By W.A. Wijewardena  –

Dr. W.A. Wijewardena

Palihakkara: Rule of law is important

The veteran diplomat and former foreign secretary H.M.G.S. Palihakkara, chairing the late H.L.de Silva Memorial Events in Colombo recently, has asked an important question pertaining to the current state of social development in Sri Lanka: Is it ‘Rule of Law’ or ‘Rule of Men’ that contributes to a society’s wellbeing? Drawing on the ideals of the late H.L.de Silva who had firmly believed that respecting the rule of law a must for an orderly society, the veteran diplomat has gone on to answering his question with a detailed explanation.

Palihakkara has said that “Diminishing respect for the Rule of Law diminishes us all. Such erosion will allow impunity to raise its ugly head. Usually, impunity signals the onset of decay. Neither those who govern nor those of us who are the governed will be spared. It impairs civilized life and democracy. And it undermines the investment climate. Conversely, the upholding of the Rule of Law manifestly strengthens sovereignty, pre-empts external calls for intrusive accountability, deters threats to the territorial integrity of the nation and facilitates the enjoyment of fruits of citizenship and democracy by all”.

Based on his reasoning, he has concluded that when Sri Lanka nurtures a rich culture of the rule of law, and not the rule of men, at home, “the image abroad becomes richer even if the country remains poor in economic terms”. Hence it is the duty of all to say yes to ‘force of rule’ (discipline made in a society by the introduction of socially accepted set of rules) and no to ‘rule of force’ (administering a country by using coercive powers) (available at: http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=52289).

King Elara applied rule of law to the letter

In a society which respects the rule of law, its members enjoy two fundamental rights which are inviolable. The first is that everyone is treated equally before the law and therefore has equal access to law’s jurisdiction and ensuing justice. Accordingly, there is no special treatment afforded to special type of people. For instance, if there is a dispute between a powerful politician and an ordinary citizen, the law enforcement officers will treat both of them equally; the politician does not get preferential treatment and the ordinary citizen is not discriminated.

Justice should therefore be administered impartially to both friends and foes and to relatives and commoners. An example from ancient Lanka in this regard is, as narrated by the author of the chronicle ‘Mahavansa’, the impartial justice delivered by the Tamil king Elara who ruled Lanka in the 2^nd century BCE by passing death sentence on his own son for the crime of killing a calf by recklessly driving a chariot along the bund of Tissa Tank in Anuradhapura.

The second is that an individual could be punished only after subjecting him to a due legal process and nothing else. No politician, public officer or any other person could mete out punishment to a person arbitrarily. The members of the society have protection against such arbitrarily delivered punishments through properly established court systems when such violations are brought before their attention. It is the duty of courts to hear those cases impartially and deliver justice to aggrieved parties.

Hence, the rule of law is the cornerstone of a civilised society by protecting the rights of people at all levels.

Rule of Law is necessary for economic growth too

Palihakkara has very correctly identified the importance of respecting the Rule of Law for a society’s wellbeing but appears to be in the belief that there is no relationship between the Rule of Law and economic development of a nation. But that is not the case. Respecting the Rule of Law has a direct impact not only on economic development but also on sustaining that development and taking it to greater heights so that once an economy has moved up, there is no any possibility of its coming down.

Protect both private and public properties

How does the Rule of Law support economic development? If a nation respects the Rule of Law, there is proper maintenance of law and order by that nation and that law and order will help it to protect property rights, the property owned by people both individually and collectively. The first category is called the private property rights and consists of both the material property owned by a person and his labour, physical as well as intellectual. The second is called the public property rights and consists of all properties held by the state on behalf of people. Thus, all state lands, common properties, state enterprises and movable and immovable state properties that generate a benefit to people belong to this category. The state is required to protect these public properties on behalf of people and, when it uses them for public’s benefit, it has to do so by following a code of principles that ensures their proper use. Allowing some people to abuse public property or running public enterprises at losses is equivalent to robbing such public resources.

