from freedom and arguments from efficiency begin to emerge. Hayek observes that opposition to state intervention in economic affairs has classically rested simply on a belief in freedom and the rule of law; mere enforcement of the common law has not constituted government interference. There are good reasons, in his view, why all governmental concern with economic affairs is suspect and why there should be a presumption against the active participation of the state in this sphere.27 However, the objections do not rest on arguments from freedom; they rest on the fact that in general such measures will be inefficient, "inexpedient" in Hayek's terms, being destined to fail outright or undesirable because their costs will outweigh their benefits. Appeals to non-interference by the state merely confuse the issue of which measures are compatible and which are incompatible with the rule of law. In Hayek's view, the dichotomy between laisse^faire and intervention does not provide an adequate criterion for admissibility of particular state actions.28 The issue is to determine which state activities assist the spontaneous forces of the economy.29 There is a range of government activity which in principle is reconcilable with freedom; in this category fall "framework" activities and the provision of public goods which are subject to collective action problems.30

23 24 25

F.A. Hayek, "The Principles of a Liberal Social Order", supra note 4, at 166,177. W, at 170. Id., at 173.

26

F.A. Hayek, The Constitution of Liberty, supra note 13, at 232.

27

Id., at 221. Id, at 231. Id, at 222. Id., at 223.

28 29 30

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Kerry RiWch "The important point is that all coercive action of government must be unambiguously determined by a permanent legal framework which enables the individual to plan with a degree of confidence and which reduces human uncertainty as much as possible".31 While we can probably never be certain to have discovered the best arrangements or institutions, "all further improvements are bound to be slow and gradual".32 In other words, there is a core set of market institutions, with some room for manoeuvre or alteration at the margin or periphery. And, in Hayek's vision of the liberal state, the limits to the rule of law are reached just when the state attempts to engage in distributive or social justice: this "is precisely what a state bound by the rule of law cannot do".33 A striking feature in the theories of Hayek, Roepke, Friedman and other market libertarians is the pride of place given to the entrepreneur and man of property.34 This figure reappears to play a central role in the drama of the neoliberal economy as well; enormous weight and significance is vested in him as the engine, saviour and hero of the market economy. Hayek explicitly endorses the existence of economic disparities and the promotion of wealth by unfettering persons of property in the pursuit of their affairs. "The rapid economic advance that we have come to expect seems in a large measure to be the result of this inequality and to be impossible without it".35 Hayek claims that the poor often eventually benefit from the excesses and luxuries of the rich: "[t]he range of what will be tried and later developed, the fund of experience that will become available to all, is gready extended by the unequal distribution of present benefits; and the rate of advance will be greatly increased if the first steps are taken long before the majority can profit from them".36 The poor of today owe their material well-being to past inequality, whereas the wealthy are merely living at a somewhat advanced evolutionary phase which 31

Id., at 222. M, at 231. 33 Id. 34 Id., at 124-125. Here Hayek demonstrates his affiliation with the Austrian economists such as Joseph Schumpeter. 35 Id., at 44. 36 Id. 32

106

Theoretical Antecedents of Neoliberalism others have not yet reached.37 It follows that Hayek is against the redistribution of wealth; such efforts will merely spoil progress for all. From his positions on the requirements of freedom and the rule of law, the relation of wealth to economic development and the inevitability of income inequality flow Hayek's views on the welfare state. Hayek is against any attempt to orchestrate the distribution of income, going so far as to say that the market does not distribute, it merely disperses income.38 He is also skeptical of the orientation of the paternalistic state; in his view, there is no such thing as "general altruism", as care is naturally directed at particular persons.39 One of Hayek's main concerns is to point out that the welfare state, in the guise of efficient service provision, is in danger of becoming a covert, creeping substitute for generally discredited old-fashioned socialism.40 In Hayek's view, the objectives of the social welfare state have been fundamentally altered and perverted from their original aim. Over time, there has been a shift from concern over poverty to the goal of equity. This has taken the form of a movement from the legitimate prevention of destitution, to the intermediate position of compelling people to provide against want so that they do not become a burden on the rest, to the point at which now the state has become an instrument of compulsory redistribution, assuming the power to determine the "just" position of everybody.41 These are objectives that in Hayek's view are both impossible to satisfy and are in any event improper. By way of example, Hayek argues that programs of compulsory insurance are now regarded as entitlements despite the fact that they are subsidized through massive redistribution from the wealthy.42 Hayek's critique of the methods of the welfare state is broad-ranging and operates on a number of fronts. He objects to the monopoly position of the state in the provision of services and to the complexity and incomprehensibility of the administrative regime to which it has given rise. This, he maintains, has created a created a cadre of experts who are specialists in particular institutions and professionally invested in their continuation. This results in a sort of role reversal: rather 37

Id.

