Transcript Legal rules

« Economic Consequences of
Legal Origins », La Porta, Lopezde-Silanes, Shleifer, (2008)
LLSV (1997-98)
and further Contributions
1) Legal rules of investor protection can be measured and coded across countries
using national commercial (primarily corporate and bankruptcy) laws.
•
•
Coding showed some countries offer stronger investor protections than others.
Countries with more protective laws have more developed capital markets
2) Legal rules protecting investors vary systematically among legal traditions
(LOs):
•
Laws of common law countries are more protective of outside investors than the laws of
civil law, and particularly French civil law countries.
3) Civil law shows a heavier hand of government ownership and regulation
•
LO predicts government ownership of banks (LLS 2002), burden of entry regulations
(DLLS 2002), regulations of labor markets (BLLS 2004), incidence of military
conscription (MS 2005a,b), and government media ownership (Djankov et al. 2003c).

•
These indicators are associated with adverse impacts on markets, such as greater corruption,
larger unofficial economy, and higher unemployment.
Common law is associated with lower formalism of judicial procedures (DLLS 2003b)
and greater judicial independence (LLSP 2004) than civil law.

These indicators are associated with better contract enforcement and greater security of
property rights.
Background on Legal Origins
•
McNeill/McNeill (2003) show how information transmission shapes human
societies:
–
–
–
•
Information (i.e., technology, language, religion, sports, law and legal systems) is
transmitted through trade, conquest, colonization, missionary work, migration, etc..
Some information are transplanted voluntarily, as when people adopt technologies they
need  difficult to study consequences since it may be endogenous.
In other cases, transplantation is involuntary, as in forced religious conversion, conquest,
or colonization  easier to identify the consequences.
Legal origins or traditions present a key example of such often involuntary
transmission of different bundles of information across human populations (Watson
1974).
–
–
–
Transplantation covers specific laws and codes, individuals with mother-country training
and human capital, general approaches/ideologies of the legal system, and elements of
the organization of the judiciary.
Of course, national laws evolved/adapted to local cultural, religious, and economic
conditions, so the legal and regulatory systems of no two countries are identical.
But individualization was not complete, so basic transplanted elements have persisted
allowing classification into legal families (David/Brierley 1985, Reynolds/Flores 1989)
Legal Origins
= English
= French
= German
= Scandinavian
= Socialist
The distribution of Legal Origin
Legal Origin, Institutions, and Outcomes
Institution
Procedural Formalism
Outcomes
Time to evict nonpaying te
Time to collect a bounced
Judicial Independence
Property rights
Regulation of Entry
Corruption
Unofficial economy
Government Ownership
of the media
Legal Origin
Labor Laws
Participation Rates
Unemployment
Conscription
Company Law
Securities Law
Stock market developme
Firm valuation
Ownership structure
Control premium
Bankruptcy Law
Private credit
Government Ownership
of Banks
Interest rate spread
Table I: Financial Institutions and Capital
Markets Development
(Bar Graph of Negative dummies of Legal Origins
in Panel A)
(Under construction!!!)
Financial Institutions and Capital Markets Development:
Size and Breath of Stock Markets
Financial Institutions and Capital Markets Development:
Private Credit and Interest Rate Spreads
Table I: Financial Institutions and Capital
Markets Development
(Bar Graph of Negative dummies of Legal Origins
in Panel A)
(Under construction!!!)
Government Regulation
Corruption and Unofficial Economy
Government Regulation
and Labor Market Outcomes
Table III: Judicial Institutions
(Bar Graph of Negative dummies of Legal
Origins in Panel A)
(Under construction!!!)
Judicial Institutions
Court Efficiency and Contract Enforcement
Summary of the evidence so far
• The economic consequences of Legal Origins are pervasive
• Compared to the French civil law, common law is associated
with:
1) Better investor protection  which in turn is associated with
improved financial development, better access to finance, and
higher ownership dispersion,
2) Lighter government ownership and regulation  which are in turn
associated with less corruption, better functioning labor markets,
and smaller unofficial economies, and
3) Less formalized and more independent judicial systems  which
are in turn associated with more secure property rights and better
contract enforcement.
• Most important aspect of the results is how pervasive is the
influence of LOs.
