BUSCAGLIA--Edgardo.-The-economic-factors-behind-international-legal-harmonization--a-jurimetric-analysis-of-the-Latin-American-experience.-2001..md

Emerging Markets Review 2 2001 67 Ž . 85

The economic factors behind international legal harmonization: a jurimetric analysis of the Latin American experience

Edgardo Buscaglia

Uniersity of Virginia School of Law and Hooer Institution, Stanford Uniersity, 580 Massie Road, Charlottsille, VA 22903, USA

Received 1 September 2000; received in revised form 11 December 2000; accepted 11 December 2000

Abstract

This paper shows that the international harmonization of commercial legal rules and commercial legal standards in Latin America have been the result of very specific legal and economic country-specific factors. The paper proposes that international legal harmonization within a regional bloc of countries is a function of the convergence of three broad conditions: 1 first, the a priori international country-to-country compatibility in the form Ž . and scope of their legal rules applied to domestic commercial transactions; 2 the emer- Ž . gence and growth of intra-sectoral international markets supported by foreign direct investment; and 3 the emergence and growth of domestic trade-related industries seeking Ž . compatible legal rules in their exporting markets abroad. A jurimetric model is introduced showing that the drive to seek international legal harmonization has been explained by these specific economic and legal domestic factors. 2001 Elsevier Science B.V. All rights reserved.

Keywords: International; Legal harmonization; Jurimetric model; Latin America

Tel.: 1-301-233-0926.E-mail address: [email protected] E. Buscaglia . Ž .

1566-014101$ - see front matter 2001 Elsevier Science B.V. All rights reserved. PII: S 1 5 6 6 - 0 1 4 1 0 0 Ž . 00020-0 68 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

1. Introduction

Recent literature on legal and economic regional integration has stressed the key role of emerging trading blocs in shaping the world economy of the 20th-century Davey et al., 1995 . Economic trends Ž . such as rapid changes in applied research, technology, capital flows and trade patterns have all assumed an enhanced importance in fostering economic growth. According to Abramovitz Ž . 1989 , the extent to which a country that is technologically behind a leader is able to catch up will depend in part on its social capability to absorb advanced technologies Abramovitz, 1989 . Nelson and Wright 1992 and Porter 1985 state Ž . Ž. Ž. that the main factors fostering the social capability for technological improvement include a strong research and development R & D sector, higher educational Ž . institutions satisfying the demand for scientists and engineers emanating from emerging markets, and competitive environments acting as disciplinary factors for firms Schumpeter, 1950; Porter, 1985; Rosenberg, 1985; Nelson and Wright, 1992 . Ž . None of these publications, however, discuss in depth the required legal changes needed to foster competitive environments and enhance the capabilities to absorb technologies. Developing nations are currently facing a unique opportunity created by global free trade, the continuous decline in transportation and communication costs coupled with the unprecedented availability of generic applied knowledge, and the expanding flows of international financial investments. However, throughout their history, many of these countries have lacked the institutional capability to create or absorb the applied knowledge aforementioned Buscaglia, 1993 . Ž . The main purpose of the analysis advanced in this paper is to explain how the limited international harmonization of commercial legal rules and commercial legal standards in Latin America has been the result of specific domestic legal and economic factors. This paper shows that the international legal harmonization is a function of the convergence of three broad conditions: 1 the a priori international Ž . country-to-country compatibility in the form and scope of their legal rules applied to domestic commercial transactions; 2 the emergence and growth of intra Ž . sectoral international markets supported by foreign direct investment; and 3 the Ž . emergence and growth of domestic trade-related industries seeking compatible legal rules in their exporting markets abroad. Specifically, the compatibility in the evolutionary natures of two or more economic and legal systems will be introduced as a factor that will affect the desirability and feasibility of international legal integrations. Moreover, a jurimetric model is introduced in Section 3 proving that the drive to seek international legal harmonization in Latin America is explained by well-specified economic and legal factors In Section 2, this paper will describe the main drives toward legal integration within South America during the 19th and 20th centuries. A jurimetric analysis follows in Section 3 revealing the connections between legal integration and economic structures. Section 4 offers a conclusion of our analysis. E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 69

2. Theory and its application: an account of the international legal harmonization experience in Latin America

Most of the civil law countries in Latin America achieved their independence in the nineteenth century and, one after the other, adopted codified law within the Roman and Germanic tradition. Much of the codification observed in Latin American legal history until the early 20th century was the product of transplanting civil, commercial and penal codes from Europe to the different countries in the region Watson, 1983 . During the period from 1825 to 1890, substantive and Ž . procedural civil, commercial and criminal codes were all transplanted from the French Codification, with few adaptations, to the South American scene Merry- Ž man, 1985a . For example, Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, . Peru and Venezuela adopted the Napoleonic Code even though they had never been under French territorial control. The impact of the American Constitution on Latin American public law is another example of a transplant Merryman, 1985b . Ž . As a result, most Latin American legal systems started from the same evolutionary base.1 The complexity of a legal system is the product of its evolution. This complexity is defined in terms of the breadth of socio-economic interactions that a legal system is capable of addressing. As an economic structure evolves from its agrarian origin to a more diversified economic structure, the legal system would tend to branch out from its evolutionary base in order to address the higher diversity of economic interactions. In this respect, if a legal system were not subject to substantive changes in its private law, a possible explanation is that its economic structure may not have experienced much change compared to its agrarian beginnings i.e., new economic sectors or changes in the relative importance of these Ž .Ž . 2 sectors Clagett, 1952 . In fact, this economic evolution provides an explanation of why those legal systems in which only mild changes in the sectoral structure of their GDP have occurred and where the agricultural sector still prevails such as Ž Bolivia, Ecuador and Peru address substantive and procedural problems of . commercial law in strikingly similar ways and without showing much evolution Ž . 3 relative to their initial legal structures Karst, 1966; de Robertis, 1988 . In fact, within countries such as Bolivia and Paraguay one can observe that present economic structures are not too different from the ones observed at the time when the early 19th century transplants occurred. In short, the complexity in the evolution of private law is also explained by the complexity in the development of

