Economic Development of Countries Founded on Common and Civil Law

From the time they were created, legal systems have heavily influenced society. Although it has not been significantly analyzed until the twentieth century, one of the areas most significantly affected by legal systems is the economy. As with all of the aspects of society, legal systems provide restrictions and regulations for the economy. Because of the legal systems influence on the economy, it is important to note the type of legal system. The world's two most predominant legal systems are common and civil law. Common law is defined as a "body of law deriving from judicial decisions as opposed to legislatively enacted statues and administrative regulations" (Reed, Shedd, Morehead and Pagnattro, 2006, pp. 618). While common law derives from judicial decisions, civil law "relies more on legislation then judicial decisions for law" (Reed, Shedd, Morehead and Pagnattro, 2006, pp. 14). It is from these differences in legal systems that causes the variation in economies and economic policies. Because the significance of this relation between legal system and the economy has just begun to be realized, literature has begun to emerge on the topic. The following will analyze several works, in an attempt to understand this relationship.

Before giving an analysis, it is important to understand the background of common and civil law. Common law began in England as circuit judges acted in the name of the king or queen and attempted to resolve disputes between the populations. As more cases were heard, the judges were able to use prior decisions and rulings to help direct them in the current cases. Common law continued to develop and prosper in England and was spread across the world as England began to colonize. Today numerous countries practice common law including the United Kingdom, the United States (with the exception of the state of Louisiana), Canada, and India (Reed, Shedd, Morehead and Pagnattro, 2006, pp. 14).

While those nations colonized by England practice common law, the rest of the world generally observes civil law. Unlike common law, civil law does not recognize prior judicial decisions or recognize judge-made law. Instead civil law focuses solely on legislation that has been passed when legal decisions are being made. The cases that are heard in civil courts are all decided on under the same legislation whereas common law numerous different rulings can be used to interpret the law. It is this uniformity that has allowed civil law to be practiced in nations such as France and even in the United States, as Louisiana follows a partial civil law system (Reed, Shedd, Morehead and Pagnattro, 2006, pp. 14-15).

After understanding the principle difference between common and civil law, one can see the primary effects of the legal system on the economy. Nations economies are constantly changing, and despite technological advances, completely predicting these changes is impossible. Because civil law is based solely on legislation, it is at a disadvantage. As nations economies continue to advance, more problems within the economy will arise. While new legislation can be passed, it is a long and tedious process. Thus, common law and its ability to base its legal decisions are prior cases allow it to adapt.

In addition to not having legislation in place, the current legislation might not cover the entire aspect of the case. By being "hamstrung by a rigid code" (Roe, 2006, pp. 466), civil law has no leeway for judges to interpret laws for a specific case. Instead the "civil law judges read plain meaning" (Roe, 2006, pp. 469), while common law judges can infer or fill in the gaps in the legislation if needed. With the ever changing economy the ability to adapt and adjust is very important. Common law judges have this ability and civil law judges do not. It is important to note this difference because of the change in the economy this difference in legal system can create. Perhaps on of the biggest areas this difference has arisen in the twenty-first century is the emergence of inside thievery. New legislation has been passed in both common and civil law systems, but when this problem first emerged, there was little could be done. The majority of these cases where little could be done were those where the insiders were following all of the legal regulations but were slightly bending the rules, so to speak. These cases mainly include those where insiders share secrets or advice in the stock market. While it is just the sharing of information, these tips can cost outside investors tremendous amounts of money, will a select few insiders are making enormous profit. In civil law systems the insiders would be not guilty, but in common law systems, the judges could find that the insiders committing this inside thievery were, in fact guilty. While "legal origin long preceded modern financial outcome" it is important to note common laws allowance for adaptation and adjustment that common law those nations. Instead of having to revamp an entire system, this built in allowance for change is a tremendous help with the everyday change that occurs in each nations economy.

In addition to these primary differences in the legal systems that affect the economy, there are several other more specific differences that affect the economy. One of the most influential aspects of the economy is the market. The transactions that occur in a nation, internal and external, are very influential on state of the nation's economy as a whole. With this influence in mind, it is important to note how each legal system protects and regulates the market. The two main ways of protecting and regulating the market are protecting the investors and providing the correct amount of regulation on the economy.