Hence, the protection of property rights – both private and public – is so central to economic development that it is called ‘bread and butter’ of any initiative made by a nation toward attaining prosperity.

Private property rights

The private property rights gives ownership of the property to an individual. He is therefore in a position to dispose of his property in any way he likes through an exchange which he conducts voluntarily in the market and not under duress. Accordingly, he could sell his material property in the market or donate it to somebody of his choice. Similarly, he could sell his labour services in the market for a salary or if he so desires he could work voluntarily for someone free of charge. Whatever the method he uses, he would get either a cash reward if the property is sold in the market or mental pleasure if the property is donated. Since the transaction is done voluntarily, there is no ill feeling in him and he has all the incentives to further develop his property.

Violate property rights and no incentive to develop property

But when property rights are violated, the property is grabbed from a person by using force leaving no choice for him. He has to either leave his property or sacrifice his life or freedom. An example of such property grabbing is governments’ taking over private property without paying due compensation most often under the guise of serving public interests. While this happens through legislative processes and therefore is justified on that ground, private property could also be grabbed by people connected to political powers by forcing the law enforcement officers to keep silent or preventing the judiciary to deliver justice to the harmed parties. This happened on a large scale in Zimbabwe under the rule of its incumbent President Robert Mugabe. In either case, the property owner who has developed his property by spending money, time and energy loses the beneficial rewards which that property could bring to him. The result of forced grabbing of private property is two – fold. In the first place, the harmed person has no incentives for developing further properties. In the second place, it discourages others too to develop properties because they could be grabbed from them either by the government or by those connected to the government. The continuous development of private property by individuals enlarges the national wealth creating prosperity. If incentives to do so are removed, the national economy becomes moribund and decayed.

Kautilya to king: Protect property rights at any cost

This was well understood by the 4^th century BCE Indian philosopher, economist and statesman Kautilya. In Part II of The Arthashastra, he has advised the king to prevent all possibilities of both private and public properties being grabbed by public officers, members of royal family, marauding highwaymen, regional noblemen and military personnel because all these instances lead to less productivity in the economy. In The Arthashastra, he said that “it is the people who constitute a kingdom; like a baren cow, a kingdom without people yields nothing because the value of the land is what man makes of it”. In collecting revenue by way of taxation or otherwise, the king should be careful not to grab it before it is due because “it will make the people angry and spoil the very sources of revenue”.

Adam Smith: Make judiciary independent to administer justice

In the modern era, economists have been concerned about the value of the rule of law for continuous prosperity of a nation ever since the publication of Adam Smith’s The Theory of Moral Sentiments in 1759 and later his The Wealth of Nations in 1776. Emphasising on the need for maintaining law and order and ensuring national defence for a prospering society, Smith argued in The Wealth of Nations that the civil governments became necessary by the introduction of property which was not there when people were hunters or gatherers. With property, it was necessary to administer justice, because there was the possibility of one person invading the property of another. To administer justice, the judiciary was created and its expenses should be borne by the government for the greater benefit of the society. Smith argued that the judiciary should not only be separate but also be independent of the executive power of the government. It should be separate from the executive to prevent the possibilities of justice being sacrificed for politics. Since those in power, even without any corrupt views, may think it necessary to infringe on the liberties of people, it is necessary to assure that people have full protection of the law. This could be done, according to Smith, only when the judiciary is independent of the executive. He further elaborated on this point as follows: “The judge should not be liable to be removed from his office according to the caprice of that power. The regular payment of his salary should not depend upon the good-will or even the good economy of that power”. So, according to Smith, even when an economy is in recession, judges’ salaries should be assured.

