Law, Politics and the Wealth of Nations: Lessons From History

Transcription

1 Law, Politics and the Wealth of Nations: Lessons From History Boston Club Meeting, March 8 Daron Acemoglu (based on joint work with Simon Johnson and James Robinson)

2 Wealth of Nations Enormous variation in the wealth of nations and living standards across the globe. What are the causes? What can we do about it? How do we expect the world distribution of income will change in the future? 2

3 Competing Views Geography view: importance of ecology, climate, disease environment, geography, in short, factors outside human control. Institutions view: importance of manmade factors; especially organization of society that provide incentives to individuals and firms. 3

4 4 The Geography Factor Log GDP per capita in 1995 Latitude AGO ARE ARG ARM AUS AUT AZE BDI BEL BEN BFA BGD BGR BHR BHS BLR BLZ BOL BRA BRB BWA CAF CAN CHE CHL CHN CIV CMR COG COL COM CPV CRI CZE DEU DMA DNK DOM DZA ECU EGY ERI ESP EST ETH FIN FJI FRA GAB GBR GEO GHA GIN GMB GRC GRD GTM GUY HKG HND HRV HTI HUN IDN IND IRL IRN ISL ISR ITA JAM JOR JPN KAZ KEN KGZ KNA KOR KWT LAO LCA LKA LSO LTU LUX LVA MAR MDA MDG MEX MKD MLI MLT MNG MOZ MRT MUS MWI MYS NAM NER NGA NIC NLD NOR NPL NZL OMN PAK PAN PER PHL POL PRT PRY QAT ROM RUS RWA SAU SDN SEN SGP SLE SLV SUR SVK SVN SWE SWZ SYR TCD TGO THA TJK TKM TTO TUN TUR TZA UGA UKR URY USA UZB VCT VEN VNM YEM ZAF ZAR ZMB ZWE

5 The Institutions Factor log GDP per capita in SDN HTI ZAR MLI LUX SGP BEL CAN CHE USA HKG DNK AUS AUT JPN FRA NOR ITA GBR ISL KWT ARE SWEFIN NLD ISR IRL QATBHR NZL ESP MLT PRT GRC KOR BHS CHL OMN SAU CZE ARG URY VEN MEX CRICOL BWA GAB PAN ZAF MYS TTOTHA HUN BRA IRN TURPOL TUN ECU PER BGR DOM DZA ROM RUS GTM JORPRY JAM PHL SUR SYR MAR IDN SLV BOLGUY EGY CHN AGO HND ZWE LKA NIC CMR COG SEN CIV GHA GIN PAK VNM MNG GMB IND TGO KEN UGA MDG BFA BGD NGA ZMB NER YEM MOZMWI SLE ETH TZA Average Protection Against Expropriation Risk,

6 Lessons from History Try to distinguish these two broad hypotheses by looking at history Roots of big differences in history At the end of 15 th century, small differences in prosperity all around the world Big changes since then, both in organization of society and in prosperity 6

7 European colonization as a natural experiment After the discovery of the New World and the rounding of the Cape of Good Hope, Europeans dominated many previously diverse societies, and fundamentally affected their social organizations. How did this intervention affect the development of these societies? How did it affect Europe? Unfortunately, no time to talk about this today. 7

8 Measuring prosperity To answer these questions, we need a measure of prosperity before the modern era. Urbanization is a good proxy for GDP per capita. Only societies with agricultural surplus and good transportation network can be urbanized. Urbanization is highly correlated with income per capita today and in the past. In addition, use population density as a check. 8

9 Urbanization is a good proxy for income today 10 USA CAN AUS NZL HKG SGP Log GDP per capita, PPP, BRB ZAF GABMYS CRI PANBWA NAM LCA GRD BLZ DZA ECU TUN GTM FJI VCT DOM PRY JAM SWZ IDN MAR PHL EGY CPV GUY SLV SUR BOL LKA AGO ZWE HND GIN CIV CMR NIC COM GHA COG LSOIND PAK SEN MRT VNM GMB SDN TGO HTI CAF LAO KEN BEN NPL UGA BFABGDTCDMDG ZAR NGAZMB NER BDI ERI MLI RWA MWI MOZ ETH TZA KNA SLE MUS MEX TTO COL BRA DMA PER CHL BHS VEN ARG URY Urbanization in

10 Results: until 1500 After the initial spread of agriculture, there was remarkable persistence in urbanization and population density see 1000 BC to 1500 AD and subperiods true also for countries that were later colonized 10

11 Reversal since 1500 (1) 10 USA CAN AUS SGP HKG NZL Log GDP per capita, PPP, CHL ARG URY VEN BRA PRY GUY DOM JAM PHL HTI MYS COL PAN CRI BLZ GTM IDN SLV LKA HND NIC PAK VNM IND LAO BGD ECU PER BOL MEX TUN DZA EGY MAR Urbanization in