1 Specifically, the compatibility in the evolutionary natures of two or more legal systems will be introduced as a factor that will affect the need and feasibility of legal integrations. 2 One can observe that, within the volatile political history of the region, agrarian economies’ public laws e.g. constitutional or labor law frameworks were subject to drastic changes regardless of the stage Ž . of development. One can also observe that private law, however, in the form of civil and commercial codes, have experienced only minor changes since their inception. 3 Karst points at these similarities found among the legal systems of Bolivia, Ecuador, and Peru without addressing its possible causes. 70 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

its economic structure. In this context, one can claim that the economic structures Ž . i.e., composition and relative importance of productive sectors provide the direction followed by the legal evolution in domestic commercial rules i.e. amend- Ž ments to the commercial code addressing new specific commands regulating economics interactions and also provide the direction followed by the legal . evolution in domestic commercial standards i.e. amendments to the commercial Ž . 4 code addressing new general norms pertaining to economic interactions . Testing this general theory within the Latin American historical context, one can find out that a bottom-up approach to law-making in the commercial area provided the framework for international legal and economic convergence during the period within which the Gold Standard ruled international trade.5 This period was characterized by the emergence of manufacturing capital-intensive industries in Latin America that were aiming at reaching economies of scale by expanding sales to foreign markets Muniz, 1951b . In this context, Latin American new industries Ž . attempted to sponsor international economic integration schemes since the early stages of their history. As a result, governments reacted before these powerful industrial groups by seeking international legal and economic regional agreements. There is a rich historical background addressing legal interrelations within the region. Starting with the Congress of Panama in 1826 and the Congress of Lima in 1864-65 where Argentina, Brazil, Chile and Peru took the first steps toward greater legal harmony by adopting a postal treaty and a trade and navigation treaty Muniz, Ž 1951b . In these treaties, all the contracting parties expressed their resolve to . provide their reciprocal trade with all possible facilities and protection, ‘as one of the most effective means of promoting the development and growth of their industry and wealth and making a future Confederation of states more secure and prosperous’.6 Both in the Trade and Navigation 1864 Treaties, there is an express provision for natives or nationals of all contracting Latin American states to be considered as equals with regard to a wide range of objectives and areas. This principle went on to become the direct legal foundation of what would later be known as the Latin American principle of equality of nationals and foreigners regarding the international liability of states when foreign nationals are subject to torts andor property damage. Moreover, the First Treaty of Lima signed by Argentina, Brazil, Chile, Colombia and Peru in 1848 contains a rule whereby the contracts signed and documents executed in one of the signatory republics would have the same force and validity in the others, and the authorities, judges, and courts would be required to enforce them.7 New initiatives presented by the

4 Forces related to the determination of comparative advantages in production and that the composition of a country’s trade reflects the relative abundance of factors in that country’s endowment, also determine the composition and relative strength of productive sectors. These economic forces, however, are always enhanced or hampered by the political weight of organized constituencies. For an understanding of the economic factors’ impact on the determination of the productive structure, see Wright Ž. Ž. 1990 and North 1982 . 5 A partial account of international legal treaties during the 19th century is taken from Muniz 1951a . Ž . 6 Segundo Congreso de Lima, Articles 23, in Acevedo 1987 . Ž . E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 71

governments of Argentina, Brazil, and Chile led to the Congress of Jurists held in Lima between 1877 and 1880 establishing uniform rules in the design of private international law.8 Subsequently, during the Second Congress of Jurists, held in Montevideo in 188889, eight treaties and an additional protocol were adopted. These treaties were sponsored and drafted by Argentine, Brazilian, and Chilean jurists. The treaties covered procedural law, literary and artistic property, patents for inventions, trademarks and brand names, international criminal law, and international civil law.9 The protocol contained general rules for applying the laws of any of the contracting states in the territories of the others. Later, Argentina, Brazil, Chile and Peru proposed a major step in legal integration when their intention in codifying international law was recognized in the Convention for the Drafting of Codes on Public and Private International Law, signed in 1902, and during the International Law Convention, signed at the Inter American Conference of Rio de Janeiro in 1906.10 Both treaties established methods and procedures to further the process of legal codification and cooperation at the Inter-American level. In all these cases, the countries pushing for international legal integration were at the same time experiencing changes in their trade-related economic structures that were addressed through amendments to their domestic commercial andor civil codes. In other words, one can conclude that during the 19th century and early 20th century we can already observe a pattern of legal harmonization driven by international trade and economic change. The process of codification of private international law in the Inter-American context has clearly been one of the ongoing legal activities of the American states since the closing decades of the last century. This work has taken on different institutional forms and is currently being carried out as a legal process through the Specialized Conferences on Private International Law CIDIP under the auspices Ž . of the United Nations. Since the start of the codification of private international law, two different approaches have been taken: one involved a global approach that envisaged a single body of rules covering all aspects of private law; the other approach envisaged a process that was more gradual and progressive, involving the drafting of specific international instruments. The approach of drafting a single code was the prevailing one during the aforementioned 1877 Congress of Lima and culminated in the adoption of a single code of international law, the Bustamante Code, at the Sixth International Conference of American States in Havana in 1928.11

