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Bankrupt: Global Lawmaking and Systemic Financial Crisis


The Asian Financial Crisis dramatically illustrated the vulnerability of financial markets in emerging, transitional, and advanced economies. In response, international organizations insisted that legal reforms could help protect markets from financial breakdowns. Sitting at the nexus between the legal system and the market, corporate bankruptcy law ensures that the casualties of capitalism are treated in an orderly way.

Halliday and Carruthers show how global actors—including ...

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The Asian Financial Crisis dramatically illustrated the vulnerability of financial markets in emerging, transitional, and advanced economies. In response, international organizations insisted that legal reforms could help protect markets from financial breakdowns. Sitting at the nexus between the legal system and the market, corporate bankruptcy law ensures that the casualties of capitalism are treated in an orderly way.

Halliday and Carruthers show how global actors—including the IMF, World Bank, UN, and international professional associations—developed comprehensive norms for corporate bankruptcy laws and how national policymakers responded in turn. Drawing on extensive fieldwork in China, Indonesia and Korea, the authors reveal how national policymakers contested and negotiated domestic laws in the context of global pressures. The first study of its kind, this book offers a theory of legal change to explain why global/local tensions produce implementation gaps. Through its analysis of globalization, this book has lessons for international organizations and developing and transition economies the world over.

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Editorial Reviews

From the Publisher

"The first study of its kind, the book offers a theory of legal change to explain why global-local tensions produce implementation gaps. Through its analysis of globalization, this book has lessons for international organizations and developing and transitional economies the world over."— Abstracts of Public Administration, Development, and Environment

"Halliday and Carruthers's book will take tis place as part of a growing tradition of work dissecting the emergence of a system of global economic governance that is redefining what 'world government" is likely to mean in the future. They are pushing forward a new tradition."—Peter Evans, American Journal of Sociology.

"Halliday and Carruthers explain how global organizations such as The World Bank and the UN developed international laws for corporate bankruptcy after the Asian Financial Crisis, and how policymakers have responded to these changes. Written for policymakers and economists for developing economies and international organizations, this volume examines how these institutions developed global standards and norms, and how countries such as Indonesia, Korea and China reacted."—Book News

"Halliday and Carruthers analyze the birth of international bankruptcy legislation in a truly expert fashion. Their engaging work will be of great importance for social scientists all over the world as well as for policyelites in the developing countries."—Richard Swedberg, Cornell University

"This is an impressive book revealing how global norms are generated and put into practice in different countries. Based on hundreds of interviews from around the world, it is extremely well researched and theoretically innovative. It speaks to those interested in globalization, international political economy, and institutional change. It moves well beyond conventional studies of global diffusion." —John L. Campbell, Dartmouth College and Copenhagen Business School

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Product Details

  • ISBN-13: 9780804760751
  • Publisher: Stanford University Press
  • Publication date: 5/6/2009
  • Edition description: New Edition
  • Pages: 536
  • Product dimensions: 6.00 (w) x 8.90 (h) x 0.90 (d)

Meet the Author

Terence C. Halliday is Co-Director of the Center on Law and Globalization, the American Bar Foundation-University of Illinois College of Law. Bruce G. Carruthers is Gerald F. and Marjorie G. Fitzgerald Professor of Economic History in the Department of Sociology at Northwestern University. They are coauthors of Rescuing Business: The Making of Corporate Bankruptcy Law in England and the United States (1998).
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Table of Contents

List of Figures and Tables ix

Preface xi

Acknowledgements xxv

Introduction: The Recursivity of Law

1 The Legal Constitution of Markets 1

Part I International Organizations

2 Managing Corporate Breakdowns Across National Frontiers 38

3 Constructing Global Norms for National Insolvency Systems 70

4 Attaining the Global Standard Terrence C. Halliday Susan Block-Lieb Bruce G. Carruthers 122

Part II States

5 Indonesia: The IMF as a Reformist Ally 166

6 Korea: Legal Restructuring of the Market and State 211

7 China: Global Norms with "Chinese Characteristics" 247

Part III Processes

8 Intermediation 293

9 Foiling 337

10 Recursivity 363

Conclusion: Globalization and Its Limits

11 The Implementation Gap 400

Notes 429

References 463

Index 481

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First Chapter


Global Lawmaking and Systemic Financial Crisis
By Terence C. Halliday Bruce G. Carruthers

Stanford University Press

Copyright © 2009 Board of Trustees of the Leland Stanford Junior University
All right reserved.

