Eur J Law Econ (2014) 37:175–181

DOI 10.1007/s10657-011-9263-6

Code or court: the financial-political aspect

of correlation between common and civil law

Olga I. Pogrebennyk

Published online: 4 June 2011

 Springer Science+Business Media, LLC 2011

Abstract This paper analyses the ‘law and finance theory’ and other papers which
are based on it and finds that the theory has more in common with a political order
than independent scientific research. This paper argues that, as our world becomes
more and more globalized, common law countries in general, and case law in
particular, have a little advantage when it concerns financial and business rela-
tionships. Consequently, such differences as legal origins can become a huge rift for
global unity. It concludes that, in agreement with many philosophers, the best way is
a ‘middle way’. It recommends the construction a new system of law, which
combines the best aspects of the common and civil law families.

Keywords Law and finance
Legal origins
Common law
Civil law
LLSV

JEL Classification F0
G3
K4

Do not believe in anything simply because you have heard it. Do not believe in anything simply because it
is spoken and rumored by many. Do not believe in anything simply because it is found written in your
religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not
believe in traditions because they have been handed down for many generations. But after observation
and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of
one and all, then accept it and live up to it.
Buddha
Kalama Sutta.

O. I. Pogrebennyk (&)
International Law Group ‘‘Astapov Lawyers’’, Europe Business Centre, 4 Muzeyny Lane, 3rd floor,
Kyiv 01001, Ukraine
e-mail: pogrebennyk.olga@gmail.com

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1 Introduction

The economic situation at the beginning of XXI century appears as a logical result
of World’s development in financial and political spheres. Consequently a new
notion of ‘‘globalization’’ becomes pervasive and fashionable in any type of
scientific research in philosophy, law, economics, political science, finance, culture,
sociology and linguistic studies. Humanitarians from all over the world argue that
from day to day our World becomes more and more convergent. If it means ‘‘unity’’,
and if it deals with non-spiritual field, thus there are two bases of it: finances and
laws. Probably these are exactly finances from what it starts, but they definitely
depend on legal regulation, which follows. International institutions, foreign
investments and credits, euros and dollars, international accounts and transactions;
all of them, and much more, are simply evidence of financial globalization.
Another fact which proves that our world is financially globalized, is the Global
Economic Crisis itself. Krugman (2008) claims that ‘‘When things went wrong in
the US these cross-border investments acted as what economists call a ‘transmission
mechanism’, allowing a crisis that started with the US housing market to drive fresh
rounds of crisis overseas’’. However, we consider that the economic development of
countries differs widely; that there are countries which are leaders, mid-players or
less developed; that their possibilities, and consequently rights, on world market are
not equal. Moreover, the age of a society which founded a country as well as
number of fine-art or architectural masterpieces that it created and even, according
to Arestis and Singh (2010), current account surpluses or deficits do not reflect this
divergence.
There are different factors which explain why one country is more economically
successful than another one. Authors talk about religion, language, legal origins etc.
One of the most general conceptions was introduced in ‘The Protestant Ethics and
Spirit of Capitalism’ written by Weber M. He put religion at the core of economic
development, and considered it the most important factor which influenced the
economic development of each country, through humans’ psychological perception
of their purpose and sense of life.
His idea was supported and even developed by Stulz R. and Williamson R. In
2003 they published an article in Journal of Financial Economics: ‘Culture,
Openness, and Finance’ Stulz and Williamson (2003), in which they tried to prove
that: ‘‘…a country’s principal religion predicts the cross-sectional variation in
creditor rights better than a country’s natural openness to international trade, its
language, its income per capita, or the origin of its legal system’’. The main point of
the article is that Catholic countries do not protect the rights of creditors as well as
Protestant countries.
Definitely, religion plays a very important role in the economic development of a
country; first of all because it constructs a social model of human life, it gives a
perceptional base for its purpose. However, nowadays its (religion’s) role has
changed. Basically, it can be argued that religion has lost its orthodoxy and become
more universal, at least in the Western World. Moreover, the theory of ‘Protestant
Priority’ does not explain economic miracle of Asian countries, such as China,

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Singapore or India. So, we should consider religion as a factor in economic

