“BOOK & JOURNAL SUMMARY ASSIGNMENT”

ROLE OF LAW IN ECONOMIC DEVELOPMENT

DR. MARIA G.S. SOETOPO CONBOY, B.SC., M.B.A.

Written by :
Name : Ziela Rofahiyyat El Quswa
Batch : 43

PROGRAM MAGISTER
ILMU HUKUM
UNIVERSITAS PELITA HARAPAN
JAKARTA
2018
 Book Summary of Indonesia Getting It’s Second Wind
by DR. Maria G.S. Soetopo Conboy, B.Sc., M.B.A.

Chapter V
Economic Analysis of Law: A Viable Solution

Pursuits of Welfare Maximization

There have been numerous prominent figures of Economic Analysis of Law (EAL);
including the U.S. Court of Appeals for the Second Circuit Judges, Learned Hand, Andrei
Shleifer, and Guido Calabresi. According to Alain Marciano, legal issues correlate with
economic issue. Marciano believed that law and economics could be understood through basic
methodological assumptions. In any society, legal rules cover every aspect of life. In political
economy, “economics is about institutions in general, and the law in particular.”

The Methodology
Richard Posner defined economics as, “the science of human choice in a world in which
resources are limited in relation to human wants, explores and tests the implications of the
assumption that man is a rational maximizer of his ends in life, his satisfactions, and his self-
interests.” By the 1970s, a scientific basis for law using an economic theory had found a
favorable reception in the legal community. In a free-market oriented economy, legal decision
making has become vital. EAL has provided the foundation for a market approach to the legal
decision-making process. The ideology of EAL is the economic science as a selected science
that was made by rational actors who had self-interests in a world where resources are limited.
There are 4 basic elements of EAL methodology, those are Policy Rationale, Explicit
Assumptions, Evaluation of Alternatives and Verification. EAL can be implemented both by a
lawyer and economist. When EAL is implemented, several factors that would be reflected as
follows; multiplier effects, treatment of uncertainty, characterizing uncertainty, and
considering specific statutory requirements. Moreover, EAL has incorporated both positive and
normative elements. The normative element is the basis of the perception as to how the law
should be applied. Law has an implicit economic structure; thus, it must be rational. The law
in 21st century has not only been cultivated into an independent science, but has developed into
a multi-dimensional science in various fields.
EAL is an approach to law that became very influential in modern societies. Within the
government, EAL provides actual legal choices. The most important principles of EAL is to
ask the following questions:
1. How much it will cost?
2. Who pays?
3. Who ought to decide both questions?
EAL has the following 3 main concepts, those are efficiency, rationality, and justice.
Out of the 3 mentioned concepts of EAL, the first concept of efficiency provides the most
comprehensive information about EAL in terms of maximizing social wealth. If maximum
social wealth occurs; then markets, exchanges, freedom, and happiness become invaluable.
The philosophy of wealth maximization is not only moral, but also pragmatic. Posner described
wealth maximization is an ethic of productivity and social cooperation. The fields of law and
economics are interconnected and surrounded by wealth maximization based on economic
liberty that can only be achieved in a free market oriented system. Therefore, the formulation
of laws must be taken into account seriously, objectively, and rationally. This process can only
take place when using methods of EAL, such as CBA.
CBA’s ultimate objective is evaluating the law by referring to an external method: the
law’s costs and benefits. CBA covers intensive and comprehensive matters while searching for
variables to indicate economic efficiency. CBA quantifies the objectives of the law. Its ultimate
goal is maximization of benefits and minimization of costs. The ideology of CBA is the
measure of quantification and the main focus of CBA is objectively measuring costs and
benefits. CBA was actually founded during the 1920s in the field of public policy analysis and
economics. Since the 1980s, the U.S. began to apply CBA into new laws and regulations to
indicate which legislation benefits the people. The virtue of CBA is that enables the analyst or
decision maker to look at the situation globally. CBA provides hints at the consequences of
their actions, and has the ability to evaluate a government action by comparing the future
projects with the status quo projects. Essentially, CBA is used to provide evidence of how the
society will benefit, and how wealth maximization can be achieved. Other tools of EAL include
Cost Effective Analysis (CEA), Fiscal Impact Analysis (FIA), Sensitivity Analysis (SA), Risk
Risk Analysis (RRA), and Regulatory Impact Assessment (RIA).

Law and Economics; Not Economics Law

Ejan Mackaay explained that economic analysis of law is the same as law and
economics. In fact, both terminologies are the same and interchangeable. Mackaay explained
that law and economics is quite different. It is not a field of law, but a method for understanding
law through its social effects, teased out with the help of concepts and theory borrowed from
economics. Its scope is much broader than that of economic law in principle encompasses all
branches of law, law and economics seeks to uncover the underlying logic of all legal
institutions. Law and economics connects to what the best traditional legal scholarship aims to
do: clarifying the underlying order of law as it is. Law and economics judge legal rules by their
expected social effects, as opposed to their justice or fairness qualities.