7 Ministerio de Relaciones Exteriores y Culto Argentina , Documento de Negociacion No 1214 Ž . A, Biblioteca Historica de Relaciones Exteriores, Buenos Aires, Argentina. 8 Id. 9 This constitutes the Latin American legal response to the Paris and Berne Conventions in Europe. Latin American and other international historians have not paid due attention to this first step in the process of legal convergence within the intellectual property area. 10 Id. 72 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

Beginning in the 1960s and as part of the Organization of American States Ž . OAS framework, the Inter American Juridical Committee made efforts to codify all the different areas of private international law. To that end and in light of the US Restatement of the Law of the Conflicts of Laws for private international law, the Committee proposed to review the Bustamante Code to determine whether it was possible to merge its provisions with those of the Montevideo Treaties of 1889 and 193940. The First Specialized Conference in Private Law adopted conventions covering international trade and procedural law in 1975. These are the Inter American conventions on conflict of laws concerning bills of exchange, promissory notes, and invoices; on conflict of laws concerning checks; on international commercial arbitration; on letters; on the taking of evidence abroad; and on the legal regime of powers of attorney to be used abroad. The 1979 Second Specialized Inter-American Conference also approved conventions on international trade law and international procedural law focusing on rules concerning checks and conflicts of laws involving commercial companies. With respect to international procedural law, these Inter-American conventions covered standards of proof and discovery material, enforcement of injunctions, and extraterritorial validity of foreign rulings and arbitral awards. Lastly, the Third, Fourth, and Fifth Specialized Conference approved the Inter American Convention on Law to be applied to international contracts where the first common ground for a hemispheric commercial code was established. As a result of this effort, the Inter American Juridical Committee prepared a draft code, but it was not supported by the member states of the OAS Ž . Muniz, 1951c . This situation led to the abandonment of the global approach of codification of Inter-American codification, and the beginning of a second stage in which sectoral codification prevailed Muniz, 1951d . Ž . In fact, during the mid 20th century one can already observe that, under the OAS umbrella, those countries that were not undergoing profound economic changes in their private sector structure did not show and, in fact, did not support a legal integration sponsored by the relatively more complex legal and economic national systems of the region. Moreover, the countries supporting legal integration were in all cases the ones subject to more dynamic economic changes Ž . Argentina, Brazil and Chile , while reservations and opposition emerged from the Ž . mostly traditional-agrarian economies i.e. Bolivia, Paraguay, Peru, and Uruguay .12 In this context and within the OAS framework, intergovernmental meetings were scheduled to deal with special technical and limited matters or to develop special aspects of inter-American cooperation Garcia-Lopez, 1973 . Ž . As result of all of the above agreements, the legal systems in countries such as Argentina, Brazil, and Chile started to address new types of economic interactions reflecting higher levels of specialization and division of labor within their domestic markets. As the relative growth of their agricultural sectors diminished and information intensive sectors of the economy grew, commercial codes became

11 Id. 12Refer to OASDoc. 1356-WP at Joint IMF-Bank Staff Library, Washington, DC. E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 73

Table 1 a Legal changes vs. economic structure during 18901995

Country No. of high-growth No. of amendments No. of international trade related in commercial commercial non-agricultural industries codes agreements

Argentina 11 353 20 Bolivia 1 9 2 Brazil 12 402 24 Chile 6 278 15 Colombia 0 5 6 Ecuador 1 7 6 Peru 0 20 7 Uruguay 0 7 5 Venezuela 1 12 3 a The information related to amendments is provided by Aragon 1978a,b ; the quantitative data Ž . related to the growth in sales in the non-agricultural manufacturing and service industries are taken from Vazquez 1991 ; the number of international legal agreements per country is included in Carcano Ž . Ž. Ž. 1941 and Urrutia 1992 .

subject to major re-drafting. Table 1 covers the period 18901995 and shows the number of economic-related amendments introduced to the commercial codes in each country. The amendments included in this table were all aimed at addressing new types of economic interactions as the direct result of the growth of the non-agricultural manufacturing and service sectors. These non-agricultural manufacturing and service sectors were composed of firms producing agro-manufacturing, chemicals, pharmaceuticals, steel, financial services, transportation, communications and energy Vazquez Presedo, 1981 . Ž . Finally, we also measure the number of international legal agreements addressing harmonization of commercial laws. Table 1 compares the dynamic economies of Argentina, Brazil and Chile where the average real annual growth in sales of Ž the non-agricultural manufacturing and service industries during the period 18901995 exceeded 2% annually to countries that experienced no significant . changes in the number and relative strength of their non-agricultural manufacturing and service sectors such as Bolivia, Ecuador, Uruguay and Venezuela. As shown in Table 1, there is a strong association among the three legal and economic variables. That is, the number of non-agricultural industries experiencing an average of more than 2% of real growth in their compounded annual sales i.e. Ž capturing the speed of economic changes in their national economic structure is . associated with a higher number of legal amendments to the commercialcivil codes addressing the new type of economic interactions taking place within the new industries. Moreover, these two patterns are also associated with a strong drive of a country to harmonize its commercial legal framework through international traderelated agreements. For example, we observe that Brazil and Argentina who possess the most dynamic economies during the period 18901995 with 12 and 11 Ž new non-agricultural trade-related industries, respectively are also the countries . 74 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