development, but not as a core or sole one.
Besides religion, the authors took anther proxy of culture–language. Frankly
speaking, it has a sense: it is obvious that English businessmen would prefer to deal
with natively English-speaking partner. However, they would doubt a lot if this
partner, for example, is Indian. This is because Indian people are well-known as
badly organized; it is some kind of mental characteristic of a big part of them. Thus,
if this Englishman prefers order and good organization he would, probably, better
chose to invest in Germany. Nonetheless, business—it is more than about religion,
language or some national mental features. Basically it is about profits. So, if any
country has all-important conditions for investments this means it will be wealthy.
Nonetheless, coming back to the example of English investor, we should consider
why this businessman is more likely to choose India than another country, under
condition that possibilities of profits are equal. Definitely this is not because of
religion, nor is it solely because of language, and not even differences in cultural
characteristics are that harmful when we talk about similar legal families. So, it is
very simple: The UK and India have the same legal origins—common law.
Of course, culture is a key factor in the success of financial-economic
development. However, the notion of ‘culture’ is much over emphasized. This is
due to two main reasons. First of all, culture in its broad sense is a phenomenon,
which reflects nature changed by humans or, in other words, new nature—‘human-
nature’. This definition suggests that ‘culture’ is the same not only for a group of
people but for the whole of humanity. Secondly, according to its narrow perception,
which is taken in the most personal way, ‘culture’ appears as a system of mental,
social, religious, esthetic, spiritual, and many other conditions that influence a
person’s behavior. According to this definition, culture differs from man to man.
What is the most important for us in this article is the problem of ‘culture’ in a
certain political society, the social culture of citizens, which is something in-
between first and second definition. Another thing we should consider is that
‘culture’ is a very basic background, which is the core of any social process. This is
why it should be treated as an abstract notion. According to this position, culture
influences everything. Hence, law and finance are not the exceptions. However, law
basically appears as an instrument in correlation between legal and economic
prospects (including financial development). This is why we can concentrate on law
as it wholly reflects cultural influence on economical growth and exists as unified
factor, which includes and reflects the religion, language, morals, and ethics of a
society.

2 ‘‘Law and finance’’ and its critics

The idea that legal origins (family) have an influence on economical cooperation
between countries is not a new one. However, four authors known under acronym
LLSV made a real revolution in the scientific world. Starting in 1998, when their
first mutual paper ‘‘Law and Finance’’ appeared, it was a very ‘‘bright case’’ in law
studies that a mathematical method had been used to argue in favor of a

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humanitarian statement. It was Shleifer A., a Harvard economist, and winner of John
Bates Clark medal as the most accomplished economist under 40, who gathered
together Vishny R. (the University of Chicago’s Business School), Lopez-de-
Silanes F. (the Yale School of Management) and La Porta R. (Dartmouth’s Tuck
School of Business).
Using regression analysis, they compared the extent of shareholders’ rights
protection and corruption in different countries and came to the conclusion that
Common Law countries treat investors and creditors much better than Civil Law
states. Moreover, they are much less corrupted. Thompson (2010) claims that, their
research was based on: ‘‘dozens of specific financial indicators—ranging from key
gauges, like the odds that a company’s assets will be confiscated by the state, to
smaller measurers, like whether shareholders can vote at company meetings—and
regressed them all against legal origin’’.
This conception provoked a huge scientific discussion. On one hand it was
sustained, for instance Beck and Levine (2003) found new fields of common law
priority: contract-enforcement mechanisms and better developed institutions. The
most interesting factor of their research was that it was organized by World Bank
and we should put our emphasis on that fact. On the other hand, a lot of scientists
did not consider ‘‘Law and Finance’’ as a valid topic for research.
Graff (2005) says that the main argument of the Legal Origins theory is that
common law is more flexible in comparison to civil law: ‘‘Judges having broad
interpretation powers and with courts molding and creating law as circumstances
change’’. Graff calls this feature an ‘adaptability mechanism’, which provokes a
‘political’ one. It appeals to the nature of both systems: common law is based on
‘natural law’, while civil law—on ‘positive law’. This could be described as a
competition between jurisprudence and laws. In other words, the ‘political
mechanism’ holds that civil law is basically oriented to protect rights of the
State, while common law enforces private property rights. However, Graff finds
this mechanism less than convincing. It is true that civil law, which designed in
order to put the state above the court and thus to increase the authority of
imperator, has changed its meaning in the modern World, much as religion has
done.
Moreover, Graff (2005) proves that the LLSV’s index is not highly valid:
‘‘…indicators that contribute to the alleged supremacy of the common law countries
in terms of shareholder protection as quantified by the anti-director rights index, two
are not valid and could be dropped and a third one is dubious because of its
dichotomization. Moreover, two variables that would suggest supremacy of the
common law countries are disregarded for the construction of the index’’. However,
after improvement of LLSV’s variables, he drew the conclusion that the common
law family still affords better shareholder rights protection, but not as much as the
LLSV theory originally claimed. Nonetheless, an interesting conclusion exists,
which was made by Fagernas et al. (2008). It is based on co-integration analysis and
indicates that there is no longer a relationship between shareholder protection and
the development of the stock market. Thus, we must rephrase it: there is no longer a
correlation between shareholder rights protection and the growth of financial
markets, hence and economic development.