Law and Econometrics

Econometrics is defined as “the application of statistical techniques and inferences to
observed data in order to evaluate economic theories and their predictions. Econometrics
provides a means for determining whether a correlation, which may reflect a parallel,
reciprocal, or causal relationship, may exist between various events that involve complex sets
of facts. Econometrics evidence has been used to resolve legal issues; such as market power,
injury facts, quantification of damages, even revelation of conspiracies. As in any type of
methodologies, econometrics has its advantages and disadvantages. First, the advantages of
econometrics provide an analysis that can reveal significant support to theoretical arguments
through conclusions that are drawn from observable facts. Second, the disadvantages of using
econometrics are transparency and controversy in the economic model and data. However,
regardless of its disadvantages, econometrics has been consistently and widely utilized by the
Department of Justice, court system, law making system, law enforcement system, and
regulatory system worldwide.

Chapter VI
Economic Analysis of Law in the United States of America

The United States Government

This chapter is describing about EAL in the United States of America. The U.S. has an
internal structure that provides legal and economic support to its decision-making mechanism
within the Executive, Legislative, and Judicial Branches.
The executive body in the U.S. has an implementation and enforcement office for
government policies and regulations called the Office of Management and Budget (OMB).
OMB is the largest division of the Executive Office of the President. The main task of OMB is
performing economic analysis for all federal and government agencies, including regulators,
to determine the costs and benefits of policies and regulations. It presents detailed information
on assumptions regarding macro-economic and fiscal projections. The U.S. deregulation
movement in the 1970s required the Executive Body to strengthen its monitoring and economic
analysis of all legislation through the establishment of the OMB. OMB has obligation to ensure
all Presidential Policies and government commitments are implemented and enforced. OMB
also has legislative clearance and coordination authority to ensure consistency of policy
positions in the President’s Administration. Under the U.S. Constitution, one of the main
responsibilities of the U.S. President is to ensure that laws are executed. In order to regulate
how the laws should be implemented, the U.S. President has the authority to issue an Executive
Oder. The U.S. Congress has the power to legislate the execution of the Executive Order.
Presidents have used a variety of written instruments to direct the executive branch and
implement policies. Examples of such instruments include Executive Order, Presidential
Memoranda, and Presidential Proclamation. However, what distinguishes the Executive Order
from the other instruments is that Executive Orders are published in the Federal Register. The
Presidential Memoranda and Presidential Proclamations, on the other hand, are published only
when decisions of the U.S. Presidents have a general applicability and legal effect. Basically,
the Executive Order must be based on a congressional act or the Constitution. In relation to
EAL, Executive Orders have been utilized to supplement the rulemaking process. Executive
Orders have been issued by U.S. Presidents. In addition, the President also has the power to
revoke, modify, or supersede his own orders or other orders made by his predecessors.
Moreover, the U.S. Congress has the power to provide the stability by codifying Executive
Orders with or without any modification.
The legislative body has an independent implementation and enforcement office of
management and budget called the Congressional Budget Office (CBO). CBO provides
independent forecasts and analyses of fiscal policies. CBO also emphasizes the setting and
monitoring of priority goals and increasing program evaluation. Because CBO is the largest
and best-resourced fiscal council, it prepares macro-economic and fiscal forecasts, analyzes
forecasts made by the Executive Branch, and presents fiscal options for Congress. CBO does
not; however, make recommendations on policy. CBO provides projected monthly and year-
to-date analyses of federal spending and revenue totals, and produces ex-post comparison
reports.
In relation to EAL, the U.S. Department of Justice (DOJ) has a departmental set of
guidelines that include a statement of assumptions based on present and future environments.
The DOJ is comprised of 39 organizations responsible of producing information to the public.
With its vital role in the Judiciary, DOJ works together with the National Institute of Justice
(NIJ) in improving knowledge and scientific understanding of crime and justice issues. DOJ
also receives assistance from the Bureau of Justice Statistics (BJS) by collecting analyzing,
disseminating crime information on criminal offenders, crime victims, and the overall justice
system.