with the largest number of amendments to their commercialcivil codes 402 and Ž 353, respectively and with the largest number of trade-related legal treaties signed . Ž . i.e. 20 for Argentina and 24 for Brazil . As was claimed above, more complex economic systems i.e. a larger number of high growth trade-related non-agricult- Ž ural industries reflect a higher complexity in their domestic legal systems mea- . sured through the introduction of amendments in their civilcommercial codes. At the same time, Table 1 also shows that the more dynamic economies are also more likely to harmonize their legal systems through international legal agreements. The international legal agreements measured here cover the harmonization of legal standards e.g. health standards applied to merchandise crossing international Ž borders , the harmonization of legal standards applied to commerce in general e.g. . Ž codifying the principles of territoriality and independence , the harmonization of . rules e.g. duration and scope of patents , and the harmonization of legal doctrines Ž . Že.g. the doctrine of equivalence in the treatment of real property or the fair use . 13 doctrine in the use of copyrights . For example, one can observe that starting in the mid 19th century, Latin American countries started to adhere to two fundamental legal standards addressing the enforcement of laws: first, the principle of territoriality, based on the premise that rights and obligations need to be honored according to each state’s domestic rules. This principle is also known as the Calo Doctrine. This doctrine maintains that ‘aliens are only entitled to those legal rights and privileges enjoyed by nationals, and hence may seek redress for grievances only before local authorities and to the extent permitted by local law’.14 The second principle of independence indicated that the definition of rights within one state does not force other states to grant the same rights. Clearly, these two principles are examples of international harmonization of laws. Table 2 breaks down the pattern of international agreements for each country and shows a clear picture where the region’s most dynamic economies are also the ones that are more likely to reach international legal commercial agreements involving harmonization of rules and standards.15 One can also argue that as an increasing number of business exchanges occur in countries with overlapping growing trade-related sectors, their need for legal harmonization will tend to increase. This could explain why in Table 2 we observe that most attempts to harmonize legal frameworks have mainly involved countries such as Argentina, Brazil and Chile. These countries all experienced growth in

13All of these international agreements deal with measures related to strengthening foreign investment protection, simplifying technical standards, regulating professional services, standards to be applied to the intepretation of territoriality and independence, and the harmonization in the enforcement of tangible and intangible property rights e.g. introducing the doctrine of equivalence, the Ž doctrine of fair use in copyrights, rules dealing with duration and scope of patents, and standards to be applied to the intepretation of pipeline protection .. 14The Calvo Doctrine, named after Argentine jurist Carlos Calvo 1824 Ž . 1906 was adopted by most Latin American states in the 19th century. For an analysis of this doctrine, see Abbott 1976 . Ž . 15Note that an international legal agreement addressing the harmonization of standards is a much weaker form of harmonization than the international agreements involving the international convergence in commercial rules. E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 75

Table 2 Matrix of inter-country legal agreements covering commercial areas

Argentina Brazil Bolivia Chile Colombia Ecuador Peru Uruguay Venezuela

Argentina 0 12 1 3 1 1 1 1 0 Brazil 12 0 1 4 3 2 0 2 0 Bolivia 1 1 0 0 0 0 0 0 0 Chile 3 4 0 0 2 1 3 1 1 Colombia 1 3 0 2 0 0 0 0 0 Ecuador 1 2 0 1 0 0 2 0 0 Peru 1 0 0 3 0 2 0 0 1 Uruguay 1 2 0 1 0 0 0 0 1 Venezuela 0 0 0 1 0 0 1 1 0

Total 20 24 2 15 6 6 7 5 3

their most dynamic and capital-intensive trade-related sectors i.e. agro-manufac- Ž turing, chemicals and pharmaceuticals, steel, financial services, transportation, communications, and energy Vazquez Presedo, 1981 . .Ž . Asymmetries in market size are usually blamed for failures to reach economic and legal integration. If one aims at understanding the social forces behind these and other drives for legal convergence, the most promising approach is provided, not just by addressing the differences in market size. In contrast, international legal convergence must also be understood within the frameworks proposed by North Ž. Ž. 1982 and Olson 1982 and here applied to the international case studied here. In our case, foreign pressures coupled with the political weight and rent-seeking of the lobby groups associated with the main productive domestic sectors affected by integration in our case, trade-related sectors influences the political actors’ Ž . perceptions of the costs and benefits of legal convergence. For example, Buscaglia Ž . 1994a shows that during the 19th century the domestic political processes throughout the region assigned greater political weight to landowners and merchants linked to the export sectors during a time when the Gold Standard ruled the world of international trade and financial flows Buscaglia, 1994a . In this context, Ž . legal change and integration had little to do with social welfare maximization and much more to do with international political influence and domestic redistributive arguments, what Schwartz and Sykes 1996 denominate ‘political welfare-maximi- Ž . zation’.16 It can be then said that redistributive forces may slow down or speed up the process of institutional reform, but there is no doubt that political welfare-maximization related factors have had a powerful influence in shaping legal institutions throughout Latin American history. For example, one can observe that in Argentina, Brazil, and Chile, ad hoc advising congressional committees composed exclusively of landowners and merchants connected to the exports sector, joined by