ISBN: 978-0-8047-6074-4

Chapter One

The Legal Constitution of Markets

THE 1997 ASIAN FINANCIAL CRISIS alarmed many besides the Asian Tigers. Rapidly accumulating national financial meltdowns not only threatened the economic stability of East Asia but sent tremors across the global economy. So great was the alarm that the G-7 pressed for a restructuring of the international financial architecture. Powerful global actors strenuously advocated worldwide projects of institution building and law making, all directed to produce more robust markets. Within these was the law that governs corporate restructuring or failure-corporate bankruptcy law.

For the G-7, and the international organizations (IOs) subject to its influence, the Asian Financial Crisis spread so quickly and dangerously in part because orderly processes for dealing with failed firms simply did not function in any of the previously acclaimed Asian Tigers. This analysis led to an obvious prescription: robust markets required predictable mechanisms for weeding out inefficient firms or for giving them temporary protection while they reorganized themselves to compete effectively. In practice, however, this part of the reform package would involve much more than a change of laws. International organizations sought to implant entire corporate restructuring systems-substantive and procedural law, courts, out-of-court restructuring organizations, restructuring professions-and to integrate those with reformed banking systems.

Awareness of the integral role of bankruptcy systems in national and global markets did not emerge de novo in 1997. The dramatic transition from command to market economies in Central and Eastern Europe in the early 1990s focused the minds of consultants, bankers, investors, institution builders, and lawmakers on precisely what laws and institutions were needed in countries developing a market economy. The reform package included laws and organizations to handle something hitherto unknown under communism-corporate failure.

Even before the events of the 1990s, bankruptcy law was on the agendas of national lawmakers and bankruptcy practitioners. Along the road to European integration, finance ministers and Brussels civil servants alike recognized that cross-border trade would bring cross-border bankruptcies and that they needed a framework to handle the collapse of a multinational firm with assets and creditors in Spain, Ireland, Germany, or Britain. For precedent they needed only to look across the English Channel or across the Atlantic. In the 1980s several massive corporate collapses, most notably the Maxwell communications empire, sent creditors, insolvency practitioners, judges, and government officials scrambling to deal with a multinational whose affairs were organized in hundreds of subsidiaries spread across many national jurisdictions.

The effort to retrieve value from failing companies stemmed substantially from two earlier national initiatives (Carruthers and Halliday 1998). In 1986 the British Parliament enacted the English Insolvency Act, which Mrs. Thatcher's government had intended as a way to help save companies before they were beyond hope. She also intended to alter how company directors did business-to "clean up" the market, as her ministers proclaimed, and make it safe for the British investing public. Even more influential was the passage in 1978 of the U.S. Bankruptcy Code. In this far-reaching reform, Congress enacted the most ambitious effort yet to shift the concept of bankruptcy law from a legal mechanism for liquidating a company to an enabling mechanism for company rescue. This emphasis on corporate rehabilitation would eventually propagate across the world.

In short, starting from scattered law reforms in the 1970s and 1980s, a quickening pattern of legal change came to characterize one of the hallmarks of capitalist markets. The chief legal instrument for weeding out failing firms found its way into the formulas of global organizations and sovereign states as they tried to build a new national and transnational market architecture. This book shows how it happened. Previously we analyzed the landmark legislation in the United States and Britain that marked the beginnings of this worldwide movement (Carruthers and Halliday 1998). Here we attend to the more recent years that brought this global movement toward fruition. It is a process that allows us to engage various arguments about the causes, consequences, and pattern of globalization and also about the role of law in supporting a market economy. Furthermore, we can consider the role of experts and their ideas in policy reform and institutional design.

This global enterprise brought law and markets into a paradoxical conjunction. On the one hand, the world's dominant capitalist nations and many powerful IOs sought coherent global standards to rectify the absence or inadequacy of laws that rendered markets so fragile. On the other, IOs offered so many competing standards that the fate of any one was placed into the hands of nation-states who were their ultimate "consumers." This "market" for standards shaped the standards for markets. Law's global markets, therefore, made law the arbiter of markets and markets the arbiter of laws.