Pervasive influence of LOs
and the Legal Origin Theory
•
Assuming this evidence is correct, it raises an enormous challenge of interpretation:

•
Following comparative legal scholars, we adopt a broad conception of LO as a style of
social control of economic life:
•
•
•
What is the meaning of LO? How can it account for all these correlations?
“Civil law is “policy implementing”, common law is “dispute resolving” (Damaska 1986).
French civil law embraces “socially-conditioned private contracting,” in contrast to common law’s support for
“unconditioned private contracting” (Pistor 2006).
Zweigert/Kotz characterize legal families not only by the purely judicial institutions (i.e.,
legal procedures, forms of legal change, patterns of judicial recruitment), but also by
the broader attitude, philosophy, or ideology:
“The style of a legal system may be marked by an ideology, that is, a religious or political conception of how
economic or social life should be organized” (p. 72).
•
Legal OriginsTheory adopts this broader conception:
•
•
Legal families are expressions of fundamental approaches to solving social problems
LOs reflect social attitudes and ideology that lead to large investments not only on legal
infrastructure, but also on human capital educating politicians, judges, lawyers, etc..
These investments are not irreversible, but are costly to reverse.
•
This view explains why when faced with a problem, LOs address them in their own style.
Three Implications of the Historical Analysis
for the Economic Consequences of LOs
1. Common law’s built-in Judicial Independence, specially for cases of
administrative acts affecting individuals  more respectful of private
property and contracts (LLPS 2004)
2. Common Law’s emphasis on Judicial Resolution of Private Disputes
(vs. legislation) as a solution to social problems  greater emphasis on
private contracts & orderings, less on government regulation.
–
–
–
Its regulation aims to facilitate private contracting rather than to direct
particular outcomes.
Pistor (2006): French LO embraces socially-conditioned private contracting.
Damaska (1986): civil law is “policy-implementing;” common law is “dispute
resolving.”
3. Common Law’s Adaptability benefits:
–
–
Greater respect for jurisprudence as a source of law suggests they will be
more adaptable to changing circumstances (Hayek 1960, Levine 2005).
Through sequential decisions by appellate courts, it evolves for the better and
toward more efficient legal rules (Posner 1973, Rubin 1977, Priest 1977).
The Historical Narratives and
the Interpretation of evidence
1) Evidence on judicial independence is a direct confirmation of the historical
account:
•
•
Common law has less formalized contract enforcement, longer constitutional
tenure of Supreme Court judges and greater recognition of case law as a source
of law.
These characteristics are predictors of the efficiency of contract enforcement –
measured both objectively and subjectively – and of the security of property
rights.
2) Evidence on government regulation: consistent with styles for addressing
social problems:
•
•
Civil law: more likely through government ownership and mandates
Common law: more likely to do so through private contract and litigation.

Common law’s regulation supports private contracting vs. dictates outcomes.
3) Evidence on finance is also consistent:
•
•
Better shareholder & creditor protection in common law than in French civil law is
consistent with the historical narrative of the greater security of private property.
Common law may have advantage in financial markets because they change
quickly, i.e., the adaptability of judge-made law, as in Delaware courts (Beck et al,
2003).
Legal Origins Theory:
Why so much Hysterisis?
•
How has the influence of LOs persisted over decades or centuries?
•
•
•
What did the British boats bring so different from what the French or the
Spaniards brought?
If all transplanted were attitudes toward social control, the effects would not
be so persistent.
So, what got transplanted were laws and attitudes that require
investments to provide the mechanisms to address social problems in a
society.
 These attitudes have persisted due to the vast investments required in
writing laws and educating and training people in them.
•
The legal system provides a style, and it is that system (as defined by
Zweigert/Kotz), with its codes, distinctive institutions, modes of thought
and even ideologies, that is very slow to change.
 It is not irreversible, but it would require large investments to be destroyed.
•
Legal Origins Theory:
Why so much Hysterisis? (2)
When private orderings get into a crisis, the civil law approach is to repress it or
replace it with state mandates, while the common law is to shore up markets:
•
•


Civil law countries: bank nationalization, and suppression of stock markets.
US: introduction of securities and banking regulation, and deposit insurance.
Civil law tends to expand government control when a need arises:
•
•
•
Example: Response to the Great Depression and financial crises of the 20th c:
Example: Napoleon’s expansion of military conscription, made possible by the existing
presence of bureaucracy that could administer the draft (MS 2005b).
