Lecture 2 ib 404 institutional framework for international business
- 1. LECTURE 2 THE LAW AND THE ECONOMY: THE LEGAL TOOLBOX FOR INTERNATIONAL ECONOMIC RELATIONS AND REGIONAL INTEGRATION 1/27/2014 1
- 2. Economy and law • The relationship between law and economic activity – domestic and international • To explain the purpose and function of international economic law. it is necessary to remove general misunderstandings regarding the relationship between domestic law and the economy, and as well as regarding the “purpose” of regulating economic activity. 1/27/2014 2
- 3. Thepurposeoflegalregulationineconomicactivity • State intervention in the economy is at times conceived as the necessary corollary of “market failures”. This approach presumes that, under normal circumstances, markets would function freely. State intervention, in contrast, would only play a role in exceptional situations. • This vision finds further support in the popular discourse of “deregulation” of the economy (as we will see in the following paragraphs, such “deregulation” is, in fact, a different kind of regulation). • Where is not regulation? What is a car? What is electricity? What is a road? 1/27/2014 3
- 4. The shortcomings of the “market failure” approach • Is it fair to conclude that the market is so riddled with “failures” that it cannot function unless based on an omnipresent legislation and, therefore, an omnipresent state? • The answer is: No. • Instead, accounts of state intervention as purely a consequence of market failures seem inaccurate. This conclusion stands regardless of the stake that each of us takes regarding the virtues or flaws of the market in allocating economic resources. 1/27/2014 4
- 5. The shortcomings of the “market failure” approach • States do not intervene “because of” market failures. Rather, they step in due to the social nature of the economy. • The economy is driven by the interaction of different agents with diverse interests. As with any social activity, this requires legal regulation. • Indeed, one could even contend that a market without regulation is not a market, but rather a “black market”. • Maybe less brilliant but definitely more provocative is to understand law as a market creator instead of a market mend. 1/27/2014 5
- 6. The four main elements of a capitalist economyare legal constructs • The four main elements of a capitalist economy - money, the firm, capital and salaried work - are legal constructs. • Furthermore, the first and the last require permanent involvement of the State and public institutions. • A firm requires very sophisticated regulation in order to grant it legal personality separate from its owners. • Capital in not just an undefined “K” in a “factors of production model” but a highly regulated instrument (rather, a set of instruments) whose ownership grants rights on the decisions of the firm and participation in its earnings. 1/27/2014 6
- 7. The Set of Lights Metaphor • In order to gain some insight into the relationship between law and economics, let us consider the “Set of Lights Metaphor”. This allegory presents economic law as a set of lights in a sophisticated, high-tech nightclub. As in any nightclub, there is a dance floor (which in this case represents the economic situation, where different agents interact or “dance” together) and a complex set of lights that illuminate the dance floor, colouring and almost shaping the dancers (economic reality). • The set of lights is composed of a diverse set of spotlights which differ in colour and intensity as well as in the size of their illuminated surface. The same applies in the case of economic law – different pieces of legislation govern diverse subjects, with different political orientations and also with a differing scope of application. 1/27/2014 7
- 8. The Set of Lights Metaphor • Each part of the dance floor (area of economic reality) is illuminated with a different combination of lights, which results from the overlap of different lights, with their respective dimensions, colours and intensities. A similar phenomenon can be observed in every part of economic reality. For example, one part of economic activity will be the object of the shaping effect (the light) of the specific rules on fixed telephone communications; while another will be ruled by norms in the production of milk. Still, the political orientation (light intensity) of these rules will not necessarily match. Moreover, the light of these specific regulations will be combined with other more-or-less-diffused lights from different spotlights, which span larger areas or even the entire dance floor (the spotlights of, inter alia, tax law, international trade law or corporate law). 1/27/2014 8
- 9. The Set of Lights Metaphor • The resulting picture thus resembles a pointillist painting, in which each spot has a colour different from each of the other surrounding points. This representation of economic reality sheds light over two crucial aspects of both domestic and international regulation of the economy: • The risk of adopting a “reductionist” point of view, and assuming that all problems can be tackled by using a unique piece of legislation. Such an approach ignores the fact that each point of economic reality is illuminated by the combined effect of a multiplicity of lights and shaped by a multiplicity of pieces of legislation. • The complexity of regulatory problems and the risk of trying to employ universal solutions in different situations. Each spot or point on the dance floor (every tiny part of reality) is different from one another and is illuminated by a specific combination of lights. The addition of a norm that illuminates all of them may have dissimilar effects in different parts of the economic reality (much in the same way as the same blue light will cause different results if combined with yellow, green or red lights). 1/27/2014 9
- 10. The Significance of International Economic Law • The economy is a social activity regulated by law. Each state assembles and puts in motion the “set of laws” that moulds this social activity. • Law and economics are not contrary concepts (this applies for both the national and international arenas). • The existence of international economic operations and transactions is an undeniable fact and creates the need for an international “set of laws” to rule such activities. • While at the domestic level we can find a specific entity devoted to the creation and management of the set of laws that moulds economic reality (the different powers and levels of government as configured by the local constitution), no such entity exists at the international level. • In fact, international economic law can only be created through international treaties and agreements between states 1/27/2014 10
