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Contract culture pays dividends

By Christopher Lingle

Sunday, Oct 14, 2001, Page 9

ILLUSTRATION: MOUNTAIN PEOPLE

Events of the past weeks bring home with painful clarity that the process of globalization inspires great disagreement concerning its nature and impact. Despite the horrific acts of terrorism, one point of agreement is that this process is seemingly irresistible. Engaging this debate requires identifying some essential elements of this momentum. One place to start is to discard an important misinterpretation.

Globalization should not be confused with Westernization or Americanization of economies and cultures. This plays into the hands of those who wish to create diviseness between peoples.

Some of those who would believe this might be forgiven in having observed that there has been a convergence towards certain norms or rules that are associated with Western cultures, especially concerning commercial considerations.

Promoting this misconception implicitly assigns a sense of domination or superiority of Western or US culture over others, itself a patently foolish assertion. The view offered here is that this convergence is a natural and evolutionary procedure. In this sense, global convergence arises from voluntary choices by citizens and their governments to engage in worldwide markets to achieve some individual and collective goals, including shared prosperity. Indeed, the overpowering nature that some observers find so troubling is actually the outcome of choices made by most other members of their own communities.

In the end, the movement is towards the establishment of and guidance by the legal bounds that govern contracts. As will be argued, exposure to contracts has important impacts on cultures since it imposes greater accountability on businesses as well as governments.

As such, globalization should not be viewed as the outcome of anonymous, outside and mysterious forces. Instead, an important source of globalizing influences in a local economy arises from choices made by most of ones compatriots who prefer better or cheaper products that are imports rather than shoddy or higher priced ones produced locally.

In this narrow interpretation, globalization can be seen as a universal application of democracy. Opposition to these results is tantamount to an elitist loathing of thy neighbor, or at least their choices. In all events, the spreading of the benefits of globalization depends upon how well markets function, because competitive markets are a force that empowers consumers and humbles producers. And well-functioning markets require and inspire a certain attitude towards agreements that can be identified as a "contract culture."

A contract culture exists when all parties in an agreement are predictably treated as equals whenever there is a legal dispute or a need for interpretation of the conditions behind the pact. Markets both depend upon and set the stage for the emergence of a contract culture as well as providing an impetus for the emergence of a commercial morality and a wider application of trust. In turn, institutional frameworks evolve to reinforce and reward or punish actions in reference to the agreements and the legal institutions that support them. This convergence is inspired by globalization.

While most may think that the discussion only involves private contracts concerning commercial transactions, it also covers social contracts like constitutions that specify duties and obligations of citizens and rulers.

Markets inspire the development of a contract culture where the spirit of compromise becomes part of human interaction.

In such a setting, equals are treated as equals just as unequals must also be treated as equals before the law.

Governments or large corporations should not receive special treatment in the courts over individual citizens while domestic interests should not override those of foreign claimants. At the same time, interactions within a community where contracts are widely negotiated can bring about a greater appreciation for compromise and humility that might undermine future claims for authoritarian leadership.

Viewed from this vantage point, capitalism and free markets are seen to provide a necessary underpinning for democracy's success rather than merely a sufficient one. It is through individualist-based institutions associated with and arising from markets that people exercise true self-ownership to pursue their own chosen goals.

The importance of establishing a contract culture cuts deep. It is an intangible element in the measurement of growth factors, but it is certainly an essential element of the institutional framework for an active player in the global economy. Apart from promoting political stability due to greater fairness, the contract culture is also associated with "middle class values" such as the importance of education, thrift and moral values that promote hard work and honesty in contract fulfilment. Globalization can reduce some of the economic vagaries by eliminating some of the sources of recurrent crises. During periods of rapid economic growth, massive cash flows can compensate for some of the inconveniences arising from a weak adherence to contractual obligations.

Once an economy reaches a certain level of maturity or begins to lose its comparative advantages, the importance of legal protections becomes clearer. It is the absence of such safety measures that induce investors to undertake reassessments that can lead to the sort of mass exoduses of capital such as the one associated with the trumoil that swept much of Asia in and after 1997.

In many Asian countries, the dominance of autocratic rule led to an entrenchment of hierarchical power relations that retard the development of a local contract culture. Outside of some former British colonies, few Asian countries have an independent and competent judiciary that issue rulings based upon strict interpretations of a body of law concerning fulfillment of contracts that includes predictable bankruptcy proceedings. Yet the exposure to and pressures from the international marketplace will eventually pressure governments to adhere to the rule of law.

Some opponents to globalization express legitimate concerns. Perhaps the most compelling objection is the fear of the dilution of local culture. Nonetheless, opening a community to global influences is most likely to reveal the strengths of those elements that are worth keeping and undercover weak points that might be given up. (It is worth noting that the Dutch have been deeply engaged in the globalization process for centuries without losing their unique cultural identity).

An assessment of globalization should begin with the fact that it introduces a contract culture in association with the rule of law to support a modern market-based economy. Although there will always be transition costs of such monumental changes, there are reasons to believe these will be exceeded by the benefits. Above all other benefits is the increased commercial and political accountability that offers greater protections to citizens and consumers.

Christopher Lingle is global strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century.
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