State’s presence is less pervasive in common law, so it relies less on administrative
solutions, and more on “market-supporting” or “dispute-resolving” ones.
Civil law tends to expand public involvement in new spheres:
•
•
Some historians argue that since LOs have differed for centuries, we should observe
equal differences in rules and regulations in the 19th c.  This is not true:
Public intervention in markets changes over time and responds to social needs or
political imperatives, so laws and regulations will change as well, but in ways consistent
with national legal traditions:
•
Labor laws and securities laws are 20th-c. laws responding to social needs. Yet, they took
different forms in countries from different legal traditions.
Legal Origin and Culture
•
•
•
Stulz and Williamson (2003) suggest that, in light of the hostility of some of the
religious traditions to lending on interest, religion may be a more fundamental
determinant of legal rules governing creditor protection than LO.
Licht et al. (2005) present a more sweeping theoretical and empirical case for
culture, using broad psychological measures of cultural attitudes.
However:
•
•
Religion is not as important a determinant of creditor rights as LO.
Most indices of cultural attitudes do not influence creditor rights holding LO
constant:
•
•
•
•
A nation’s masculinity is not conducive to creditor protection, while belief in the
independence of children is,
But neither of these makes a big dent in the effect of LO on creditor rights.
LLSV do not propose that culture is unimportant. But the effects of LOs
remain large.
The notion of culture LLSV consider focus on religion and broad social
attitudes. One can alternatively include in culture beliefs about the law,
regulation, and the role of the state. This theory of culture would then be
broadly consistent with the view of LLSV.
Creditor Rights, Culture and Legal Origin:
Percentage of Catholic Population
Creditor Rights, Culture and Legal Origin:
Percentage of People that say Strangers can be Trusted
Legal Origins and Politics
•
Politics presents a broader challenge to the explanatory power of LO:
•
•
Hellwig (2000), Rajan and Zingales (2003), Pagano and Volpin (2005, 2006), Perotti
and von Thadden (2006), Roe (2006), and Mueller and Philippon (2006).
They mostly deal with Western Europe or the Wealthy West.
Political theories:
• Sometime in mid 20th c. Continental European countries formed alliances
between families that controlled firms and (typically organized) labor.
• The alliances were: (1) a response to crises from hyperinflation, depression, or
defeat in war; (2) sought to win elections and secure insiders’ economic rents
away from the “outsiders,” such as unorganized labor, minority shareholders,
corporate challengers, or potential entrants.
• When these alliances won elections, they wrote legal rules to benefit
themselves:
•
•
•
Families got poor protection of outside shareholders  keep control benefits
Labor got social security & worker protection laws keep employment & wages.
Families and labor got the laws protecting them against product market competition.
Legal Origins and Politics (2)
•
Continental Europe vs the US in the 20th c.:
•
•
•
•
•
The political story is part of a broader narrative of Continental European
history in the 20th c., in which the response to crisis is characterized by the
rise of proportional representation (Alesina & Glaeser 2004, Persson &
Tabellini 2003), socialist politics (Alesina & Glaeser 2004), and social
democracy (Roe 2000).
The US was spared from these events, so it did not get the laws adopted
on the Continent.
The legal rules observed in the data, are thus outcomes of this
democratic process, and not of “permanent” conditions, such as LOs.
If politics were appropriately controlled for in the regressions, LO would
not matter.
Some implications of political theories are plausible and broadly
consistent with the evidence:
1. Countries with strong shareholder protections have weak protections of
labor and low regulations of entry.
2. We see social democracies in Continental Europe but not in the US.
Legal Origins and Politics:
An analysis of the Political Theory
•
What is the evidence when political variables are added to the
regressions?
•
Regressions of legal and institutional rules on 3 variables of the political
theories:
•
•
•
•
Proportional representation = Form of democracy seen as an adaptation
to political demands of labor in the early 20thc.  Only for democracies!
% years in 1928-95 when chief executive and largest party in legislature
were leftist or centrist.
Union density = % total work force affiliated to labor unions in 1997.
Results:
•
•
•
Political variables explain the variation in legal rules only occasionally.
LOs continue to explain the variation even with political variables in, and
the difference between common law and French civil law remains highly
statistically significant.