16The links between the political arm of lobbies and the business institutions associated with them often yields rents and higher profits for the firms involved Olson, 1982; Schwartz and Sykes, 1996 . Ž . 76 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

foreign pressure business groups, were asked to provide assessments of the civil, commercial, and criminal codes during the amendment procedures Perez, 1963a . Ž . The advice provided by these committees was often quoted and followed during the debates in the Senate and Chambers of Deputies Perez, 1963b . Moreover, the Ž . opinions issued by these committees were the foundation of key changes to the newly enacted codes. No other domestic groups were included in this political process. All this occurred during the period when the Gold Standard determined the terms of trade and trade patterns worldwide and during which all countries in Latin America were dependent upon foreign capital for their development.17 One should also pay attention to other catalysts of legal change. For example, starting in the mid 20th century, developed economies generating technologies, led by the United States, started to rely heavily on the application of unilateral pressure and sanctions in order to stop the infringement of their multinationals’ property rights. Suspension of preferential tariffs and trade sanctions were the most common policy tools for punishing developing countries.18 Foreign pressures notwithstanding, this study also shows that the trade-related legal convergence observed throughout Latin America is mainly explained by favorable incentives within the political and economic systems of the region. Based on the historical experience explained above, one can also show that the most recent legal reforms introduced within the legal systems of Latin America’s largest exporters during the 1990s are also following this same historical pattern of harmonizations. Following the same historical pattern described above, legal reforms in Latin American countries are still the product of the joint effect of local political conditions and foreign economic pressures Buscaglia, 1994a . In this Ž . respect, recent constitutional reforms in Latin America have done nothing to either enhance or to hamper the already strong historical trend in international economic-related legal harmonization within the region Buscaglia, 1994b; Ž Buscaglia and Guerrero, 1995 . Furthermore, regardless of the latest constitutional . reforms in Argentina, Chile, Colombia and Mexico, Buscaglia and Guerrero 1995 Ž . have shown that foreign economic pressures to reform commercial laws during the period 195094 arose particularly because an increasing proportion of imports to these countries consisted of information-intensive and capital-intensive goods and 19 services. For example, Buscaglia and Guerrero 1995 show that in countries with Ž . a poor enforcement record and lack of international harmonization drive, intellectual property was subject to a constant pattern of infringements due to the lack of a domestic producer base with a stake in this modern sector.20 As a result,

17For a description of how the Gold Standard affected international business transactions, see McKinnon 1982 . Ž . 18An example of unilateral measures aimed at inducing legal changes in Latin America is provided by the Omnibus Trade and Competitieness Act of 1988, 19. 1301-1303 amending Section 301 of the Trade Ž Act of 1974 to include a ‘Special 301’ to deal with intellectual property protection. . Section 301 . authorizes the US Government to reduce Generalized System of Preferences GSP benefits i.e. Ž. Ž preferential tariffs or their elimination, and the imposition of import restrictions . or even retaliatory measures. 19See Buscaglia and Guerrero 1995 , and BNA 1996 . Ž. Ž. E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 77

advanced-country firms generating these technologies were then demanding their governments’ use of trade sanctions or threats of loss of trade benefits as a way to punish less-developed countries’ unauthorized use of intellectual property.21 From a domestic policy perspective, Buscaglia 1994a also shows that a move- Ž . ment toward legal integration also covered the period within which an import substitution approach to development was implemented. As a product of the Great Depression, from the early 1930s until the 1980s, Latin America and almost all other developing countries encouraged domestic import substitution manufactur- Ž . ing investment, suppressed agricultural prices, and expanded the size of their public sector enterprises while attempting to stimulate savings and investment through taxation and credit allocated by the public sector. The prevailing view was that a shortage of domestic physical capital was the key impediment to developmentIn this context, Latin America’s attempts at legal integration during the period 19301980 were also conceived as an integral part of this import-substituting industrialization ISI , a strategy strongly advocated and supported by the Economic Ž . Commission for Latin America ECLA , a branch of the United Nations known Ž. Ž more widely in Latin America by its Spanish nomenclature: Comision Economica para America Latina or CEPAL . For ECLA . CEPAL, regional integration offered a way to provide markets large enough to satisfy economies of scale and scope which would, in turn, strengthen the import-substitution process. Non-reciprocity and preferential treatment were to be granted through international legal agreements in accordance with, or dependent upon, the level of economic development of individual countries. Tariff barriers against countries outside the region would serve to protect Latin American products and enable them to compete more effectively against foreign imports. In brief, the ECLA recipe for regional integration was an inward-looking strategy, conceived and understood as a ‘collective defense’ for sheltering Latin America from adverse fluctuations in the world economy Rosenthal, 1991 . Ž . Import substitution industries grew behind protective walls based on subsidies and tariffs in a milieu where many other determinants of the rate of economic

