Role Models - JSE MAGAZINE

Role Models

It’s all very well for a country to have legislation on the books, but it’s how and when it is applied – and how consistently – that matters when it comes to investment

Role Models

The rule of law is one of the first things a potential investor tends to consider in order to be informed about any market. Does a particular government keep the promises it makes to investors or does it change the rules without warning? Does it treat like cases alike or does it favour particular insiders?

It is a given that for the continent of Africa to experience economic growth it needs to attract investment, and for that to happen it needs adequate legal frameworks. Recently, the World Bank’s 2017 World Development report, titled Governance and the Law, has injected a further layer of complexity into the debate by insisting that it is not only the rule of law that must be considered but also what it calls the ‘role of law’.

Everyone agrees on the importance of the rule of law. In June 2017, IMF MD Christine Lagarde insisted that ‘investments can only thrive in the right environment – one in which the rule of law is respected and safeguarded by strong institutions’. The African Development Bank stated as long ago as 2006 that ‘in the absence of the rule of law, chaos exists … development does not occur in chaotic or unpredictable settings but thrives in secure, predictable environments’.

However, the mere existence of formal laws does not inexorably lead to their intended effects. In many developing countries (and indeed developed countries), the laws on the books are just that – they remain unimplemented, or they are selectively implemented.

Investment will tend to avoid places where investors may face uncertainty in the form of expropriation, shifting taxes, weak copyright protection or obstacles to recourse. Traditionally, legal consultants are hired to ask how closely African markets comply with the principle of the rule of law. This can be a very formal task, achieved by referring to any of a number of indices such as those produced by the World Justice Project, the Mo Ibrahim Foundation or the World Bank’s Governance Indicators. Of course, most investors – and most lawyers too – have always known that these sorts of indicators have considerable limitations.

The World Development report gives some guidance on how to transcend those limitations. It observes, in the words of legal scholar Jean-Pierre Olivier de Sardan, that ‘the gap between official rules and actual behaviour is not a space where norms are forgotten or missing, but a space where alternative norms are in use’. So the totality of the system and its underlying power relations needs to be understood. This, the World Development report insists, is a far better predictor of economic outcomes ‘than the content of the rules themselves’.

This is a tall order, perhaps too tall. Investment advisers are required to effectively be anthropologists as well as lawyers. But the World Development report is unyielding on the point. It asserts that ‘the divergence between rule and practice is rarely a matter of the absence of rules’, but rather requires that the totality of the system of laws and norms be considered.

This needs to be done in order to cover some practical areas.

For instance, where does a franchise that has launched a product in a particular country stand if a local businessperson copies the brand and thus benefits (unfairly) from its marketing campaign? Will the local courts uphold its trademark rights, even where the local businessperson is politically connected? What happens to agreements to develop land, made with the formal state institutions, when it turns out that a traditional leader is of greater account in a particular locality? What about regulations that have existed on paper for many years and have never been applied but are suddenly thrown at a foreign investor (together with a fine for non-compliance) during a time of fiscal crisis?

These are all the sorts of issues where, in order to understand risk, legal advisers have to delve into local norms, parallel legal systems and power relations. In other words, legal experts need to master the functions served by law – its role – and not just its formal shape.

By David Christianson
Illustration: Hanlie Huisamen