Modern economists: Rule of law and growth are positively related

According to the Harvard University economist Dani Rodrik, respecting the Rule of Law is necessary to create a just society and prosper growth. This is not a new revelation since it had been noted by both Kautilya and Adam Smith earlier. But Rodrik and other economists who have studied the relationship between the Rule of Law and economic growth have found a clear positive relationship between the two. Three studies done by three groups of economists since late 1990s, first by Dani Rodrik, Aravind Subramaniam and Francesco Trebbi, the second by Daniel Kaufmann and Aart Kray and the third by F Alcala and A Ciccone, have revealed that the greater the results which a country has achieved in respecting the rule of law, higher the per capita income level of that country. When the countries in the world are plotted on a graph, the horizontal axis showing the degree of respecting the Rule of Law and the vertical axis the level of per capita income, all three studies have revealed an upward sloping curve indicating a positive relationship between the two concepts. Thus, the theoretical prognoses made by Kautilya and Adam Smith have been vindicated by empirical evidence.

Lack of the Rule of Law fuels economic crises

The new fascination about the Rule of Law by these economists was fuelled after the disastrous East Asian financial crisis of 1997-98. The critics of the free market economy system were quick in pointing out the apparent destabilising features of capitalism and its enormous social, political and economic costs. Rodrik and others went into studying the phenomenon and found that it was not due to the contradictions in the free market economy as the critics had argued, but due to the weak economic governance which these countries had in place for long periods of time. The weak economic governance had been fuelled by the disregard for the Rule of Law, downgrading the democratic institutions that would have checked the abuse of power and a colluding judiciary that had endorsed sheepishly every wrong action of the political authorities. Hence, if the economic governance and the Rule of Law are in a mess, they reasoned out that any tinkering of macroeconomic policy will not allow a country to escape the greater evil of impending economic disaster. So, the combination of all these features was the ideal recipe for sudden and unexpected economic collapse.

Institutional weakness prompted Thai baht crisis

The importance of Rule of Law and economic governance and the ensuing protection of both private and public property rights for preventing economic calamities and ensuring sustainable growth became prominent in the behaviour of the Bank of Thailand prior to its triggering the East Asian crisis in mid-1997. Despite the growing public criticism that the Bank of Thailand should not protect the Thai baht rate at the expense of the country’s foreign reserves, the Bank led by Governor Rerngchai Marakanond continued to go on spending reserves unabated. As reported in a subsequent paper published in 2001 under the title “Rerngchai: A Sinner or Scapegoat?” (available at http://thanong.tripod.com/112820012.htm), the Bank blew away some $ 30 billion out of its reserves before it had to allow baht to depreciate in the market from baht 25 a dollar to baht 48 a dollar. The subsequent inquiries revealed that internal governance in the Bank of Thailand was so weak that its senior officers had simply endorsed the action by the governor without providing sound counsel. Why have they done so? They had wanted to protect their jobs, ensure their career advancement by supporting the views of the governor and continue to enjoy the perks that had been offered to them by the Bank’s management. But later after all the disasters had hit not only Thailand but also the entire region, Governor Rerngchai was charged for criminal negligence of losing the country’s valuable foreign reserves and in 2005 fined some $ 4 billion plus interest as fine by Bangkok High Court. In an appeal against this judgment, in 2011, he was cleared by the Court of Appeal but not before he had to suffer, according to his own words, “with a complete shattering of his emotional and mental wellbeing”.

Listen to critics and make prosperity a reality

So, the Rule of Law, economic governance and strong institutions are a must for the continued economic prosperity of a nation. When the property rights of individuals are violated by the state or by those who have been sponsored by the state and when the public properties are abused by those under whose custody those properties have been kept, the rule of law should be invoked. If this does not happen automatically, there should be strong institutions to cry about it and it is in the interest of those in power to pay heed to such cry – outs. Within institutions, there must be mechanisms to hear such foul-plays. If this role is not played by the public, institutions and media, the continued economic prosperity is just a dream.

(Write is a former Deputy Governor – Central Bank of Sri Lanka and teaches Development Economics at the University of Sri Jayewardenepura. This article first appeared in Daily FT  – W.A. Wijewardena can be reached at waw1949@gmail.com )