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Another minus of the method is that it does not include a measure of creditor’s
rights protection, which is said to be one of the most important measures of financial
development. In his article Graff M. proves that there is no pricipal difference
between civil and common law ‘‘in how a country will handle creditor rights’’, they
only treat them differently.
Other flaws in the theory were introduced by Sarkar and Singh (2010). First of all
it did not take to the account the question of causality and, secondly, it considered
only the short-term dynamics. Moreover, whilst discussing the flexibility of
common law versus civil law traditions, the authors disclosed the fact that French
practice judges interpret the law, whereas English judges have less scope in view of
the detailed descriptions contained in modern English law, for example company
law. What is more, French judges also have discretion by appealing to the Roman
law concept of ‘good faith’. At the beginning, Roman law was based on case studies,
thus legal precedent was a core of it. As Graff M. says, it was the Justinian’s code
which broke the Roman law tradition by the elimination of jurisprudence, and many
centuries later Napoleon’s code merely developed and enforced this effort.

3 Pitfall of the theory

So, is there any real difference between common and civil law, which has direct
influence on financial-economical development of a country? As this article shows,
there is no direct one. Thus, what is the sense of the huge work, which was done by
LLSV? Notwithstanding that fact that many scientists from all over the world, even
those from common law countries have proved that the Legal Origins theory is
doubtable and majority of its data is not valid or relevant, some international
institutions have been considering it as scientific background for their politics,
especially politics concerned with developing countries. Thus, on opinion of Sarkar
and Singh (2010), the theory has been used: ‘‘…by organizations such as the World
Bank to suggest that developing countries should reform their laws to adopt
common law, and to follow Anglo-Saxon model of finance to foster economic
development’’.
As Thompson (2010) claims, we should agree with Zingales and Rajan that
LLSV has done a very clever relabeling of things; the differences: ‘‘…may not come
from something intrinsic to common law or civil law, but rather from some other
correlated factor. Correlation is not the same thing as causation, especially when
you are looking at complicated global trends’’. Hence, the Legal Origins theory,
which is written by a group of four American immigrants, of whom three grew up in
developing civil law countries (Russia, Argentina, Mexico), is basically not about
law, finance or economics, it is about politics, and geopolitics in particular. Sarkar
and Singh (2010) argue that ‘‘…from the Third World perspective it seems arguable
that it is not law that determines economic development but, rather, politics that
determines both law and development’’.
This is a common thing that power tends to be increased. Notwithstanding all the
defects of the theory, it has still made a huge impact. First and foremost, it raised the
problem of the necessity of legal unification. If we understand and agree that

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the future of humanity is possible only as a united conglomeration, we should not

look for differences, but find similarities and endeavor to increase them. Both
families are very similar: they both are systems of law, thus they have similarities in
the subject matter of regulation and in underlying values, same logic etc. Practice
shows that lawyers from one law family can easily adopt and work in corporate,
financial, business law of another one.
Secondly, the theory has provided a huge amount of data, by demonstrating new
methods of scientific law research. Finally, we should agree with Thompson
(2010) that there is still a lot to be learnt from the research: ‘‘This, at least, is the
path being taken by the French government, for obvious reasons the most elegant
and persistent defender of civil law. Initially, the French government ignored
LLSV’s findings. Then it dismissed them. Starting last summer, it began funding
research through its Ministry of Rights and Justice into what the country can learn
from LLSV’’.

4 Conclusion

In essence, from what has been discussed, the following conclusions can be drawn:
1. The theory of legal origins has distinct disadvantages, and its conclusion cannot
be perceived as valid. This theory has more in common with a political order
than independent scientific research. Consequently it is geopolitical interest,
which is the real correlation between common and civil law.
2. Both legal families have a lot of similarities. This makes a reliable background
for future mutual development and even unification.
3. Common law countries in general and case law in particular, have a little
advantage when it concerns financial and business relationships. This is because
it is impossible to predict all the probable situations in any code. For example,
when a dispute over a ‘mandatory bid’ appears, the court can easily see if an
application to the ‘mandatory bid’ increases or decreases the value of a firm
depending on the type of ownership. Thus if it is useful and rightful, or harmful
and injurious for shareholders and creditors.
4. However, common law has two main problems: systematization and high level
of judgments (in other words, judges must be very professional and highly
moral and ethical).
5. Probably, we should construct a new system of law, which will combine the
best positions of common and civil law families. Moreover, an attempt to make
this combination has been already done: ‘‘German civil code’’ (1900), which
became a base of private law in Germany, Portugal, Austria, Switzerland and
Japan, amongst others. Nottage (2001) says that ‘‘taking ‘the middle way’, in
this respect, should hold a more universal appeal. The position was advocated
not only by Ovid two millennia ago; moderation was advocated by both Solon
and Gautama Buddha in six century BC’’. It would help to avoid many
contradictions, for instance such as between ‘‘Contracts (Applicable Law) Act
1990’’ and ‘‘The Rome Convention’’.

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6. The formula of possible combinations, which is an interesting topic for a new

scientific discussion, could appear in the form of the following circle: First civil
code as a base, then common law’s case as its realization and improvement and
finally, amendments to the code and so on.
7. Third World countries should consider that the belief of such organizations as
the World Bank that the common law system is superior is not sustained by
scientific research. Nonetheless, it is the writer’s opinion that it would be quite
useful for these countries to give to their commercial courts a right to interpret
laws and to create precedents.

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