Research Highlight How existing laws shape (or hinder) the creation of new markets
While the legal process has been acknowledged as essential in the creation of new markets, little attention has been paid to how existing laws can shape emerging organisational fields by enabling or resisting new legislation. Zsuzsanna Vargha and her co-author filled this gap with their case study of Hungary's successive attempts to create a mortgage banking market.
After the communist period in Hungary, the government and banks were keen to build a market economy, including a Western-style mortgage market, which had been all but non-existent until then. Both commercial banks and political decision-makers supported the plan. They remained vague about the details, however (in fact, some high-level government officials later admitted that they initially had no idea how mortgage banking would work).
In any case, the Ministry of Finance set up an organization, the Mortgage Bank Preparatory Plc (MBP), which commissioned studies on mortgage lending and visited banks in the West. Once the idea had been defined, the drafting of the agreed mortgage bank into law – the supposedly boring technical details – was left to the Ministry of Finance.
To the surprise of the other key stakeholders, what they considered mere 'paperwork' altered some of the essential features of what they had envisioned. Worse, once the Mortgage Banking Act of 1997 was passed, it was a flop: the commercial banks withdrew and the state-owned MPB underperformed, lending out only 3 billion Forints (the Hungarian currency) in 1998 against its 10-to-15 billion Ft forecast. The desired market simply did not materialize.
Three years later, the next government launched a second attempt, the 2000 Housing Programme. It proved successful: two new banks entered the market and mortgage borrowing boomed from 130 bn to 1130 bn Ft ($449m to $3902m) between 2000 and 2003.
Law as a non-human actor
Why did the initial endeavour fail and the second one succeed? One answer is put forward by ESCP Business School professor Zsuzsanna Vargha and Università della Svizzera italiana’s Léna Pellandini-Simányi. “Law proved to have agency instead of being docile and pliable, a bureaucratic afterthought,” they write in an article published in Organization Studies. In their research, based on the example of post-Socialist Hungary's attempts to establish a mortgage market, they demonstrate how existing legislation matters in the creation of new markets.
To shed light on the process, the duo used an analytical framework known as the ‘law itself’ approach. Akin to infrastructures such as dams or railroads, the legal system has 'discursive materialities', rules that may be intangible yet no less rigid than actual materialities (courtrooms, documents, etc.). “Far from being malleable to incorporate just any new content, it can be worked on and worked with by taking into account its own distinctive qualities and interdependencies,” write the researchers. The legal infrastructure, understood as “the interconnected system of laws with its own technical properties and agency,” is in effect a key stakeholder – think of it as a non-human actor.
Following this, professor Vargha and her co-author utilised the methodological approach of actor-network theory, which holds that phenomena, including markets, are temporarily stabilised networks of human and non-human actors. To trace the actor-network of the Hungarian mortgage market, they collected relevant archival documents and conducted 32 interviews with actors involved. The process then revealed that “the existing legal system made a difference as an ‘actant’: at first derailing the emerging mortgage market, then shaping some of its key aspects.”
Why the legal infrastructure “behaved” differently in the two endeavours
So why did the two successive attempts described above result in different outcomes? The impact of the extant laws and human stakeholders depends on which laws and which humans manage to enrol one another into the emerging network. In the case of legislation, its agency (capacity to act) depends on the position of its spokespersons – in the case of Hungary, bureaucrats at the Ministry of Finance.
The first time around, the actors customarily treated as key stakeholders in market-building were aligned; here, the Hungarian banks and government. But the Ministry of Finance, responsible for drafting the law, prioritised the smooth fitting of the new law into the legal system over maximising its capacity to yield financial and political profits. Ministry employees altered the initial draft for consistency with the web of existing Hungarian laws and (anticipated) harmonised obligations with EU regulation. The authors explain that far from expressing abstract concerns, bureaucrats talked about “the concrete ‘plumbing’ problem of connecting one piece of legislation to the rest that is already in place or will be in place.”
Again, this conceptualisation goes beyond merely including legal professionals or state bureaucracy among the key stakeholders. “Focusing solely on experts risks attributing their actions too easily to professional or bureaucratic self-interest, missing the crucial aspect that these actors are above all spokespersons for a non-human agent – the law,” emphasize the researchers, who wield the metaphor of technicians in service of a machine.
So how did it work out the second time around? While in 2000 the Ministry still enforced compatibility with the extant legislation, it found a solution by 'hacking' the law, “re-interpreting, combining and completing previously unconnected elements,” in effect presenting a “legally feasible ‘bricolage’ of existing legal constructs.” Indeed, the spokespersons for the law worked against the resistance of law. It also helped that in 2000, the mortgage task force, unlike its predecessor the MBP in 1997, was aware of the legal constraints. In addition, the Ministry's ad hoc body introduced further regulatory changes as the market evolved, for instance broadening eligibility and lowering interest rates. In actor-network terms, the Ministry's Mortgage Unit engaged in the constant maintenance of the network, iterating between the emergent interests of banks, the government and the legal system.
Beyond market-building, these findings, which shed new light on the demands of the work to connect legal wiring and piping, and on the resistance of legal systems to political interests, are instructive for market dissolution and the analysis of large-scale projects of integration and disintegration – Brexit, for instance.