Each political variable is surely measured with error, and specifications
may not capture the full subtlety of the political theories, but political
variables are rarely significant in contrast with LOs.
Politics and Legal Origin
Legal Origins and Politics:
An analysis of the Political Theory (2)
• Does the democratic process lead to the observed legal
rules?
•
•
This is a key implication of all the political models: it predicts that
the relationship between LOs and laws should not hold outside
democracies.
But under legal theories, LO should predict legal rules in both
autocracies and democracies.
• Note of caution:
•
•
•
It is NOT the conclusion of LLSV, nor their belief, that politics do not
matter for corporate governance, government regulation, or the
structure of the judiciary.
The critics offered a different hypothesis, namely that LO is just a
stand-in for politics.
For this hypothesis, there is no support.
Table IX: Legal origin in countries with Autocratic
governments
(5 graphs of the negative dummies of Legal
Origins in the various groups of variables)
Under Construction !!!!
French Legal Origin
French Legal Origin
German Legal Origin
German Legal Origin
Ln(GDP per capita)
Ln(GDP per capita)
Constant
Constant
Observations
Observations
R-squared
R-squared
(1)
(1)
Anti-SelfAnti-SelfDealing
Dealinga
-0.3421
-0.3421a
[0.0792]
[0.0792]
-0.2508
-0.2508
[0.1487]
[0.1487]
0.1074b
0.1074b
[0.0445]
[0.0445]
-0.2647
-0.2647
[0.3658]
[0.3658]
37
37
0.36
0.36
(2)
(2) in
Disclosure
Disclosure
Prospectusin
Prospectus
-0.3642a
-0.3642a
[0.0858]
[0.0858]
-0.1145c
-0.1145c
[0.0639]
b
[0.0639]
0.0907
0.0907b
[0.0401]
[0.0401]
-0.0156
-0.0156
[0.3398]
[0.3398]
26
26
0.46
0.46
(3)
(3)
Creditor Rights
Creditor Rights
-1.1816a
-1.1816a
[0.2685]
[0.2685]
-0.7960b
-0.7960b
[0.3729]
b
[0.3729]
0.2571
0.2571b
[0.0989]
[0.0989]
0.3189
0.3189
[0.8444]
[0.8444]
78
78
0.22
0.22
(4)
(4)
Debt
Debt
Enforcement
Enforcement
-14.3174b
b
-14.3174
[6.6720]
[6.6720]
-3.4763
-3.4763
[7.9660]
[7.9660]
21.8679a
21.8679a
[4.3514]
[4.3514]a
-141.9287
a
-141.9287
[39.5086]
[39.5086]
39
39
0.51
0.51
(5)
(5)
Govt Ownership
GovtBanks
Ownership
Banksb
0.2822
0.2822b
[0.1172]
[0.1172]
0.3852b
0.3852b
[0.1514]
[0.1514]
-0.1259c
-0.1259c
[0.0657]
a
[0.0657]
1.2749
1.2749a
[0.4261]
[0.4261]
47
47
0.18
0.18
(6)
(6)
Ln(Steps)
Ln(Steps)
0.4438a
0.4438a
[0.0925]
[0.0925]
0.0936
0.0936
[0.1618]
[0.1618]
-0.1023b
-0.1023b
[0.0392]
a
[0.0392]
2.8843
2.8843a
[0.3254]
[0.3254]
47
47
0.32
0.32
(7)
(7)
Labor laws
Labor laws
0.2040a
0.2040a
[0.0464]
[0.0464]
0.1333b
0.1333b
[0.0559]
[0.0559]
0.0011
0.0011
[0.0257]
[0.0257]
0.3142
0.3142
[0.2157]
[0.2157]
46
46
0.28
0.28
Table IX: Legal origin in countries with Autocratic
governments
(5 graphs of the negative dummies of Legal
Origins in the various groups of variables)
Under Construction !!!!
