The rule of law is something that is very hard to define. We know when it is not there at all: chaos and warlords. We also know when it barely exists: bribery and impunity. But it is very possible for a state to operate without outright bribery and impunity and yet still lack the benefits of the rule of law.
Consider the recent Casas Geo bankruptcy in Mexico. (Hat tip: Xóchitl Herrera.) Casas Geo started by building small modern houses for poor Mexican families. The houses would be built in long rows, sharing foundations, with modern utilities already hooked up. A small four-bedroom house went for around $46,000. Reforms that made mortgage credit widely available fueled the company’s growth.
In February 2013, however, the new administration announced a change in housing policy: federal subsidies would be redirected from suburban expansion to more center-city housing. The reason was that Mexican suburbs had outrun their cities’ transportation nets, leaving increasing amounts of vacant housing around the outskirts and burdening poor households with crushing commutes. The problem was that the housing companies had accumulated a lot of land outside existing built-up areas. Geo was particularly hard hit. In April, the company announced a 38% decline in quarterly sales. (Page 2.) By May, the company had begun to default on some of its bonds. To be fair, housing construction had been in trouble before then and the reform was sorely needed. But it sent Geo over the edge into bankruptcy. Geo sought protection under the 2013 amendments to Mexico’s 2000 Bankruptcy Protection Act.
The Mexican congress modeled the Bankruptcy Protection Act on American bankruptcy law. (A comparison can be found here.) As in the United States, federal courts run bankruptcy proceedings. Creditors cannot make an end-run around the bankruptcy proceeding by appealing to state or lower federal courts.
Only they did! A bunch of would-be homeowners whose made down payments but never received a house wanted cash instead of the promise of a future house. So they sued in a different federal court. And now the whole reorganization is at risk; Geo might be forced to liquidate, which would leave everyone worse off.
That is not supposed to happen; you are not supposed to be able to get around a bankruptcy court decision by filing in a non-bankruptcy court. But since it did happen, well, now it is not clear if Mexico even has a functioning bankruptcy law.
This sort of thing is not as obvious as corruption or an executive branch that flaunts judicial decisions. But it is nonetheless pernicious. The rule of law looks similar everywhere, but every place that lacks it lacks it in its own way.