12 Reversal since 1500 (2) 10 CAN AUS SGP USA HKG NZL Log GDP per capita, PPP, ARG BWA BRA NAM SUR GUY VEN ZAF CHL LCA DOM GRDECU TUN DMA PER BLZ DZA VCT GTM PRY JAM SWZ PHL IDN CPV MAR BOL SLV AGO ZWE HND LKA CMR NIC GIN COG MRTCOM CIV LSO GHA SEN GMB SDN PAK IND HTI CAF TGOVNM LAOKEN BEN UGA NPL ZMB TCD MDG ZAR NGA BFA BGD NER MLI ERI BDI MWI MOZ RWA Log Population Density in 1500 BHS BRB MYS KNA GAB MEX COLTTO PAN CRI TZA SLE ETH EGY 12

13 No Reversal Among the Non- Colonized. log GDP per capita in FIN MNG NOR ISL KWT ARE BHR QAT SAU OMN RUS EST BLR LTU LVAKAZ UKRUZB TKM KGZ MDA SWE IRN ARM GEO AZE ISR SVN THA JOR LUX CHE DNK AUT BELJPN GBR DEU FRA NLD ITA IRL ESP GRC PRT KOR CZE HUN SVK TUR POL BGR ROM HRV SYR MKD CHN ALB MLT 7 TJK YEM Log Population Density in

14 What s happening? It cannot be geographical differences no change in geography Perhaps certain geographic characteristics that were good in 1500 are now harmful? no evidence to support this view Reversal resulting from changes in social organization 14

15 Results: from 1500 to 2000 Europeans established relatively better institutions/social organizations in places that were previously poor and sparsely settled. E.g., compared United States vs. the Caribbean or Peru. Institutions have persisted and affected the evolution of income, especially during the era of industrialization Former colonies with high urbanization and high population density in 1500 have relatively low GDP per capita today. 15

16 Institutions Matter But what are these institutions? The institutions that Europeans set up or maintained in place, both good and bad, had many dimensions. Can we make more progress? 16

17 Law Versus Politics Two hypotheses: 1. Property rights institutions ( politics or political institutions ): distribution of political power, determined by political institutions When political power of elites unconstrained: weak property rights for investors because of holdup potential for blocking of new technologies non-level playing field 2. Contracting institutions ( law or legal institutions ): Affect enforcement of contracts E.g.: Greater legal formalism. 17

18 Key Empirical Question Relative roles of law and politics for Economic growth Investment Overall financial intermediation Form of financial intermediation Theory: Perhaps law relatively less important than politics, because possible to contract around law? 18

19 Measurement Measures of political institutions: Risk of expropriation by government (measures how unconstrained governments and elites are in expropriating others income and assets); from political risk services Constraints on the executive (more generally on politicians and elites: Typically low in countries with extractive institutions; e.g., Caribbean planters, corrupt tyrants, many colonial regimes Measures of legal costs of private contract enforcement: Legal formalism data from DLLS. 19

20 Data on Legal Formalism Legal scholars: concept of legal formalism Contrasts to neighbors model with third party judgments based on fairness Formal rules about evidence and other procedures Generally more costly (more formal), possibly more arbitrary and less fair Legal formalism can be measured Extent of formal inflexible rules when tenant eviction for nonpayment of rent collection of check returned for nonpayment Previous research: more formalism correlated with longer duration of dispute resolution less consistency and less fair 20

21 Data on Legal Formalism (2) Cases specified so defendant has no justification & avoids voluntary payment Comparable across countries Simple disputes resolved in lower level courts, most relevant to ordinary citizens Dimensions legal formalism Use professional vs. lay judge/lawyer Need make written vs. oral arguments Legal justification of claims and judges decisions Regulation of evidence Superior review of first-instance judgment Engagement formalities Number of required independent procedural actions Raises cost of adjudication and creates delay 21

22 Determinants of Legal Formalism Legal formalism comes from legal origin in Europe (Berman, Merryman, etc) Plus exogenous transplantation to colonies (French) civil law systems in French and Spanish colonies and common law and British colonies. Legal origin explains a large fraction of variation in formalism. 22

23 Political Institutions: Colonization as a Natural Experiment Within each empire, not all countries received the same institutions e.g., U.S. got much better institutions, including courts, than did Jamaica or Nigeria (all British colonies) Europeans took better institutions where they wanted to settle where there was no large population to exploit. Institutions: a tendency to persist Not remaining the same, but places with worse institutions 200 years ago more likely to have bad institutions today. 23