Pragmatism and Theory

The reform of bankruptcy law and institutions resulted from a conjunction of pragmatic concerns, which concentrated the minds of practitioners and policymakers, and theoretical questions, which opened up explanations of legal change, markets, and globalization. Reform participants included people who were simply concerned to assist troubled economies and others who pondered social science theories about the relationship between law and markets and how globalization affected economic development. The ideas that shaped reform ranged from the narrowly practical to the sweepingly grandiose.

For decades, bankruptcy law belonged to the arcane margins of legal practice and interested only those unfortunate companies that failed, or the professionals who ushered them out of business. Although the repercussions of multinational collapses and the reconstruction of Eastern European economies brought bankruptcy law closer to center stage, it was the Asian Financial Crisis that finally made global actors realize that a concerted campaign was necessary to protect financial sectors, countries, and the world economy from financial shocks (Stiglitz 2001, 2002). But how to do this? One big issue concerned the role of law itself. Many possibilities for corporation liquidation or reorganization exist outside law, including private restructurings by creditors, reorganizations on the advice of major consulting firms, and use of formal mechanisms set up by the state. In other words, procedures to deal with corporate failure can be provided without law. Yet law offers particular benefits: arguably it is more orderly, less arbitrary and ad hoc, more transparent, more concerned with equity, more mindful of the public interest, and, most important, binding on all actors involved.

To champion a legal core to corporate insolvency regimes raises many practical and theoretical questions. The world is divided into legal families that derive from centuries of culturally embedded political and economic development. To construct an international financial architecture that rests on national legal systems poses an enormous challenge. Which global actors would have the capacity or the legitimacy to craft global standards and then persuade nations to enact them? How much flexibility would those standards offer to nations pursuing reform in widely variable circumstances? What kind of relationship would be crafted between legal, in-court mechanisms and nonlegal, out-of-court methods? Would nation-states conform to these standards, and how effectively could they frustrate global legal change? If laws were enacted and institutions erected, would they be implemented? And even if all went the way of global actors, and laws were enacted and implemented, could they deliver the results promised?

The interdependency of law and capitalism is a central issue for the sociology of law. For Max Weber, the possibility of market exchanges that went beyond local and personalistic relationships depended upon law that was formal, unambiguous, and enforceable by authorities with jurisdiction over market actors (Swedberg 1998; Weber 1978). Markets, like law, require legitimation. Economic sociology also posits that national and global markets depend on rules and considers the sources and bases for those rules (Fligstein 2001). Is predictable law necessary for modern capitalism, as Weber argued? And does the global spread of markets produce convergence among varieties of capitalism (Halliday and Carruthers 2007b)? The success of global legal norms, moreover, precisely turns on the capacity to legitimate particular conceptions of law's regulatory functions vis-à-vis markets. What kinds of global norms emanating from which institutions are sufficiently legitimate? What global scripts, templates, or standards are available to cope with the vast diversity of laws, nations, and firms worldwide? And how are these adaptable to local circumstances and legal cultures?

Research on markets and law takes on a different hue from the perspective of the globalism and antiglobalism conflict (Santos 2002; Silbey 1997). Who formulates the norms and rules to govern global markets? The most powerful countries? Global capital? International professionals? Is a global consensus possible, and if achieved, how are global norms propagated? And if propagated, how are they received by national policymakers? Their local reception can range from welcome adoption to hostile resistance, with ambivalent adaptation in between. To understand the globalization of law and markets, we must be able to identify its agents, the scripts they craft, the mechanisms they deploy, the powers they exercise, and the structuration of global/local relationships (Halliday and Osinsky 2006). Ultimately, such an account must address convergence at the center and periphery around global norms and the actors that articulate them.


