(This essay was published in Hong Kong Economic Journal on 7 October 2015.)

 

Discordance over “one-country two-systems” has been growing, with Beijing insisting on implementing “one-country” and Hong Kong persisting in defending the “two-systems”. A central issue creating this divide lies with the fact that China operates on a civil law system and Hong Kong the common-law system.

 

Tensions between civil and common law systems are the ultimate cause of some of the incongruences in political cultures, social lifestyles, and economic organizations. If not properly understood, these characteristics fuel misunderstandings, some of which are avoidable. Those that are difficult to avoid have to be resolved through wise accommodations, not stubborn confrontations.

 

Recognizing that these deep differences are rooted in the incongruences of the two legal systems could be a first step toward political dialogue that could lead to accommodation. Successful resolution of these conflicts through this approach would be beneficial for all parties.

 

Legal systems reflect different styles of control over economic and social activities. The common law strategy seeks to support private and market-originated initiatives, whereas civil law seeks to replace such outcomes with state-desired outcomes.

 

Civil law, which originated with the French, is thus “policy implementing,” while common law, which originated in England, is “dispute resolving.” Civil law embraces “socially-conditioned private contracting,” in contrast to common law’s support for “unconditioned private contracting.”

 

The contrast between the two legal systems is most prominent in terms of their influence on financial market development. The fact that after two centuries of modernization, London is an international financial center but Paris is not, speaks volumes about the difference between British common law and French civil law.

 

This idea that the legal system is the primary driver of different forms and styles of societal development comes from the Legal Origins Theory that emerged out of the pioneering work developed chiefly by Harvard economist Andrei Shleifer.

 

It demonstrates that legal systems exercise pervasive and persistent influence not only over finance, but also the economic life of a place, the beliefs of its people, and its politics.

 

Some have criticized such an interpretation and argued that legal origins are merely a proxy for culture or politics or something else. But the more impressive evidence is in favor of the Legal Origins Theory because the influence of legal systems is present even after their introduction into foreign societies of different cultures and political arrangements through conquest and colonization. The legal systems are therefore involuntary transplants.

 

Consider that among former French colonies, one can hardly name any significant financial center. Hong Kong, Singapore, Sydney, New York and Toronto (which is located in British not French Canada) are all former British colonies.

 

Another example of the influence of legal systems can seen in the comparison of Hong Kong and Singapore, which have common law traditions, with Taiwan and South Korea, which have civil law traditions. Taiwan and South Korea have functioning democratic political systems, but not Hong Kong and Singapore. Yet the most robust international financial centers are found in Hong Kong and Singapore.

 

Legal systems exert lasting influence in their societies because differences in their styles of social control inform the creation of not only specific legal rules, but also the organization of the legal system and the education and training of the participants in the legal system. When common and civil law were transplanted into much of the world, this also involved transferring not just specific legal rules but also legal institutions. Most important of all, the styles of the law in dealing with new problems were also transferred.

 

The legal system supplies the fundamental tools for addressing economic and social problems and it is that system, with its codes, distinctive institutions, modes of thought and beliefs, and the education and training of its participants, that is very slow to change. In more stable areas of law, such as legal procedure, there is sometimes a great deal of rigidity.

 

The fundamental strategies and assumptions of each legal system can therefore survive even when there is much local legal evolution, and continue to exert substantial influence not only on financial development, but also other social and economic outcomes. This accounts for the lasting influence of legal origins.

 

Government officials and scholars on the Mainland have expressed considerable perplexity, surprise and exasperation that Hong Kong people have failed to embrace “one-country” when it is the Chinese National People’s Congress that had promulgated the Basic Law, enshrined the “two-systems,” and promised democratic elections after Britain had denied it for 150 years of its rule. They have despaired at the thought that judges in Hong Kong have even failed to comprehend the Basic Law.

 

Underlying such different perceptions of the Hong Kong situation is the failure to grasp that economic and social life here is being organized according to a common law tradition that differs from the Mainland’s civil law tradition. The two systems embody different deep-rooted beliefs of how economic or social life should be organized.

 

In common law systems, societies and economies are organized from the bottom up, and even political life in some places. In civil law systems they are organized from the top down. There is a stronger presumption under common law that what is not explicitly prohibited by law is legal, than is the case with civil law. There is also a stronger inclination under common law to presume innocence unless proven guilty than there is in civil law.

 

All this may sound exaggerated and imprecise, but it is a useful way to think of the differences. To those coming from a civil law tradition, life in common law societies appears anarchic, while the reverse perception is of everything being arranged (or pre-arranged) by the state.

 

Legal origins provides an obvious explanation as to why it has been so much easier for Macau to make the conversion to Mainland rule, for its people had long been accustomed to the civil law tradition introduced by the Portuguese colonists. It also means that the people of Hong Kong have failed miserably in understanding and appreciating Chinese habits of thought and the influence of its civil law tradition. Sadly so has Beijing in misunderstanding Hong Kong.

 

Perhaps one day Taiwan, too, will find it easier to make the conversion on account of its shared German legal origins with the Mainland (the German legal system had its own origins in French civil law). Interestingly, 50 years under Japanese occupation made no difference because Japan’s legal system also had German origins.

