what is the relationship of law to economic development? erik jensen summer fellows program july 26,...
TRANSCRIPT
What is the Relationship of Law to Economic
Development?
Erik JensenSummer Fellows Program
July 26, 2012
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Remember - What “Goods” Does Rule of Law Deliver?
• Citizen security and stability• Dispute resolution• Economic growth and development• Human rights protection• Protection from governmental
caprice and corruption
Causality?
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Three
Questions
1. Is ROL Dependent on Regime Type?
2. How Does Law Develop?
3. Is Law/Legal Institutions a Leading or Lagging Indicator in Economic Development?
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Remember My Contention:ROL =/= Pregnancy
Rule of law is not like pregnancy, you don’t either have it or not
Matters of degree with pockets of performance
Pakistan Singapore Cambodia China
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1. Is Regime Change Necessary to Achieve ROL?
Five States of Legalitya. AnarchyBreakdown of indigenous social
structures
b. Despotic RuleArgentina 1976-79 where internal
secret military police played a prominent role in governancea
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Rule by law
c. “Rule by Law”• The use of law as in instrument
of domination.
• Authoritarian and oppressive
• “To my friends everything, to my enemies the law.”
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Rechtsstaat
d. Rechtsstaat emphasizes law and order
(a) all state authority governed by law(b) reason-based codification
administered by civil service(c) evenly applied and adjudicable
Trying to fit the messy phenomena of life into a Code. (Casper)
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Democratic rule of law
e. Democratic rule of law
(a)upholds political rights; limits state actors(e.g., freedom of the press, free and fair elections)
(b) upholds civil rights, and
(c) holds all officials, high and low, accountable
2. How Does Law Develop?
Jerry Rosenberg, Hollow Hope: Can Courts Bring About Social Change (1991) -> Michael Klarman -> Pam Karlan
Law changes [or is upheld] when patterns of demands and expectations change
Demand for law and legal institutions increases as economies grow ( Marx, Smith)
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Law’s Connectedness Depends On …
Law is potentially connected to and shaped by every aspect of society, economy and polity.
• History, tradition and culture• Political and economic system• Distribution of wealth and power• Degree of industrialization• Mediation of ethnic, language and
religious differences• Power dynamics among elites in society
(particularly influential)04/19/23 10
3. Is Law a Leading or Lagging Indicator in Economic Development?
Underlying Assumptions
That a well-functioning judiciary is necessary for economic growth and development
That “substitutes” for a well functioning judiciary entail high transaction costs (unpredictability, enforcement costs)
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Legal Substitutes for Formal Processes
Relationships (clans, tribes)
Good faith/repeat dealings
Abundant information
Guilds, associations, codes of conduct
Private security
The Assertion
Legal Institutions and Judicial Enforcement Are Necessary to Move From a Traditional Economy (Economy of the Bazaar) to a Developed Economy
“Missing in the suq (bazaar economies engaged in regional trade) are the fundamental underpinnings of legal institutions and judicial enforcement that would make such voluntary organizations viable and profitable. In their absence, there is no incentive to alter the system.”
Doug North, Institutions, Institutional Change and Economic Performance (1991), p. 124.
Primitive Accumulation
Smith: “Previous Accumulation”“The accumulation of stock must, in the nature
of things, be previous to the division of labour" (Smith 1776, II.3, p. 277).
Marx: “Primitive Accumulation” – the separation of people from their means of production (expropriation, enslavement, etc.)
"Primitive accumulation plays approximately the same role in political economy as original sin does in theology" (Marx 1977, p. 873)
Marx’s “primitive accumulation” is the rule, not the exception
Legal Institutions and Economic Growth
The vast weight of evidence in critical earlier stages of economic development:
(a) That a well functioning judiciary is not needed for dynamic economic growth
(b) That law is not necessarily “better” (cost-effective) than “legal substitutes” as a device to govern economic activity
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China and India Problem
India: 2007 WB ranked India 173 out of 175 countries in contract enforcement – only Bangladesh and Timor Leste faired worse (2008 WB India 177 out of 178)
China: 9% growth over 25 years with highly underdeveloped legal system, poor corporate governance, relatively small capital market
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Weber Redux
“Nonlegal” factors are important
Custom and convention difficult to change
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Differing Views
THE OTHER PATH, Hernando De Soto claims that:
“The legal system may be the main explanation in the difference in development that exists between industrialized countries and those that are not industrialized.”
“Development is possible only if efficient legal institutions are available to all citizens.”
“The law is the most useful and deliberate instrument of change available to people.”
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Differing Views
East Asia Miracle pays no attention to legal system
Doug North’s Institutions, Institutional Change and Economic Performance asserts importance
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Differing Views
Causal Arrows
• Do property rights and enforcement of contracts cause economic growth?
• Or, does economic growth lead to the need for greater respect for property rights and contracts and better performance of legal institutions?