(1)
Anti-SelfDealing
-0.3421a
[0.0792]
-0.2508
[0.1487]
(2)
Disclosure in
Prospectus
-0.3642a
[0.0858]
-0.1145c
[0.0639]
Ln(GDP per capita)
0.1074b
[0.0445]
Constant
-0.2647
[0.3658]
37
0.36
French Legal Origin
German Legal Origin
Observations
R-squared
(3)
-1.1816a
[0.2685]
-0.7960b
[0.3729]
(4)
Debt
Enforcement
-14.3174b
[6.6720]
-3.4763
[7.9660]
(5)
Govt Ownership
Banks
0.2822b
[0.1172]
0.3852b
[0.1514]
0.0907b
[0.0401]
0.2571b
[0.0989]
21.8679a
[4.3514]
-0.0156
[0.3398]
26
0.46
0.3189
[0.8444]
78
0.22
-141.9287a
[39.5086]
39
0.51
Creditor Rights
(6)
(7)
Ln(Steps)
Labor laws
0.4438a
[0.0925]
0.0936
[0.1618]
0.2040a
[0.0464]
0.1333b
[0.0559]
-0.1259c
[0.0657]
-0.1023b
[0.0392]
0.0011
[0.0257]
1.2749a
[0.4261]
47
0.18
2.8843a
[0.3254]
47
0.32
0.3142
[0.2157]
46
0.28
•
Legal Origins and Historical
Arguments
Suggests the correlation between common law and finance is a 20thc.
phenomenon:
•
•
•
If we look at data in the early 20thc the correlation does not exist. Since LOs
predate the 20thc, they cannot account for the differences in financial development.
Rajan & Zingales (2003) is the starting critique. Using individual country sources,
they show stock market capitalization to GDP as of 1913 for 6 common law and 18
civil law countries (10 French).
Focused on finance  But an alternative theory must address all the evidence!
• The Historical Argument has two component parts:
1) In 1913, French civil law countries had more developed financial markets than
common law countries:
•
RZ’s 1913 sample: 5 common law countries had average stock market to GDP of
53%, compared to 66% for the 10 French civil law countries.
2) Correlation of common law and financial development emerges over the 20thc,
inconsistent with LLSV:
•
In the “Great Reversal,” the initial (1913) French LO superiority disappears with
MarketCap/GDP ratios of 130% and 74% in 1999 for common law and French civil
law countries (RZ 2003).
Stock market capitalization over GDP
(based on Rajan and Zingales, 2003)
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1913
1923
1933
1943
1953
1963
1973
1983
English Legal Origin
French Legal Origin
German Legal Origin
Scandinavian Legal Origin
1993
Legal Origins and Historical
Arguments (2)
1) Measurement Problems in Several Countries:
• The relevant measure to test LOs’ influence is a country’s capitalization of equities listed
on that country’s stock exchange(s) whose shareholders are subject to the country’s
legal protection.
• RZ undertook to find such numbers, but doing so for early 20thc is difficult because:
1.
2.
Many securities trading were bonds rather than stocks, and many were government bonds.
Many firms listed were incorporated or had primary listings, in Europe/U.S.
 So, for a given country, these factors may lead to an overestimate of market value of
stocks subject to national shareholder protection laws. For example:
A) Cuba: RZ’s most financially developed country in 1913 [MktCap/GDP = 219%].
•
•
The largest company with listed stock was Havana Electric (incorporated in New Jersey)
If one excludes bonds and looks only at stocks, the Cuba ratio falls to 33% and the French
civil law average goes from 66% to 47% (i.e., below their common law average).
B) Egypt: RZ’s second most financially developed country in 1913 [MktCap/GDP
=109%].
•
•
It appears it includes debt (Tignor, 1984). Largest firms incorporated/listed in UK or France.
We estimate a correct observation for Egypt of at most 40%
C) Rich countries:
•
•
France: RZ estimate 78%, but a recent estimate by Bozio (2002) puts it at 54%.
US:
RZ has 39%, but Sylla (2006) proposes the 95% from Goldsmith (1985).
Legal Origins and Historical
Arguments (3)
2) Compare the two mother countries: England and France.
•
•
•
RZ recognize that England was more financially developed than France in early 20 th c.
Standard narratives see Paris as a financial backwater (Kindleberger 1984).
A formal comparison is possible using France, from Bozio (2002), and UK, from Michie (1999),
and adjusting to exclude corporate bonds using Goldsmith (1985).
3) Common and civil law countries in 1913 based on Goldsmith (1985):
•
•
•
Consistent with Kindleberger, Britain is ahead of France as far back as the middle of the 19 th c.,
and perhaps even earlier. So, interestingly, is the United States.
