UNITED STATES AGENCY FORINTERNATIONAL DEVELOPMENT COMMERIAL --- LEGAL AND INSTITUTIONAL REFORM (C-LIR) ASSESSMENTS FOR EUROPE

AND EURASIA Diagnostic Methodology Handbook USAID Omnibus II-C: Policy/Legal/Training Contract no.EPE-I-95-00071 Task Order No. EPE-I-09-95-00071-00 NOVEMBER 15, 1999 BOOZ.ALLEN & HAMILON INC.INTERNATIONAL CLIENTSERVIE TEAM Booz.Allen & Hamilton Inc. 1 I.OVERVIEW This Handbook has been prepared to assist commercial law and institutional reform (C-LIR) specialists to apply proven methodology for understanding the commercial law environment in a developing or transition country so that they can design better programs of assistance. Just as importantly it is a tool for helping policy makers understand the need for and dynamics of specific commercial law reforms. The methodology as further described below, was developed over a two-year period between 1998-2000, and field tested in seven countries of the Europe/Eurasia region. The diagnostic methodology is both quantitative and quantitative. Qualitative of the commercial law environment are assessed through a systematic examination of laws and the institution necessary for the implementation of those laws. Findings are quantified by assigning numerical values to the qualitative judgments. These two facets together provide a more complete picture than qualitative assessments with no scoring. Quantification permits both a standard for comparison with other countries and between areas of law, while providing a reality check on the integrity of the assessment. This tool was thus intended to result in both a written, qualitative report on the areas of law studied, and a set of scores based on the indicators provided. The scores, by themselves, have little more than academic value without a supporting discussion. The qualitative findings, however, can standalone without the sores, but are strengthened by the numerical back-up, with an be used very effectively to sensitize planners to the need for change.

In the end, this diagnostic tool is meant to be just that a practical tool for designing and prioritizing programs of assistance in the area of commercial law reform. It can be modified to fit the needs of the users, and expanded to other areas of laws not covered yet. Within USAID, the diagnostic scores provide a growing database of comparative indicators. For those who do not need such indicators, the methodology still provides the in-depth systematic analysis necessary for effective strategic planning. Below, the Handbook provides a brief background on the methodology was developed, a glossary of terms used, an explanations of how scores are calculated (with examples from prior assessments), and general commons on each of the four dimensions of the assessment. Following these general discussions is a separate section for each of the seven areas of law, including comments and the indicators themselves. II.BACKGROUND Project Design Since the fall of communism, most of the countries of Central and Eastern Europe and the former Soviet Union have been making the difficult transition toward a market economy. Intuitively many realized that because commercial laws serve as the rules of the game for a market economy, it was critical to get them right if a free market was to flourish. Recognizing this, reformist governments began to tackle legal reform generally and commercial law reform specifically. To assist with this process, international donor agencies such as the World Bank, the International Monetary Fund, the European Bank for Reconstruction and Development, the European Union, the German Development Agency (GTZ), along with USAID and its partner agencies in the U.S. government, lent support by fielding an army of short - and long-term technical advisors to provide an ar-

Booz.Allen & Hqmilton Inc. ray of technical advisory services. The success of these early efforts referred to here as 1st generation commercial legal and institutional reform (C-LIR) were mixed. New laws were drafted (sometimes copied verbatim from advanced market economies) and enacted, but with little lasting change. Two important lessons were learned during this early phase of C-LIR. First, getting the Legal framework right is an essential, but not sufficient, precondition for sustainable, market-driven economic growth. Second, without a supporting institutional framework, and associated capacity, commercial laws cannot be fully implemented or enforced. These lessons served as the basis for the 2nd generation in C-LIR as a distinct area of economic development theory and practice. During the second phase, practitioners attention turned to rationalizing and strengthening the institutional framework for implementation and enforcement of commercial and capacity building. The internal donor community to address institutional deficiencies marshaled policy advisors, technical training, and limited equipment procurements. The record of success for these 2nd generation interventions has been somewhat better but still not what was hoped for. While significant gains were achieved in certain substantive areas (e.g.. GATTIWTO accession, customs administration, collateral registries, and capital markets), there was little progress in others - notably in the enforcement of bankruptcy, antitrust, and intellectual property laws. This practical experience in the field brought to light the complexity and subtlety of the institutional dimension of C-LIR. This Handbook is the result of a project representing a tangible and significant commitment of resources by USAID to advance a 3rd generation of C-LIR. Despite some success in the field, there is a growing recognition that the legal and institutional elements of C-LIR are two parts of a larger and more complex whole. The evidence to support this conclusion lies in the implementation/enforcement gap that has been observed even after technically competent 1st and 2nd generation C-LIR implementation and enforcement of legal and institutional reforms. Addressing the Challenge The challenge of the 3rd generation of C-LIR is to develop a cost-effective, results-oriented approach ( or approaches ) that will help close the implementation/enforcement gap