38

F.A. Hayek, "The Principles of a Liberal Social Order", supra note 4, at 171.

39

F.A. Hayek, The Constitution of Liberty, supra note 13, at 78.

40

Id., at 285. Id., at 289. Id., at 292.

41 42

107

Kerry Rittich than merely implement public policy, bureaucrats now direct public opinion as to its advisability.43 All of this redistribution is underwritten through policies of progressive taxation, the widespread adoption of which Hayek regards as a regrettable mistake.44 Progressive taxation is a source of injustice as well as misallocation of resources for the following reasons: high levels of taxation on the wealthiest have a negligible effect on the revenues collected; they offend against the "only universally recognized principle of economic justice", equal pay for equal work;45 they produce obvious and well known adverse economic incentives; and, they have deleterious effects on the rate of savings. In the final analysis, having turned away from the strategy of combating social evils through the growth of wealth, we are now in a situation in which growth is threatened by the very remedies we have devised. The chief dangers which face us will come from: inflation, paralyzing taxation, coercive unions, the increasing dominance of government in education and a powerful, arbitrary social service bureaucracy.46 In Hayek's account, some of neoliberalism's central themes and specific concerns are clearly in evidence: growth as the only remedy to poverty, control of inflation as the overarching economic concern, excessive taxation as a disincentive to economic activity, and unions as repositories of monopoly power. Hayek's distinction between the proper aims of the state in social provision, that is poverty relief rather than redistribution or equity, also surfaces in a softer but still recognizable form in neoliberal policy. Such analyses now attempt to discredit on both normative and efficiency grounds the aim of basic social provisioning which lies at the heart of the welfare state, at the same time changing popular expectations about the state as a primary provider of services such as health and welfare.47 The writings of Roepke have much in common with Hayek, providing further perspectives on neoliberal economic policy concerning the welfare state. In addition, Roepke provides an explicit theorization about the positive relationship 43

Id, at 290-291.

44

F.A. Hayek, "Taxation and Redistribution", The Constitution of Liberty, supra note 13, at

306-323. 45

46

W., at 317.

Id., at 305. 47 See the World Bank's 1997 World Development Report: The State in a Changing World (Oxford; New York: Oxford University Press, 1997). 108

Theoretical Antecedents of Neoliberalism between the neoliberal view on the proper relation of the market and the state and global economic integration. As against the view of the complete autonomy of the economic sphere, Roepke maintains that economic success is dependent on a metaframework which consists of the proper legal, institutional and moral conditions.48 In no society can economic integration go further than its social-political-legal-moral integration.49 "Mutual trust, confidence in the stability and reliability of the legalinstitutional framework (including money), contractual loyalty, honesty, fair play, professional honour and that pride which makes us consider it unworthy of us to cheat, to bribe or to misuse the authority of the State for egoistic purposes. All that is to be based on a "creed" in the most general sense of the belief in ultimate values and norms, of acknowledging some final sanctity and, last but not least, on some understanding of the meaning and working of the economic process itself'.50 What emerges then is an insistence on the need for a common set of values, at least as far as the operation of the market is concerned, acceptance of the "final sanctity" of the rule of law which backstops contract and property relations, and a knowledge of the principles and acceptance of the values which guide market transactions. The categorical imperative of such a system, as Roepke describes, is "pacta sunt servanda".51 Roepke identifies two prerequisites to the international economic order. The first is a stable currency; the second is an "unimpeachable legal order and, beyond this, an unwritten but generally recognized code of norms, principles, rules of behavior and value ideas".52 The international economic order presupposes a certain state of affairs and certain reforms of the domestic order.53 International trade is no different than intranational trade; the only difficulty is the issue of a 48

W. Roepke, "Economic Order and International Law", 86 Receueil des Cours 203 (1954), 211. For a discussion of the role of law in Roepke's thought and his place among the ordoliberals in Germany, see David Gerber, "Constitutionalizing the Economy: German Neoliberalism, competition law and the "New" Europe", 42 American J. of Comparative Law 25 (1994). 49 W. Roepke, "Economic Order and International Law", supra note 48. 50 Id, at 211-212. 51 52

53

Id., at 212. W, at 218.