Using US 1912 data, Goldsmith has 4 common law and 7 civil law countries. Even with India
pulling way down the common law average and no underdeveloped civil law country in 1913’s
sample:
Common law = 88%; French LO (France & Belgium) = 77%; Overall Civil law = 69%.
Goldsmith’s data has its own problems. But it independently confirms that the relative financial
underdevelopment of common law in early 20th c. is a myth.
Conclusion:
• Contrary to RZ (2003), common law countries appear to be more financially developed
than civil law ones at the start of the 20th c, and in particular Britain is ahead of France.
• Over the 20th c the differences have widened, which needs to be explained.
• The alleged Great Reversal that animated political and historical writings did not really
happen.
Stock market capitalization over GDP
France and Great Britain
% 160
140
120
100
80
60
40
20
France
Great Britain
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
1870
1860
1850
1840
1830
1820
1810
1800
0
Table XI: Stock market capitalization over GDP (Goldsmith 1985)
(1)
Year
1805
1815
1830
1850
1860
1861
1875
1880
1881
1885
1895
1899
1900
1912
1913
1914
1927
1929
1930
1937
1938
1939
1940
1947
1948
1950
1951
1953
1955
1956
1957
1960
1962
1963
1965
1966
1969
1970
1972
1973
1975
1976
1977
1978
Belgium
(2)
(3)
French Legal Origin
France
Italy
(4)
Mexico
(5)
(6)
(7)
German Legal Origin
Japan
Germany Switzerland
(8)
(9)
(10)
Scandinavian Legal Origin
Denmark
Norway
Sweden
(11)
(12)
Australia
Canada
(13)
(14)
(15)
English Legal Origin
Great Britain
India
Israel
(16)
(17)
South Africa
USA
7
14
69
12
23
6
1
11
64
2
17
38
80
63
54
14
7
4
58
11
156
26
3
26
32
88
65
41
82
74
37
123
88
29
137
126
71
95
121
40
5
130
9
85
6
154
69
23
3
25
75
193
46
182
2
17
149
139
66
33
14
28
47
105
118
61
32
44
107
25
110
39
12
13
58
5.67
19
11
59
24
113
47
51
111
37
31
137
14
37
5.59
57
24
43
30
46
116
33
48
9
46
83
6.30
108
124
85
83
37
57
33
15
29
63
20
27
28
25
7
92
30
26
44
36
65
12
17
0.5
39
10
39
53
21
24
102
27
5
21
76
41
Legal Origins and Historical Arguments: (2)
Britain at the start of the 20th c.
•
Argument:
•
•
•
Counter-argument: That British shareholders were utterly unprotected is controversial:
•
•
•
•
•
Britain had a reasonably developed stock market in early 20th c, with beginnings of ownership
dispersion, but that this had nothing to do with the law (Cheffins 2001, Franks et al. 2005).
Based on LLSV index and legal rulings, they see UK shareholders only weakly protected. So,
English financial development is due to the bonding role of financial intermediaries and trust.
Britain led the world in securities regulation in general, and corporate disclosure in particular (Coffee
2001, Gower 1954, and Sylla and Smith 1995).
Britain passed Directors Liability Act in 1890, and Companies Act in 1900, mandating significant
prospectus disclosure, and holding directors accountable for inaccuracies.
Legislation in early 20th c mandated on-going financial disclosure, and addressed some abuses in the
new issues market Coffee (2001).
Britain also had perhaps the best commercial courts in the world, with most professional and least
corrupt judges, with centuries of precedent and experience at dealing with fraud.
Bottom line:
•
•
•
Standstill: British shareholder protection glass was half empty or half full.
Frustration: Except for some US vs Britain points, the literature is NOT comparative. We know little
of how the British shareholders were protected compared to French and German ones.
To rescue: Shareholder rights have improved enormously in Britain in the 20th c, parallel to its
markets’ growth. Explaining this parallel growth is a challenge to legal and historical accounts.
Legal Origins and Historical Arguments: (3) World
War II Destruction
•
Argument: Roe (2006)
•
•
•
Poor economic performance, particularly associated with the destruction of capital
stocks in World War II, radicalized continental European politics, leading to legal rules
hostile to financial markets and favorable to labor.