24 Disease Environments and Political Institutions Big variation in the ability of Europeans to settle because of local disease environments Potential Settler mortality data (from military & clergy records, particularly Philip Curtin) Australia, New Zealand, the U.S.: healthy for Europeans Africa, India, Indonesia, Caribbean: much less healthy Most European deaths from malaria and yellow fever Local populations had much greater immunity. Europeans more likely to set up better institutions in places they settled. Better institutions in areas with disease environment favorable to Europeans. Mortality rates of potential settlers as an instrument. 24

25 Population Density and Political Institutions Colonial powers typically introduced extractive institutions, forced labor systems, high tax/tribute systems in areas with high population density. Example: Peru vs. United States. Population density of indigenous people before colonization as a potential instrument. Data on population density in 1500 from McEvedy and Jones. 25

26 Figure 2 Residuals from Regressing Constraint on Exec on Eng. Leg. Orig AUS NZL FJI USA ZAF CAN ETH DJI MUS MYS SGP CHL URY ECU BOL CRI COL IND PRY BRA VEN ARG PAK HND SLV MEX GTM PER GUY TUN EGY MAR DZA MMR AFG DOM TTO PAN NIC HTI LKA BGD GNB JAM PNG BEN CAF SEN VNM LAO COG AGO MRT IDN SDN KEN BDI CMR GAB TCD BFA RWA ZAR NER Residuals from Regressing Log Settler Mort. on Eng. Leg. Orig. MDG CIV GIN TZA TGO UGA SLE GHA MLI GMB NGA Resid. from Regress Cons. on Exec on Log Settler Mort ETH DJI ARG HND SLV HTI CAF MEX CIV GTM GNB COG AGO MRT SEN GIN PER VNM LAO IDN TGO BDI EGY CMR GAB BFA TUN MAR TCD RWA DZA AFG MDG CHL BOL CRI ECU URY PAN NIC MUS COL PRY BRA VENDOM BEN NER ZAR MLI AUS NZL USA ZAF CAN PAK LKA BGD Residuals from Regressing Eng. Leg. Orig. on Log Settler Mort. FJI GUY MYS SGP MMR IND PNG JAM TTO SDN TZA KEN UGA SLE GMB GHA NGA Residuals from Check Measure Formalism on Eng. Legal Orig AUS NZL USA SGP MYS CAN ZAF ETH HKG VEN PAK PRY BOL GTM PER CRI IND ARG ECU HND MEX MAR CHL SLV DZA COL TUN URY EGY BRA LKA PAN BGD NIC SEN BRB DOM TTO IDN VNM KEN CMR BFA JAM BEN BLZ NER MDG Residuals from Regressing Log. Sett. Mort. on Eng. Leg. Orig TZA UGA CIV GHA MLI NGA Residuals from Check Measure Formalism on Log Sett. Mort ETH VEN PRY GTM BOL PER PAN ARG CRI ECU HND MEX MAR CHL DZA NIC SLV SEN CMR TUN URY COL BFA BEN EGY DOM NER IDN MDG BRA VNM CIV MLI USA SGP MYS AUS CAN NZL ZAF IND BGD Residuals from Regressing Eng. Leg. Orig on Log. Sett. Mort. HKG PAK LKA TTO KEN BLZ TZA BRB JAM UGA GHA NGA

27 Figure 3.. Res. from Regress Av. Protect. Exprop. on Eng. Leg. Orig NZL AUS USA CAN SGP HKG MYS ETH ZAF SUR CHL BRA MEX COL VENIND URY MAR PRY CRI EGY TUN ECU DZA ARG PER BOL HND GTM PAK SLV GUY MMR VNMBHS TTO DOM PAN SEN NIC LKA GNB BGD HTI IDN SDN GAB CMR PNG JAM AGO TGO CIV Residuals from Regressing Log Settler Mort. on Eng. Leg. Orig. GIN TZA KEN NER COG BFA MDG ZAR UGA SLE GHA GMB MLI NGA Res. from Regress Av.Protect.Exprop. on Log Settler Mort GAB CIV IDN TGO BRA CHL GIN MEX COL MAR VEN CMR URY PRY CRI EGY VNM ECU DZADOM TUN ARG PAN SEN AGO NER PER BOL NIC MDG HND COG ETH GTM BFA SLV GNB SUR ZAR HTI MLI Residuals from Regressing Eng. Leg. Orig. on Log Settler Mort. AUS USA CAN NZL SGP HKG MYS IND PNG BHS TTO GHA JAM TZA ZAF LKA PAK GUY MMR BGD SDN KEN UGA SLE GMB NGA Residuals from Eviction Measure Formalism on Eng. Legal Orig AUS NZL ZAF MYS HKGSGP USA CAN GTM VEN LKA PAKARG PER IND BOL PRY CRI BGD CHL MEX MAR ECU HND URY TUN COL BRA EGY SLV DOM PAN KEN BRB JAM TTO SEN IDN BLZ VNM Residuals from Regressing Log. Sett. Mort. on Eng. Leg. Orig TZA UGA CIV GHA NGA Residuals from Eviction Measure Formalism on Log Sett. Mort GTM VEN PAN ARG PER BOL PRY CRI CHL MEX MAR ECU HND SLVDOM URY TUN COL BRA SEN IDN EGY VNM CIV ZAF LKA PAK IND MYS HKG BGD SGP USA Residuals from Regressing Eng. Leg. Orig on Log. Sett. Mort. AUS NZL CAN KEN TZA GHA BRBJAM UGA TTO BLZ NGA

