Defending the Wrong Rule of Law

Both liberal democracy and business environment in Central Europe suffer from the extreme level of formalism in making and implementing laws and regulations—the approach, which has unfortunately been eagerly promoted by the region’s legal elite.

Even though a quarter century has passed since the fall of Communism, for many Western commentators political stories that come from Central Europe are still invariably viewed as episodes of a grand struggle between wellminded (if often fallible) forces promoting Western-style standards of democracy and the assortment of bad guys—populists, xenophobes, bribers. One unfortunate consequence of such a mindset is that we rarely reflect on whether the Western standards themselves, as applied in the region, suffer from some design flaws. My research over the last decade has been focused precisely on such defects in the model of the rule of law—or Rechtsstaat, as our lawyers like to call it—promoted in Central Europe.

My broadest dataset comes from Poland, where I have interviewed and surveyed hundreds of public officials responsible for producing and enforcing laws and regulations. This Polish emphasis may, in a peculiar way, be timely given the country’s current status as the poster child of Western analysts. Today’s Poland is a place where the model of liberal democratic transition is emphatically not under challenge by politicians in power. But it is worth keeping in mind that it was Poland that first encountered the post-EU-accession brand of illiberal populism, with the 2005–2007 rule of the Kaczynski twins. That political project faltered but the lingering dissatisfaction of large segments of the Polish society with the status quo continues, reminding us about how short a distance separates the narratives of a “regional success story” and a “young democracy in crisis.”This stubborn socio-political volatility is precisely what should prompt us to seriously examine aspects of the liberal model promoted in the region.

What problem with the Polish version of the rule of law has my research uncovered? The short answer is “extreme, often grotesque, formalism.” By that I mean the true obsession of the Polish legal elite with what I call “the neatness of the legal system”—up to and including the actual tidiness of legal texts—at the expense of any serious attention to laws’ real-life socio-economic consequences.

In Poland, this fixation with the formal aspect of laws sometimes surfaces in the public debate in the context of nonsensical decisions of our administrators of justice. A good case in point is the tale of Joanna W., a single mother and a micro-entrepreneur from the city of Opole, who in 2012 was jailed (with her kids sent in their pajamas to a foster care) for issuing a wrong kind of invoice in her flower shop. Another is a verdict against a director of a prison who paid a 13 dollar fine for a schizophrenic inmate jailed for stealing a 30 cent candy. The court found the director guilty of paying a fine on behalf of an unrelated person. Yet this senseless formalism is even more harmful at the stage of drafting new laws and regulations. Despite repeated encouragements from the OECD, Poland (and most other Central European countries) still treats Regulatory Impact Assessments as essentially a window dressing. The laws are written without any reflection on whether benefits of a new regulation justify its costs. And by “costs” I do not mean only budgetary expenses, but all the burdens on the economy, and especially on entrepreneurs. Business groups constantly bring examples of these irrational burdens to light. A recent comment in the business section of Rzeczpospolita daily points out, for instance, that after a string of amendments to various corporate laws, so many common business mistakes have been criminalized in Poland that “the job of a board member begins to resemble that of a mine disposal specialist.” In my Initiative for Regulatory Innovation research center at CEU Business School, we even keep the dedicated online Repository of Governmental Absurdities, with executives from throughout the region eagerly contributing examples. The list never seems to end.

Behind these unfortunate outcomes stands a growing institutional framework bolstering the obsession with legal neatness and the concomitant neglect of serious policy analysis. In Poland, this institutional environment includes the increasingly powerful, uber-formalist Governmental Legislative Center that closely oversees every piece of law and regulation introduced by the Cabinet, the lawyers-heavy analytical staff of the Parliament, and formalistic courts and control institutions, particularly the Constitutional Tribunal and the Central Audit Office.

To be sure, the neatness-function tension is inherent in any legal order. In the generally policy- oriented United States, the Supreme Court has recently agreed to hear the challenge to President Obama’s landmark healthcare reform, based on an argument that a section of the 1.000-page Affordable Care Act mentions federal tax credits for the insured only in the context of insurance exchanges “established by the State.” On a literal read, this would imply that residents of states which refused to organize such exchanges, and where the federal government stepped in to fill the void, would not be eligible for the federal subsidy. But the case seems to be a long shot and even the decision to hear it was harshly criticized by most American legal commentators. Compare it to Poland, where in mid-2000s the Constitutional Tribunal stroke down an important provision of a parliamentary act because, in the court’s opinion, the provision was placed in a wrong section of the text.