As a test, Roe regresses modern ownership concentration on GDP growth between
1913 and 1945 for 27 countries. He finds countries with worse economic growth have
higher ownership concentration.
Comments:
1.
Results fall apart under just about any perturbation:
(i)
(ii)
using a broader sample of countries;
using alternative measures of financial development (e.g. stock market capitalization, block
premium, or private credit); or
(iii) if we look at other predictions of his theory.
2.
3.
Prediction on ownership concentration:
•
•
•
No scientific reason to selectively throw out data, so we rerun Roe with available sample.
Result: Roe’s correlation disappears (Figure V).
Not surprising: many developing countries have stayed out of World War II, yet have remained
financially underdeveloped.
Prediction that World War II devastation leads to pro-labor laws:
•
Figure VI shows this is not true in a broader sample.
USA
.4
Figure V: Ownership concentration and GDP
growth 1913-1945
.6
24 observations
observations w/data
.2
AUS
SWE
IRL
GBR
CAN
FRA
NZL
IRL
NLD
IND
0
CHE
KOR
JPN
BEL
AUT
ITA
TUR
LKA
DNK AUS
MEX
SWE
PRT
MEX
coef = .18698655, (robust) se = .08753752, t = 2.14
COL
URY
ARG
-.5
0
.5
1
GDP growth 1913-1945
PER
BRA
-.4
ESP
VEN
GRC
-.2
AUTFRA
GRC
ITA
NOR
FIN
CAN
CHE
DNK
CHL
DEU NZL
ESPPRT
ARG
BEL
FIN
NOR
NLD DEU
-1
USA
KOR
-.2
% not owned by 3 largest shareholders
0
.2
.4
JPN
TWN
GBR
34
1.5
-2
0
2
4
GDP growth 1913-1945
coef = -.00529849, (robust) se = .01612937, t = -.33
6
Figure VI: Labor laws and GDP growth 1913-1945
(sample of 24 observations)
Controlling for Common Law
PRT
.2
.4
Univariate regression
FRA
PRT
ESP
SWE
FIN
NLD
DEU
.2
FRA
ESP
NLD
SWE
FIN
DEU
NOR
AUS
IRL
ITA
NOR
GBR
Index of labor laws
0
ITA
MEX
CAN
DNK
AUT
GRC BEL
USA
AUT
NZL
KOR
CHE
KOR
GRC BEL
AUS ARG
ARG
-.2
IRL
CHE
-.2
0
MEX
DNK
GBR
CAN
USA
-.4
NZL
-.4
JPN
JPN
-1
-.5
0
.5
1
GDP growth 1913-1945
1.5
coef = -.09302556, (robust) se = .05266563, t = -1.77
-1.5
-1
-.5
0
.5
GDP growth 1913-1945
coef = -.0185974, (robust) se = .04088877, t = -.45
1
.4
Figure VII: Labor laws and GDP growth 1913-1945
(sample of 34 observations, univariate regression)
PRT
.2
ESP
FRA
NLD
DEU
SWE
FIN
NOR
VEN
ITA
MEX
DNK
0
GRC
AUT BEL
LKA
KOR
IND
TUR
CHL
TWN
CHE
AUS
ARG
IRL
-.2
BRA
PER
COL
GBR URY
CAN
USA
NZL
-.4
JPN
-2
0
2
GDP growth 1913-1945
coef = -.00750986, (robust) se = .02814714, t = -.27
4
6
Legal Origins and Historical Arguments: (4)
The 20th century Divergence
•
We see no evidence for the reversal of financial development
rankings in the 20th century between common and civil law countries
•
But the historical research yields two important findings to explain:
1) Common law countries have moved ahead of civil law ones in the 20th c
(RZ (2003) Figure III).
2) Unambiguously, investor protection has sharply improved in common law
countries over the 20th c (Coffee 1999, Cheffins 2001, Franks et al.
2005).
•
The 20th c was a period of explosive world economic growth, including
of the wealthiest countries:
•
•
Growth relied largely on outside capital and was far from smooth (i.e.,
World Wars, Great Depression, economic and financial crises).
Countries that grew successfully found their own way to deliver capital to
firms and survive the crises:
 For some, success involved massive state involvement in finance and
development.