- 11. Working of International Law • The existence of international economic law thus entails the appearance of a second mechanism that may overlap with domestic law. In order to reconcile this fact with our set of lights metaphor some caveats must be introduced: 1. The main goal of IEL is to shape economic reality and the participation of distinct economic agents. IEL, however, rarely illuminates the dance floor directly. Instead, it influences the domestic laws, by compelling states to turn on laws, turn off others, change their position, or the coverage of their laws. 1/27/2014 11
- 12. Working of International Law 2. The set of lights or international mechanism has much fewer spotlights or instruments than the domestic mechanism. Consequently, the main concern in any discussion about international economic law must be the one referring to selectivity. What topics should be included? Why these and no others? Remember always that attempts to simply apply the logic of the domestic set of lights in the international scenario are unsustainable because of the different character of the domestic and the international systems. 1/27/2014 12
- 13. Working of International Law 3. In principle, the domestic set of laws is characterized by the coherence and unity that comes from the existence of the constitution. This comprises a system of rules specifically designed to prevent inconsistencies between the different rules applicable to the same situation. The international arena presents a different picture. At this level, diverse agreements coexist and influence the domestic set of laws. There is not a single set of laws or international mechanism overarching the domestic set of laws, but a range of them, which can differ between each other, and with no guarantee that there will be a solution for these divergences. 1/27/2014 13
- 14. Domestic vs. International level: two different perspectives • One of the main problems that results from the interaction between domestic law and international economic law is that the same portion of reality can be “seen” from different perspectives. 1/27/2014 14
- 15. Thedifferentinteractions“lit”bytheIEL (betweenstates,statesandindividualsandbetweenindividuals) • It is to distinguish two different types of interactions covered by the legal regulation of the economy: 1. The interactions between private economic agents or individuals (i.e. relations between “equals”; which does not exclude the possibility of one of these “equals” being the state or any of its branches, acting as a mere economic agent). 2. The relationships between these private economic agents (i.e. “individuals”) and the state. It is noteworthy that, due to the omnipresence of both the state and the public regulation of the economy, this second category is ubiquitous. 1/27/2014 15
- 16. The different interactions “lit” by the IEL (betweenstates,statesandindividualsandbetweenindividuals) • In both cases we are in the presence of “state legislation” (i.e. legislation “by” the state) that applies to individuals (legislation “for” the individuals). • Similarly, IEL remains economic law and, as such, it is a “law for individuals”. It applies to both interactions between individuals that result from their economic activity and, more importantly, to the relationships of these individuals with the state and its various branches. IEL, however, is also international and, thus, it is a law “between states” and not “state legislation.” 1/27/2014 16
- 17. The differentinteractions“lit” by the IEL (betweenstates,statesandindividualsandbetweenindividuals) • This topic is sometimes presented in a confusing manner. Indeed, two completely different aspects – the subject of regulation (the “what”) and the instrument of regulation (the “how”) – are often muddled. 1. As for the “what”, or the object of regulation, it is clear that IEL and domestic law may well regulate the same issues. While IEL is particularly focused on ruling the relationships between the state and individuals, its object of regulation does not exclude interactions between individuals. 2. With respect to the “how”, or the means of regulation, IEL deploys mainly an indirect technique of regulation and creates obligations on states, mandating them to adjust their own sets of laws in accordance with international rules. • Nevertheless, it must be kept in mind that IEL can also project its norms directly on the excerpts of reality that it intends to mould. 1/27/2014 17
- 18. OthermeansattheState’sdisposaltomouldreality– bothnationallyandinternationally • So far, we have insisted on the binding union between law and economy and between market and regulation. But this reasoning should not lead us to infer two erroneous conclusions: First, that all economic activities are regulated; and, second, that the law is the only tool at disposal of the states to mould the economy. The first of these conclusions has just been addressed, so we will now focus on the second conclusion. 1/27/2014 18
- 19. OthermeansattheState’sdisposaltomouldreality –bothnationallyandinternationally • On one hand, we must always bear in mind that the law can be infringed (even systematically). If that is the case, the ability of the law to mould reality can be diminished or even vanish. Moreover, the application of a piece of legislation may entail effects opposite to the ones originally envisaged by the norm. Indeed, lawmakers are often unaware of the possibility that a regulation may well end up producing unforeseen effects. This is an additional reason why policymakers should be cautious when enacting legal regulations. 1/27/2014 19
- 20. OthermeansattheState’sdisposaltomouldreality– bothnationallyandinternationally • On the other hand, we should not downplay the state’s ability to shape reality through non-legal means. Indeed, legislation is not the only instrument at their disposal. • States can rely on two additional tools with which to mould reality: 1. Public activities (including the granting of subsidies to certain economic activities carried out by private agents); 2. The redistribution of income through budgetary transfers. These tools are also helpful in the arena of international economic relations. • Furthermore, international economic relations can be handled (precisely due to their “international” quality) through the traditional diplomatic mechanisms of dialogue and cooperation 1/27/2014 20