Protecting the investor is key to having a successful market. The investor is the one who stimulates and provides financial support to the market. If there is a high probability that the investor will be exploited, then the investor will not make an investment and the market suffers. By providing protection to the investor, more investments are likely to be made and the market will be more likely to prosper. As opposed to civil law systems, "common law institutions effectively protect outside share holders" (Roe, 2006, pp. 463), and because civil law systems to not protect the investor as efficiently, their markets are less likely to be successful. The reason for this difference in protection lies in the main difference of the legal system. Because "common law systems protect minority stockholders well via judge-made fiduciary duties" (Roe, 2006, pp. 470), investors will be more comfortable in investing. Each legal system will have flaws in protecting the investor, but if there is a void, then the common law system allows the judge to fill the void and correct the problem. The civil law system will still enforce punishments on those who try to wrong investors, but the basic legislation is too rigid to offer the same amount of investor protection that common law does.

Another significant aspect to having a successful market is correctly regulating the market. Regulation is vital, because it prevents market domination through monopoly and other processes that companies use to dominate the market. While regulation is significant, it is just as significant to ensure that there is not too much regulation imposed on the market. Common law has appeared to find a middle ground as they regulate less and "prefer market solutions and private contracting to centralized, statist regulation" (Roe, 2006, pp. 466). With this being said, common law still imposes regulations but for the most part, lets the market be as independent as possible. The "common law judiciaries confine the over-regulatory tendencies of their legislatures" (Roe, 2006, pp. 474), while civil law societies tend to over-regulate. This system of checks and balances allows the common law societies to successfully use regulation but not obstruct the market's progress. It is for this very reason one can see that "civil law intrinsically induces over regulation of the economy, while the common law lets markets flourish" (Roe, 2006, pp. 474). Because civil law will not allow judges to decide fill gaps in the legislation on their own, this legal system provides legislation and regulations that cover the vast majority of the market. By allowing judges to fill in the gaps in the legislation, common law is not forced to impose too many regulations and in turn, lets the market attempt to fulfill its potential.

It is very important to note the differences in the common law and civil law systems when facilitating a market, but it is also important to know which system facilitates the creating of a nation. The creation of a governmental institution is the most important aspect of creating a new nation, but a successful economy is a close second. The government must have a financial backing to support its numerous different institutions. Without this backing, the ruling body will be unsuccessful in governing and eventually become a failed state. Now the importance of a successful economy is apparent, a comparison between the two legal systems can be made to see their effects on the economy.

As with having a successful market to boost the economy, it is important to have a successful market to create the market. Once the market is in place and begins to stabilize, other policies can be instituted but a solid foundation is required. Although there are different was to create a successful economy, "the normative implication is that developing nations should seek those tools that work- such as market-oriented" (Roe, 2006, pp. 465), policies that will stimulate and set up the market for success. Similar to the reasons listed in the previous paragraphs, common law has the advantage over civil law. Civil laws institutions rely on "codes, narrow judicial intervention, high regulation, and market directives instead of market solutions" (Roe, 206, pp. 465), to direct the market. While these institutions might be more successful once they are implemented and the economy is running smoothly, they are not successful to create a market because they tend to hinder financial markets. Unlike civil law's institutions and policies, common law institutions and policies tend to facilitate financial markets. This facilitation is done through "adaptive judges, wide judicial discretion, light regulation, and private contracting" (Roe, 2006, pp. 465). Again, common laws policies allow for the adaptation to the situation. It is this adaptation that allows the economic policies to be flexible and adjust to the most efficient policies. Although common law's flexibility has numerous positives, it is sometimes necessary for a more regulated system that has more conformity.

Up until this point, it appears that common law is the superior legal system, but this is not the case because civil law is still practiced in numerous nations around the world. Civil law remains the legal system in numerous countries around the world for the main reason mentioned throughout the paper, stability. Because the judges in civil law society base their decisions on legislation, there is less leeway for the judges to input their personal opinions or views. Because the common law judges can use prior rulings, if one judge is corrupt, or faction of judges is working together, the judges could then control the legal system. Judges corruption is a very significant problem because, if corrupt, their "primary task is to enforce what the parties have agreed to rather than creating justice" (Moss, 2007). If the judges in the legal system are corrupt, under common law, the economy can greatly suffer. Certain companies or actors within the market can pay off the judges to ensure they have an advantage. This advantage will more than likely help a select group but hurt the vast amount of others within the market. In countries like the United States, who is a practitioner of common law, it is easy to see the importance placed on the checks and balances system. This system ensures that if one aspect of the ruling body becomes corrupt, the entire government and legal system will not become corrupt as well. In both common and civil law systems, it is important to remember that "judges can be the great equalizer, assuring fair litigation" (Koch, 2004, pp. 139). With such an importance placed upon the judges, each legal system must ensure their judges act justly. While corruption or faulty action can occur by a judge in either system, civil law systems are less likely to be affected than common law systems.

