Enforcement and Good Corporate Governance in Developing Countries and Transition Economies

Abstract

More than regulations, laws on the books, or voluntary codes, enforcement is key to creating an effective business environment and good corporate governance, at least in developing countries and transition economies. A framework is presented to help explain enforcement, the impact on corporate governance when rules are not enforced, and what can be done to improve corporate governance in weak enforcement environments. The limited empirical evidence suggests that private enforcement tools are often more effective than public tools. However, some public enforcement is necessary, and private enforcement mechanisms often require public laws to function. Private initiatives are often also taken under the threat of legislation or regulation, although in some countries bottom-up, private-led initiatives preceded and even shaped public laws. Concentrated ownership aligns incentives and encourages monitoring, but it weakens other corporate governance mechanisms and can impose significant costs. Various steps can be taken to reduce these costs and reinforce other corporate governance mechanisms. But political economy constraints, resulting from the intermingling of business and politics, often prevent improvements in the enforcement environment and the adoption and implementation of public laws. The problem of enforcing agreements has been a long-standing part of the development agenda. Nobel laureate Douglass North (1991) argues that "how effectively agreements are enforced is the single most important determinant of economic performance." Recent research supports this assertion, suggesting that enforcement of the rule of law is perhaps the central functional difference between developed market economies and developing economies. Indeed, according to some analyses, the degree to which private property rights are respected explains the development of countries (Acemoglu, Johnson, and Robinson 2001). Comparisons between developed market economies and transition economies also show much larger differences

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