Legal and Judicial Reform Policy by World Bank and Its Implication to Policy Choice and

Legal Design in Borrowing Countries

By: Rudy

Faculty of Law University of Lampung

Graduate School of International Cooperation Studies
Kobe University

Abstract

This paper mainly discuss about legal and judicial reform policy by the World Bank and its
indicators for measuring the process of legal and judicial reform. Within the context, the paper
will describe legal and judicial reform policies by the World Bank since 1980 until present, from
the Structural Adjustment Policy, Governance, and current Comprehensive Development
Framework Policy. Then it explains the indicators used by the World Bank to measure the
process of legal and judicial reform. Finally, it discusses the effect of the policies and indicators
to policy choice and legal design by borrowing countries.

Introduction

Despite the absence of major formal law reform in most economies, the legal system changed
significantly between 1960 and 1995. This change can not be captured by focusing only on
enactment or amendment of major codes. Legal change over 35 years was less visible because it
often took place at the level of administrative rule making or practice rather than the enactment
of major legal codes (Pistor and Wellons: 1998). However, these changes had important
implication for the functioning of the laws that were already on the books.

Asian financial crisis 1997 marked the visible process of legal and judicial reform in Asia
especially in South East Asia, these reform mostly promoted by international agencies such as
International Monetary Fund, Asian Development Bank, European Bank for Reconstruction and
Development, and The World Bank. Although most multilateral banks and donor agencies are
involved in programs which fall within the broad notion of legal and judicial reform, the
intellectual and practical leadership is provided largely by the World Bank, through its
numerous publication and the projects in which it is involved. 

It is widely known that the legal and judicial reform led by international agencies gives
implication to the policy choice and legal design in the respective countries since the respective
countries or borrowing countries are working closely with The Bank in reforming the legal and
judicial reform. The example is Indonesia which works closely with the Bank in its
development framework (Shihab: 2000). Therefore, it is very important to have better
understanding regarding World Bank policy on Legal and Judicial Reform.

Legal and Judicial Reform Policy by World Bank

Bank activities on rule of law projects can be told by situating them within the main
development models of the Bank in three different periods. The first period goes from 1980 to
1990 within the structural adjustment development policy. The second period witnesses the
emergence of the “governance” from 1990 to 1999. The last period, since 1999 is
comprehensive development policy (Santos: 2006). These periods encompass the rise and fall of
Washington Consensus, and the subsequent move to the enlightened Washington Consensus.
Structural adjustment was a period of market shock and trade liberalization. The Bank
involvement in reforming developing countries laws and legal system predates the introduction
of the notion rule of the law in the Bank’s projects. The notion of the rule of law was not part of
the development strategy; however, the Bank assisted the borrowing countries in a wide variety
of legal changes deemed necessary to implement the macroeconomic policies as part of
structural adjustment loans (Shihata: 1991). Legal reforms were thus a condition for loan
disbursement.

The Bank provides support under a variety of lending instruments and in the context of a wide
range of lending operations. Lending operations for capacity building and institutional
development often included components related to legal reform. In other operations, such
reforms were stipulated as conditions or components of structural adjustment programs
supported by Bank financing.

The governance period was inaugurated the dismemberment of the Soviet Union, the dramatic
political transformation of Eastern Europe and a severe political crisis in the African continent
in the late 1980’s and early 1990’s. In this context, the rule of law emerged as a central part of
strategy for transforming these countries into market economies. With the introduction of the
rule of the law as an area of legitimate Bank intervention, law reform became a priority and the
Bank rapidly began to broaden its reach in the form of investment or technical assistance which
were not necessarily subject to conditionality (World Bank: 2002). Legal technical assistance
includes drafting constitution and legislation; advising on institutional reform; establishing new
institutional frameworks; providing technical support for the development of parliamentary
procedures and practices; advising on judicial reform; offering short training course on specific
legal topics, and providing advise and guidance on legal education generally.

The Bank's legal and judicial reform programs have expanded considerably since the Nineties.
Initially, the Bank focused primarily on assisting countries through law reform, helping them
to develop legal environments that encouraged local and foreign private investment—
including stable and predictable systems to protect and honor property and contractual rights.
Since beginning its activities in governance in 1991, the Bank has addressed judicial reform as
countries began to recognize that enacting legislation alone could not yield the desired reforms
without adequate infrastructure to implement, enforce, or modify the law. Subsequently, the
focus became building and reforming the institutions needed for dispute settlement as well as
for access to dispute resolution mechanisms and qualified and affordable legal representation
(World Bank: 2004).

The Bank is aware that the provision of legal technical assistance is a sensitive issue. In one of
its publication, it clearly states that the political decision about the choice and the direction of
legal reform is one of which has to be made by each country: “before launching comprehensive
legal reform, each society has to make fundamental choices about the structure of its legal
system” (World Bank: 1995). Consistent with this approach, The Bank defines the role of
external advisors narrowly as assisting in the decision-taking process, but not deciding which
specific legal model should be adopted.

Initially, the legal and judicial reform was intended to make the financial markets works
properly. Regulation serves four purposes in successful financial market: maintaining safety and
soundness (prudential regulation), promoting competition, protecting consumer, and ensuring
that underserved groups have some access to capital. Protecting consumer is not only good
social policy but also builds confidence that there is a “level playing field” in economic markets
(Stiglitz: 1998). Without such things, those markets will remain thin and ineffective.

The current comprehensive development phase was inaugurated by President James D.