Despite this advantage for civil law systems, it is still widely believed that common law systems are preferred when dealing with nations economies. While the markets within the nation are vital to a successful economy, it is the nation's imports and exports that truly can bring large amounts of wealth to a nation. In dealing with these international imports and exports, it is crucial to have legislation in place to ensure the transactions that take place. When these regulations and contracts are made legislation, "most of the international...contracts reproduce common law styles" (Mass, 2007). With common law systems being favored in international trade it is clear, which law system countries favor. Noting this favoritism is significant because not all economic powerhouses of the world have common law system. The United States has used a common law system to establish itself as the most dominate country in the world, but there are still other countries who are very successful that under civil law, such as France. There is still no conclusive evidence that shows common law is superior to civil law when making international trade contracts. But the fact that common law is favored over civil law in most situations is important to note.

After giving seeing how the different law systems can affect the economy, it is clear that "law largely determines finance outcomes" (Roe, 2006, pp. 480). Yet even after examining each of the differences in the legal systems and their effects on the economy, it is important to not that each legal system has been successful as well as unsuccessful in different nations around the world. As different as the two systems effects are, for the most part, each system can be effective. Looking at a country that represents each legal system, we can compare their economies to see if there is a distinct advantage. According to the CIA, in 2006, the United States' GDP was $43,800 and France's GDP was $31,200 (CIA, 2006). Although this measure of wealth is different, it is comparable, especially since the United States is considered to be the world's most successful economy. Even as we compare the growth rate there is only a small difference, with the United States growing at 2.9% and France growing at 2.2% (CIA, 2006). France, a country that is much smaller in a sense of land, population, and production capability, is holding its own. While the legal systems influence on the economy is huge, it is clear that both systems can be successful.

Although the world uses these two main legal systems, are there any better alternatives? While each legal system is effective, neither is perfect in every aspect. There are always improvements that can be made, especially in the economic policies that are constantly changing on the local and global level. While these economic policies are going to have the most frequent changes, there are other factors, such as politics that will affect the economy as a whole. For the only way to truly optimize the economy through the ruling body of the nation "law, economic task, and politics might as well be determined simultaneously" (Roe, 2006, pp. 481). If all three of these fractions can be decided simultaneously, then the optimal policy would be put into place. These decisions are not easily made and take extended periods of time to decide on. Because of this complicated process, it is highly unlike that even two of the three parts will be decided on at the same time. There is no way to perfect a legal system to optimize the economy, but both the common and civil law systems have withstood the tests and trials of time.

Throughout this paper, common law and civil law and their affects on the economy have been compared and contrasted. Each system has been seen to be successful, yet there always be debate on which legal system is better for the economy. In conclusion, it all comes down to the economic policy of efficiency. Common law and civil law systems each have positives and negatives yet, each system remains. While there might be a more efficient legal system that better benefits the economy, each nation decides that it is more efficient to keep the legal system they currently have instead of changing. It is more cost efficient to make minor reforms in the legislation than completely revamp the entire legal system. After all, civil law and common law systems have been around for centuries and continue to be the most predominate in the world. If so many have utilized these legal systems for such an extend amount of time, then there is no need to change an effective system.

Works Cited
Koch, Charles H., Jr. "The advantages of the civil law judicial design as the model for emerging legal systems." Indiana Journal of Global Legal Studies 11.1 (Wntr 2004): 139(22). Expanded Academic ASAP. Gale. Clemson University. 7 Dec. 2007

Moss, Giuditta Cordero. "International contracts between common law and civil law: is non-state law to be preferred? The difficulty of interpreting legal standards such as good faith." Global Jurist 7.1 (March 6, 2007): NA. Expanded Academic ASAP. Gale. Clemson University. 7 Dec. 2007

Reed, Shedd, Morehead and Pagnattro. "The Legal and Regulatory Environment of Business." McGraw-Hill/Irwin, New York, 2006.

Roe, Mark. "Legal Origins, Politics, and Modern Stock Markets." Harvard Law Review. (December 2006): 120(2). Expanded Academic ASAP. Gale. Clemson University. 2 Dec. 2007 < http://sys.lib.clemson.edu:3904/ehost/detail?vid=6&hid=116&sid=ffc637cc-295d-45ef-aad6-65edad43008e%40sessionmgr106>.

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