W. Roepke, The Soda/ Crisis of Our Time, supra note 5, at 235.

109

Kerry Rittich supranational order. And how have states obtained this order in the absence of a world state? Through the "universal-liberal" solution, the international "open society", a secularized version of the Res Publica Christiana which prevailed in Europe during the Middle Ages, in which free trade is a postulate of natural law. It is this liberal world order, Roepke maintains, which has guaranteed the economic co-existence of big and small countries on a footing of complete equality and which has precluded the possibility of the exploitation of weak states by political powerful nations.54 Roepke echoes Hayek's belief in the essential need to contain the state and erect bars to the its incursions into areas of social life through the protection of non-political spheres.55 Roepke is perhaps best known as an exponent of the proposition that there should be the widest possible separation of politics from the economy.56 It is this principle, he insists, which accounts for the successful functioning of the liberal international order, as it minimizes the significance of sovereign states with different legal orders and administrative systems and the presence of borders, all of which are potential sources of conflict in the operation of an international economic order.57 This order makes possible the functioning of an "As-If-World Government".58 In a phrase remarkably resonant with current Bank claims, Roepke states that, "[ojbedience to these directives of the market is rewarded, disobedience is punished..."59 However, in an apparent move away from the stark anti-positivism expressed by Hayek, Roepke explicitly endorses a functionalist approach to the law governing economic life.60 He extolls the virtues of the marriage and cooperation of the economist and the lawyer and lauds the development of an economically literate

54

Id., at 107. Id., at 85. 56 W. Roepke, "Economic Order and International Law", supra note 48, at 224. 57 Id. 5S Id., at 227. 59 See World Bank, World Development Report 1995: Workers in an Integrating World (Oxford; New York: Oxford University Press, 1995), 5: "international capital movements intensify the impact of domestic policy on labor outcomes, richly rewarding policy when it is sound but punishing it hard when it is unsound". 60 W. Roepke, "Economic Order and International Law", supra note 48, at 227. 55

110

Theoretical Antecedents of Neoliberalism legal profession in a system based on free markets, free competition and a freely working price system.61 Despite the totemic way in which socialism and market societies are commonly contrasted by both Roepke and Hayek and despite the fears of creeping totalitarianism that pervade their discussions of the liberal social order, Roepke recognizes that the welfare state, a command economy, and privatization are all distinct and separable elements of what is commonly known as socialism. This he describes as "a policy whose aim it is to bring about a radical change in the distribution of income and property by all the means which make up the modern Welfare State, i.e. generally speaking by taking continuously from the ones and giving it to the others".62 He insists, moreover, that the problems of the economic order - that is the issue of plan (which he calls "office") versus market economy - and those of economic incentives be kept stricdy apart. The presence of a welfare state is not necessarily incompatible with a market economy. "The interesting question, however, is whether this is not again one of the cases where quantity finally changes to quality. We can no longer doubt that once the fiscal system takes more than a certain maximum share of the national income it ceases to be a mere machinery to change the distributional aspect of the market economy".63 Here we can see the clear limits which are to be placed on redistribution through tax and transfer on the part of the state. The problem with the welfare state is that it depends upon a sharply progressive income tax. After a certain point, taxes become confiscatory and punitive, fundamentally altering the incentive structure of a market economy. People, reacting to incentives, will lose the desire to work, with the result that total production declines. Those who underwrite the welfare state will lose the impetus to produce for profit. But more is involved than mere economic constraints; the health of society is at stake. In Roepke's view, it is a truism that social assistance beyond a certain limit destroys the individual's sense of responsibility and creates a diseased state. As the

61

W. Roepke, The Problem of Economic Order, in Two Essays, Johannes Overbeek ed. (Lanham, MD: University Press of America, 1987). 62 Id., at 7. 63 Id. 111

Kerry Rittich state takes care of us, all "true charities" will die out. In a critique of the concept of social and economic rights, Roepke argues that "the spurious 'freedom from want' kills all the genuine freedom".64 Roepke provides a very neat summary of the limits of redistribution as well as the deleterious moral effects of the welfare state: "Under the crushing burden of taxation as we find it today in so many countries, people will tend to prefer leisure to work, safety to risk, routine to initiative, and consumption to saving".65 Like Hayek, Roepke also offers a critique of unions, as well as stern warnings about the dangers of inflation.66 His writing reflects a deep concern with the moral qualities of capitalism and the deleterious changes in motives and incentives which arise from deviation from the liberal order. He is concerned that any economic system rest on incentives which correspond to what he invokes as "human nature", that is work, saving, and caring for one's family.67 However, Roepke distances himself repeatedly from a purely economistic approach to life,68 as well as from those who, dwelling in the land of theory, are concerned only with questions of supply and demand. Instead, the necessary support to freedom of the market in his view is a comprehensive social program which is traditional and nostalgic, if not romantic and Utopian, in its orientation. It includes: decentralization, promotion of smaller production and "sociologically healthy forms of life and work (after the model of the peasant and the artisan)", legislation against monopolies and financial concentration, elimination of "overcomplicated methods of organization, specialization and division of labor" and widely dispersed property ownership (i.e. anti-feudalism).69 In Roepke's world, the state "without which a genuine and real