Wolfhenson’s strategy of Comprehensive Development Framework (Wolfhenson: 1999). This
strategy was launched as a response to the critiques of the neoliberal economic policies and
sought to turn from a focus on economic growth to one of “interdependence” of all aspect of
development. Comprehensive Development Framework (CDF) seeks to re-conceptualize
development by going beyond its macroeconomic and financial aspect to focus on structural,
social and human concerns (Santos: 2006). The quest is for stable, equitable and sustainable
development. The reduction of poverty, or rather freedom from poverty, has been introduced as
a central part of the strategy.

Conceptually integrated form of development makes it impossible to think of any given sphere
of development in isolation. The connection of each of the different domains—legal, economic,
political, social—is constitutive of development. Thus, development as a whole cannot be
considered separately from the development in each domain (Sen: 1999). In this view, the legal
and judicial reform is importantly as the economic, social, or political domain. Then, the
understanding of legal and judicial reform is shifting from the pre requisite for the economic
development to the development on its own as a part of development process. In addition, The
Bank argued (2004) that “a well functioning legal and judicial system critical both as an end in
itself as well as a means to facilitate and leverage achievement of other development objectives.

The Comprehensive Development Framework sets out a role for each of the actors of
development (government, private sector, civil society, development agencies) and proposes a
framework for coordinating their efforts. The program keeps the stress on sequencing and
phasing of reforms as well as on local ownership, while preserving the role of the private sector
as the main engine for development. In this holistic approach to development of CDF, the focus
of legal and judicial reform projects has moved beyond economic growth, also promoting
human rights to achieve sustainable and equitable development. In the struggle against poverty,
these projects emphasize access to justice as well as empowerment, ownership and security for
the most vulnerable groups, with particular emphasis on the poor, women and children (World
Bank: 2004).

Indicators of Legal and Judicial Reform by Bank

The Bank's approach to legal and judicial reform has evolved significantly to incorporate
judicial sector assessments and diagnoses, which are used to design appropriate project
components. In 1994, the first judicial sector assessment was completed in Ecuador, and was
updated in 2003 (Legal Vice Presidency, World Bank: 2002). The Assessment examined
different aspects of the administration of justice, including court and case administration;
selection, promotion, and disciplining of judges; training of judges, lawyers, and law students;
access to justice and its gender dimension; and alternative dispute resolution mechanisms.

Judicial sector assessments are now regarded as highly desirable prerequisites to ensure that
projects meet the needs of the country and achieve intended objectives. To date, the Bank has
completed twenty-five legal and judicial sector assessments. For example, assessments were
undertaken in Argentina, Bulgaria, Georgia, Mongolia, Peru, and Trinidad and Tobago, to
facilitate discussions with the governments on defining appropriate components for individual
lending operations. As a result of the sector assessments, such as in Ecuador, the projects
included a broader range of components than had been included in the first project in Venezuela
(World Bank: 2004).

There are 2 indicators used by the Bank, which are Legal and Judicial Indicators (World Bank:
2002) and Reports on the Observance on Standards and Codes (ROSC). The latter is used by
both World Bank and IMF. However, the indicators are not an empirical evaluation of the results
of reform, but evaluation of the progress of reform based on certain model (Kaneko: 2006).
World Bank Legal and Judicial Indicators is based on the American Law philosophy that the
judicial sector should be independently and be allocated larger budget, and be the central target
in the Law and Judicial Reform. Meanwhile, ROSC is based on model laws reflecting the neo-
classical deregulation policy. Both indicators are reflecting neo-classical economic thinking and
promote the global standards for legal and judicial reform direction.

Policy Choices and Legal Design

Early 1990s witnessed the promotion of “Legal and Judicial Reform” by The World Bank in the
context of ‘Governance’ and ‘Rule of Law’. These contexts are basically justification for legal
and judicial reform as a mere technical assistance, accordingly, ‘Governance’ and ‘Rule of
Law’ is talk on legitimacy of legal and judicial reform and never gives any direction of legal
policy choices by the borrowing countries. The introduction of Comprehensive Development
Framework in 1999 gives World Bank diversification reasons for legal and judicial reform in
borrowing countries.

Bank stated (2004) that “the reform should come from within the country and responds to its
specific needs,” however, the policy of legal and judicial reform by the Bank does not give the
policy choices for borrowing countries to implement the their own model of legal and judicial
reform since the reform should follow the specific models, thus the appropriate legal design
which is suitable for each country characteristic will not be achieved. It is then reinforced by the
introduction of indicators which favor the neo-classical model law as global standards. More
importantly, the indicators are frequently referred to in leading academic papers or development
aid policy papers as if there are pure objective data.

The global standards constraint the development of borrowing countries specific law reform
model, for example is Indonesia which has three law systems: Western Law, Islamic Law, and
Adat Law. With the promotion of global standards, the reform in Islamic Law and Adat Law
will be neglected, and the indigenous specific law reform model will not be achieved in
Indonesia. Even there is no conditionality to follow the Bank policy on legal and judicial
reform; the pressure and the influence to follow are not small.

Conclusion

World Bank involvement in legal and judicial reform obviously gives big impact on law
development. Its policy on legal and judicial reform is very important, but more importantly is
the freedom for borrowing countries to create its own model of legal and judicial reform
suitable with each country characteristic rather than pushing forward the global standards based
on neo-classical economic law thinking. Law is not created within short term length but
developed based on the interaction of real forces in the community and reflect the evolving
interests, values and convictions that do exist with the community; The Bank should consider
that carefully.

Reference

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Seminar Class on Law and Development, May 2006, Graduate School of International
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available at http://siteresources.worldbank.org/CDF/Resources/cdf.pdf.

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