One of the things that definitely comes out of studies on what produces economic growth is that the rule of law is a necessary but not sufficient condition for there to be sustained economic growth.
If contracts can be torn up at bureaucratic or political whim then investments tend not to be made because of those bureacratic or political risks. The way that BP was shafted over TNK, Shell at Sakhalin, they\’re poster boys for not investing in Russia (as someone who has either worked in Russia or had interests there for near two decades now I still wouldn\’t invest in physical plant there for this very reason, legal uncertainty).
So, what about London then?
In an extraordinary ultimatum that has shocked some of the City\’s biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict.
Many of the global players have in recent weeks made representations to the City watchdog, in particular about pre-existing employment contracts that guarantee bonuses over a year or more. But their appeals have been met with the FSA\’s toughest yet response.
The FSA is saying that unless the banks breach their own contracts they\’re at risk of having their banking licences pulled.
This is putting bureaucratic action above the rule of law.
Whether the actual proposal itself is a good idea or not isn\’t the point here at all. The breach of that rule of law, the way in which a political appointee can take it upon himself to over rule entirely legal contracts is going to casue much more damage in the long run than any effect of the details of the regulation itself.
Bad, bad idea.