There are a great number of definitions of institutions within the New Institutional Economics. As Voigt (2002, p. 33) pointed out, since the NIE is a “young” research program, there has been no commonly accepted definition of institutions. However, there are two main approaches on defining institutions, namely (i) institutions as the results of games (e.g.
definition of Schotters 1981 cited in Voigt 2002), and (ii) institutions as the rules of games (e.g. North 1990). In the book published in 1990 and entitled “Institutions, institutional change and economic performance”, North defines institutions as “the rules of the game in a society or, more formally, … the humanly devised constraints that shape human interaction”
and points out that “they consist of formal written rules as well as typically unwritten codes of conduct that underlie and supplement formal rules” (1990, p. 3 - 4). In another work, North
defines institutions as “a set of rules, compliance procedures, and moral and ethical behavioural norms designed to constrain the behaviour of individuals in the interests of maximizing the wealth or utility of principals” (1981, p. 201 - 202). Drawing from the definition of Ostrom (1986 cited in Voigt 2002), Voigt (2002) shows that institutions consists of two components, namely a set of rules and a corresponding enforcement mechanism.
Consequently, institutions can be defined as general known rules with a corresponding sanctioning mechanism the use of which is threatened in case of non-compliance with the rule (p. 34).
An important point is how to divide institutions into formal and informal institutions? Voigt (2002, p. 33) separates institutions into internal institutions and external institutions by defining whether the enforcement mechanism is based on state enforcement or not. In his view, only external institutions are based on state enforcement. Accordingly, he lists 5 types of institutions as in table 2.1.
Table 2.1 Types of institutions
Kind of institution Kind of enforcement Type of institution
Convention Self- enforcing type 1 - internal
Ethical rule Self- commitment of the actor type 2- internal
Custom Informal societal control type 3- internal
Private rule Organized private enforcement type 4-internal
State law Organized state enforcement External
Another classification can be found in the study of North (1990). North divides institutions into “formal constraints” as rules that human beings devise and “informal constraints” as conventions and codes of behaviour. Following this definition, Aoki (2001) argues, “humanly devised constraints may be informal (e.g., social norms, conventions, and moral codes) or formal (e.g., consciously designed or articulated)”. He also added that “formal rules include political rules (constitutions, regulations), economic rules, and contracts” (Aoki 2001, p. 5).
From such two classifications, it can be defined that formal institutions are a set of formal rules, which are created or recognized by government and subject to a state enforcement
III. 2. The conception of the rule of law
The conception of the rule of law, as pointed out above, seems to be more difficult to subsume under a common viewpoint. As a consequence, even in Western democracies, the rule of law belongs in the category of open-ended concepts that are subject to permanent debate.
Nevertheless, in common sense, the rule of law means that everybody, the government and its agents included, must be subject to the same rules promulgated publicly, and laid down in advance. The idea behind it is that individuals should be protected against arbitrary use of official power since state authorities are also bound by the law themselves.
There are three basic definitions of the rule of law13 classified according to whether they emphasize formal characteristics, substantive outcomes or some performed functions. The
“formal definition” of the rule of law emphasizes the measurable characteristics of the rule of law or legal system. According to Craig (1997), formal conceptions of the rule of law deal with: (i) the manner in which the law was promulgated (was it by a properly authorized person…); (ii) the clarity of the ensuing norms (was it sufficiently clear to guide an individual’s conduct so as to enable a person to plan his or her life, etc.); and (iii) the temporal dimension of the enacted norm (was it prospective…). Most formal definitions are based on the view that the rule of law is measured by some explicit standards, namely an impartial judiciary; laws that are public; the absence of laws that apply only to particular individuals or classes; the absence of retroactive laws; and provisions for judicial review and so on.
