Unbundling the State: Legal Development in an Era of Global, Private Governance

• In Event: Rule of Law and International Finance

Abstract

Global, private regimes with the power to write, interpret and enforce commercial rules have proliferated in recent decades. Much of the research in this area focuses on transnational regimes themselves, often neglecting the broader implications this new form of governance carries for domestic political and legal development. How do local development incentives shift when authority that has traditionally been rooted in the domestic state has been delegated to transnational institutions? This paper examines this question through a study of the global privatization of commercial dispute resolution. I present a theoretical framework for understanding how governmental tasks that have traditionally been ``bundled” together in state institutions become ``unbundled” and outsourced to private bodies. Depending on the design of that unbundling, the resulting public-private governing complex is expected to exert either an enhancing or stagnating effect on the underlying unbundled public institution. I apply this framework to international commercial arbitration (ICA), a private, transnational system of cross-border commercial dispute resolution that serves as an essential pillar supporting the modern global economy. I argue that ICA provides key interest groups that would otherwise lobby for rule-of-law reforms an exit option from weak local institutions which in turn reduces pressure on the state to invest in needed rule of law enhancing reforms. I test this proposition using semiparametric analysis, finding that the enactment of strong protections for ICA leads to the gradual erosion of the quality of local legal institutions. The effect is most pronounced in weak rule of law states.

Author

• Michael O. Allen, Yale University