1. The New Comparative Economics
Simeon Djankov, World Bank
Edward Glaeser, Harvard University
Rafael La Porta, Dartmouth College
Florencio Lopez-de-Silanes, Yale University
Andrew Shleifer, Harvard University
Economics 980l: Macroeconomics and Politics
Tuesday, October 30, 2007

2. “Is comparative economics dead?”
Comparative economics historically: socialism vs. capitalism
Comparative economics today: differences among capitalist economies
→ How institutions affect economic performance

3. Historical Background
Enlightenment Economists:
Good economic institutions make for good economic growth
Good institutions…
Secure property rights, enforce contracts, resolve disputes, protect investment returns
Problem with property rights:
Government that secures property may also take it away

4. Two Challenges to Property Rights
On Security of Property: Hobbes v. Montesquieu
“War of all against all” vs.
“Nation in slavery labors more to preserve than to acquire”
Two challenges: Disorder and Dictatorship
Either your neighbor may steal your property, or your government
Institutions designed to control both – at once
Success varies, affecting economic performance

5. The New Comparative Economics
The study of the different ways countries design institutions to resolve the conflict between the twin goals of controlling disorder and dictatorship at once.
The Study of Questions, such as…
How much government ownership is desirable?
How much should governments regulate?
How hard should the government fight disorder?
Is democracy or authoritarianism better for reform?
In democracies, do economies do better under divided or consolidated government?
Is a federal structure better for economic transformation?

6. The Purpose of this Paper
To provide a framework for considering
the dictatorship-disorder tradeoff, as well as its implications and application
The rest of the presentation will therefore go as follows:
Part 2: Overview of the Framework
Part 3: Three Illustrations
Part 4: Transplantation – legacies of colonial policies
Part 5: Politics
Part 6: Conclusion

7. Overview of the Framework
Section 2
Overview of the Framework

8. Basic Framework
Risk to individuals and their property comes from…
Disorder
Dictatorship
Private expropriation by:
Banditry, Murder, Theft
Violation of contracts, torts
Monopoly pricing
Private subversion of public institutions by:
Bribes and threats
Expropriation by the state via:
Murder, Taxation
Violation of property
Artificial barriers to market entry, competition
Corruption
→ Institutions function to control these twin dangers of disorder and dictatorship…

9. The Tradeoff Institutional Possibility Frontier (IPF):
The efficient institutional choice for a given society or sector within society

10. Slope and distance from origin determined by “Civic Capital”:
Determinants of the IPF
Institutional Possibility Frontier (IPF):
Slope and distance from origin determined by “Civic Capital”:
Culture
Ethnic heterogeneity/strife
Factor endowments, geography
Social capital (e.g. history of cooperation in pursuit of public goods)
Technology of production
Efficiency of taxation
Human capital

11. An Example: Social Control of Businesses
Institutional Possibility Frontier (IPF):
Objective: Reduce disorder from…
Monopoly pricing
Torts (e.g. breaches of contract)
Predatory Tactics
Alternatives: Degree of public control…
Individual market discipline
Litigation
State regulation
State ownership
Constraints: Institutional capacity…
Civic Capital
Other state-specific characteristics

12. Illustrations of Institutional Design
Section 3
Illustrations of Institutional Design
3.1 — Twelfth/Thirteenth Century Legal Systems: France and England
3.2 — Progressive era rise of the regulatory state: United States
3.3 — Post-communist transition: Eastern Europe

13. Strong King, Weak Nobles Weak King, Strong Nobles
Legal Origins
(Glaeser and Shleifer 2002)
England: Common Law
France: Civil Law
Fact-finding juries
Independent judges
Infrequent appeals
Reliance on precedent
Fact finding by state-employed judges
Decisions automatically reviewed
Judges bound by procedural and substantive codes, rather than discretion
Strong King, Weak Nobles
Weak King, Strong Nobles

14. (Glaeser and Shleifer 2002)
Legal Origins
(Glaeser and Shleifer 2002)

15. The Rise of the Regulatory State
(Glaeser and Shleifer 2003)
Before 1900, commercial disputes in the U.S. resolved by private litigation
Before the Civil War, this worked – litigants were of relatively equal status
Disorder increases with Post-Civil War industrialization
Monopolies, Unsafe conditions for workers/passengers, Increased inequality, litigation less effective – robber barons hire better lawyers and bribe judges
Progressive movement calls for more regulation

16. The Rise of the Regulatory State
(Glaeser and Shleifer 2003)

17. Institutions in Transition
→ Communism falls…
Russia: Dictatorship drops, disorder spikes
End communist control, entrepreneurship, unofficial economy reaches 40% economic activity
Belarus: Dictatorship same, disorder same
Personal dictatorship replaces communists, structures of controls kept intact
East Europe: IPF near origin, disorder increases
IPFs already closer to origin, end communist control, increased capitalist activity

18. Institutions in Transition

19. Transplantation of Institutions
Section 4
Transplantation of Institutions

20. World Imperialism c.1900

21. Legal Origins
World Imperialism c.1900

22. Some Prior Work on Transplantation
La Porta et al. (1997, 1998)
Legal origin affected investor protections, and thus affected financial development
Djankov et al. (2002, 2003), Botero et al. (2003)
Countries’ control of businesses related to origin of laws
La Porta et al. (2004)
Judicial independence associated with common law independence; good for business
Acemoglu et al. (2001)
Quality of institutions today related to whether colony was a settlement and cultivated or an outpost and exploited
→ All of these legacies affect the present IPF!

23. Transplantation and the IPF
Different colonial legal systems led to different present business environments
Legal origin and investor protection correlated with aspects of financial development
Transplantation profoundly influenced present social control of business
Observed institutional choices may be inefficient

24. Legal Systems and the IPF

25. Legal Systems and the IPF
Transplantation leads to…
Higher dictator-disorder equilibrium
Excessive state intervention and regulation – especially in civil law countries
Developing countries need less regulation for efficiency

26. Section 5
Politics

27. Politics and the IPF
Institutional Possibility Frontier (IPF):

28. Politics Can Increase Inst’l Efficiency
Institutions evolve and become more efficient as they face new circumstances
Pro-efficiency interest groups capture government
Coasean bargaining leads to efficient institutional choice
Voting leads to more efficient institutions

29. Influence of Politics on Institutions
Politics: a negotiation between interests
Success of negotiations depends in part on civic capital
Location of IPF and political choice of a point on the IPF are not entirely independent
Not all poor institutional outcomes can be blamed on politics

30. Section 6
Conclusions

31. General Conclusions
Different institutions will be appropriate for different circumstances
The diversity in institutional arrangements can be understood as a tradeoff between dictatorship and disorder
An inefficient – or more efficient – tradeoff may arise from political forces
Reforms in each country must be evaluated relative to its own institutional opportunities

32. Looking Forward
Recent history has called new attention to the role of institutions in macroeconomics
This framework offers a systematic way to compare different countries’ different institutions, and different economic outcomes
It is this type of comparative perspective of institutions that is at the heart of the new comparative economics

33. Thank you.