Some may argue that the problem of the overly formalistic approach to law is not specific to the post-Communist Central European states, being rather a feature common to countries which belong to the so-called Continental legal culture. Indeed, some cross-country studies suggest that economies based on the more flexible, functionally-oriented common law system enjoy certain institutional advantages over their Continental counterparts. Yet there are important differences between Central European and Western styles of “Continental” lawyering. A starting point here is legal education. Although the United States and Canada are rather unique in requiring lawyers to finish a full undergraduate degree in a non-legal discipline prior to pursuing legal studies, Western European law schools still generally offer more training in social sciences and humanities than their Central European counterparts. In Central Europe, lawyers are—to put it bluntly—high school graduates who spent a few years memorizing a lot of codes. Western Europe benefits also from a more robust environment of policy-oriented centers of thinking, such as the Grandes Ecoles system in France or well-funded specialized research institutes in Germany. In many Western European countries, there is also a more developed culture of corporatist- style dialog that allows political decision- makers to leverage real-life policy insights of industry and civil-society actors. Finally, Western Europe—and especially international institutions such as the European Commission or OECD—has also been increasingly affected by the American culture of policy analysis, partly through the hiring of graduates of American or American-style schools of public policy. In Central Europe, the formalist zeal of narrowly educated lawyers is not similarly balanced by other sources of substantive policy expertise.

Even more fundamentally, there are important historical reasons why Central European lawyers are particularly unwilling to appreciate the more functional, policy-oriented aspect of laws. When the Communism fell in 1989, much of the region’s legal elite—high court judges, influential commentators, notable prosecutors and attorneys—was encumbered with a record of at least some degree of accommodation toward the Communist regime. This “résumé problem” made it exceedingly uncomfortable for lawyers to embrace value-laden, functionalist positions in the spirit of the new democratic order. Appearing as non-political legal technicians was a much safer option, especially since it was fully in line with the relentless emphasis of Western advisors on “strengthening the rule of law.” In addition, the neatness-oriented perspective guaranteed a rather impressive degree of intellectual continuity. As my and other authors’ research shows, Central European legal professionals happened to be rather formalistic also under communism— the tendency, which (depending on one’s interpretation) may be regarded either as an effort to limit communist excesses by subjecting the regime to some legal rules or as an opportunistic strategy to avoid taking a stance against glaring human rights violations of the day. Reasons aside, if one looks at the history of some of the most extremely formalist legal institutions created in the region—such as the Article 92 of the Polish Constitution which severely limits the ability to establish new regulatory agencies—the roots of many of these institutions date back to discussions and postulates of the legal community from the 1960s or 1970s.

Unfortunately, as I claimed at the outset, the obsession with the formal aspect of law contributes in many ways to the underlying weakness of the liberal-democratic model of Central European governance. Two groups of these harmful effects are particularly worth emphasizing. On one hand, the lack of appreciation of socio-economic consequences of laws increases the likelihood of harmful policy mistakes. In Hungary, it took the illiberal Orbán administration to solve the glaring social problem of Swiss Franc mortgages, which brought incredible hardship to hundreds of thousands of Hungarians. A functional policy perspective would immediately question the reasonableness of these loans: Is an individual consumer really best suited to bear the FX risk, especially if she is sold the CHF mortgage precisely because her credit rating would not allow her to get the same amount in the local currency? How do these mortgages account for the well-researched phenomenon of bounded rationality? But the formalist perspective focuses instead on esoteric concepts such as “the sanctity of contracts.” That is obviously not particularly convincing to people suffering from disastrous consequences of the policy, such as the Polish group of CHF borrowers. These losers in the formalist jujitsu are an ideal group to be targeted by populists. In addition, the capriciousness of the formalist system decreases the willingness of many other groups, especially entrepreneurs, to defend that system against populist encroachments. If the life of a businessperson is already so unpredictable under the liberal rule of law, how much worse can it get if populists take over?

On the other hand, the formalist focus deeply undermines the public debate, often to the advantage of populists. For in some way, populists are the only ones who get it right about the law—treating it not as a sacred artifact of democracy but as a tool to achieve certain socio-economic outcomes. Liberals tie their hands if instead of bringing to light potentially disastrous consequences of populist policies—and, importantly, outlining attractive consequences of their own proposals—they engage in their favorite talk about “standards of democracy and the rule of law.”For most people, standards and principles are simply too abstract to outweigh immediate concerns over the future of their family, business, or employment. Instead of defending the hollow, and often genuinely misguided, version of the rule of law, liberals should focus on the admittedly more difficult task of demonstrating why a liberal state will be better to live and work in than a populist one.

Maciej Kisilowski

Director of Initiative of Regulatory Innovation and Assistant Professor of Law and Public Management at Central European University Business School.

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Heart of Europe on the Periphery

Illiberal backsliding is getting stronger in Visegrad countries recently. Central Europe suffers from a complex of inferiority, they say. Is it a legitimate feeling? Discover the heart of Europe and its pounding chambers on the periphery.

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