Globalization set the stage for reform at the end of the twentieth century. As an idea, "globalization" proceeds from a premise of universality (Boyle and Meyer 1998). Whether global flows consist of goods, services, ideas, beliefs, capital, or cultural artifacts, the idea connotes that nations and peoples, organizations and individuals, will be connected and progressively integrated across the world. Furthermore, in many arenas it is presumed that particular goods, services, or ideas will prevail-that universal ideals, norms, or standards will originate in a global center and be diffused throughout global peripheries. In many conceptions, globalization means convergence or homogenization: a fully globalized world is one in which there is greater global uniformity and less local variety than before. The tension between global forces and local structures, and the domination of the former over the latter, means that power inequalities accompany globalization (Arrighi 2003; Santos 2002; Silbey 1997).

To understand how law features in globalization, we need to identify global norms, structures, standards, and ideals and understand where they originate. We must also explain their propagation and whether it produces convergence. There are four distinct approaches that address this conjunction of law and markets (Halliday and Osinsky 2006). World polity theory holds a strong view of global norms (Berkovitch 1999; Boyle and Meyer 1998; Schollmeyer 1997; Supit 1998). Its proponents maintain that global norms of rationalism, universality, and human rights represent the cultural triumph of Western civilization. A strong global consensus within "world society" originates from Western Europe and North America and is progressively diffused throughout the world. These norms are more self-validating than imposed by dominant actors. By contrast, world systems theorists recognize global economic integration but attribute little importance to global norms (Boswell and Chase-Dunn 2000; Wallerstein 2002). Dominant economic actors at the global center are resistant to normative constraints on their power. To the extent there is legal regulation of markets, it is contested between, for instance, capital and labor. Scholars of postcolonial globalism also point to a global hegemony, albeit more broadly construed, whereby nations and institutions at the global center exercise economic and intellectual dominance over weak peripheries (Darian-Smith 2004; Santos 2002; Silbey 1997). Global norms privilege those of a particular "local" and are better understood as globalized localisms (Santos 2000). Scholarship on law and development similarly proceeds on the assumption that global actors have forged a consensus around an ideology of law and markets that they subsequently have propagated in two successive waves (1960s-1970s, 1990s-2000s) to poor and weak countries the world over (Salacuse 2000; Trubek 1996).

With the partial exception of world systems theory, these approaches all embrace a similar concept of universal global norms, standards, structures, or rules. They also posit that such norms are formulated asymmetrically because of the exclusion of weak nations and marginal actors. Mostly, however, these theories advance on the basis of a reified and unitary concept of the "global." As an explanatory concept it is rarely more than a monolithic black box. There is little recognition of the internal contests and conflicts among global actors striving for ascendancy in the formulation of norms. To be sure, these theories recognize the conflict between central powers and peripheral players, although the battle is invariably won by the center. The battle within the global center, over whose law regulates global markets, gets overlooked. Furthermore, there is scarce attention to those who play a key role in the creation of global norms, most notably professionals. With some notable exceptions (Braithwaite and Drahos 2000; Canan and Reichman 2001; Merry 2005), too little theory specifies the conditions under which global consensus on norms will be possible.

In some measure, these theoretical lacunae follow from a methodological shortcoming. Social scientists mostly lack access to the councils of global norm making. Forced to rely either on the public documents that global actors release, which themselves are forms of opinion shaping, or on a potpourri of journalism, autobiographies, and official histories, social scientists face two problems. They either place undue reliance on official self-representations, and thus are caught by projected self-images, or they rely on reified concepts that owe more to theoretical deduction than empirical induction. One consequence of the latter is a tendency to overestimate global consensus and global capacities, a lapse that can misrepresent the force and impact of globalization. What is required, therefore, is access to the crafters of global norms, observation of norm making as it occurs, and access to the internal documents, successive drafts of competing proposals, and intermediate formulations that trace out the creative process.

In this book we open up the black box in which global norms are debated and decided. In the course of our fieldwork, we established long-standing relationships with the key individual and institutional actors who have competed over the formulation of global norms on bankruptcy law. Over seven years, we conducted hundreds of interviews with these actors, as they have advanced alternative sets of norms. We have had access to drafts of standards under deliberation, not just the finished products, and we participated in many meetings of international organizations as they negotiated over global norms. And, most important, we had former "observer" status inside the United Nations Commission that brought the global consensus to fruition.


Excerpted from BANKRUPT by Terence C. Halliday Bruce G. Carruthers Copyright © 2009 by Board of Trustees of the Leland Stanford Junior University. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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