However, formal definitions of the rule of law have two main shortcomings. First, formal conceptions of the rule of law do not seek to assess the actual content of the law. They are not concerned with whether the law was in that sense a “good” law or a “bad” one. The “formal”
approach, therefore, was criticized by Hayek (1960). In the book Constitution of Liberty (1960), he wrote:
“The rule of law, of course, presupposes complete legality, but this is not enough, if a law gave the government unlimited power to act as it pleased, all its actions would be legal, but it would not be under the rule of law. The rule of law, therefore, is also more than constitutionalism: it requires that all laws conform to certain principles” (p. 205).
Those principles, to which all laws should conform, require that law must be abstract and general, known and certain (1960, p. 205-210). Similarly, Fuller (1964) also argues that the rule of law requires publicly promulgated rules, laid down in advance, adherence to at least
13 Some authors even distinguish four types of the rule of law, see more detail in Fallon (1997).
some natural law values. Strikingly, Hayek supposes that under the rule of law, government must never coerce an individual except in the enforcement of a known rule. He thus seeks to restrain the government coercion by attaching the separation of state powers and independent judiciary as an integral part of the rule of law (1960, 210-211).
According to Stephenson (2001)14, a formal definition of the rule of law may place too much emphasis on the law “in the books” and not enough attention to the law “in action”. Official rules do not always reflect the actual operation of the legal system. Recently, the economists who believe that since a free market depends on certain institutions and the enforcement of certain rules have also provided some criteria for measuring the rule of law. For example, many economic researchers measured the degree of the rule of law through using indicators of quality of the court system or judicial independence (e.g.: Gwartney, Lawson and Block 1996;
Feld and Voigt 2003; Kaufmann, Kraay and Mastruzzi 2004, 2005). Some others even suppose that the rule of law should include the protection of property rights and enforcement of private contracts (Knack and Keefer 1995). In order to test the relevance of institutions for economic performance, Knack and Keefer basically rely on the institutional indicators provided by International Risk Guide (ICRG) and Business Environmental Risk Intelligence (BERI). In their study, ICRG “rule of law” and “state expropriation” indicators are interpreted as proxies for the security of property and contract rights (1995, p. 210).
Despite having drawbacks, as pointed out by Stephenson, the main advantage of a formal definition of the rule of law is that it is clear and fairly objective once the formal criteria are chosen. Choosing which standards to include may be controversial, but after the standards are made explicit, it is usually not difficult to observe the degree to which countries meet or do not meet the standards.
The second type called “substantive definition” of the rule of law stresses substantive values promoted by the law such as certain ideas of freedom, justice, fairness, etc. Those values are regarded as integral components of the rule of law (see more detailed in Stephenson 2001).
The scholars, who advocate substantive conceptions of the rule of law, seek to go beyond the limits of the formal approach. Therefore, contrary to the formal approach, the substantive rule of law adheres to the definition of the rule of law with the good legal system, and measures the rule of law in terms of how well the system approximates this idea. The substantive approach, however, faces with some difficulties of definition, specifically (i) determining the
14
"justness" of a particular legal order is very subjective, (ii) defining the rule of law as a
"good" legal system risks making the concept so vague that it could include almost anything.
In order to overcome those weaknesses of substantive approach, Stephenson (2001), inspired by Hayek (1960) advances the third approach which is called functional definition. This approach is similar to the substantive definition, but focuses on how well the law and legal system performs some functions, specifically the constraint of government discretion and/or the making legal decisions predictable. For example, a society in which government officials have little or no discretion has a high level of rule of law, whereas a society in which they wield a great deal of discretion has minimal rule of law. Based on this approach, the next chapter of this research will scrutinize the rule of law in Vietnam.
Although there are different approaches, there is a common consensus that a political system based on the rule of law embodies some components such as: (i) an equal treatment to all people before the law, (ii) constitutional and actual guarantees of basic human rights and property rights, (iii) a legal system that is fair, transparent, certain and general, and (iv) an effective mechanism constraining government discretion. These components are essential for the protection of citizens against the arbitrary state authority and lawless acts of both organizations and individuals. They are formal institutional arrangement as they are stipulated in the constitution and the laws and rely on government enforcement mechanisms.
IV. Basic components of the rule of law