New Study Shows How Systemic Financial Crises Trigger Global Actions And State Reactions
May 27, 2009, Press releases
A Partnership of the American Bar Foundation and the University of Illinois College of Law
FOR IMMEDIATE RELEASE
Contact: Terry Halliday
NEW STUDY SHOWS HOW SYSTEMIC FINANCIAL CRISES
TRIGGER GLOBAL ACTIONS AND STATE REACTIONS
Bankrupt: Global Lawmaking And Systemic Financial Crisis gets to the heart of global-local tensions in addressing the world’s economic crises
CHICAGO, IL MAY 27, 2009- How do global financial institutions respond to systemic financial crises? A major new book by scholars at the Center on Law and Globalization argues that the best predictor is what happened the last time, during the Asian Financial Crisis. The research, supported by the American Bar Foundation and National Science Foundation, shows that widespread economic crises provoke intense lawmaking by international organizations and frequent struggles with countries they are intended to help out of the crisis.
In a unique research project on international organizations, “we tracked closely the interventions of powerful international financial institutions and major states when they were confronted with a quickening momentum of economic collapse in Asia,” says Terence Halliday, Co-Director of the Center on Law and Globalization (American Bar Foundation and University of Illinois College of Law) and Research Professor, American Bar Foundation.
The G-7 and G-22 demanded quick action. “The immediate response of the International Monetary Fund, the World Bank, and the Asian Development Bank, among others,” observed Halliday, “was to stem the tide of economic collapse.” In the longer term, international organizations tried to reconstruct the regulatory systems that monitor and constrain economic activity. How well they succeeded is being tested now, ten years after the last experiment in financial stabilization and regulation.
The full study is reported in a book just released by Stanford University Press, Bankrupt: Global Lawmaking And Systemic Financial Crisis, written by Terence Halliday and Bruce Carruthers, Professor of Sociology, Northwestern University.
Bankrupt shows that alongside the urgent macroeconomic efforts at financial stabilization, international organizations pressed countries hard hit by the crisis, such as Indonesia and Korea, to immediately create new laws and institutions to handle an avalanche of failing businesses. Corporate bankruptcy reforms moved to the top of regulatory interventions. Indonesia and Korea had to agree with the IMF and World Bank that they would undertake specific changes in their laws as a condition of $10s of billions of new money to stabilize their economies.
The international financial institutions combined hard and soft incentives. They sought to increase certainty that businesses without any hope of recovery would be quickly liquidated. At the same time, they pushed policy-makers to make it far easier to reorganize companies that could be saved.
To rescue businesses, the IMF and World Bank demanded four types of law reforms. They insisted that countries agree swiftly to make it easier and faster for companies to use bankruptcy law and courts. Rapid decisions were required to save what businesses still had prospects for being turned around. This would keep jobs and minimize loss to creditors.
Since most developing countries also had weak courts and judges inexperienced in complex commercial cases, Bankrupt shows how the IMF and World Bank urged political leaders to strengthen their courts, recruit high-quality judges, and shield courts from political interference or corruption.
But in a crisis courts can be quickly overwhelmed. In Indonesia, Halliday and Carruthers show that the government created a special mediation agency that encouraged companies and banks to conclude quick out-of-court settlements. This took pressure off the courts. In Korea, the government introduced plans for banks to monitor companies in difficulty and to quickly restructure their finances if the companies had any hope of survival.
In China and Indonesia, international organizations successfully persuaded lawmakers that rescuing the business sector in a crisis, or in ordinary times, will not work unless there are specialized and expert professionals. Both countries put in place special provisions to increase the supply and competence of skilled practitioners, usually lawyers, but often accountants, or even dedicated insolvency practitioners.
Bankrupt shows that the Asian Financial Crisis stimulated a flurry of efforts by international organizations to produce new standards for bankruptcy systems that all developing countries could adopt. “International financial institutions responsible for Asia, Central and Eastern Europe, and vulnerable economies everywhere,” notes Halliday, “began intensive projects to produce standards, principles, and legislative guides that lawmakers everywhere could adopt to inoculate themselves against future crises.”
The IMF, World Bank and Asian Development Bank all produced new legal architectures. These were capped by the massive 500 page Legislative Guide on Insolvency, published by the United Nations Commission on International Trade Law in 2004. Developed and developing countries across the world quickly built parts of the Guide into their national law.
Bankrupt shows, however, that neither in 2010 nor 1998 will reforms be quick or successful. “A large implementation gap opens up between law on the books and law in practice,” concludes Halliday. To get financing, countries instantly agree to make changes. Once the urgency is over, however, policy-makers who resist foreign pressures find many ways to stop legal changes from producing actual changes in practice. Sometimes it is clear resistance is intentional. At other times countries simply do not have capacities to put in place effective, efficient and fair regimes.
Halliday predicts that the current crisis will have similar results. Already the G-20 and international organizations call for far-reaching reforms of the international financial system. Already international financial institutions are rushing to save countries as diverse as Iceland and Ukraine from financial collapse. Law reforms are part of the rescue packages. New efforts at global lawmaking have already begun as international organizations rush to refine their models of national bankruptcy systems.
Yet systemic lawmaking always confronts the hard reality of implementation. While new models of global regulation will be rolled out over the next months, their impact inside vulnerable nation-states will be tested by the will and ability of policy-makers to practice what they profess.
“This is an impressive book,” states John Campbell, Dartmouth College and Copenhagen Business School. “Based on hundreds of interviews from around the world, it is extremely well researched.” He adds, “It reveals how global norms are generated and put into practice in different countries” and “moves well beyond conventional studies of global diffusion.”
The Center on Law and Globalization is a Partnership of the American Bar Foundation and the University of Illinois College of Law. The Center brings together the top legal officials of international organizations, key journalists, and academic experts to understand behavioral and legal dimensions of critical global issues, to stimulate well-informed global policy choices, and to advance empirical research on globalization and law. To access the Center’s Smart Libraries – clustering the leading scholarship on globalization- click here.
The American Bar Foundation is the nation’s leading research institute for the empirical study of law. An independent, nonprofit organization, for more than fifty years the ABF has advanced the understanding and improvement of law through research projects of unmatched scale and quality on the most pressing issues facing the legal system in the United States and the world.
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