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ESNIE European School on
New Institutional Economics
Institut d’Etudes Scientifiques
de Cargèse
21 May 2008
Hans-Bernd Schäfer
Rule of Law and Economic
Growth
GDP Growth in Relation to the Rule of Law
World Bank, World Development Indicators (2006)
R2 = 0,0095
Average per capita GDP
growth 1995-2004
12
10
8
6
4
2
0
-2 -2
-1
0
-4
Rule of Law Index 1996
1
2
Law and the Poverty of Nations
Capital accumulation explains 30-35% of per capita
growth Barro (1997), Hall/Jones 1999), Easterly
(2001), Acemoglu/Johnson et. al (2003)
Factor mobilisation explains growth in few countries
Investment in human capital explains little of growth
Good institutions which protect property rights and
contracts are crucial for growth
(Rodrick/Subramanian/Trebbi 2004)
Glaeser/Laporta/Silanes 2004)
“Countries with corrupt government officials,
severe impediments to trade, poor contract
enforcement, and government interference in
production will be unable to achieve levels of
output per worker anywhere near the norms of
western Europe, Northern America, and Eastern
Asia”.
Hall/Jones 1999 „QJE
Fig. Gross national savings (% of GNI) 1970-2003
World Development Indicators 2005
30
25
20
15
10
5
0
Middle income
Low income
High income OECD
Capital Stock per Capita vs.Capital Output Ratio
1980ies (Data from King/Levine 1994)
129 Countries
5
4
Capital Output Ratio
4
3
3
2
2
1
1
0
0
10000
20000
30000
40000
Capital Stock per Capita
50000
60000
Capital Output Ratio, Algeria, Tunesia, UK
(1960-1988) Data from King/Levine (1994)
Capital Output Ratio
3,5
3
Algeria
2,5
2
UK
1,5
1
Tunesia
0,5
0
1
3
5 7
9 11 13 15 17 19 21 23 25 27 29
Year (1960=1)
Growth in Rich and in Poor
Countries 1993-2003
GDP per capita growth (annual %)
6
5
4
3
2
1
0
-1
High income
Low & middle income
State Led Growth
Nationalization of key industries
including banks and insurance
companies
Price distortions
Import Substitution
Planning, Industrial Policy
“The most important change in state policies in
underdeveloped countries is the common
understanding that they should each and all have
a national economic development policy…Indeed it
is also universally urged that each of them should
have an overall, integrated national plan. All
underdeveloped countries are now attempting to
provide themselves with such a plan, except a few
that have not yet been reached by the Great
Awakening.
Gunnar Myrdal 1957
Washington Consensus (around
1980)
• Liberalization
• Privatization
• Free international trade, free international
capital movements
• Macroeconomic stabilization (low inflation)
• (J. Williamson 1993)
Accumulated Growth of Per Capita GDP in Per
Cent in Selected Countries from 1993 to 2003
Low Growth
High Growth
Argentina
-3,5
Albania
122,3
Brazil
6,5
Botswana
38,1
Congo, Rep.of
-32,5
Chile
38,9
Cote DÕIvoir
-3,2
China
133,2
Ecuador
-2,6
Cyprus
45,2
Gabon
3,6
Finland
41,6
Honduras
-1,3
Hungary
36,4
Nicaragua
4,6
India
55,4
Niger
-4,2
Ireland
97,8
Papua New Guinea
0,5
Korea, Rep. of
54,4
Paraguay
-9,9
Malays ia
46,6
Sierra Leone
-21,6
Poland
50,3
Uganda
-11,8
Slovenia
45,1
Ukraine
-11,8
Taiwan
46,9
Zimbabwe
-20,7
Source: Ca lculated fr om Penn World Ta bles 6.2 , 2000
GDP per capita (US$)
GDP per Capita in Eastern Europe (population
weighted averages)
6000
5000
4000
8 new EU
members in 2004
3000
2000
12 non-EU postSoviet countries
1000
0
3.000
2.500
Russian
Federation
2.000
1.500
2003
2001
1999
1997
1995
1993
1991
1.000
1989
GDP per capita (constant
2000 US$)
Shock Therapy in Russia
Year
Source: Word Development Indicators 2006
GDP in Central European Countries 1990-2004
(World Development Indicators 2006)
6.000
Czech Republic
5.000
Hungary
4.000
Poland
3.000
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
2.000
19
US Dollars (2000)
7.000
4.000
3.500
3.000
Latin America
& Caribbean
2.500
2001
1997
1993
1989
1985
1981
1977
1973
1969
2.000
1965
GDP per capita
(constant 2000 US$)
Stagnation in Latin America
Year
Source: Word Development Indicators 2006
A shift from import substitution policy to free
international trade implies a decline of import
substituting industries and intends rapid growth of
export-oriented industries. If however capital
markets are imperfect and intellectual property
rights are not protected, expanding becomes
difficult. In many Latin American countries
“numerous small and middle enterprises have
been forced to close down, in many cases not as a
result of their long-term inefficiency, but as a
consequence of imperfect factor markets which
precluded their access to long-term finance,
engineering and managerial know-how[1]”.
