Volume 42 | Number 3 Summer 2007
Page 2 of 6
« First
<
1
2
3
4
>
Last »
I. Introduction
A number of common preconditions must prevail if a market-orientated financial system or national economy is to develop and function effectively.2 Those relating to financial sector development rest on three principles: the first, institutional and legal; the second, largely legal; and the third, related mainly to policy.
First, a market economy and a market-based financial system cannot exist if certain institutional and legal supports are not in place, namely, a governance mechanism that establishes property rights and provides for the consistent enforcement of contracts and resolution of commercial disputes. It is also important that the setting provides for the development of human capital.3
With these institutional foundations in place, a number of legal underpinnings must then be available for a market-based financial system to function effectively. These include the availability of collateral to support secured transactions, a system of law for the establishment and dissolution of corporate bodies, and a transparent system of government funding, including taxation. To maintain such effectiveness, national and sub-national governance should also provide more widely for the rule of law, which is taken to be transparent and non-discriminatory, in addition to establishing specific property rights, enforcing contracts and supporting commercial dispute resolution.
Third, a financial sector functions most effectively in the context of appropriate macroeconomic policies. These policies, while largely outside legal and institutional concerns, operate best in the context of an appropriately designed and transparent institutional framework.
No sophisticated market economy or market-based financial system can exist without these prerequisites, regardless of indigenous or acquired national characteristics or the form manifested by that system. In this context, this article examines the relationships within East Asia between economic development, governance, property rights, provisions for the deployment of collateral and the creation of secured financial transactions, and creditor rights and their relationship with insolvency.
The eleven subject jurisdictions appear in two groups, shown in Table 1. First is a core group of nine, which have undergone, or intend to enact, reforms in the subject areas. Second are two common law jurisdictions that are perceived as being among the most sophisticated in the region in terms of the issues examined, and which may represent benchmarks for reform elsewhere. It is not suggested that either jurisdiction represents an institutional or practical optimum.4
Table 1: Jurisdiction Classifications
| Study Core Jurisdictions | Regional Benchmarks |
|---|---|
| Cambodia | Hong Kong |
| China | Singapore |
| Indonesia | |
| Malaysia | |
| Philippines | |
| South Korea | |
| Taiwan | |
| Thailand | |
| Vietnam |
Neither law nor practice is advanced in relevant areas in most of the remaining jurisdictions within the region, but the issues addressed in this article have begun to receive attention from policymakers and commercial interests. The issues of policy and principle raised in this article have been regularly debated in official and legal circles since the economic and social shocks associated with the 1997-98 Asian financial crisis. In no national case can the legal, regulatory, or policy background be described as either complete or fully integrated, even in the two examples of benchmarks, or elsewhere in countries where specific reforms have been recently instigated or completed, for example, China or the Philippines.
Later sections include tables that give appraisals of the legal framework for creditor rights, especially in relation to secured claims; the effectiveness of national insolvency systems; specific or general provisions for private securitized transactions; and the mutual compatibility of systems for enforcement. Thus in Tables 2, 5, 7 and 8, a scale rising from 1 to 5 is used to indicate the quality or effectiveness of specific factors that are self-explanatory, with “NA” used to signify where the law makes no provision in a specified matter, based primarily upon qualitative analysis. Unless stated, these tables use terms such as “security” and “interest” in a generic sense without attachment to any legal system or jurisdiction. In each case, the appraisals acknowledge not only pure aspects of law and regulation (often clear where the law includes recent legislation), but also qualifications to reflect enforcement issues, integration with related law, and the stability of the regulatory setting. Commercial participants throughout the region have often found that while the law appears clear, it suffers from uncertain application. The results appear in complex private financial transactions that seek to mitigate such risks.
It is now generally accepted that the form and practice of law influences economic behavior. In particular, institutional quality is an important determinant of credit creation and flows of capital, both among the main sectors of an economy and in cross-border savings and investment. Factors such as legal origin, the nature of the acquisition or founding of law, and details of its application and enforcement are seen in features of governance, economic systems and structure, commercial culture, corporate behavior, and financing patterns. These conditions also affect broader variables such as national output or personal income. The appraisals in this article and the research upon which they are based thus adopt the view of users, that is, principals and agents, that become subject to the law rather than those involved in its creation or administration.
At the same time, the efficiency and consistency of the law’s operation will always form part of its institutional costs, so that no assessment can ignore the organization and management of legal systems. This is especially valid in the context of creditor claims and corporate distress. In general, the main objective of the reform of laws governing security and creditor rights will be to influence behavior through changes in costs. The following two parts of this article discuss respectively, its theoretical background and the role of property rights in transaction formation and credit creation. Parts IV and V then examine collateral and secured transactions, and creditor rights and insolvency, respectively. Part VI concludes with an outline of provisions in Asia for contract enforcement and commercial dispute resolution.