Contract Enforcement and Dispute Resolution

A Presentation @ Prime Institute by Ali Malik

Business Centers of the World

London

New York City

New York City

Chicago

Major Commercial Hubs

Mumbai

Tokyo

Moscow

Bangkok

Chicago

Karachi

Story of a Country
After a devastating earthquake, government is accused of slow response while the banned outfits are hailed for swift relief response The leading business houses are accused of using mafia to coerce people to sell their land to them for real estate development A leading bank is accused of leniently financing mafia through car and real estate loans

Which Country is it?

So Which Country is it?

Earthquake was Kobe Earthquake of Japan 1995 Real Estate Coercion took place in 1980s leading to Japanese Asset Price bubble And Mizhuo Bank is the bank in focus Its Yakuza (Japanese Mafia) that we are talking about.

And What about Major Commercial hubs?

Chicago

Tokyo

Moscow

Bangkok

Mumbai

Karachi

And London, New York?

They have historically been the Gang Capitals of Western World at the respective times of their rise as financial centers.

Whats happening here?

There is a very strong link between mafia and commercial activity. And the link stems from the need for contract enforcement in society and commerce.

Types of Contracts
Contract between Individual and State Contract between Society and State Contract between Individual and Individual

2 Competing Theories on contract enforcement

Douglas C. North writes: Neo-classic economics saw a world of arms length trading supported by powerful legal institutions. States capacity to enforce a contract is an essential element in rise of West.

2 Competing Theories on contract enforcement

Klein & Laffer (1991): Importance of law in contractual relations has been vastly overstated and the economic agents use a variety of purely private mechanisms such as personal trust, calculative trust, and constructed mutual dependence.

And which theory is right?

Historically, the gangs remained powerful in the early days of rise of a mega commercial center.
London 1665 (Queen Annes era) Yakuza 1867 Gangs of New York 1830 Cosa Nostra of Chicago 1910 Moscow and Russia - 1991

What is mafia?
Wikipedia: Mafia is a term used to describe a certain type of organized crime syndicate that primarily practices protection racketeering

How mafias spur up?

Transitional times (most mafias spur up from a societys transformation to industrial age society) Legal prohibition of commodities in high public demand Geographical/ Social distance from centers of political decision making In all of them, Mafia ensures enforcement of commercial/ social contracts

What helps a mafia gain foothold?

Power vacuum for effective contract enforcement Through promise of a fair and even-handed contract enforcement mechanism
Justice and Honor above all (Soakiya Jiagaya) Both Malala Yousufzai and Molvi Fazal Ullah agreed that State has not been a fair arbitrator in Swat since 1972

From Mafia to State

With time as mafias gain foothold, power starts corrupting the mafia - this and nonrepresentative nature of it starts eroding its position as a fair arbitrator in contract enforcement As the economic activity increases, states resources, and thus its ability to fill in the power vacuum increases In most commercial centers, state ended up taking over mafias

From Mafia to State

However, the battle is never fully won!!!
Reemergence of London gangs post- financial crisis East London Gangs Resurgence of black and Hispanic gangs in major US cities since 1990s

From Mafia to State

And when mafia loses, its loss depends more on its inability to be a fair contract enforcer than states prosperity
Japan high honor code Italy mafia still considered a better arbitrator than state, specially in South

Pakistan
Mafias emerged in post-colonial transition to industrial age Karachi has led the rest in emergence What I learnt talking to stakeholders
In Karachi In Lollywood

How can State prepare to make a comeback?

Fighting mafias without having the capacity and a fair deal for contract enforcement never bears fruit Sense of fairness and inclusion of crosssection of society in running state helps establish state as an acceptable contract enforcer Devolution helps State against Mafia

How can State prepare to make a comeback?

But above all, it is the expanded economic activity and its complexity that makes mafia incapable of contract enforcement and also gives state resources to takeover mafia!!!!!