 

In exerting social control over the economy and society, all legal systems must simultaneously address two problems: (1) the problem of social disorder or market failure, and (2) the problem of state abuse of power. There is an inherent trade-off in addressing these twin problems: as the state becomes more assertive in dealing with social disorder, it may also become more abusive.

 

In finding solutions for society’s problems, French civil law is relatively more concerned with social disorder and less with public abuse of power. In contrast, the English common law family is relatively more concerned with public abuse of power and less with social disorder.

 

Both systems seek a balance between social disorder and public abuse of power. But they seek it in different ways: common law by shoring up markets and mediating conflicts, civil law by restricting them or even replacing them with state commands.

 

This is not to say that common law always works better for the economy or society. Regulation and state control may well be efficient responses to disorder when common-law solutions fail to sustain markets. All countries efficiently resort to the quintessentially civil law solution of planning in time of war and terrorism. The early 20th century rise of the regulatory state can be interpreted as a response to the subversion of the justice system by large corporations in the United States.

 

The standard explanation as to why there are differences between English common law and French civil law in particular, and to some extent all civil law traditions, focuses on developments in the 17th-19th century Europe.

 

According to this narrative, English lawyers were on the same winning side as the property owners in the Glorious Revolution, and in opposition to the Crown and to its courts of royal judges. As a consequence, the English judges gained considerable independence from the Crown, including lifetime appointments in the 1701 Act of Settlement.

 

A key corollary of such independence was the respect for private property in English law, especially against possible encroachments by the sovereign. Indeed, common law courts acquired the power to review administrative acts: the same principles applied to the deprivation of property by public and private actors.

 

Another corollary is respect for the freedom of contract, including the ability of judges to interpret contracts without reference to public interest. Still another was the reassertion of the ability of appellate common law courts to make legal rules, thereby becoming an independent source of legal change separate from Parliament. Judicial independence and law-making powers in turn made judging a highly attractive and prestigious occupation.

 

In contrast, the French judiciary was largely monarchist in the 18th century (many judges bought offices from the king) and ended up on the wrong side of the French Revolution. The revolutionaries reacted by seeking to deprive judges of independence and law-making powers, to turn them into automata.

 

Following the doctrine of the separation of powers, the revolutionaries proclaimed legislation as the sole valid source of law and explicitly denied the acceptability of judge-made law. This made it easy for the legislature alone to use its power to transform the basis of society.

 

France under Napoleon created a huge and invasive bureaucracy to implement the state’s regulatory policies. If only the legislature could make laws, and the judiciary could only apply them, then such legislation had to be complete, coherent, and clear. If a judge were required to decide a case for which there was no legislative provision, he would in effect make law and thus violate the principle of rigid separation of powers. Hence it was necessary that the legislature draft a code without gaps. Conflicting provisions in the code had to be avoided. The code had to be absolutely clear.

 

Napoleon’s experiment failed in France. Over time French courts regained some powers and became involved in the interpretation of codes. Even so, the law-making role of French courts was never explicitly acknowledged, and never achieved the scope of their English counterparts.

 

The differences between common and civil law can be traced, then, to distinct conceptions of freedom. The English empiricist view finds the essence of freedom in the absence of coercion. The rationalist approach in France believes freedom to be realized only in the pursuit and attainment of an absolute social purpose.

 

The legal institutions that evolved out of these two different conceptions and the historical contexts of their development in the birth of modern Europe led to critical differences:

 

First, the built-in judicial independence of common law, particularly in cases of administrative acts affecting individuals, has meant that it is more respectful of private property and contracts than civil law.

 

Second, common law’s emphasis on the judicial resolution of private disputes, as opposed to legislation, as a solution to social problems, suggests greater emphasis on private contracts and orderings, and less emphasis on government regulation. Regulations, if present, aim to facilitate private contracting rather than to direct particular outcomes. Growing amount of legislation is now used in common law countries, but statutes in these countries often follow and reflect judicial rulings, so jurisprudence remains the basis of statutory law. Statutes in common law countries are often highly imprecise, with an expectation that courts will spell out the rules as they begin to be applied.

 

Third, the greater respect for jurisprudence as a source of law suggests that common law is more adaptable to changing circumstances. The adaptability of common law tends to improve the law’s quality over time.

 

Hong Kong today is suffering from a difficult political gridlock between the executive and the legislative branches of government. This is unlikely to be quickly resolved, especially after the failed political reforms of the past summer. Without political consensus, the economic and social contradictions of society that have accumulated in the past three decades cannot be addressed.

 

The judiciary of Hong Kong provides an important alternative means of addressing some of these contradictions. Law alone cannot deal with all problems, which are largely political in nature rather than legal. Fortunately, judicial independence in the common law provides some small amount of flexibility in handling them. Things in Hong Kong would have been even worse, and more grievances left unaddressed, if all we had to use was a civil law approach. Still, law is not a substitute for political reform.

 

Reference:

 

Edward Glaeser and Andrei Shleifer, “Legal Origins”, Quarterly Journal of Economics, Vol. 117, No. 4, 2002, pp. 1193-1229.

 

Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, “The Economic Consequences of Legal Origins,” Journal of Economic Literature, 2008, 46:2, 285-332.

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