Principal Aspects Of The Legal Framework

Sound legislation and a well-functioning judicial system are essential underpinnings to all economic activity. Judge Richard Posner has made the following observations about legal systems and economic growth:

If it is not possible to demonstrate as a matter of theory that a reasonably well-functioning legal system is a necessary condition of a nation's prosperity, there is empirical evidence showing that the rule of law does contribute to a nation's wealth and its rate of economic growth. ... It is plausible, at least, that when law is weak or nonexistent, the enforcement of property and contract rights frequently depends on the threat and sometimes the actuality of violence . .. , on family alliances that may be dysfunctional in the conditions of a modern economy, and on cumbersome methods of self-protection. These are costly substitutes for legally enforceable rights, as are the discredited 'command-and-control' methods used in communist economies. The hidden costs of these substitutes are a bias against new firms, which have no established reputation to persuade clients that they are reliable, and a bias in favor of simple, simultaneous exchanges over more complex transactions because it is unlikely that legal remedies can be invoked against nonperformance. . . . The cumulative costs of doing without law in a modern economy may be enormous.29

In a market economy, the basic concepts of ownership and contractual obligations need to have clear legal support, and the judicial system needs to offer appropriate opportunities for rapid redress in cases of transgression. Forms of economic association also require a solid legal framework. Oddly, in many countries the concept of joint stock companies, or limited liability companies, is not fully spelled out in the corpus of legislation for the agricultural sector. Preference is sometimes given to co-operative forms of association, partly because of tradition and partly out of concern that one individual or a few could come to dominate a joint stock company by purchasing the shares of others.

Co-operatives have been successful for generations of farmers in some countries and sub-sectors, as in the case of grain marketing in Western Canada and dairy marketing in Denmark and elsewhere. Marketing and input purchase have been the strongest areas for cooperatives, while production co-operatives have had a much more mixed record, although some of them have been successful as well. On the other hand, co-operatives have two distinct disadvantages, i.e. (a) the rules for distribution of the gains among members are not always clear, nor are they always linked to the intensity and effectiveness of each member's contributions, and (b) they are not attractive to lenders, because a co-operative may be able to escape its repayment obligations simply by dissolving and reconstituting itself under a different name. For this last reason, co-operatives often find it more difficult to raise funds than joint stock companies.

There would appear to be room for more creativity in crafting the legislation governing forms of association in agriculture. For co-operatives, the rules governing the distribution of net earnings could be made more precise, and also responsibility for financial obligations could be placed on each member. For joint-stock companies, rules preventing the concentration of shares in few hands could be drawn up, and current members of the enterprise could be given the first option to bid for the shares of a member who has decided to leave, thus minimizing the chances that persons outside the entity would come to control it. Such legislation has, in fact, been put in place in some countries.

The objective in this area should be to improve the entrepreneurial character of the association.

Major types of legislation that can be relevant to agriculture in this regard and others include the commercial code, the labor code, gender aspects of legislation (especially, but not only, family legislation and land tenure legislation) and tax legislation. Another set of laws that is pertinent to agriculture's development prospects is consumer protection legislation. It is increasingly important all over the world to legislate and enforce adequate safeguards regarding food quality and safety, not only out of domestic concerns but in order to be able to penetrate export markets. However, there is another realm in which caution needs to be exercised, and that is the putative protection offered to consumers by anti-hoarding laws. Such laws are intended to prevent 'speculators' from causing undue price increases during the season of scarcity of staple crops. However, they can have the perverse effect of discouraging investment in storage and marketing facilities, and therefore increasing the amplitude of the seasonal fluctuations in prices. Storage and marketing are important economic activities that relocate products in time and space. Accordingly, they have a cost, and that cost needs to be remunerated if those activities are to be encouraged. Attempts to legislate limits on private trading in food products is one of the main causes of underdeveloped marketing systems in many lower-income countries.

Legislation is crucial in the financial field. To facilitate agricultural lending, the concept of collateral needs adequate definition. Often its legal

29. Richard A. Posner, 'Creating a legal framework for economic development', The World Bank Research Observer, 13(1), February 1998, p. 3.

definition excludes crops and livestock, thus severely limiting a farmer's chances of borrowing to cover production costs. More generally, bank supervision and prudential norms is another critical area for legislation. In agriculture, where local savings and loan co-operatives may provide an important source of production finance, those norms need to be defined in a flexible, but nonetheless solid, way in order to avoid stifling the growth of such co-operatives or associations. Among the financial laws, one of the most important is the bankruptcy law. Without clear, firm rules governing the disposition of insolvent enterprises, the development of finance will remain hampered.

Enforcement of laws is often weak in developing countries, and poor families are the most disadvantaged in access to legal resources. Judicial systems urgently need strengthening, and it can be important to establish rural tribunals in order to make justice swifter and more accessible to all.

These and other legislative issues are explored extensively in the succeeding chapters in the context of specific areas of agricultural policy. Chapter 5, for example, reviews many aspects of the legal framework for land tenure policy, while Chapter 7 comments at length on the legislation for bank regulation in the rural sector.

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