20 Id. at 34. 21The international harmonization of intellectual property rules and standards can also be understood from a historical perspective. The Paris and Berne Conventions, administered by the World Intellectual Property Organization WIPO , governed the international protection of intellectual Ž . property during more than a century. The Paris Convention, Berne Convention, and others that are assigned to protect intellectual property, are administered by the World Intellectual Property Organization WIPO , founded in 1967 as a specialized agency of the United Nations. The three most important Ž . international agreements under WIPO are: 1 the Paris Convention for the Protection of Industrial Ž . Property 103 nation members established in 1883; 2 the Madrid Agreement concerning the Ž . Ž. International Registration of Marks 29 states adopted in 1891; and 3 the Berne Convention for the Ž . Ž. Protection of Literary and Artistic Works 90 members adopted in 1886. WIPO administers a total of Ž . nineteen unions and conventions. One of these treaties is the Patent Cooperation Treaty of 1970 PCT Ž . Ž . 51 members . PCT provides for the filing of international patent applications, thereby facilitating the examination of patent applications in the patent office of other member countries. 78 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

growth, such as investment in human capital and the role of microeconomic incentives, were completely ignored by policymakers. Protection of import substitution industries allowed domestic prices and costs to far exceed international prices and created little incentive for efficiency. These protected industries produced substitutes for imports but usually depended on the import of raw materials and technology. Domestic demands for foreign exchange and the region’s international debt grew rapidly over time as these firms and their governments imported capital goods to accelerate investment Buscaglia and Ulen, 1996 . In this context, the Ž . import substitution approach to development came to an end during the international debt crisis of the 1980s when developing countries’ policymakers realized that internal markets and protection of infant industries were not enough to assure sustainable growth.22 The failure of the ISI strategy combined with the second oil shock, debt crises, and recession in the developed world which reduced the demand for developing- Ž country exports led to the 1980s Latin American economic crisis. As a result, . international legal harmonizations acquired a new form. By the early 1980s most countries in the region started to adopt pro-business market-driven economic policies to address the problems posed by large foreign debts, high inflation, and huge fiscal deficits. The ultimate goal of this free-market economic prescription was to push through legislative bodies laws needed to deregulate and liberalize trade so that the market, rather than the state, would be the ultimate referee on how resources would be allocated.23

3. A jurimetric analysis of the economic factors affecting international legal harmonization

The regional drive towards legal harmonization in Latin America has never been uniform. More specifically, one can observe that countries with overlapping dynamic trade-related sectors i.e. experiencing a higher proportion of intra-sectoral Ž international trade as a proportion of total trade also have private sectors . demanding compatible legal frameworks in their foreign markets within the areas affecting their products or foreign direct investment within their sector of the economy. We have already described how this has been true under both, the import substitution industrialization and the export-driven periods. In this context, imagine two types of countries hoping to harmonize their commercial laws: countries where private commercial laws are not far from their evolutionary agrarian base and with weak non-agricultural sectors producing information-inten22 For a complete description of this process, see Buscaglia 1993 . Ž . 23As part of this new strategy and in order to address the crises, some countries ammended their constitutions e.g. Argentina, Colombia, and Mexico , while others pursued this new approach to Ž . policy-making on a legal piece meal basis e.g. Ecuador, Peru and Venezuela . For more details on the Ž . nature of the region’s domestic legal reforms see Barragan 1994 . For details on the macroeconomic Ž . aspects of reforms refer to Edwards 1991 . Ž . E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 79

sive products exist e.g. Bolivia, Paraguay , and, in contrast, countries with rela- Ž . tively evolved commercial legal systems i.e. legal systems addressing a much wider Ž range and higher complexity of economic interactions and with a high proportion . of their trade concentrated on dynamic sectors such as Argentina, Brazil and Ž Chile . The quantitative evidence Tables 1 and 2 and the analysis advanced would . Ž. predict that legal harmonization involving agrarian countries, possessing legal systems that are not far from its evolutionary base, will have less motives to seek legal integration. For example, one can currently observe that private sector firms in Bolivia or Uruguay importing Brazilian computer software and hardware, compact disks, or movies, actually oppose the enactment of foreign investment protection or intellectual property laws compatible with the needs and interests of the Brazilian firms exporting these products to Bolivia.24Let’s now test the above hypotheses. We measure the following independent variables that are aimed at explaining a country’s drive to harmonize its laws: The number of economic-related amendments to a country’s civilcommercial codes Ž . no. of ammendments ; The annual number of non-agricultural trade-related industries experiencing an average annual real growth of 2% or more in their compounded annual sales. This variable is designed to capture the economic dynamics and changes in economic structure Ž . no. of non-agricultural trade-related industries ; The average intra-sectoral international trade as a proportion of total trade Ž . aerage intra-trade as a percentage of total trade ; The relative size of the national GDP as compared to the region’s GDP Ž . national GDP as a percentage of the region’s GDP ; and The annual growth in trade between pairs of countries Ž growth in international trade..

