Why a Well Functioning Judicial and Legal System is Necessary for Market Economies

There would be Anarchy without a well functioning legal and Judicial System

For transacting business and commerce, laws and regulations are needed and more importantly, there needs to be a mechanism to enforce such laws and regulations.

For instance, corporates cannot work without contracts between them and their employees, suppliers, shareholders, and other stakeholders.

Indeed, in the absence of contractual agreements between them and their partners, there would be anarchy.

Moreover, as mentioned earlier, such contracts have to be enforced as well since in the case of noncompliance or default on the contractual obligations, arbiters and judges are needed to adjudicate on them.

More importantly, the legal and the judicial systems have to be well oiled meaning that there must be speedier disposal of cases as well as fair and transparent mechanisms where due diligence is done and due processes are followed.

Thus, the importance of a well functioning judicial and legal system for the continued success of market economies cannot be overstated.

The Case of China and How Corporates Learn to Coexist with Poor Legal Systems

Having said that, there are instances when corporates and transnational corporations find that they can coexist in countries where these mechanisms are weak.

For instance, China was long considered as a Wild West type of country where the allusion to the western part of the United States during the course of the Robber Barons of the Gilded Age is seen as a reference to which businesses often learn to live with poor legal and judicial systems.

Of course, this means that the cost of doing business goes up since palms have to be greased, local officials kept in good books, and otherwise engage various stakeholders in a manner where increased costs of compliance are the norm rather than the exception.

On the other hand, for a long time the West was also considered as an example of economic growth and corporate success are closely interlinked to the legal and judicial system being efficient.

Indeed, many experts believe that the Enlightenment and the Renaissance not only gave rise to the Industrial Revolution but also to the modern corporation as we know now since established rules of jurisprudence were laid out and norms were also enshrined wherein there was clarity on what happens in case contractual obligations are not honored.

Need for Well Functioning Legal and Judicial Systems

Thus, the two examples cited above illustrate how corporates need some sort of legal protection which China now is gradually providing.

While domestic Chinese firms were long known to steal technical secrets and expertise from the Western corporations, things have improved much in recent years.

In this context, it is worth noting that one of the reasons cited by President Trump for the ongoing Trade Wars is precisely this or namely, the fact that China does not provide a level playing for Western and American firms when they do business there.

This is a fact recognized by the Chinese as well as can be seen from the crackdown on corruption that the current President, Xi Jinping, has made it a centerpiece of his term in office.

Thus, it can be said that there is a realization among Asian business leaders and politicians as well about how economic growth and corporate success can be increased with a strong legal and judicial system.

The Indian System and the Ease of Doing Business

The case of India in this regard offers a study in itself as it falls somewhere to the middle of this spectrum as far as this aspect is concerned.

For instance, India does have a well established judicial and legal system though cases wind through it for years and decades.

On the other hand, the fact that India is moving up the Ease of Doing Business Rankings means that it is also making efforts to rein its corruption and the associated lack of legal and judicial and more importantly, Administrative Transparency.

Having said that, there is much ground to be covered in this respect and this is the reasons why many Western firms often take arbitration disputes to places such as Singapore that have their preferred International Arbitration courts.

However, this is restricted only to transnational corporations and for the most part, Indian firms still rely on age old Jugaad and other means to survive the legal and judicial jungle.

Protectionism and Populism Adding Fuel to the Fire

World over, there is now a growing tendency towards protectionism and populism which means that if the present trends persist, in the years to come, there would be much chaos and anarchy for both domestic and foreign firms.

This is the reason why Globalist gatherings such as the World Economic Forum in Davos often have sessions on how to tackle the problems associated with poor and ill functioning legal and judicial backbones for doing business in both developed and especially developing countries.

Often, there is agreement on what needs to be done without a clear enunciation of how it would be done or whether it would be done and this is the reason we are seeing a One Step Forward and Two Steps Backward approach in this regard.

How Technology Can Help Here

Lastly, what we need is a new Renaissance where there are new terms for engagement especially suited to the Digital Age so that businesses in the future would be incentivized to invest globally and create ecosystems where innovation and creativity thrive.

Indeed, the present generation of startups and entrepreneurs are spearheading this to some extent as can be seen in the many New Age firms that have sprung up which harness the innovative abilities of their employees and at the same time, take proactive action to tackle the problems caused by poor and inefficient legal and judicial frameworks.

To conclude, technology can certainly help and hence, one can be cautiously optimistic about the future.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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