Chapter VII
The Solution Applied
Philosophy of Economics
This chapter explains about the application EAL in Indonesia. Since the 1970s,
economists and lawmakers across the globe had found a common language for the rule of law
to work in the financial market. The science of law and economics united to reach one common
goal: maximizing benefits and minimizing cost to the society. Nicholas Mercuro and Stephen
Medema stated that economic analysis of law places the law in a certain way which indicates
the objectives of law. In addition, EAL provides the public a deeper understanding that the law
is an instrument of analysis that shapes the legal world. A simulated application of EAL can
be done with the BLBI case. In order to execute EAL of BLBI, 3 elements that explained are
statement of need for policies and regulations, examination of alternative approaches, and
analysis of costs and benefits. An economic analysis of Indonesia’s government policy during
the 1997 financial crisis can be describe as follows:
1. Urgent need of crisis management policies
a. Market failure
b. Crisis management policies
2. Examination of approaches
a. Macro economic and micro economic performance approach
b. Dissemination measures
c. Market-oriented approach
d. Specific statutory requirement of discretionary powers
3. Cost benefit analysis
a. General principles
b. Cost estimates, the total cost breakdown of the government rescue program during
the 1997 financial crisis in Indonesia is IDR 653,5 Trillion
c. Benefit estimates
d. Net benefits

Journal Summary of Law and Development in the Twenty-first Century

by David M. Trubek
The idea that a nation’s legal system affects its economic and social prospects can
be traced back as far as the 18th century. And as early as the 19th century the discourse about
law reform often took account of the economic impact of specific measures. But it was only in
the 20th century that an effort was made to create an academic discipline to study the
relationship between law and development and governments and international institutions
concerned with development began to organize systematic legal reform projects.
1. Law and development in the 20th century
In the second half of the 20th century, the author saw the emergence of several
theories, each of which spawned reform efforts. Three major themes can be identified:
a. Law can be an instrument to be used by developmental states to foster change
b. Law may be a barrier to economic development
c. Law should be a framework to facilitate private decision-making
According to the author, the legacy of the 20th century is a complex one. First, the
hoped-for academic field of law and development never materialized. Second, the experience
of reform was mixed as best. Third, there are conflicts among the several ideas that dominated
the period. There are tensions between the idea of the use of law by a strong developmental
state on the one hand and a deregulatory push on the other.
2. Law and development today
Thus, as we enter the 21st century the author thought that we can begin to glimpse
new ideas and new phenomena that need to be studied and absorbed. They include:
a. Law should facilitate experimentation and innovation
b. Law is increasingly affected by global forces
c. Law itself is part of development
d. Law and development policy should be evidence-based
 Journal Summary of General Theory of Law and Development
by Yong-Shik Lee
The general theory is comprised of two parts. The first part of the general theory sets
the disciplinary parameters of law and development by clarifying the constituent concepts of
“law” and “development.” The second part explains the causal relationship between law and
development through “the regulatory impact mechanisms,” i.e., the mechanisms by which law
impacts development, with references made to institutional frameworks and socioeconomic
conditions. The first law and development movement was largely unsuccessful due to difficulty
in the implementation of laws and legal practices, including reform of legal education, in
developing countries where key socioeconomic conditions, which were essential to their
successful implementation, did not exist and their absence had been overlooked or ignored.
Law and development was resuscitated in the 1980s and the 90s after the fall of the Soviet bloc,
with the proliferation of neoliberal law reform projects that sought to reduce state intervention
in the economy by promoting the privatization and deregulation of the economy. This second
law and development movement was substantially larger in scale and impact than the first, with
significant effects on development projects and policies around the world. Since the late 1990s,
law and development has been undergoing a period of reflection and new approaches,
sometimes referred to as the “third movement”. advocates in the third movement has supported
a more holistic view of development51 and chastened the neoliberal approach52 in the
preceding period, incorporating a range of non-market values as the objectives of development.
Another notable development is that intergovernmental organizations, such as the United
Nations, initiated global efforts to eradicate poverty in this period, including the Millennium
Development Goals (MDGs: 2000 – 2015) and the subsequent Sustainable Development Goals
(SDGs: 2015 – 2030).
The disciplinary parameters of law and development, beginning with the concept of
“law” in the context of law and development. Law is defined in its generic sense as a “body of
rules of action or conduct prescribed by controlling authority, and having binding legal force”.
In the law and development context, “law” may be broader than what is perceived as such
based on formalistic characteristics. For the purpose of law and development studies, “law”
also includes some of these norms or informal rules, referred to as “customary law,” that are
consistently observed with an opinio juris.
Another concept that is closely relevant to the discussion of law in the context of law
and development is legal frameworks. Legal frameworks refer to frameworks in which law is
organized, including regulatory structures and legal systems. Legal frameworks are a
determinant of regulatory impact. Legal frameworks may also present challenges for the
adoption of laws that originated in another jurisdiction.
Lastly, the concept of institution is also relevant to the law and development
discourse. Institutions, in the context of law and development, refers to organizations, norms,
and practices related to the adoption, implementation, and enforcement of law. The impact of
law cannot be assessed separately from relevant institutions.
The proposed general theory incorporates both economic and social development.
However, economic development and social development are not completely separate and
influence each other. The varied distributive effect of economic development among different
groups of populations may raise social issues. For instance, economic development based on
industrial promotion and exports would benefit those in the manufacturing and export sectors
more than subsistence farmers in rural areas, creating economic gaps between urban and rural
areas, and raising social issues like the desertion of rural communities by the youth and
migration to cities. Social progress may also influence economic development.