• Where is the tipping point when demand for law and legal institutions becomes more pervasive?
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Property Rights and De Soto
“What the poor lack is easy access to the property mechanisms that could legally fix the economic potential of their assets so that they could be used to produce, secure, or guarantee greater value in the expanded market.”
Hernando de Soto, The Mystery of Capital (2001).
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But is it that simple? The “De Soto Effect”
If there is extreme poverty and little competition, increasing property rights registration can lead to greater exploitation in the credit market because lenders can foreclose on defaulting borrowers more easily, without any efficiency gains.
If the state is unwilling to act to constrain lender’s market power, then property registration is not a win-win for borrowers and lenders.
Tim Besley and Matreesh Ghatak, “The de Soto Effect” (April 2009)
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Is it that simple?
Jensen et al research on slumsJakarta – relocation of slum-dwellers
Confusion about “justice” and property rights – who’s justice, when and how? Naga City example
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Property Rights and Many Paths
[W]hen investors believe their property rights are protected, the economy ends up richer. But nothing is implied about the actual form that property rights should take. We cannot even necessarily deduce that enacting a private property rights regime would produce superior results compared to alternative forms of property rights….
Rodrik, One Economics, Many Recipies: Globalization, Institutions and Economic Growth (2007)
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Positive Law and Economic Growth
LLSV study found through elaborate cross country regressions in forty-nine developed and developing countries that common law countries grew faster than civil law countries.
BUT
“Startling result” contrary to the key finding/bias of their study that the origins and content of positive law explain economic performance:
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Positive Law and Economic Growth
The poorest one-third of countries have better substantive law than the richest one-third by the LLSV authors’ own definition of the crucial substantive rules!
Also, see Germany and France vs. UK
And see Tunisia, Morocco and Algeria vs. most of sub-Saharan African common law countries
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Working Hypothesis
EVIDENCE
Available empirical evidence: best working hypothesis is that there are on-again-off-again connections between law, legal institutions and economic growth and development.
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Reasons for on-again-off-again connections
A) Larger issue: Growing evidence that desirable institutional arrangements have a large element of context specificity, arising from:
• differences in historical trajectories• geography • political economy or • other initial conditions…
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Reasons for on-again-off-again connections
B) Legal substitutes for formal legal processes:
- relationships (clans, tribes) - good faith dealings (repeat dealings)- abundant information - guilds, vol. assoc., codes of conduct- private security
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Reasons for on-again-off-again connections
C) Common Business Practice
Data provide inconsistent evidence on the importance of formal laws and legal institutions to economic development because the measurements fail to account for common business practice.
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Risk and Economic GrowthFDI, for example, at least six types of risk
are possible:
(1) commercial risk (e.g., fluctuating markets)
(2) political risk (e.g., expropriation)
(3) legal risk (e.g., unpredictable courts)
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Risk and Economic Growth(4) regulatory risk from administrative
action (capricious rule or decision-making)
(5) security risk (crime)
(6) social risk (civil society action against or for certain types of investment)
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“Legal Risk” and Investors on-the-Ground
Important data point:
Fewer than half of firms in almost all transition countries surveyed in 2002 believed that courts were able to enforce their decisions.
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Investors on the Ground Alternative hypotheses - investing despite a
poorly functioning legal system:
(1) Investors are not aware of the potential damage that an inefficient or unpredictable legal system can cause to their investment
(2) Legal systems that deviate from the
“ideal” may nonetheless offer efficiency and/or predictability
(3) Investors are aware of potential damage, but view legal system as modest factor in risk assessment
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What Comes First?
Order, Stability and Economic Growth
How much security is needed?
Level of “legal security” needed is variable. And how you achieve security varies (e.g., cell phone towers in Afghanistan)
Level of sunk cost: power generating plant vs. stitching factory
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What Comes First?
ROL Institution-Building + (the Politics of Scarcity or Economic Growth)
(1)Karl Marx, Adam Smith: demand for law and legal institutions as economies grow
(2) Palestine – meeting in 2004 • GDP: $1423 in 1999, $925 in 2003• Poverty increased 20% during this four
year period to 47% (64% in Gaza)04/19/23 37
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Successful Programs at a National Level Internalized Agenda
Country *GDP/PC/PPP 2011
Singapore ($61,103)
Korea ($30,206)
Hungary ($21,738)
Poland ($21,281)
Chile ($17,125)Costa Rica ($12,236)
Indonesia ($4,668) ???$8,000-28,000 GDP/PC/PPP at reform tipping points in
roughly early 1990s, except Costa Rica (approx. $6,000)*World Bank 2012 at http://data.worldbank.org/indicator/
Conclusion
Bumper Sticker: “It’s Complicated”
On-again-off-again connections
The relationship of law to economy is part of the “messy phenomenon” of life where
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