By applying multiple least squares regression analysis, in Table 3 we can see that the first three explanatory variables are significant at the 5% level and all have the expected signs. That is, a country’s larger number of international legal agreements aimed at harmonizing its commercial laws with the rest of the world will be explained by first, the higher number of amendments to its domestic civil code indicating the presence of a higher domestic legal complexity addressing new types of economic interactions; second, by a higher percentage growth in its international intra-sectoral trade with the region i.e. showing the presence of domestic economic Ž actors with a stake in harmonizing international rules in order to expand their markets abroad on a ‘one lawone market’ basis , and, third, by a higher annual . percentage growth in sales within the non-agricultural trade-related sectors i.e. Ž showing the presence of demand driven trade-related sectors aiming at expanding its markets .. Please note that the annual number of international legal accords used to measure our dependant discrete variable include all agreements involving the

24Ministerio de Relaciones Exteriores Argentina , Comunicado No 342-92; and supra note 45 at 67. Ž . 80 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

Table 3 Multiple regression analysisa

b Variable to be explained Number of International Legal Agreements Number of observations 90 Multiple R 0.619 Squared multiple R 0.514 Standard error of estimate 1.92 Variable Coefficient Error Tolerance T P

Constant 1.46 0.12 12.16 0.00 No. of amendments 0.10 0.01 0.95 7.49 0.0 No. of non-agricultural 1.08 0.05 0.95 21.60 0.00 trade-related industries Average intra-trade as 2.02 0.23 0.99 8.78 0.00 a percentage of total trade National GDP as a percentage 0.05 0.15 0.86 0.33 0.34 of the region’s GDP Growth in international trade 0.07 0.33 0.93 0.21 0.45 a An exponential link among the variables was tested and rejected for lack of fitness. The Sims’ test was also applied in order to show the direction of causality. The data related to the number of international legal agreements per country as our dependent variable are contained in Carcano 1941 ; Ž . Ž. from Urrutia 1994 . In dealing with the independent or explanatory variables the data were drawn from Ž . the following sources: i the annual number of amendments to the domestic civil codes dealing with Ž . commercial aspects is provided by Aragon 1978a,b ; ii the quantitative data related to the annual Ž . Ž. growth in sales of the non-agricultural manufacturing and service industries i.e. no. of non-agricultural Ž trade-related industries are taken from Vazquez 1991 ; iii macroeconomic data related to national, . Ž .Ž . regional GDP i.e. national GDP as a percentage of the region’s GDP , growth in international trade Ž . Ž .Ž i.e. growth in international trade and intrasectoral trade i.e. average intra-trade as a percentage of total trade are taken from Montenegro 1980 . Ž . b The international legal agreements include data on the harmonization of legal standards e.g. Ž health standards applied to merchandise crossing international borders , the harmonization of legal . standards applied to commerce in general e.g. codifying the principles of territoriality and indepen- Ž dence , the harmonization of rules e.g. duration and scope of patents and the harmonization of legal .Ž . doctrines e.g. the doctrine of equivalence in the treatment of real property or the fair use doctrine in Ž the use of copyrights ..

trade-related non agricultural industries defined. However, the relative size of a country within the region national GDP as a percentage of the region’s GDP and Ž . the annual percentage growth in international trade between two countries growth Ž in trade show no significance in the explanation of legal harmonizing agreements. . In other words, relative size and movements in annual international trade, in general, do not explain a country’s drive to harmonize international legal standards and legal rules. Finally, we see that 51.4% of the variability in our dependent variable is explained by the independent variables included here. Therefore, the jurimetrics results here are consistent with the fact that a large proportion of international trade based on intra-sectoral exchanges between two countries creates an incentive for the private sectors in these countries to demand harmony in the rules of their international trade i.e. a drive towards a ‘one Ž market-one law’ business condition Buscaglia and Long, 1997 . This simply means .Ž . E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 81

Table 4 Growth in intra-sector a

Argentina Brazil Chile Uruguay Paraguay

Argentina 9.5 2.1 0.3 0.2 Brazil 3.9 0.8 0.6 Chile 1.0 0.1 Uruguay 0.0 a Bilateral trade as a percentage of total bilateral trade: 196098. Data related to the average intra-trade as a percentage of total trade are taken from Montenegro 1980 . Ž .

that a bottom-up legal framework would emerge if enough overlapping in economic structures exist. Table 4 addresses this point by showing the proportion of total intra-sectoral bilateral trade for a sample of agrarian and ‘dynamic’ economies. As stated, one would expect that the larger the proportion of intra-sectoral trade, the more pronounced the propensity to seek legal harmonization. Based on the evidence shown in Table 4, we expect that a larger proportion of export-driven dynamic economic sectors engaging in intra-sectoral trade, such as Argentina, Brazil and Chile, would be actively supporting economic integration and the harmonization of commercial rules applied within their industries sectors. Fig. 1 shows the historical pattern relating high levels of intra-sectoral trade with a strong drive to seek legal integration. The number of trade-related international agreements is measured on the vertical axis while a country’s proportion of total international trade classified as intra-sectoral trade is measured on the horizontal axis. One can observe a pattern already established in the correlation and regression analyses presented above. If one considers the period 18901990, the agrarian economies of South America have shown a poor record in seeking international legal harmonization while those economies with private sectors engaged in crossborder trade and investments tend to seek a ‘one-marketone-law’ approach to international exchanges.25 Historical evidence shows that industries such as agro-manufacturing, computer-related material, food manufacturing, energy and textiles actively support policies to harmonize international commercial laws by actively lobbying before the Argentine and Brazilian Congress.26 These industries have also pushed for the establishment of more effective and uniform procedures for dispute resolution mechanisms.27 For example, MERCOSUR’s provision for binational