 For others, success relied to a much greater extent on shoring up markets.
Legal Origins and Historical Arguments: (4) The
Synthetic account and Divergence
•
In the middle of the 20th c:
•
•
•
•
In the second half of the century, the world became a good deal more peaceful and
orderly:
•
•
•
Civil law countries relied heavily on state supply of finance, bank nationalization, and
state investment companies to promote economic growth and resolve crises. The
standard civil law solutions to addressing social problems, going back at least to
Napoleon.
Common law countries, particularly US and UK, shored up markets relying more heavily
on market-supporting regulations (i.e., securities laws, deposit insurance, court-led
improvements in corporate law). The standard common law solution to social problems.
The differences were not absolute, with many nationalizations in common law countries
and many market-supporting reforms in civil law ones. But they were still pronounced
(i.e., LLS (2002)’s data on government ownership of banks).
Market-supporting solutions of common law, whether in the form of judicial decisions or
regulations, worked better than the policy-implementing solutions of civil law.
As a consequence of their 20th c legal and regulatory evolution, common law countries
ended up with better investor protections and their financial markets ran away from the
civil law ones.
Looking back over the 20th c, we see the basic differences in the legal traditions
and regulatory strategies playing out in how both the laws and the markets evolve.
Blueprint of Policy Reform:
Measurement ahead of Policy
•
This research sheds light on the nature of good reforms, and on the
specific policy levers.
•
•
•
Helps understand why so many developing countries end up with
inefficiently high levels of regulation, especially in the civil law world.
Even in the developed countries, the high levels of regulation of many
activities (labor markets and entry) were probably adopted in a less orderly
environment, or for reasons of consistency or habit, and as such are
excessive for modern markets.
In finance, institutions that replaced markets must now be replaced by those
that sustain them.
•
•
•
Developing countries: mismatch between institutions and needs is even greater.
The heavy-handed regulatory policy that might work tolerably well in continental
Europe translates into over-regulation, corruption, and suppression of
entrepreneurship in the developing world.
Note: even when the measured rules are not the entire problem, and
thoughtless formalistic reforms likely to fail, these rules can provide
relevant data and point closer where the problem actually lies.
Blueprint of Policy Reform:
Measurement ahead of Policy (2)
•
Recent sketchy evidence is broadly consistent with the optimistic view that in some
circumstances the laws we measure are the reason for inefficient outcomes:
1) Reductions of entry regulations:
•
•
55 countries lowered administrative costs to start a business in 2005-2006 (DB 2006).
Russia: beneficial effects of firm entry after reforms (Yakovlev/Zhuravskaya 2007)
2) Mixed picture for labor markets:
•
•
Labor markets were liberalized in the OECD in the last 15 years, although most reforms
pertained to temporary rather than permanent employment (OECD 2006).
No tendency for liberalization in Latin America in the 1990s (Heckman/Pages 2004).
3) Investor protection:
•
•
•
•
Improvements in shareholder rights in OECD during the 1990s (Pagano/Volpin 2005).
Tendency toward improving shareholder rights in the EU (Enriques/Volpin (2007)
•
Emerging markets: some examples of improvement, such as Mexican securities laws
(Chong/Lopez-de-Silanes 2008) and bankruptcy reform (Gamboa/Schneider 2007).
 Although too little to resolve the problem of related-party transactions.
Much of the evidence is circumstantial, and confined to the developed world.
But if the world remains peaceful and orderly, the attraction of market-friendly
reforms will increase.
Conclusions
•
This research has evolved a great deal in the last 10 years:
•
Nonetheless, the fundamental LLS contribution appears to be standing:
•
•
•
LOs have significant consequences for the institutional framework of the
society, and for economic outcomes.
The range of legal, economic, and social spheres where legal origins have
consequences has broadened.
Four propositions appear to be correct:
1) Legal rules differ systematically across countries, and these differences
can be measured and quantified.
2) Differences in legal rules are significantly accounted for by the differences
in LO.
3) Historical divergence in legal traditions (i.e., policy-implementing focus of
civil law versus dispute-resolving focus of common law – explains why
legal rules differ.
4) The measured differences in legal rules matter for economic and social
outcomes.
•
The outlines of a coherent theory have become clearer but not all the
empirical issues have been settled, or that the LO theory will survive
further scrutiny.