LAW AND ECONOMIC GROWTH Frank B. Cross Presented by Joanna Rymaszewska Seidu Issah M.A in Development Economics Warsaw University 2007

29/10/2007Development Economics2 Outline Review Legal institutions and Economic Growth Can Law be subsituted? In the Absence of Law Cultural Issues Discussion

29/10/2007Development Economics3 Introduction Empirical findings on Economic Growth Good legal institutions enhance economic growth New institutional economics Property rights Relationship on law and economic growth Which institutions matter?

29/10/2007Development Economics4 Legal institutions and economic growth Legal intitutions are crucial for economic development Property rights Theory of institutional economics (D. North) Good legal institutions Institutional capital matters Legal institutions as a „social glue”

29/10/2007Development Economics5 Substitutes for law... Law can be substituted Extralegal norms Voluntary transactions, informal mechanisms Private contracts may be more efficient Historical evidences – merchants created rules for transactions voluntarily...really?

29/10/2007Development Economics6 Law cannot be substituted Individuals don’t trust private arbitration Problem of exclusion some non-members of private network Relying on family and trust reduces entrepreneurial opportunities Difficult to enforce External costs

29/10/2007Development Economics7 In the absence of law If there is no law... Private enforcement mechanisms may result into organized crime syndicates Employment of threat and violence Unproductiveness Inefficency Shadow economic activities

29/10/2007Development Economics8 Has culture been exaggerated? Culture correlates with good institutions and growth......but also institutions and laws can modify culture! Law arised from the culture will be more effective. Culture is not as influential as percieved.

29/10/2007Development Economics9 Author’s conclusions Legal intitutions are important for economic development and cannot be easily substituted. Law is a contributing factor, not sufficient. Culture influences development, but also can be influenced.

29/10/2007Development Economics10 Discussion Importance of institutional capital It matters but it is not sufficient or more important that other factors Not natural – need an enabling environment Very general suggestions What type of intitutions, laws, rights should we focus on? Only a good legal law can enhance private rules

29/10/2007Development Economics11 Discussion contd. Legal institutions incorporate transaction cost. Weak legal intitutions may result into organized crime and ineffective administrative system. Trust is not enough for serious contracts.

29/10/2007Development Economics12 Other view... Dam, Kenneth W, (2006); „The Law-Growth Nexus: The Rule of Law and Economic Development”. Brookings Institution Press. The western legal systems work but not replicable Enforcement of rules is more important than a kind of substantive law* Transactions problems may be solved by alternative mechanisms than legal ones, such as trust, culture, social norms.* * Different approach

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