25The graph shows Venezuela as an outlier within the group. The linearized fit was tested and met. Moreover, the standard assumptions required by the regression analysis presented above have been met. 26 Id. at 56. 27This is a clear trend in public opinion observed in Gallup polls throughout the region. For more details, see Buscaglia and Dakolias 1995 . The results indicate that in samples of 60 Ž . 100 firms per country, the majority of these enterprises consider the role of the judiciary to be ‘deficient’. These businesses consider the lack of a reliable judiciary within MERCOSUR countries as one of the main reasons for seeking a predictable dispute resolution mechanism. Id. at pp. 2531. 82 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

Fig. 1. Number of legal treaties vs. average intra-sectoral trade, 18901990.

corporations has led to the establishment of 11 Argentine-Brazilian joint ventures, particularly in communications, computer, and pharmaceutical industries that are designed to expand market operations.28 In addition, at least a hundred agreements for cross-border cooperation have been signed between Argentine and Brazilian companies in industries as diverse as automotive, banking, steel, aluminum and plastic.29 MERCOSUR has also provided the legal framework for sector-bysector agreements among private entrepreneurial associations that has contributed to the harmonization of rules aforementioned. For example, Argentine and Brazilian associations of steel producers have signed 34 and 30 accords regulating the treatment of patents, copyrights and trademarks.30 In contrast, for the reasons shown, the same degree of harmonization efforts is not observed among Uruguayan and Paraguayan firms and no legal integration initiatives have been advanced or accepted from the governments of Uruguay and Paraguay Ministry of Foreign Ž Affairs, 1994 ..

4. Conclusion

Social scientists have usually viewed regional institutional integration as a series of multiple interactions among national governments that would lead to the creation of new supranational decision-making institutions to which the national governments would gradually cede their authority over domestic issues. In this mainstream view, the citizens of those states would eventually and passively come to redefine their loyalties and extend their identification to encompass the new

28 Id. at 34. 29Argentine Secretariat of Economic Planning, Document 341-TA, pp. 1213. 30 Id. at 34. E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85 83

entity Dougherty and Pfaltzgraff, 1990 . In this context, during the 1960s and 70s, Ž . functional theorists viewed integration as a linear development and as a state-driven process in which such regional groupings would pass through successive stages of ever increasing institutionalization. It was assumed that initial state-by-state initiatives would lead to ‘spillover’ effects in which, as the scope of integration deepened and broadened, closer cooperation in one area would engender in a positive way the movement toward integration in other related areas as well. However, this mainstream account does not fit the historical evolution of legal and economic integration in developing countries in general and within Latin America specifically. Spillover effects failed to materialize Buscaglia and Long, Ž 1997 . After some promising beginnings, most regional integration efforts in . Ž Africa, Asia and Latin America tended to lose steam and, after a period of time, . collapse. It has been argued that this linear theory of how integration develops is not really applicable to Latin America because the ‘balance between the push of formal institution building and the pull of informal interactions tends to be unstable and fragile’.31 Nonetheless, conventional theory posits that regional integration must be accompanied by a process of formal and state-driven institution-building if it hopes to survive Mols, 1993 . Ž . In contrast, our framework proposed here views legal harmonization of commercial rules of international trade as a result of a bottom-up process driven by related economic industries on different sides of international borders engaging in increasing intra-sectoral trade. This contrasts with the aforementioned top-down conventional approach used to understand past drives to legal and economic integration. In our framework, we showed that once a trade agreement has been organized, its future development and growth is much determined and driven by the private sector’s perceptions whether real or apparent of the issues and burdens they must face. In this context, history shows that the states that comprise a successful regional bloc must constantly deal and address the pros and cons of integration-related issues brought before them by a variety of private actors, domestic and international. How are integration-related benefits distributed among, and across, the member countries? In other words, who gains and who loses from integra- Ž . tion? Do the payoffs justify the effort? Do some partners reap benefits at the expense of others? In the final analysis, these are crucial considerations that also determine the ultimate success or failure of regional cooperationintegration over the long run. Yet, scholars of the so-called ‘realist’ school of international relations, which holds that states operate at the international level in a state of anarchy, must come to terms with the inisible hand behind the success or failure of their efforts. As shown above through the examination of our jurimetric evidence, international differences in the composition and nature of the economic structures of the countries involved will represent the real obstacle or promoter of legaleconomic integration. Given this context, foreign pressures on developing countries coupled with the compatibility of economic structures trading across

31See van Klevener, supra note 65 at 24. 84 E. Buscaglia Emerging Markets Reiew 2 2001 67 ( ) 85

borders have all combined to create the incentives needed for the international harmonization of legal rules and standards.

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Further reading

Buscaglia, E., Ratliff, W., 1995. Judicial Reform in Latin America: A Framework for National Development. Hoover Institution Press, Stanford, CA. Buscaglia, E., Ratliff, W., 2000. Law and Economics in Developing Countries. Hoover Press, Stanford, Palo Alto, CA. Schwartz, J., 1996. One hundred sixty countries set treaties on internet copyrights. Washington Post December 21, A1.