28 Figure 4 Res. from Regress Av. Protect. Exprop. on Eng. Leg. Orig CAN AUS USA SGP NZL BRA CHL GAB MEX IDN COL GMB IND HKG VEN URY CRI CIV MAR PRY MYS BWA TGO ARG MOZ BHS CMRTTO ECU PNG GIN VNM DZA TUN DOM JAM ZAF MWI PAN SEN BOLZMB PER TZA ETH AGO PHL HND GHA LBY GTM NIC KEN GUY NER ZWE SLV SLE MMR LKA PAK SUR COG MDG GNBNGA BFA BGD MLI HTI ZAR UGA SOM Residuals from Reg. Log Pop Density in 1500 on Eng. Leg. Orig. SDN EGY Res. from Regress Av.Protect.Exprop. on Log Pop. Density in NZL IND USA GMB EGY CAN SGP IDN GAB AUS MYS MEX MAR CHL CIV BHS TTOJAM TGO COL TUN PNG BRA CRIDZA HKG PAK GIN BWA LKA VENECU VNM TZA PRY MWIGHA MOZ CMR SEN ZAF ZMB DOM ETH KEN MMR LBY SLE URY BGD PAN NGA PER ZWE ARG BOL PHL AGO HND GTM NIC GUY SLV UGA NERGNB BFA SDN COG MDG SUR MLI HTI ZAR Residuals from Regressing Eng. Leg. Orig. on Log Pop. Density in 1500 SOM Residuals from Eviction Measure Formalism on Eng. Legal Orig CAN AUS ARG HKG SGP USA URY BRA BWA NAM VEN PAN GTM PER VCT SWZ ZAF BOL MOZ PRY CRI PHL NZL CHL MYSMEX MAR ZWE MWI ZMB HND ECU NGA GRDTZA KEN DOM SLV GHA UGA COL BRB SEN IDN JAM TUN TTO BLZ CIV LKA PAK IND BGD Residuals from Regressing Log. Pop. Density in 1500 on Eng. Leg. Orig VNM EGY Res. from Eviction Measure Formalism on Log Pop. Density in VEN PAN GTM ARG PER URY BRA PRY BOL MOZ CRI PHL CHL MEX HND MAR ECU DOM SLV COL SEN IDNTUN CIV VNM EGY Res. from Reg. Eng. Leg. Orig on Log. Pop. Density in 1500 BWA NAM VCT SWZ ZAF LKA PAK IND HKG SGP BGD MWI MYS USA ZWE ZMB NGA GRD TZA KEN GHA CAN UGA BRBJAM AUS TTO BLZ NZL

29 Empirical Strategy Exploit differences in colonization strategy and identity of colonizer as sources of variation in legal and political institutions among former colonies today. Formally: multiple instrumentalvariables approach. 29

30 Legal vs. Political Institutions: Results (1) GDP per capita today no effect of legal formalism (contracting institutions) often wrong sign strong robust effect for property rights institutions. Similar result for economic growth between

31 Legal vs. Political Institutions: Results (2) Investment-GDP ratio. legal institutions insignificant strong robust effect for political institutions. Overall financial development same results Stock market development now both legal and political institutions significant (though political institutions quantitatively more important). 31

32 Legal vs. Political Institutions: Results (3) Form of business regulation legal institutions matter a lot. Real costs of business regulation political institutions make the difference. 32

33 Summary Findings Property rights institutions (expropriation risk, constraint on executive), and not contracting institutions, matter for GDP per capita Investment-GDP ratio Credit to the private sector Real costs of regulation Both set of institutions matter for Stock market development Form of financial intermediation. 33

34 Interpretation Political institutions most important for understanding wealth of nations. Businesses and individuals can often contract around legal imperfections. E.g.: write different types of contracts (debt versus equity) enter into long-term or trust-based relationships. 34

35 What Can Be Done? Important to encourage political reform. But how? We are far from an answer, but: Success stories: Neo-Europes, South Korea, Taiwan, Botswana, Mauritius, Eastern Europe. Pitfall to be avoided: Dealing simply with the symptoms not the fundamental causes. Ignoring internal dynamics. 35

36 The Future Hard to predict. A general, but slow, tendency towards institutional reform in many countries. End of Cold War may encourage faster institutional reform but the threat of war against terrorism. 36