[1] J. Katz (2000),
14.000
10.000
8.000
Argentina
6.000
Brazil
4.000
Chile
2.000
Mexico
0
19
50
19
56
19
62
19
68
19
74
19
80
19
86
19
92
19
98
20
04
Real GDP per capita
12.000
Year
180
160
Arab countries (oil)
140
Arab countries (Nonoil)
Low income countries
120
100
80
02
20
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
60
19
GNP per capita (1986=100)
GNP in Arab Countries (from World
Development Indicators 2007)
Year
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
GDP per capita (constant
2000 US$)
600
500
400
300
200
India
100
0
Source: Word Development Indicators 2006
Year
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
GDP per capita (constant
2000 US$)
1400
1200
1000
800
600
400
China
200
0
Source: Word Development Indicators 2006
550
500
Sub-Saharan
Africa
450
2001
1997
1993
1989
1985
1981
1977
1973
1969
400
1965
GDP per capita (constant
2000 US$)
600
Year
Source: Word Development Indicators 2006
“The cross-national literature has been unable to
establish a strong causal link between any
particular design feature of institutions and
economic growth. We know that growth happens
when investors feel secure, but we have no idea
what specific institutional blueprints will make them
feel more secure in a given context. The literature
gives us no hint as to what the right levers are.
Institutional function does not uniquely determine
institutional form.”[1]
[1] D. Rodrick (2006)
The Barcelona Consensus (2004)
• … both basic economic reasoning and international
experience suggest that institutional quality -such as
respect for the rule of law and property rights- plus a
market orientation with an appropriate balance
between market and state, and attention to the
distribution of income, are at the root of successful
development strategies.
• Moreover, the institutions that put these
abstract principles into reality matter, and
developing countries should work hard to
improve their institutional environments. But
effective institutional innovations are highly
dependent on a country´ s history, culture
and other specific circumstances.
What Makes Law Reform so
difficult?
• Why do people with power accept limits to their power? An even
more pointed formulation is: why do people with guns obey people
without guns? An economic twist is: why would the rich even
voluntarily part with a portion of their wealth? In legal theory, the
parallel question runs: why do politicians sometimes hand over
power to judges? Why do politicians allow judges, who control
neither purse nor sword, to overturn and obstruct their decisions and
sometimes even send office holders to jail?...Societies may
approximate the rule of law if they consist of a large number of
power wielding groups, compromising a majority of the population,
and if none of them becomes so strong as to be able thoroughly to
dominate the others. We may be able to loosen the grip of a few
organized interests on power by forcing them to share political
leverage with a variety of other groups. This is polyarchie; it is also
rough justice, the only kind human beings will ever experience.
Formulated differently, the balancing of many partialities is the
closest we can come to impartiality. This may not sound particularly
ideal, but it is nevertheless historically quite rare and very difficult to
achieve.[1]
•
[1] S. Holmes, Lineages of the Rule of Law” (2003)
Neglect of finance and corporate
governance in development economics
What matters most
1. Property
2. Finance and corporate governance
3. Contract
4. Torts
Fig. Domestic credit to private sector (% of GDP) 1970-2003
From World Development Indicators 2005
180
160
140
120
100
80
60
40
20
0
Middle income
Low income
High income OECD
Distribution of Assets and Collaterals in
60 Developing countries, 200-2003 (Data
from Safavian/Fleisig/Steinbuks,2006)
80
70
60
50
40
30
20
10
0
Percentage of
Total Assets
Land and Building
Percentage of
Collaterals
Accounts Received
Machinery
Market capitalization of listed companies (current US$) (bill) Data from
World Dev. Indicators, 2005
35000
30000
25000
20000
15000
10000
5000
0
High income
Low & middle income
Market capitalization of listed companies (current US$) (bill)
Data from World Dev. Indicators 2005
700
600
500
400
300
200
100
0
China
India
Russian Federation
Enforcement of Shareholders Rights and Market Capitalization
(from Claeessens/Klingebiel/Schmuckler, 2002)
Value of control-block votes/Firm
Value in %
Value of control-block votes in relation to rule of
law
70
60
Czech Republic
50
40
Mexico
Korea (Rep.)
30
Italy
Brazil
France
Chile
Australia
20
UK
10
South Africa
Hong Kong
0
-1
-0,5
0
0,5
1
Rule of Law Index, 1998
1,5
2
2,5
Widely held
Family
State
Argentina
0
65
15
Hong Kong
10
70
5
Mexico
0
100
0
Singapore
15
30
45
South Korea
55
20
15
France
60
20
15
Germany
50
10
25
Italy
20
15
40
UK
100
0
0
USA
80
20
0
The ex-post and ex-ante approach to
corporate governance
Regulation vs. Civil liability
Rules versus Standards
Qualification and loyalty of judges
(Black, R. Kraakman, and J. Hay, 1996)
Crosslisting
The institutional element of cross listing „rent
a regulator“
The increasing number of cross listed
companies in developing countries
Cross listing and share prices (Karyoli 1998
Reese/Weisbach, Didenko 2005)
Large barriers to entry and to exit in
developing countries
-Licensing laws
-overregulation
-labor relations
-dismissal,
-bancruptcy procedure,
-establishing a firm
-tax law
Consequence: development of a large informal
sector which evades law altogether
Source: Schneider 2004