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1 Measuring the Law: The Economics of Doing Business Timothy Fisher and Mark Melatos Economics University of Sydney.

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Presentation on theme: "1 Measuring the Law: The Economics of Doing Business Timothy Fisher and Mark Melatos Economics University of Sydney."— Presentation transcript:

1 1 Measuring the Law: The Economics of Doing Business Timothy Fisher and Mark Melatos Economics University of Sydney

2 2 Overview economics and law legal origins theory Doing Business reports criticisms of DB methodology detailed analysis conclusions discussion

3 3 Economics and Law... the rights which individuals possess, with their duties and privileges, will be to a large extent, what the law determines. As a result, the legal system will have a profound effect on the working of the economic system and may in certain respects be said to control it. Ronald Coase, 1991 Nobel laureate

4 4 Law and economics law tries to regulate behaviour economics analyses behaviour EXAMPLE regulating speeding B benefit of speeding F fine if caught p probability of being caught individual compares the cost to the benefit will not speed if cost exceeds the benefit

5 5 Law and economics will not speed if p × F > B e.g., F = 500, B = 20, p = 1% cost is 5, benefit is 20 individual will speed implications law matters (F ) enforcement matters ( p)

6 6 Comments trade-off between p and F higher F can compensate for lower p public policy may try to influence B e.g., campaign about the dangers of speeding point: tools of economics to evaluate problems of law

7 7 Legal origins theory: seminal paper Law and finance, by La Porta, Lopez-de- Silanes, Shleifer, & Vishny, JPE 1998. examine financial laws in 49 countries corporate governance shareholder protection creditor rights

8 8 Law and finance classify countries by legal origin common law: UK, USA, Australia, Canada civil code: French, German, Scandinavian conclude: link between legal origin and development of financial markets 1.Common law 2.Scandinavian and German civil law 3.French civil law

9 9 Legal origins theory link between financial market development and economic development conclude: legal origin is an important factor determining economic development Shleifer appointed by World Bank to oversee Doing Business project

10 10 World Bank Group (WBG) a family of 5 organizations, of which two International Bank for Reconstruction and Development International Development Association are focused on developing countries provides grants and low-interest loans education, health, agriculture, environment, etc. often tied to specific reforms

11 11 Doing Business database objective measures of business regulations enforcement input and verification by 3,500 + people government officials lawyers business consultants accountants

12 12 Doing Business database comparable indicators across 175 countries index based on 10 sub-indices used to analyze which regulations enhance or constrain investment, productivity, and growth DB published annually since 2004 attracts widespread media coverage

13 13 Sub-indices in Doing Business Index 1. Starting a business 2. Dealing with licenses 3. Hiring and firing workers 4. Registering property 5. Getting credit 6. Protecting investors 7. Paying taxes 8. Trading across borders 9. Enforcing contracts 10. Closing a business

14 14 Ease of Doing Business Index

15 15 Doing Business Index specific rankings 1. Singapore 2. New Zealand 3. U.S.A. 8. Australia 18. Thailand 93. China 135. Indonesia

16 16 Obvious criticisms law reform is ongoing origin increasingly irrelevant (dropped 2005) errors and omissions e.g., Canadian bankruptcy law ignores other factors wars, corruption, cronyism, hyper-inflation

17 17 Example of other factors Indonesian public services hit by unskilled spending Financial Times, February 12, 2007. inflexible budgetary system inadequately trained civil service especially at local government level unable to spend increasing fiscal resources unspent reserves at 3.1% of GDP in 2006

18 18 Criticisms of the methodology national legal experts who are they? how are they chosen? optimality of law index is based on WB preferences e.g., index favours easy dismissal of workers not necessarily optimal

19 19 Outputs versus inputs real issue: does law achieve its goal? WB index does not measure outcomes measures the law (inputs) empirical study of law point: may be many ways to reach goals many laws may be compatible with a given goal

20 20 DB reports Poor countries regulate more Schleifer (2005, EFM) … American and European societies are much richer today than they were 100 years ago, yet they are vastly more regulated.

21 21 Types of Regulation Procedural vs Behavioural regulation Transaction form vs quality Behavioural regulation as a response to market failure Social weight? DB measures often emphasise form Procedures, time, cost

22 22 Procedural Regulation Costs: Inefficiency, corruption Complexity fosters uncertainty Benefits: Enforcement, consistency, fairness Control of outcome Procedural regulation and outcomes Djankov et al. (2003, QJE)

23 23 Behavioural Regulation Regulating the business environment: Environmental Law Competition Law Consumer Protection Law Costs opportunities foregone Benefits: complexity, clarity, externalities

24 24 Procedural Regulation in DB Starting/closing a business Dealing with licenses Registering property - property rights? Paying taxes - clarity, dispute resolution? Trading across borders Protection, infrastructure? Enforcing contracts Success rate of appeals?

25 25 Behavioural Regulation in DB Employing workers Difficulty of hiring/firing Rigidity of hours Nonwage labour cost Getting credit Strength of legal rights Depth of credit information Credit registry coverage

26 26 Behavioural Regulation in DB (cont.) Protecting investors Extent of disclosure Extent of director liability Ease of shareholder suits

27 27 Interpreting the DB Reports Cautious interpretation Specific cases measured Who is the regulator? What is their aim? Endogeneity: Regulation Agent behaviour Measurement difficulty: sample selection bias

28 28 Conclusion Worthwhile exercise Benchmarking reform opportunities Methodological issues Interpret with caution

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